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Strategies & Market Trends : Strictly: Drilling II -- Ignore unavailable to you. Want to Upgrade?

To: SliderOnTheBlack who wrote (20344)	10/16/2002 6:06:15 PM
From: pogbull	Respond to of 36161

Post by Jim Woolly -- HUGE BOND RISK NOW: on swaps, spreads, yield curve investorshub.com I will keep this brief, even though a huge issue with great complexity since last year 100's of companies have swapped their more expensive longterm bonds for shorterm money Pimco's Gross brought this to my attention last spring LT bonds paid out 6-9% to their corp bond holders they replaced with 2% ST money thanks to Sir Alan GreenButtWadd now they carry risk of ST rates rising what they have done is to capitalize on the widening Trez spread defined as corp bond yield minus Trez yield sometimes, if they want less risk, they swap LT for LT instead of LT for ST the Trez spread is now the highest since 1991 or 1930 take your pick I heard yesterday it was around 10% on junk, and 3-4% on regular those who issue such swaps are the same notorious gang JPMorgan, GoldmanSux, Citicorp, BAmerica so these guys are selling the spread this spread risk is essentially a short of the yield spread the bankers are carrying that risk now the yield curve has remained sloped upward despite the decline in LT yields ST is 1.5-1.7% or so, LT is 4.0-4.7% or so a sloping yield curve indicates health, mild future inflation expectations that is what we have now if however, a recession comes at us, then the yield curve will repeat its INVERSION seen in late 2000 that was the greatest missed signal of my life actually I noted the signal, but did not act upon it!!! as Israel says -- "NEVER AGAIN" the difference between the LT Trez yield and ST Trez yield is called the Bond spread if the yield curve flattens, not necessarily inverts, just flattens, then the Bond spread will close toward zero flattening yield curve means the bigbanks lose again they are shorting the Trez spread, which is highly linked with the Bond spread banks that are heavily involved with swaps to shorterm are most vulnerable to a closing of the bond spread obviously so what happens if the Bond spread closes toward zero? same question as so what happens if the yield curve flattens? corporations that swapped are nailed to the wall, suffering big losses in earnings from debt financing bigbanks that sold spreads with heavier swaps into shorterm will suffer big losses from their shorted spreads going in wrong direction other speculators who simply bought Trez spreads and Bond spreads make out like bandits a doubledip recession will do colossal damage to bigbanks and to corporations who used the "Clintonesque" swap to shorterm bigbanks have placed a very large BET that the Fed rate cutting policy will result in a positive response to the economy, with mild manageable inflation returning thru reflation, and all returning to health a recession will further decimate bigbanks their derivative exposure is more linked to these interest rate contracts, to bond futures of all kinds, than any other type of contract Sinclair has made general references to this I try here to explain it in broad stokes my personal gut tells me that such a spread closing development would generate more than enough for a DERIVATIVE EVENT of large proportions !!! / jim

To: SliderOnTheBlack who wrote (20344)	10/16/2002 7:34:01 PM
From: Roebear	Respond to of 36161

Slider, (Winter Forecast Update) I am now completing my winter forecast, to add to my winter forecast preview a call for higher than normal snowfall amounts for my forecast area of Pennsylvania, also to include the mid Atlantic and the Northeast. (All ski enthusiasts, you are welcome, ggg!) The total success of my call for at least two tropical systems (and or their residuals) to end the drought in the Eastern US indicates the change in weather pattern I have forecasted was spot on and completes the necessary things I needed to indicate winter precipitation. I do not believe I will go all the way out on a limb and call for a repeat of the 95-96 winter here in the East, but I will indicate that as a possibility, with several large snowstorms a high probability. Maybe not a big deal in the NE, but my area of PA has a history of missing a lot of storms other folks get, ggg. An excellent article by Joe D'Aleo (see end of post)which outlines some of the climatological aspects that went in to my winter forecast work this year along with my natural observations, which give me the direction and drive on what to look for. Please note that while I have the highest regards for the two Joe's (Joe D'Aleo and Joe Bastardi) and admit I am an avid follower of their work and am far inferior to them on as a meterorolgist (I'm just an amateur), my own forecast PREVIEW predated theirs (well, Bastardi's isn't out yet) by several weeks, being made here on September 26. Natural observations being my edge in indicating the general direction of the forecast... Unfortunately for myself and the thread, and the large amount of work I put into the winter forecast, there were not a lot of opportunities to profit the last few weeks in the energy sector from my early winter forecast, but perhaps that will change at some future point. The EPO and AO were the main tipoffs for me this year (along with abundant natural observations) in addition to good prospects for a mostly negative NAO this winter, the EPO being the most work intensive for me as I had not done a lot of work with that previously, but began to note it in my data in early Sept. It was most gratifying to me to see the EPO (for me definitely like detective work) confirmed by the "Two Joe's". I hope the thread enjoys this article by Joe D'Aleo: intellicast.com Anyone with investing/trading ideas in the energy sector feel free to reciprocate! Best Regards All, I'm out of here the rest of the week, finishing up the fall vacation, Roebear