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Strategies & Market Trends : January Effect 2003 -- Ignore unavailable to you. Want to Upgrade?

To: Londo who wrote (42)	12/24/2002 8:34:26 AM
From: RockyBalboa	Respond to of 666

Thanks for your astute estimate of the situation, I also see how much "momentum"is built into the bond charts and I read through lots of technical advice which advised on how to buy the futures once they completed their November retracement from the earlier set highs. That said, it appeared that the fundamentals are sound for buying and holding bonds (in the short term) and I might miss the top by a point or another, thats for sure. It is a different thing with the fundamentally weaker European Bonds. Of course they trade at a higher yield which is clear given the composition of the debt (including italy, spain, portugal and ireland) some might believe the yield differential is not justified. It is, given the dire financial situation of many European budgets and the need to finance the annual 2.5 to 3% budget deficits. Besides that, it might be that the steepness of the US curve is well justified by the slow monetary demand coupled with a sort of inertia on the long side (or by the outlook that there might be some federal deficits in the coming years). It also might indicate that the US Treasury is not overbought enough (but I more follow the inertia and secondly risk premium theory). For the Europeans this does not apply hence the curve flattened (too much) with the one reason that the inertia existed primarily on the short end of the curve (thanks to the sticky ECB politics). This would well call for a more opportunistic approach (namely to arbitrate the "lagging" by buying one curve and selling the other), but I admittedly follow a baby with the bath approach. Once the US rises rates (or does not lower it) or requires financing (for the coming iraq war) the bond types will quickly turn heads and sell it. As said earlier, the more accomodating fiscal policy should over time change the attitude a lot. Regarding the threat of deflation... sometimes I think we are there. There are indeed periodic headlines about deflation. But...we have another asset inflation (housing) which is significant and we have rising commodity prices which is usually a good leading indicator of inflation appearing in the production sector. We also have a significant USD weakness (remember that the EUR gained 16c over the year and it is likely that the Dollar repeats its 80s dip trip) which shall continue into 2003. I agree that the oil is far too cheap right now and the next leg is likely up. I looked at the chart in 1990s and it hit some $40 easily at the times of the kuwait invasion only to drop after the quick success of desert storm. The OPEC announcement to dampen oil prices may work in the future but right now I consider this a bear trap (given the relative insignificance of OPEC oil in the world oil markets). That said, I wish you nice holidays, and a happy 2003.