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Strategies & Market Trends : Galapagos Islands -- Ignore unavailable to you. Want to Upgrade?

To: Jorj X Mckie who wrote (39393)	5/13/2003 12:51:49 AM
From: stevenallen	Read Replies (1) \| Respond to of 57110

Pancaked AHEAD OF THE TAPE By JESSE EISINGER By signaling that the Fed isn't going to raise rates soon, Alan Greenspan picked up his lute last week and sang a tune that soothed the savagely steep yield curve. And bond traders have it good since: Long-term bonds have duly fallen (as prices rose), reducing the difference between long-term and short-term interest rates. Stock-market investors have had it good, too, and this is a tad incongruous. After all, if they were taking the message from the Treasury market to heart, they might have unloaded stocks. One interpretation of the Treasury market activity is that bond traders think the economy isn't going to recover strongly anytime soon. If the bond market was expecting recovery, the yield curve would get steeper, not flatter, as long-term rates rose. So what happens to stock-market investors if the curve keeps pancaking? It is clear that investors in interest-rate sensitive sectors such as regional banks, credit-card companies, asset managers, mortgage originators and services, broker-dealers and others are focused on the positive. The economy could recover. Consumer credit could improve. Corporations could take advantage of the lower cost of capital to invest wisely. Banks and brokerage firms that invest in bonds could make big profits as the values go up. But there are reasons to question the optimistic scenario. Already, the banking sector has watched as the profits they make from borrowing at lower rates and investing at higher rates have gotten squeezed over the past year. Most regional banks are dependent on deposits, which are loans from customers. They take that money and invest it to make a spread. But the rates they pay on deposits can only go so low while it costs a fixed amount to administer the deposits. Meanwhile, they are having asset-reinvestment problems, unable to find good high-yielding investments. The more the yield curve flattens, especially when rates themselves are so low, the worse the profit picture becomes. North Fork, Citizens, Fifth Third, Charter One, all have rallied of late and all could get dinged. The falling rates could trigger a new round of mortgage refinancings, hurting mortgage-servicing companies. All sorts of companies dependent on securitizing assets would get pressed. In that case, MBNA and Capital One are vulnerable. Updated May 13, 2003