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Strategies & Market Trends : LastShadow's Position Trading -- Ignore unavailable to you. Want to Upgrade?

To: Jay Lyons who wrote (9378)	3/1/1999 10:35:00 AM
From: LastShadow	Read Replies (1) \| Respond to of 43080

From briefing.com Arguments For A Bear Market Unlike the past three years in which strong growth failed to produce higher inflation, the current growth pace will finally see the underlying inflation rate tick higher. The long term improvement in the budget is coming to an end -- having finally achieved a surplus, politicians are now talking about frittering it away. The long term trend toward freer trade is coming to an end -- trade wars are brewing on both the Pacific and Atlantic fronts. Arguments Against A Bear Market Inflation: We have seen three years of 3.4-4% GDP growth, and yet the underlying inflation rate has trended lower over that period. The only threat on the inflation front is a tight labor market, yet wage growth has shown no signs of accelerating over the past two years, even as labor markets have tightened. Every other inflation factor continues to point in the direction of disinflation: the dollar is strong, commodity prices are falling, productivity growth is accelerating, and most of the globe -- Asia, Latin America, and now Europe -- is experiencing deflation. Recent comments by some Republican Congressmen have been cause for some concern on the budget front, as there does appear to be some willingness to scrap the spending caps that were primarily responsible for improving the fiscal picture. Yet we are far from convinced that the tide has turned against fiscal conservatism. There is still broad agreement that the budget should remain -- at worst -- balanced, and at best, still in surplus. The politics have shifted to the extent that an argument for spending some of the surplus is an argument against Social Security -- that makes it an uphill battle for those looking to spend the surplus. The trade disputes brewing on many fronts are certainly a threat and bear watching in coming months, but suffice it to say that we've been there before. As in past trade disputes, it has been in the perceived interests of all parties to toe a hard line right to the end, in a bid to win concessions. In all trade disputes this decade, however, both sides have approached the dispute with the assumption that free trade -- broadly speaking -- is good. That underlying bias toward free trade hasn't changed, which makes it unlikely that key industrial countries will let disputes over such items as bananas and steel devolve into a full-scale trade war. Near Term Reality These arguments make Briefing.com's bias clear -- the Treasury market's recent sell-off is a correction rather than a change in trend. Having said that, these corrections can at times be quite nasty and can last for several months. We would not, therefore, suggest that all is well -- further troubles most likely lie in store for Treasuries over the near term, particularly given the likelihood of continued strong economic growth. Impact on Stocks As long as rates on the 30-yr bond hold above 5.5%, stocks will experience difficulty sustaining any upward momentum - valuations are simply too high. However, assuming our assessment of the Treasury market is accurate, and this is only a temporary blip up in rates amid unwarranted fears of Fed tightening, then stocks will resume their advance once bond yields start drifting lower. Considering that none of the major market indices have done even modest technical damage during the current retreat, first sign that bond yields have reversed course will ignite yet another buying spree. In other words, now is a time for tinkering with, not overhauling, your investment strategy