What do you think of this idea?

Reduce federal taxes to stimulate the economy and create jobs.

Is this faster than shovel-ready projects that build infrastructure? Does it put money in the hands of employers faster than building bridges and tunnels? Does it create consumer spending faster than government-supported projects?

Let's hear from you!

S&P analyst, Alec Young, notes that stock market corrections are occuring with increasing frequency.

Corporations issue unsecured, short-term loans called commercial paper. Money market funds used to buy them in large quantities. Recent issuance is low and declining in yet another piece of bad news for the fragile economy. No wonder the stock market is selling off today!

Our weak dollar makes it easier for us to export our goods and services. It does, however, have the secondary effect of acting as a drag on our trading partners' economies. Printing money and reducing the value of one's currency is called exporting your recession.

This "beggar-thy-neighbor" risk may affect Europe, Latin America and Asia.

For more information you may want to see www.subodhkumar.com or on Twitter at http://twitter.com/subokumar

Today the Fed finished the program to buy $300 billion of Treasury securities. This program began last March in order to keep interest rates low during the crisis and was the first of its kind since the 1960s.

It accomplished the Fed's goal of keeping interest rates low - even as the US sold a record $1.25 trillion in notes and bonds.

One more indication that interest rates are expected to increase - according to the Chartered Financial Analysts' daily news summary.

"The Treasury plans to change the average due date of its outstanding debt to 72 months from 49 months, according to this (Bloomberg) article. The Treasury would then try to increase sales of 10- and 30-year bonds by 40% over the next year. The object would be to take advantage of low interest rates this year..."

This excellent newsletter is free to the public. Just register at http://www.smartbrief.com/cfa/

The NY Fed has $1,684,437,136.50 in its system open market account (+$17 million more than last week). Hopefully, banks will be strong enough to start lending to the public again before too long!

Former Fed Chairman, Paul Volker, wants to break up the big banks.

He advocates a return to the Glass Stegall Act that separates commercial banking (with low risk & minimal leverage) from investment banking. Opponents contend that we need our large institutions in order to compete with the rest of the world's large banks.

Our financial system may continue on this roller-coaster until he gets his way. Let's hope we don't have to return to a 20% prime rate in the process!

Source: New York Times, Oct. 21, 2009 http://www.nytimes.com/2009/10/21/business/21volcker.html?_r=2&hp

The decline in consumer spending may subdue GDP growth. Consumer spending is 70% of GDP and leads most recessions into a recovery. A consumer-led recovery is nowhere in sight according to this graph from Stone & Youngberg: http://www.syllc.com/

Regulators may be slow to close weak banks. The FDIC doesn't have the manpower to close all of the troubled banks at once.

This is the opinion of award-winning analyst, Kevin Fitzsimmons, at Sandler O’Neill which is a New York brokerage firm specializing in banks.

Banks hold toxic assets (primarily mortgage-backed securities), loans to speculative real estate developers, and mortgages to individuals who are facing historic unemployment rates.

This is the opinion of no-award-winning author, me.

The federal funds rate has been cut in half in less than a week: from 0.14% to 0.07%. Perhaps the Fed is trying to avoid the usual market declines in October.

You can see the data at: http://www.newyorkfed.org/markets/omo/dmm/fedfundsdata.cfm

Correction for the presentation at AAII this Wednesday: AAII charges $25 per person for their meetings. Thanks to Louise for this information.

The MACD line for the S&P 500 just turned negative per StockCharts.com:

http://stockcharts.com/h-sc/ui

On Sept. 30 and Nov. 18:

I will speak to the American Association of Individual Investors (AAII) at St. Jean the Baptiste Church, 184 E. 76 (bet. Lex & 3rd). This one-hour workshop will apply the principles in my book to current financial market conditions. The session is from 5:00 - 6:00pm and is free to the public. The November meeting will be the last in a series of quarterly events that AAII has requested on this topic.

Another week, another $64 billion in Fed purchases of government securities.

While this activity is important in keeping interest rates low, it also "crowds out" private investors who cannot compete with the Fed's spending ability.

A recent Wall St. Journal article indicates that the Fed has doubled its balance sheet. Agency and mortgage-backed securities, mainly GNMAs, make up the bulk of the expansion. Is this another way of adding cash to the financial system? How long can it last?

Does anyone know how much money the Fed has added to the system over the past 12 months? Changes in the Treasury's System Open Market Account (SOMA) may hold the answer. http://www.newyorkfed.org/markets/soma/sysopen_accholdings.html

This report shows astonishingly large increases in the Treasury's holdings.

Options on the VIX near-term index are moving higher. An increase of 5.8% this morning suggests that fear may be creeping back into the market.

The media is worried about the recession rather than inflation. The yield curve, however, indicates that fixed-income investors have inflationary concerns. The bond market is usually more accurate than either the stock market or the media.

The banking system may be weakened by "upside-down" mortgages. People walk away from good loans that they prefer not to pay.

Will new mortgage defaults depress the stock market?

Daniel Alpert, managing partner of Westwood Capital, suggests that owners of homes that are worth less than their mortgage will send banks their keys instead of payments. Additional defaults, as people find cheaper places to live, may add new (foreclosed) inventory to the housing market. The NY Times has this article in its blog - "Dealbook" http://dealbook.blogs.nytimes.com/2009/07/08/are-bank-bailouts-part-of-the-problem/?ref=business

The short-term outlook for business appears weak. Either companies don't want to raise money in the commercial paper market, or investors refuse to lend to them. This Federal Reserve graph shows exceeding low issuance. http://www.federalreserve.gov/

The yield curve is unusually steep and reflects investors' inflation fears. (http://www.bloomberg.com/markets/rates/)

The 3-mo./10-yr. spread is 350 BP; that number usually identifies an opportunity to buy gold.

You probably saw today's report on GDP "growth" of -6%. That number is in line with the serious recession of 1980-82 with 12% unemployment. Hedge fund manager John Paulson thinks that this stock rally is just "squeezing the shorts."

Graph, courtesy of SeekingAlpha.com http://seekingalpha.com/article/62350-historical-gdp-numbers-1947-present

I spoke at The Traders Expo New York in January. A webcast filmed at the Expo, as well as a live interactive chat session with me and other viewers will be available this Thursday from 12:00 pm-1:00 pm EDT at MoneyShow.com. My presentation, "Free Information That's Easy to Use", discusses professional tools that are free to the public on the internet. If you are not a member of MoneyShow.com you will sign up when you get to the site. It's fast, easy, and free.

For more details and to watch free click here:
http://www.moneyshow.com/video/details.asp?wkspid=97D15D2340D543B09E1603C0A3259A8E&scode=014436

The commercial paper yield curve is about the same as in the graph below. Not enough data to complete the graph for the normal 270 days. A2P2 still truncated at 30 days.

Credit default swaps indicate increased fear according to Bloomberg: "The cost of protecting European corporate bonds from default rose, signaling an increased perception of credit risk."

Investors who follow the contrarian indicator of odd-lot short positions need to know that the calculation has changed. http://www.wallstreetcourier.com./index1.htm

"Important Message: Data about odd-lot activities are now compiled by the NYSE and not anymore by FINRA. The odd-lot numbers are presently distorted and totally different from the ones which we got in the past week before the change took place. Any complaints should be addressed to : NYSE Service Desk, 212-383-2062, ( support@nyx.com )."

How can a stock market rally last if firms can't even raise money for 31 days? The commercial paper yield curves used to go out to 270 days before the financial crisis.

The one-month Treasury bill just registered a negative yield of -0.01%. http://www.bloomberg.com/apps/news?pid=20601110&sid=a1z1kK4EYlPY

The next bubble may be in this part of the market.

The administration's plan to rescue banks (without nationalizing them) may be what we need to restore confidence in the banking system and the stock market. Hopefully, today will be the last day that we will have to look at dysfunctional commercial paper yield curves such at this one from last Friday, March 20, 2009:

Money supply FINALLY increased on a preliminary reporting basis.

The commercial paper market, however, is still in terrible shape. We need this source of short-term funds to keep the economy going. Be careful with your investments until this returns to normal.

Here are the results from the first TALF. Only auto and credit card loans were covered:
Auto
$1.9 billion
Credit Card
$2.8 billion
Student Loan
-
Small Business
-
Total
$4.7 billion

I will speak at theNew York City chapter of the American Association for Individual Investors on Wed., March 18. This "special interest group" is open to the public for a nominal charge but requires pre-registration. aaiichapter_nyc@yahoo.com

Anecdotal evidence suggests a market bottom on St. Patrick's Day. Several turning points occurred on that day in the past (especially 2000 & 2003), and this year's bear market may be setting itself up for another inflection point.

More...Bloomberg reports a contrarian indicator...
“The American Association of Individual Investors said 70.27 percent of investors were bearish as of yesterday. That’s the highest reading since the index’s creation in 1987.

The AAII index measures sentiment on U.S. stocks for the next six months among individual investors. Its prior peak of 67 percent was set in October 1990, when the S&P 500 closed at 305.74. The stock benchmark then surged fivefold through 2000.

“When emotions get to one extreme, you get a counter-trend move,” said Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York. “Today, it’s very much at an extreme. It tells you that you’re closer to a bounce than not.”

Kumbu leaves frequent comments. His most recent: "and only one sub sector was up on the day, "Brewers." I'll drink to that."

One other strong stock deserves mention. Gun manufacturer Sturm Ruger has gone up lately.

Some hedge fund managaers are so worried about inflation that they contemplate denominating their funds in gold rather than in dollars!

All 30 of the Dow Industrials declined today. An aggressive technical trader might want to dip a toe into the market, but a fundamentalist watching credit quality bond spreads would wait for an improvement of that indicator.

One thing affecting today's market is Fed. Chm. Bernanke's slip of the tongue. Traders took it to mean that the government may be considering nationalizing some of our banks. CNBC reported this comment during a meeting at the national press club:

"I think there's a very strong commitment on the part of the administration to try to return banks ... or KEEP banks private or return them to private hands as quickly as possible."

The Dow closed today at 7,465.55 on fears of US bank nationalization and a worsening recession. This breaks through the Nov. 21 bear market intraday low to levels we have not seen since October 2002. BigCharts.com provided the graph.

President Obama called up 17,000 additional troops for Afghanistan today. Under normal conditions (including a normal commercial paper yield curve), that would stimulate the economy and the stock market.

Perhaps we will get out of this recession a little sooner than the pessimists suggest.

Join the heated discussion on the Jan. 30 post...but keep it civilized...this isn't the Jerry Springer Show!

Quality spreads have narrowed in both the commercial paper market and in the bond market. Firms with low credit ratings took advantage of lower rates and issued the most new securities in seven months.

Unfortunately, the CP market yields look the same as they did in the last graph below. Asset-backed paper still can't find buyers at the long end of that curve.

The NY Fed's Charles Steindel spoke at the Stamford CFA Society forecast dinner last night. The audience was concerned that current monetary policies might ultimately cause inflation. Mr. Steindel assured us that the Fed is prepared to turn its policiy around and avoid such a scenario.

Bloomberg reports that the commercial paper market will undergo a test next week when paper matures. This paper was originally bought by the Fed who hopes that the public will refinance it. If the public buys this paper, that may build confidence that U.S. companies are able to fund themselves without government support

Newspaper Columnist, Julie Jason, JD, asked about the commercial paper market. I referred her to the Federal Reserve website that publishes this data every day. http://www.federalreserve.gov/releases/cp/

The yield curve has had insufficient data to complete the graph for the past several months. Investors may want to be convervative and risk-averse until this very important source of short-term funds becomes viable again.

You probably know by now that the US Treasury auctioned four-week bills at a discount of 0.00% earlier this week. The secondary market traded bills at a negative return during the day. This is the first time that investors have accepted absolutely no return.

The new "bubble" is in cash.

One piece of good news is that many pension funds are required to rebalance each quarter. This time they will have to sell government bonds and buy equities in order to bring their asset allocations back into their guidelines.

On Nov. 20, Dave added a great question to the comments on this blog. He requested a source for the critical spread between junk bonds and treasuries.

Here is my response: I use the Merrill Lynch High Yield Constrained Index at http://online.wsj.com/mdc/public/page/2_3022-bondbnchmrk.html

from which I subtract the ten-year treasury note on the Fed's website:
http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

The index reached a new peak yesterday at 21.63%; the spread is at an all-time high of 18.91% or 1,891 basis points. A year ago that spread was about 250 bp.

Small investors hold small sizes, odd-lots, of equities. Traditionally, these people are a counter indicator; one should sell stocks they small investors are "long." That is the case now. Odd-lot short positions are unusually low as of yesterday. This graph is from http://www.wallstreetcourier.com./index1.htm

The National Bureau of Economic Research (NBER) just declared this a recession. They date the start of this downturn at December 2007!

Perhaps we are near the bottom of this cycle which is already longer than average according to G. H. Moore, Business Cycles, Inflation and Forecasting, 2nd ed., 1983. You can see his summary of two centuries of economic cycles at the Library of Economics and Liberty: http://www.econlib.org/library/Enc1/Recessions.html

Technicals are catching up with the fundamental bad news. The S&P fell yesterday on strong volume. (Capitulation ?) Odd-lot short positions increased, but just to a normal level. The VIX reached an hisrtoric high of 80. Yahoo.com provided this graph of the VIXZ from 1990 through the present.

While market technicals scream "buy," the fundamentals are poor.

Several sophisticated analysts have noted that the commercial paper market, the link between Wall St. and Main St., must return to normal before things can improve. That has not happened and results in the ever-increasing spread of junk bonds over Treasuries. That spread just reached an unimaginable 1700 basis points.

Many bonds are priced to reflect the 70 cents on the dollar that they usually get in bankruptcy court.

Many stocks trade under $1 which is their critical value for antiacipating bankruptcy. Today's WSJ makes a good case for improvement early next year. "Ignore the Stock Market Until February"
http://sec.online.wsj.com/article/SB122714126820842751.html

The S&P 500 dipped down to 850 today, Nov. 17, as it did during the panic on October 27.

Fear continues to increase in the fixed-income market. The high-yield index just hit an all-time high of 19.25%. With the ten-year treasury note at just 3.72%, the spread is an historic 1553 basis points or 15.53%. This spread has been growing wider almost every day for several months.

The commercial paper market yield curve indicates that investors are afraid to lend to financial firms for more than 15 days. The red line for AA financial firms ends at the 15-day point. This is a poor situation for fundmental investors.

Technical investors may be concerned that the odd-lot short positions are low.

If Obama follows through on his promise to raise taxes on the people who are able to spend money and stimulate the economy, we may have a lower GDP than previousely expected. A further drag on the economy would come from his suggestion to increase import duties. Such duties act as a tax on everyone and inhibit consumer spending.

What do you think?

The bond market disagreed with the stock market's rally during the final three days of the presidential campaign. Credit spreads widened during this period. The commercial paper market continues to lack liquidity. These are poor fundamentals for the stock market.

The bad news is that the Lehman high-yield bond index (constrained) reaches new heights every day. The most recent level is 18.51% and is double what it was a year ago. The spread over ten-year notes also sets a new high every day. This spread indicates fear in the bond market that normally flows into the stock market.

The S&P is only 5% above its lowest levels in 2002. With this volatility, we could breech that in one day.

The good news is that M1 and M2 have finally expanded. This may not last; the
Fed has been taking $29 billion out of the financial system every day for about two weeks. I assume that these "reverse repos" are an effort to balance the $700 billion rescue plan.

A summary of this plan is available on the Fed's website. Just google it.

Further good news is that the commercial paper market seems to work better. Rates for highest quality paper have declined and curves for this sector are normal. Some days. Some days - not.

It's probably a good idea to stay risk-averse in your portfolio.

The S&P may have soared 400 points yesterday, but the bond market's index of fear reached an all-time high. High-yield bonds are 1400 BP over the 10-year treasury; the previous high was 1000 BP about seven years ago.

Global recession worries are probably driving this bond market fear. I take this seriously because the fixed-income market values cash repayments; the stock market dreams of growth. At some point, the stock market usually wakes up and smells the bonds.

From Yahoo.com:

Extreme volatility such as we are now seeing is one of the hallmarks of a market bottom. The VIX traded over 76 last Firday during that rout; today it's all the way back down to a mere 56! (The previous high was around 40 during the last debacle.)

The commercial paper market is closed for Columbus Day, so there is no good news to report there - yet.

So Congress passed the Wall St. Bailout after re-naming it the Financial Rescue Plan. Within the hour, Secretary of the Treasury Paulson's office announced an interest in hiring 5 - 10 money managers to oversee the $700 billion windfall. :)

Meanwhile, the commercial paper yield curve still can't generate enough data to complete the graph. Quality spreads (the high-yield index less the ten-year treasury) registered an all-time high.

Another benchmark is reached. The high-yield index is now 10% (1000 B.P.) over the ten-year treasury. The last time we saw this was in the early part of this century during the corporate bankruptcies such as Enron and Worldcom.

Sometime soon it will be time to take advantage of this spread. We need to address the liquidity crisis first...

Americans flooded Washington with pleas for their Representatives to veto the Emergency Economic Stabilization Act according to a blog on Finance/Yahoo. No wonder it failed...

While the VIX is high at 47, the put/call ratio is just normal (1.00) and odd-lot shorts are low. Volume on the NYSE was high on Sept. 19th during that rally. Yesterday's historic drop created much less volume!

While the market's technicals are mixed, the fundamentals are clear. commercial paper is an important fundamental indicator of economic viability.

Three of the four commercial paper yield curves are normal, but the credit spread is still so wide that many businesses can't borrow at their usual rates. This short-term borrowing pays for wages, inventory, rent, utilities and other necessities. Such businesses could cut jobs and slow the GDP without the ability to borrow short-term money.

So much for bi-partisanship - the rescue package failed.

"Sept. 29 (Bloomberg) -- The $700 billion financial rescue plan is being rejected as voting continues in the U.S. House.

The vote was at 207 to 226 as the tally was held open while congressional leaders sought to persuade lawmakers to switch sides.

The Dow Jones Industrial Average, which fell as much as 6.3 percent, was off 403.5 points, or 3.6 percent, at 1:54 p.m. New York time."

The Treasury hopes to make money on the AIG deal. The Fed just delivered this email to subscribers:

"Statement by the Federal Reserve Bank of New York Regarding AIG Transaction

On September 16, 2008, the Federal Reserve Board announced that, with the full support of the Treasury Department, it had authorized the Federal Reserve Bank of New York to lend up to $85 billion to American International Group, Inc. (AIG). That announcement explained that the $85 billion was advanced in the form of a two-year secured loan to AIG, with many features put in place to protect and compensate the U.S. government and taxpayers. One of these features, a 79.9% equity interest, has the potential to provide a substantial financial return to the American people should the $85 billion loan, as anticipated, provide AIG with the intended breathing room to execute a value-maximizing strategic plan."

You now own AIG stock!

At 8.95%, high-yield spreads are almost at the extreme levels during the Enron crisis. The spread was 10% during that cliff-hanger. We survived that one and we will survive this one.

More of the same...The Fed drained another $22 billion in O/N RRP and CP quality spreads hit a new high. Volume on the NYSE is low for the third day in a row as investors (including GE who cancelled its stock buyback) lose interest.

Jack Welch was on Bloomberg saying that the government "bailout" is a mis-nomer. What's really happening is that the goavernment stands to get toxic paper at rock-bottom prices. They may then be able to sell it at a profit to traders of distressed securities. Is this a coup for the US Treasury?

The Fed just executed the first overnight reverse-repurchase in many months. It drained $25 billion from the system. This may be a reaction to pressure on the inflation front.

The bond market, however, still doesn't like the situation. Some commercial paper yield curves are still inverted at historically high quality spreads over treasuries. The spread went from 30 BP to 360 BP over the past year.

Good thing the markets improved today. Yesterday all three of the major indexes entered bear markets. The graph is from Yahoo.com.

The 2000 - 2003 rout was much worse with the Nasdaq losing 80% and the Dow off 40%.

The Fed just added an historic amount of new cash: $105 billion in one morning. Some technical indicators flash "buy." Odd-lot shorts are high; the put/call ratio is high; the VIX is high; and all 30 Dow stocks fell.

BUT the commercial paper yield curve is inverted and corresponding credit spreads are at an historic level.

Gutsy technicians could nibble at this market; wimpy fundamentalists will join me on the sidelines.

You know the bad news: The contaigion spread is spreading. Russia's stock market is closed and an airport outside of London is for sale.

Here's the bad news you may not know. Commercial paper yield curves are sharply inverted and there is a gap (not enough trades to report) in the asset-backed curve. Quality spreads across the board are near historic highs. Odd-lot short positions are still in the normal range!

Here's the good news. US Treasury yields are the lowest since 1954. These low returns will eventually force people to buy stocks that have higher returns than fixed-income securities. Money will eventually flow from 3-mo. bills at 0.23% into the DJIA whose dividend yield is around 3%. It did last time...in 2003 when we were last in the tank.

The Fed is adding $50 billion as I write this at 8:30am.

The 2.64% fed funds rate ranged from 0.01% to 7% yesterday. This is an historic range and is a result of the chaos in the markets. The central bank issued the following statement at 8:15 this morning in reaction to yesterday's market distress.

"Statement Regarding Open Market Operation

Shortly, the Desk will arrange a large over-night repo. The Desk stands ready to arrange further operations later in the day, as needed.

In addition, at around 9:30 am the Desk will conduct its typical Tuesday morning $20 billion, 28-day single-tranche repo, settling
1-day forward."

Investors may want to stay on the sidelines until Fed actions reduce the funds rate and cause the commercial paper yield curve to normalize.

Breaking news...the Fed just added another $50 billion in new cash to the financial system. This daily total of $70 billion exceeds their actions during the 9/11 crisis.

The Fed has been adding unusally-large amounts of cash to the system for the last couple of days. On 9/11 it added $31.5 billion which is ten times the normal amount. Today, during the Lehman bankruptcy announcement, it added $20 billion. These are the same levels that we saw during the terrorist attacks seven years ago.

This time it's just a different form of terror.

Today's commercial paper yield curve reminds me of an old folk song called "There's a Hole in My Bucket." There's a hole in my yield curve today; just look at the gap in the red line for financial paper. The graph is from the Fed's website www.federalreserve.gov.

The market reacted decisively to the Freddie/Fannie takeover - credit spreads narrowed. Investors sold Treasuries in anticipation of new supply of government securities to pay for the bailout. The cash raised from sales of Treasuries then went into corporates which felt less risky under the new regime.

A negatively-sloped yield curve usually signals an economic slowdown. The following countries, according to the August 23rd edition of "The Economist" magazine, are in for trouble: Britain, the Euro area, Czech Republic, Turkey, Australia, Indonesia, Taiwan, Brazil, Chile, Columbia, Venezuela, Egypt and South Africa.

Brazil has the steepest inversion. It's three-month bill is 12.92% and its ten-year note is 6.16% in US dollar-denominated securities.

GM is moving its products away from big SUVs and light trucks and into more fuel-efficient vehicles. It is even trying to find a buyer for it's Hummer division.

Major changes such as this signal an inflection point in the stock market when firms are forced to make long-term changes at the worst-possible time.

Wider junk bond spreads are not a good sign. The High-yield Index/Treasury 10-year spread is increasing every day. It has gone from 586 basis oints to 735 recently as fear has increased.

We may be bouncing along the bottom of the stock market; but it's a long, painful bounce!

A fellow blogger askes about quality spreads.

The commercial paper market is looking better. Those quality spreads are narrowing and three of the four curves that the Fed reports are normal.

Quality spreads in the corporate bond market are another story. We haven't had daily reports on the high-yield index for about a year. Too few trades have kept that number out of the press (Internet) lately. I can't calculate my favorite risk measure, the high-yield/ten-year spread, without this number.

The yield curve is inverted in most of Europe, Asia and in much of South America. These countries will probably have a slower economy in about a year; their stock markets may feel the effect of this slowdown. South Africa's yield curve is severely inverted and suggests the deepest economic decline.

Another day, another Fed easing. Thirty billion dollars a day is becoming common. We may avoid a full-blown recession, but the next bout of inflation could be a big problem!

The yield curve and new unemployment claims suggest that the worst may be behind us. However, here has not been a high-yield index published on the Wall St. Journal's website for at least a day, and that gies one pause. Better to stay conservative until that critical measure becomes available.

Today's New York Institute of Finance seminar, "Market Trends," came up with the following investment idea. Buy gold bullion in the expectation of a short-squeeze; an unidentified investment vehicle appears to be vulnerable.

The Treasury curve has developed a negative shape in the one-month to two-month area. The commercial paper market is also negative and its quality spreads are wide. It is no surpruse that this market is having trouble developing confidence in the financial system. Although the equity market has moved up lately, conservative investors may want to wait intil these yield curves and quality spreads are normal.

The commercial paper market is reviving from its coma. After two historic days of insufficient issuance for the Fed to complete is daily graph, all four categories are reportable. Their yield curves are just slightly inverted.

We may be near the bottom of the stock market:

1. the put/call ratio is extremely high at 1.4;

2. the VIX at 31 is the highest closing price since the market bottom in March 2003;

3. odd-lot short positions are high

4. we just had the unexpected bankruptcy (Bear Stearns);

5. the Treasury yield curve ended last week almost normal except for the one-month which is a few BP higher than the three-month.

Sentiment is so bad that everything the Fed does to bail us out just drives the stock market further down.

Here's what the NY Fed has to say about the $200 billion mortgage program: http://www.newyorkfed.org/newsevents/news/markets/2008/rp080311.html

Today's Fed anouncement of another bailout explains yesterday's announcement that they will drain funds later this week. Even an organization the size of the Fed must retrench a little to accommodate a spending spree.

The Dow was up over 400 points on the news of this global purchase of mortgages...or was it on the news of Gov. Spitzer's downfall... (a certain website is closed due to excessive traffic)...

Is the Fed going to tighten on Thursday!?! The Dow fell just 100 points on this announcement:

On Thursday, March 13, 2008, the Federal Reserve’s System Open Market Account will redeem $5 billion of Treasury bill holdings.

The Federal Reserve Open Market Trading Desk will continue to evaluate the need for the use of other tools, including further Treasury bill redemptions, reverse repurchase agreements and Treasury bill sales.

Some benchmaraks are reached. The VIX hit 30; the put/call ratio is 1.24; odd-lot short positions have been high all week. If it weren't for the bad news from the MACD lines on the Dow, S&P and the NASDAQ, one might be tempted to buy in spite of the negative yield curve in the money market.

For some reason, St. Patrick's Day is sometimes the bottom of the equity market. It was a wonderful time to buy on that day in 2003.

Kumbu comments frequently on this blog and has impressive technical analysis skills. He is proud of his Mid-Atlantic heritage, so he may be interested in the Mid-Atlantic Hedge Fund Association. They are meeting tonight in Princeton, NJ.

http://www.mahfa.org/

Commercial paper quality spreads, courtesy of the Federal Reserve, (http://www.federalreserve.gov/releases/cp/) are becoming wider as fear increases. The money market yield curve is more negative; this is another indication of investors' concerns. Conservative investors may want to wait a little longer before adding any risk to their portfolios.

Aggressive investors, however, may want to take their que from some technical indicators. For example, all 30 of the DOW declined last Friday, March 29th. This is probably not part of Leap Year but a real indication of an over-done stock market.

Fed actions and government spending may prevent a full-blown recession, but it is too early to buy stocks without worry. As the graph above indicates, the money-market yield curve is more negative than ever. Short-term rates are volatile and can change the shape of this curve very quickly, but we aren't there yet!

A professional money manager likes this web site for the Merrill Lynch High-yield Index (Constrained). I'm always concerned when this index is unavailble for several days at a time:
http://online.wsj.com/mdc/public/page/2_3022-bondbnchmrk.html

A reader comments that the Federal Reserve graphs of commercial paper are hard to read. Try going directly to their site:
http://www.federalreserve.gov/releases/cp/

You will see that, while the curves are all negative, their quality spreads continue to narrow. All is not lost.

Deutsche Bank's economist Mark Wilde, Ph.D. reminds us that the cheap dollar helps our economy in two ways.

Obviously, our firms that export can sell more abroad. Additionally, foreign companies are unable to sell their products here. Dr. Wilde's remarks were good news to the paper companies to whom he spoke yesterday because our paper competes with European and Asian firms selling their products here in the US.

That analysis filters down to the rest of the economy. US vacationers are more likely to visit the Disneyland in FL than the one outside Paris as long as the dollar is so weak.

The commercial paper market is starting to show signs of recovery. Its curves are less inverted and spreads are less worrisome. Asset-backed CP issuance is finally increasing. These yield curves may become normal before long, and conservative investors may want to move some cash into equities.

On January 1, 2008 the yield curve suggests the following:
1. Slow GDP growth of about 1.5% during the first quarter of 2008
2. Moderate GDP growth of about 2.5% one year from now
3. Continued stress in the financial markets for the next few months while investors avoid institutions suspected of holding of low-quality loans
4. Happy new year...there may be a light at the end of the tunnel in the form of narrower commercial paper quality spreads
Fear appears to be on the wane (again):

Is the the top of the Chinese stock market? Often there are structural changes at the peak of a bull market, and the NYSE just opened in Beijing...

A reader asks if yield curve analysis applies to undeveloped markets such as China. Mr. Bee is interested in corporate/Treasury spreads in the new market fixed-income market in China. While I would expect that spread to be volatile, it still reflects investors' decisions and expectations. Please let all of us know how that plays out.

The yield curve is telling us that investors expect the following:
1. no recession (the 3-mo./10-yr. spread is positive)
2. modest inflation (the 10-yr./30-yr. spread is slightly positive)
3. slow growth (GDP a year from now is expected to be about 2.9% based on the above spreads)
Not exciting but not the end of the world either!

With the yield curve steepening and the VIX piercing 28, aggressive investors may want to take advantage of last week's sell-off.

Chartered Financial Analyst (CFA) and author of AGAINST THE GODS, Peter Bernstein, may disagree. He told a CT society of CFAs that the Goldilocks Era of "just right" conditions is over. He thinks that we are in for a long period of slow growth and that it will be a long time before we see a vigorous expansion. Ouch.

The odd-lot shorts, the VIX and the put/call ratio suggest that aggressive invesotrs could add to positions. Twenty-nine decliners in the Dow 30 underscore their decision.

The inverted yield curve from 1-12 months may keep conservatives out of the market. My local banker said that their CD curve is negative because they expect rates to decline. They probably expect the GDP to slow as well.

Quality spreads are interesting. The much-feared commercial paper market shows improvement. The currently-ignored long term corporate market is still in a panic. The high-yield/Treasury spread has been widening as fast as the CP spreads are narrowing. Here is the Federal Reserve's daily graph of commercial paper spreads:


It's unusual for all 30 DOW stocks to decline on the same day. Aggressive investors may want to take advantage of Friday's sell-off. Conservative investors will be glad they stayed out of the fray and could sit on the sidelines until the Treasury curve is completely normal. It is still inverted from the 6-mo. to the 12-mo. maturity.

Let's get the bad news out of the way: 1. Retail sales are forecast to decline during the holiday season in response to problems in the housing market. 2. The yield curve is flattening. 3. The curve is still negative from 6-12 months.

The good news outweighs the bad: 1. Bond quality spreads are narrowing as fear eases out of that market. 2. Commercial paper yield curves are less negative and their quality spreads are narrower. 3. The Fed added $29.5 billion on Oct. 11 to keep the stock market rally intact during this critical period leading up to the presidential election.

Aggressive investors can continue to assume more risk; conservative investors need cash on the sidelines until the yield curve normalizes in the 6-12 month range. This will protect them from the problems that may surface as the housing market continues to deteriorate.

Quality spreads continue to shrink in the corporate bond market. As the Fed reduces rates and creates more cash, the value of the US dollar declines. A cheaper dollar makes our exports more attractive to overseas consumers. The Commerce Dept. said that our exports have risen in each of the last five months.

The Dow was up 247 and the S&P was up 31 points today...I guess a lot of people agreed with yesterday's entry on this blog. :)

Aggressive investors may want to add more risk to their portfolios. The 3-mo./10-yr. spread is normal as are the Treasury bill and AA-rated commercial paper yield curves. More importantly, bond quality spreads have been narrowing for a week. Finally, all 30 of the DOW dropped today.

Fear indicators, of course, increased today with the VIX reaching 26 and the Put/Call near 1.30. The market is looking backward at the Fed's old preoccupation with inflation rather than forward to its continued support of credit-worthy mortgages.

There may be some bargains now for those willing to face slower consumer spending in a sluggish economy.

The Fed sent this unsual email to subscribers of its news. This is the first time I've seen them announce an operation in advance!

"On Thursday, August 23, 2007, the Federal Reserve’s System Open Market Account (“SOMA”) will redeem $5 billion of Treasury bill holdings. This action is designed to give the Federal Reserve Open Market Trading Desk (the “Desk”) greater flexibility in the day-to-day management of reserve levels to offset factors that may add reserves to the banking system, such as additional discount window borrowings.

To achieve the $5 billion redemption, SOMA will purchase $7,126,019,000 of the 2/21/08 26-week Treasury bill (912795C82), $5,239,824,000 of the 11/23/07 13-week Treasury bill (912795B34), and will not participate in the 9/20/07 4-week Treasury bill (912795A27) auction. As with all SOMA purchases in the Treasury auctions, the amounts purchased are “add-ons” to the amounts publicly announced and issued by Treasury.

The Desk will continue to evaluate the need for the use of other tools to add flexibility to its open market operations. These may include further Treasury bill redemptions, reverse repurchase agreements, and Treasury bill sales."

The Fed cut the discount rate, and stocks jumped 300 points in 10 minutes. The 3-mo./10-yr. spread is +81 B.P. and the AA-rated commercial paper curve is finally positive. Agressive investors who can stand volatility may want to increase their risk exposure.

Less aggressive investors may want to wait until quality spreads stop widening, the asset-backed commercial paper curve normalizes, or the Fed lowers its targe funds rate.

The good news for all investors is that the ten-year note at 4.6% is near its 2002 low of 4%. Since this note is the benchmark for many adjustable-rate mortgages that will face refinancing soon, fewer Americans may go into foreclosure.

We have just gotten a peek behind the curtain of secrecy at the Fed; today they published a "Clarification of Collateral Tranches on Desk RP Operations: http://www.newyorkfed.org/markets/omo/dmm/temp.cfm.

In sum, there are three tranches that request offerings of paper with decreasing credit quality.

"From time to time, for operational simplicity, the Desk has arranged RPs just in the third tranche, under which dealers have the option to pledge either mortgage-backed securities issued or fully guaranteed by federal agencies, federal agency debt, or Treasury securities. Today's RPs were of this type. August 10, 2007

The commercial paper yield curve is sharply inverted. This is because of fears that financial institutions may be exposed to sub-prime loans or to hedge funds invested in these loans. You may want to continue to increase the quality of your portfolio until the banking system improves.

Last year's troop call-up and Congress' addition to defense spending protected the stock market from the inverted yield curve; there is no such protection this year.

Last summer when the curve inverted, troops were called up and substantial funds were allocated for the war effort. That fiscal stimulus usually improves both the economy and the stock market...as it did last fall. Chapter 19 of TIMING THE MARKET goes into this investment philosophy of "Buy at the sound of cannon."

This time, however, the inverted curve is not being bailed out by such activity; so conservative investing may be in order.

One astute reader asked what investments typically do well when the curve is inverted. "Sin" stocks such as alcohol, gaming, defence, and tobacco may fill this bill. People look for cheap fun when the economy is slowing down. For an entertaining analysis of this sector, you may want to read: "Investing in Vice: The Recession-Proof Portfolio of Booze, Bets, Bombs & Butts" by Dan Ahrens (St. Martin's Press; 2004)

Yield curve inversion and widening credit spreads are poor for the stock market. It appears that the flight to quality in bonds is spreading, as usual, to equities.

I was at the site of the NYC explosion yesterday and am now more more focused on investments in global infrastructure. Parker Global Strategies is putting together such a fund.

Money supply's narrow measure, M-1, has declined for the past three weeks despite large additons of cash by the Fed. Is all that money going into the market?

The yield curve is becoming flat again. The 3-month/10-year spread has shrunk from +60 Basis Points on June 18 to +5 BP on July 3. Fear in the mortgage market is spreading to Treasuries.

The Fed is adding large doses of cash for quarter-end demand. We need the Fed's help as credit spreads continue to widen during the sub-prime mortgage mess.

The yield curve is flatter than it was before the mortgage scare. Credit spreads continue to widen. Today there is no data available for the Merrill-Lynch High-yield Constrained Bond Index on the WSJ web site: http://online.wsj.com/mdc/public/page/2_3022-bondbnchmrk.html?mod=mdc_h_bndhl

Quality spreads have widened during the last week. This is particularly dangerous when the stock market exhibits bullish tendencies. Keep an eye on the high-yield/10-year spread.

The 3-mo./10-yr. spread is getting wider every day. Quality spreads of junk bonds over Treasuries remain tight. Keep an eye on the S&P 500's MACD line this summer.

The Treasury yield curve is normal from three months to ten years including that critical stretch - the money market (less than one year). Now if only the commercial paper yield curve would join the party...

As Kumbu noted in his (her?) comment yesterday, the 3-mo./10-yr. spread finally normalized. The NY Fed's article last summer says that this is an important indicator: newyorkfed.org/research/current_issues/ci12-5.pdf.

The 3-mo./10-yr. spread (which is on the Fed's website http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml) has narrowed to just a negative 5 basis points. As I've been saying since last summer, US escalation of the war has stimulated the economy and the stock market despite this inverted curve. As one astute reader summarized, "War trumps the inverted curve."

The Dow's MACD lines have converged. Let's hope they move up and keep this rally going.

Preliminary estimates for M-1 declined for the week ending April 30. Did the reverse repurchase agreements have an effect so soon? More to come?

More contradictory actions from the Fed.

On May 2, reverse repurchases (RRPs) = $5.75 billion followed by outright purchases (permenant additions of cash) = $1.35 billion.

Then on May 3, they added $18.65 billion!

Whatever their reasons, they have reduced the 3-mo./10-yr. inversion in Treasuries and created the first NORMAL commercial paper curve in almost a year!

We haven't seen the Fed take money OUT of the system for awhile. Today they drained $5.25 billion overnight while simultaneously adding $3 billion for two weeks! Fine-tuning at its best...

Deal Date: Thursday, April 26, 2007
Delivery Date: Thursday, April 26, 2007
Maturity Date: Friday, April 27, 2007
Type of Operation1: Reverse Repo
Settlement: Same Day
Term of Operation2: 1 Day
Operation Close Time: 09:40 AM
Total $5.250 billion

Deal Date: Thursday, April 26, 2007
Delivery Date: Thursday, April 26, 2007
Maturity Date: Thursday, May 10, 2007
Type of Operation1: Repo
Settlement: Same Day
Term of Operation2: 14 Days
Operation Close Time: 08:30 AM
Total $3.000

M-1 and M-2 rose last week. Perhaps this is why the high-yield/ten-year spread narrowed...more cash makes it easier to hold junk bonds.

The Fed's cash infusions are having their usual effect. Short-term rates are declining and causing the yield curve to flatten.

After many weeks of Fed ease, the funds rate finally showed a significant decline. It closed yesterday with an effective yield (average yield) of just 5.2%...substantially lower than the 5.42% we saw on March 1.

No one's talking about the "stealth" bear market in the US dollar. A new benchmark has been reached now that it takes over $2.00 (US) to buy one British pound. Economists call this "exporting your recession" as our products become cheap in other countries.

The Fed just added $1 billion in permenant funds when it bought bonds to hold indefinitely. This is in addition to the $10 billion overnight repurchase agreement for a short-term boost. Fed funds, however, continue to trade around 5.30% in an inverted yield curve. Ben can't seem to print enough dollars to normalize the curve.

The Fed's aggressive cash infusions are finally showing up in the money supply data. The stock market may respond well to the fact that preliminary estimates for M-1 and M-2 increased last week.

Amid the media hysteria surrounding the dumping duties imposed on China's coated paper, investors overlooked the fact that this is a temporary tax often imposed on government-subsidized products. The new Congress, however, appears to be protectionist. That is a legitimate worry for the stock market.

The US Commerce Dept.'s 10-20% import tax on Chinese coated paper caused the market to lose steam today. This duty is the Department's first in 20 years and is expected to spread to other Chinese products. This news is contrary to the academic position that free trade benefits all participants.

The 2-year/ten-year spread is normal for the first time in over a year. Things are looking up!

The 2-year/ten-year spread is normal for the first time in over a year. Things are looking up!

The MACD line, which looked scary at the end of February, is now bullish. StockCharts.com shows:

The "disinversion" of the yield curve is very positive for stocks. The three-mo./ten-yr. spread has shrunk from 60 BP to 49 BP (about 15%) during the past week.

The usual scenario during a steep market decline is for the Fed to inject massive funds and for the rate to decline below its target. This time, the Fed did not add enough money to do so. I don't see the strong support that we did on 9/11, in 1998 and 1987. The Fed seems willing to tolerate a little market correction.

The Fed funds rate is 5.29% and, therefore, higher than its target. Recent (enormous) additions of new cash have not been sufficient to create "ease." Not good for stocks in the short-term.

The high-yield/ten-year spread is unavailable today. Yesterday it increased an unusually-high 3.7%. Bad news on top of bad news.

The MACD still looks poor. The widening high-yield/ten-year spread confirms.

Although M-2 has increased lately, M-1 declined during the second half of February. Hopefully, the recent additions of new cash will improve this data...and the stock market.

The high-yield/ten-yr. spread has narrowed for the past two days. The Fed Funds rate ahs come back into target range. It might be safe to come out and play soon.

I prefer to use fundamental analysis. Although some technicals (VIX, Put/Call, Odd-lot Shorts) are screaming "Buy!", I give more weight to quality spreads and Fed Funds rates which are pessimistic.

The high-yield/10-yr. spread continues to widen. The Fed has added new cash - but not enough to bring the funds rate back down to 5.25%. These fundamentals cause me to sit this one out for awhile.

Thanks to all who left comments; I hope this summary answers the many thoughtful questions.

The outlook for equities is not great. The high-yield bond index/10-yr. note spread is widening dramatically.

The high-yield index is not available today. Neither are many of the usual corporate bond benchmarks. Not a good sign.

Here's the story: the put/call ratio at 1.7, a VIX that shoots straight up 80% in one day and all 30 Dow stocks declining together suggest buying stocks.

The high-yield spread over the 10-year, however, looks poor. Keep an eye on this measure of fear. It increased 7% yesterday and suggests putting a stop-loss under your equities.

The markets sold off around the world today including all 30 of the Dow. Tomorrow morning we'll get the new yield for the junk bond index for guidance...

The junk bond/10-yr. spread is the most narrow that I've ever seen: 271 basis points. We can relax until this indicator of fear starts to widen at the rate of 1% per day. Use the "constrained" high-yield index at http://online.wsj.com/mdc/public/page/2_3022-bondbnchmrk.html?mod=mdc_h_bndhl

No wonder we've had a stock market rally, money supply has increased over the past 52-, 26- and 13-week periods: http://www.federalreserve.gov/releases/h6/Current

Find out more at the FREE NYC Traders' Expo with 50 speakers and 100 exhibits from Feb. 17-20. http://www.newyorktradersexpo.com
Introduce yourself to me at my presentation on Tues., Feb. 20 from 1:30-3:00.

The weak dollar benefits our international trade. The BLS reports that U.S. import prices declined last month while export prices rose. http://www.bls.gov/mxp

Odd-lot shorts, a great contrary indicator of stocks, just exceeded the normal range. This is good for the S&P. This graph is from wallstreetcourier.com.

The MACD line for the S&P is getting into trouble...let's hope that trouble doesn't materialize! This graph is courtesy of StockCharts.com.

Pres. Bush wants to increase our defense spending and our health care coverage. It sounds like "guns & butter" to me! Economic stimulus...here we come.

It seems like yesterday that pessimists bemoaned our record budget deficit. However, the economy improved over the past few years and allowed the US Treasury to collect more income taxes. The debt is shrinking and the Treasury may stop offering the 3-yr. note.

Preliminary money supply data shows increases in both M-1 and M-2. The Fed's new policy of not tightening is finally taking effect.

Odd-lot shorts have been high for the past few days. This often preceeds an uptick in the S&P.

Commercial paper quality spreads are narrow because of confidence in the markets. As Martha would say, "This is a good thing." This graph is from federalreserve.gov/releases/cp

The third year of a President's term is usually bullish for the stock market. (He's trying to make friends who will vote for him in the upcoming election.) This is Pres. Bush's third year in this term, so it could be a good one for stocks!

One reason for the narrow spread between the Treasury 10-yr. and high-yield (junk) bonds, per Dec. 22 WSJ p. C4, is a basic shift in the market. As junk bond issuers borrow directly from hedge funds and pension trusts, scarce junk bond supply drives those yields down closer to Treaurys.

An important measusre of investor confidence has been improving this month. The high-yield/Treasury 10-yr. spread has been narrowing since Nov. 29.

More good news: the 3-mo./10-yr. spread is becoming less inverted while the long end of the curve becomes steeper. Goldman celebrated by paying its Chm. $53 million...Wall Stret's highest yet!

According to the CBOE website, the Put/Call ratio is a bullish 1.13. See for yourself at http://www.cboe.com/data/mktstat.aspx

The most entertaining book review I've ever read is on the site of a British educator, Duncan Williamson. duncanwil.co.uk/book_reviews
It just happens that this charming review is about my book, TIMING THE MARKET.

Money supply is finally growing; preliminary data for M-1 & M-2 posted large increases last week and last month. You can see the Fed data at http://www.federalreserve.gov/releases/h6/Current/

The S&P's MACD line (courtesy of StockSharts.com) is starting to produce a "buy" signal:

Today is Dec. 7, Pearl Harbor Day. On this day in 1941, my husband, who was a 17-yr.-old Yale student, lied bout his age and joined the Marines. You and I weren't born yet.

Keep in mind that a troop call-up such as the one last summer stimulates the economy and the stock market. This call-up was followed by an appropriation of $70 billion new funds to support the war before the election turned Congress over to dovish Democrats. (Congressional Record #6996 dated Sept. 25, 2006)http://www.rules.house.gov/109_2nd/text/
hr6166/1092nd_cr_hr5631.pdf. I'm not expressing a political opinion on the war; I'm ambivalent about it. But war tends to stimulate the economy and the market.

The Dow continues to set new highs despite the inverted curve. TIMING THE MARKET points out that troop call-ups such as the one last Aug. 22 signal major investment opportunities. (See blog comment on Aug. 24.) It is well known that war stimulates the economy, and investors react to this news very quickly. You may want to stay with high-quality stocks until the curve narmalizes.

I believe in conspiracy theories. The Fed has injected twice its normal amount of new cash during the past 25 sessions, and Election Day is tomorrow...

For the last two months, Nasdaq short positions set new record highs. (See Oct. 25 WSJ p. C11.) Such extremes often accompany a turning point...in this case a continuation of the last two month's market advance.

Money supply (seasonally-adjusted) rose for the first time in many, many months!

High-yield spreads over the ten-year returned to normal. Now if the yield curve would just do the same, we could all take on more risk.

The high-yield/ten-year spread made a big increase. If this continues all week, sell stocks and put your money in the bank.

Bond quality spreads have narrowed from 365 B.P. to 330 BP over the past few weeks. This is a sign of confidence in the financial system.

Commercial paper spreads are narrow. There is little fear in that important market.

Lots of good technicals today: Put/Call=1.2; VIX down a little;odd-lot shorts over 4 million; S&P volume strong and most of the Dow closed higher. Fed still pouring cash into the system which should normalize the curve soon.

Short positions on the Nasdaq peaked in mid-Sept. according to the WSJ's monthly report. Extremes in this data usually point to market advances.

The US Treasury is concerned about possible abuses in the Treasury securities market. These abuses may cause high prices for issues (cash, futures, and repo) that are in high demand according to today's Wall St. Journal. Is this the reason for the yield curve's inversion?

Join me and the Am. Assoc. of Individual Investors on Sept. 27 at 6:00 at St. Jean Baptiste Church - Lexington Ave. at E. 76th St. for a workshop based on TIMING THE MARKET.

The Fed is increasing our supply of cash as we approach the end of this quarter. The Fed funds rate, however, rose yesterday from 5.24 to 5.3%.

The rally in the ten-year pushed its yield BELOW that of the 3-month by 35 basis points. Good for mortgage rates but poor for GDP in 12 months.

The Put/Call ratio is high at 1.4. This sign of extreme fear is bullish for stocks.

The high-yield/10-yr. note spread has been getting narrower for the past few days. This is a sign that fear is on the wane.

Today's money supply numbers may reflect the new Fed policy. You can see them on: http://www.federalreserve.gov/releases/h6/Current.

The American Assoc. of Individual Investors (AAII) in CT asked what to read. Ralph Acampora's THE FOURTH MEGA-MARKET discusses market cycles in an entertaining manner.

The MACD line for the S&P has just turned down. See the graph on StockCharts.com.

TIMING THE MARKET is a one-day seminar at the NY Institute of Finance in their new computer lab. Each attendee goes online to access free data. Sign up now for Sept. 22. Course details at www.nyif.com/courses/fimk_1014

Chevron found oil, so investors are changing the shape of the yield curve. The 3-mo./10-yr. spread went from -28 BP to -19 BP in one day!

The M-2 weekly average finally expanded after shrinking for seven weeks.

"Sin stocks" often create wealth when the economy grows slowly. If only Foxwoods Casino would go public!

Usually, as we head into a recession, the 10-yr./30-yr. spread is negative. With that spread at +13 BP, the Fed's simplest GDP formula suggests that in 9-12 months the economy will grow 1.64%.

Pres. Bush authorized the call-up of Marine Corps. Reserves. If this is exercised, as it usually is, the market will probably go up. See Ch. 19, "War and Rumors of War," in my book TIMING THE MARKET (Wiley, 2005).

The Fed added five times its normal amount today, and some will stay in the system for two weeks. Money supply should start to grow soon.

Bond quality spreads are narrowing as investors gain confidence in the market.

The 3-mo./10-yr. spread has improved this week. It was -17 basis points on Monday and is just -11 BP in the WSJ today.

The Fed has injected more than twice its usual amount of cash into the system for the past 25 days. Today's $9 billion addition will remain for two weeks.

The Fed's pause in raising rates should help the stock market. Invest conservatively until the yield curve becomes normal.

The Fed knows that inflation is a lagging indicator. They are probably attempting a "soft landing" similiar to the one in 1994.

The 3-mo./10-yr. inversion has increased. Commercial paper rates are also inverted. Caution, but not panic, is advised.

M-2 has finally exceeded its monthly average (see http://www.dallasfed.org/data/data/us-charts-cond.pdf). The Fed's huge cash infusions in July are starting to make a difference and may create normal yield curves soon.

The VIX has peaked and both the put/call ratio and the S&P's MACD signal "buy." Perhaps the 3-mo./10-yr. spread will normalize soon so we can become aggressive investors again.

As long as the 3-mo. and 10-yr. are inverted (as they are now), it's best to invest on the conservative side of your guidelines. This stock market correction may not last long because quality spreads are still narrow and the long end of the curve - ten years on out- is still normal.

The yield curve is inverted from 3 months to 10 years. The stock market usually declines on the day that happens.

The yield curve has been flat for two days: the 3-month and the 10-year are 5.11%. The good news is that there is no inversion and that the Fed just added three times its usual daily cash infusion.

Commercial paper yield curves are negative from 1-7 days. This suggests a sluggish stock market for a few days.

It's hard to imagine a GM/Nissan combination. Gen MacArthur must be turning over in his grave at the thought of a Japanese firm controlling our WWII source of military tanks.

Great economic news today: GDP revised upward, consumer spending and corporate profits strong, imports lower than expected, and prices in check. Fears of increasing inflation and deficits may abate.

Fear indicators (VIX, Put/Call, etc.) are declining. Buying into this market's weakness may pay off handsomely.