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.
4 comments:
I thoroughly enjoyed reading your book.
What are your thoughts on new recent suggesting that traditional yield curve tools are less effective b/c of global finance? For example, Ken Fisher argues that looking at GPD-weighted global yield curve is most relevant. The global yield curve in fact is a normal looking yield curve which as you know is bullish for equities.
Also, there is more recent research from Fed researchers suggesting the US only yield curve is not as predictive as it used to be:
http://www.econbrowser.com/archives/2006/11/the_yield_curve_2.html
Some global yield curves are now negative. Thoughts?
http://www.econbrowser.com/archives/2007/10/the_world_inver.html
Dear Ram,
I can see the value in a GDP-weighted global curve. It would, of course, be influenced by steep curves (positive OR negative) in each component country. The globalization of economics validate such a methodology.
As to the negative curve in Australia...it disturbs me to see that developed economy forecasting a recession!
I've read the recent Fed literature and feel that, because it is based on quarterly averages, that daily yiled curve analysis is still one of the best indicators we have of the the US economy and stock market.
I assume that you are referring to the Cleveland Fed's October issue of Economic Trends.
Since one has to pay so much money, one has to select wisely the right investing seminar to attend. It's important to do research on the speaker and the seminar because just about anyone can hold a seminar. A good way to find out the credibility of the sales seminars and its organizer is to ask around. Talk to past graduates and the organizer should be able to give you some references.
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