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I make no claims to being the greatest trader at anything, but I think at
least four things could be noted on this thread:
1. The "free put option" is quite an out of the money put option.
2. Although I have great respect for Bill Gross (as do many others who have
made PIMCO one of the biggest bond funds in the world), recent actions on
the long end have been exacerbated by hedge funds finding themselves on the
wrong side of straddles. I have to wonder if Bill Gross's firm also bet on
the entire treasury curve moving together as it used to. If so, then this
astute observation came from a painful lesson for PIMCO investors.
3. The Fed has been quite predictable for years. They almost always raise
or lower rates after the markets have moved in that direction already. The
Fed guards its independence by moving after the bond market has already
moved.
3. "What would it take for the markets to continue declining in spite of
lower short term rates and increased liquidity from the Fed?" Assuming the
bond market is referred to, increased inflation ought to do it. Assuming
the stock market is referred to, lower than expected earnings in the Tech
sector ought to do it. I'm not expecting these things, but I've been wrong
before.
It does look like an inverted yield curve will be with us for quite a while
under any circumstances.
With respect to both Earl and Gwen for there contributions on this board,
Ross Kovacs
rossrk@xxxxxxxxxxxxxx
> -----Original Message-----
> From: Earl Adamy [mailto:eadamy@xxxxxxxxxx]
> Sent: Thursday, February 03, 2000 4:41 PM
> To: realtraders@xxxxxxxxxxxxxxx
> Subject: Re: [RT] Bill Gross on Tbonds
>
>
> An astute observation! So the next question, what would it take for the
> markets to continue declining in spite of lower short term rates and
> increased liquidity from the Fed?
>
> Earl
>
> ----- Original Message -----
> From: "Gwenael Gautier" <ggautier@xxxxxxxxxxx>
> To: <realtraders@xxxxxxxxxxxxxxx>
> Sent: Thursday, February 03, 2000 1:36 AM
> Subject: [RT] Bill Gross on Tbonds
>
>
> > The second force, Gross says, is the fact that Fed Chairman Alan
> > Greenspan, by cutting interest rates aggressively after the stock
> > market crash of 1987, and in response to the market turmoil of the
> fall
> > of 1998, "has demonstrated to investors that he will, when required,
> > lower interest rates and provide emerging liquidity to support the
> > stock market." This amounts to a free put option for stock investors,
> > Gross says. Accordingly, stock prices will be higher than they should
> > be at any given point in time, the economy will be stronger than it
> > should be and the short-term interest rates controlled by the Fed will
> > be higher than they would otherwise be. As long as the Treasury is
> > buying back long-dated paper, only a stock market crash that prompts
> > the Fed to cut short-term interest rates has the power to un-invert
> the
> > yield curve, Gross says.
>
>
>
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