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James Smith's latest.
Note: I do not have any association with his service. Go to
http://www.pei-intl.com for any info desired.
JW
-----Original Message-----
From: James Smith [mailto:JSmith@xxxxxxxxxxxxxxxxx]
Sent: Monday, October 02, 2000 9:15 PM
Subject: The Debates and their effect on bonds
Politics has been known to play a role in the markets at times.
Conventional Wisdom has it that Bush will NOT do well in Tuesday
night's debates. But if he holds his own or actually beats Gore
in the debates, it could very well send a chill thru the bond
mkts. Ironically, Wall Street may be happier with a Gore win
than a Bush win. Many on Wall Street worry that Bush's trillion
dollar tax cut would herald a return to deficit financing. The Bond Mkt
won't wait til Nov 7th to discount the worst fears. This could
be one factor in explaining why the Sept High in Bonds is likely
to hold. The other factor may be another spike in oil as Winter
approaches. Can you imagine the effect on bonds if Bush wins
the 1st debate at the same time oil begins a move to $40??
Why do you suppose foreigners are selling their bonds?
Europeans holding US bonds for the last year are sitting
on huge foreign exchange profits, not to mention the capital
gains due to the Treasury Dept Yield Curve Manipulation.
Smart Money may be taking money off the table now, before
the election. Afterall, there is no great need for the Treasury
Department to continue buying in old bonds once the election
is out of the way. The Treasury Dept focused their buy backs
on the old bonds, which are closer in maturity to the 10 years, in a
transparent attempt to lower the 10 year bond yield off which
mortgages are priced.
As you know, the housing market is a key sector of the
economy. The administration could not afford to allow
higher rates disrupt the housing market.....at least not
until the election is over. What this means is that no matter
who wins in November, bond yields are likely headed
nowhere but higher.
Bond market mavens will have noticed that the yield curve
has been steepening of late. Typically bonds should
rally as the economy slows down, but because the bonds
have already seen such a tremendous rally, astute investors
have come to realize that the risk outweighs the reward.
With the 30 year bond yielding 5.95%, why risk a move
to 7.00% or higher, for a potential rally to 5 1/2%--if that.
It is extremely unlikely that bond yields will again move
below 5.00%. It can't be ruled out completely, but the
chances are slim, especially with oil already having started
a longerterm bull market. But even if bonds were to rally strongly,
we do not see this rally as "sustainable." Bonds can
rally to tremendous levels, as they did in 1998 after the
LongTerm Capital Ponzi scheme came undone, but note
that such rallies are "short-term" in nature. If stocks
were to go into an absolute freefall, no doubt Greenspan
would cut rates aggressively, but it would take a real
threat to the economy, not just the stock market, for
the FED to get involved. The chaos so far in tech stocks
does not qualify. Lowering rates before the election
would be viewed by many as a political move.
Remember, Greenspan still has over 3 years left to his term.
He is very unlikely to do anything that will be remotely
viewed as "politically motivated" in front of the election.
He might try to talk the market up by standing on the
Titanic and telling people there is nothing to worry
about, but he is not going to rescue your sinking
portfolio.
It is entirely possible that both stocks and bonds go
down together. Many investors have been and will
continue to, run to cash. Cash is King when all others
are reduced to paupers.
Technicians will also note that bonds (expressed in yield
terms) broke out above a 20 year downtrend line
some time ago. After breaking out above the trendline,
bond yields can move aggressively higher at most
any moment. That moment may not be far off.
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