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How to make a profit by going against the herd
You Re No Good For Me
Greg Silberman
Here's a significant story that's not getting
much play:
Chart 1 shows 10-yr Bonds breaking below support
For over 2 months, Long Bonds have been marching
relentlessly lower, breaking key support at 106.
50 on Friday. The next downside target is the Jul
06 lows at 104 (which equates to 5.25%).
Here's where is gets curious:
The news last week was decidedly negative, weaker
than expected 1st quarter GDP growth and a string
of layoffs from some of the nation's biggest
employers (Dell, Pulte Homes and IBM).
That's a sign growth is slowing which should be
bullish for Bonds. As price inflation fears
subside, Bonds should rally. Hell, even Gold buys
that story and has been moving lower since early
May. So what's happening? Why are Bonds tanking?
I know markets discount the future and that news
is effectively ancient history. I've been telling
subscribers for a while that there are
intermarket forces at work pulling Bonds lower and forcing
yields higher. That force is a declining US
Dollar, where Bonds have been following the
Dollar lower with a 2 to 3 month time lag. [The
US Dollar bottomed in late April so we have at
least 1 more month of Bond weakness ahead.]
But that still doesn't answer the conundrum, why
are interest rates rising in the face of a
slowing economy?
By the way, since February, the short end of the
curve has been dropping precipitously. The yield curve has
widened substantially, even righting itself from
its previous inversion. Investors are voting with
their wallets and they're saying the Feds next
move will be to cut interest rates in response to
a slowing economy.
So if short term interest rates get it, why don't
long rates?
I think they do.
Chart 2 shows the Nikkei weekly ; Gold and 10-yr US Yields
The major holders of Long-term US Bonds are
Japanese investors. A slowdown in the USA is
causing Japanese investors to sell US Bonds (
raising rates) and repatriate the funds back home
to invest in Japanese stocks which offer more
promising prospects. More promising because Japan
is a net exporter and the weak Yen is a boon to
Japanese Corporations.
The upshot for Gold investors (as the above chart
shows) is that Gold is very closely tied to
rising Japanese stocks. Interest rate sensitive
Banks and Housing are most negatively effected.
A slowdown in growth is causing a shift out of US
long-term debt into the Nikkei and by correlation
into counter-cyclical Gold. Expect the above
trends to remain in place for some time to come.
More commentary and stock picks follow for
subscribers...
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