The Tasgall Group

This chart jumped onto my leg and started to hump?it like a dog wearing plaid.? In other words,?the pattern I saw just couldn’t be ignored.

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We spend a good amount of time discussing interest rates, but there are a few different ways to look at them…

One way is the yeild curve. It looks at the current rates across many maturities right now, and many people are watching it to see if/how much it becomes inverted. There is even a web page that will calculate the probability of a recession based on the Federal Reserve’s research. (Current answer: 35%) And, of course, there’s the animated version of the yield curve.

We can also look at the yield spread ($TYX:$IRX) which compares the 30 year rate treasury bond rate and the 3 month treasury bill rate over time. (You can use the 1 month yeild ($UST1M), 1 year ($UST1Y) 5 year ($FVX), 10 year ($TNX), 30 year ($TYX), or any other yield you might want.)

As long as the line is dropping, liquidity is contracting. The line should start to rise when the FOMC starts trying to ease again, or if 30 year rates were to shoot up (bond prices would fall). This would indicate that liquidity was expanding.

We can attach a simple moving average to the chart (which StockCharts does automatically) to try and identify when a trend change is underway. This is one of the charts I regularly review to keep the concept in my mind that we haven’t seen the spreads start to widen yet.

Now might be a good time to start thinking about a CD or bond ladder for your short-term or “safe money”. With the FOMC still raising short-term rates, long term rates have had plenty of time to move up as much as possible…

Why ladder? Let’s look at three scenarios: (more…)

Crestmont Research has put together an excellent resource called the Stock Market Matrix. It shows how the long-term buy-and-hold approach would have worked for every holding period of the last 100 years.

Take a look. There are a lot of other good resources on their website too. I highly recommend looking at the Excel spreadsheets they put together with the historical interest rate yield curve graphed over time.

What to make of the strong finish in today’s market…? The Dow reversed a full 300 points to finish down only 16 points for the day…? that’s a whopping 3% drop, followed by a 3% rally all in the span of a single trading day.? That kind of action usually signals a short-term bottom, but I’d be careful making that assumption…

We had a similar big one-day reversal as recently as Friday, August 10… the dow hit a low of 12,958 before closing back at 13,239 — a 281 point recovery. What happened next? Bad news on Monday caused this week’s price action, and all of the liquidity injections from the central banks could not get stocks in the black for even a single day (so far).

Interestingly, the Dow and the NDX closed spot on their 200 day moving average. The S&P 500, nasdaq composite, and Russell 2k are all well below their 200 dma. Medium term (1 year+) trend lines have already broken on most of the major indexes.

After today’s strength, tomorrow is set up for a bullish day. If there isn’t strength, then most likely we’re going to have some additional jarring drops. If there is strength, then the question of the day will be, how long with the strength last?

Also worthy of note is the yield spread… the 30 year / 3 month has shot up like a bat out of hell. Looking at a longer term view, there’s still a long way to go… And the contraction is happening even while the FOMC has pushed the overnight rate down to 4.9% despite the lip service about not lowering rate targets.

Here’s a quote from Mish:

Yes, already. David Greenlaw at Morgan Stanley noted that although the Fed Fund rate is officially 5.25%, as a result of various Fed open market operations “the funds rate averaged 4.51% yesterday [2007-08-14], and then opened at 4.75% this morning [2007-08-15]. Indeed, the cumulative average for the 2-week maintenance period that ends today is 5.04% — well below the official 5.25% target.” Greenlaw went on to call this a ?temporary? easing of policy on the part of the Fed.

I’ve personally moved to a hedged position — puts offsetting the longs that haven’t hit trailing stops or that I don’t want to sell (yet) for tax reasons…? There might be a sizable bounce over the next few days/weeks, but I’m in capital preservation mode and don’t feel like risking more than is appropriate given the recent price action.

I’ve always thought that?animation was sorely underutilized as an investment tool.

It’s time.? A project that I’ve been working on extensively for weeks, probably to the great annoyance of the lady of the house, is finally at a point where I’m ready to share my work and begin testing the idea in a semi-public forum.? The working title for this project is the Uberman’s Portfolio, inspired by the infamous Uberman’s Sleep Schedule in that it never sleeps and because of the many late nights spent building the?gears and levers that make it all?possible.? Also, the acronym is UP, which is where I hope my equity will be when all is said and done.

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