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Five Things You Need to Know for Tuesday


What you need to know (and what it means).


Five things you need to know to stay ahead of the pack on Wall Street.

1. Danger, Yield Curves Ahead

Yesterday, the yield on the 10-year note rose to its highest level since 2004. Conventional wisdom is that the economy is (reasonably) strong, inflation is accelerating, and the Bernanke Fed will continue its tightening cycle. I forgot, how many rate hikes is that since June 2004 - 14? 15? Ok, 14. Just a few weeks ago, everyone was worried some were worried that an inverted yield curve was portending doom. What if the yield curve doesn't invert?

  • What is an inverted yield curve? First the term "yield-curve" refers to the relation between the cost of borrowing and the maturity, or length of time the money is loaned out for.
  • An "inverted yield curve" occurs when short-term interest rates are higher than long-term interest rates.
  • Why in the world would someone get paid more to loan money for less time? One answer is that if investors believe the economy will get worse in the future, they may choose not to lend out money over the long-term due to the worsening economic conditions.
  • Another answer is that risk aversion may cause demand for short-term U.S. government bonds (considered among the safest of all investments) to rise at a faster rate than long-term bonds.
  • When the curve inverts, as it did a number of weeks ago, most believe it hurts the profits of banks, although Prof. Katsenelson has argued in Minyanville that banks are less sensitive to the yield curve than they used to be.
  • Prof. Sedacca has written that he believes Fed Chairman Ben Bernanke is implicitly endorsing an inverted yield curve.
  • Meanwhile, increasingly it is clear that given debt levels in the economy, the markets are having difficulty coping with both an inverted yield curve and a steepening yield curve. Can't we find something "just right?" (That would be stagflation.)
  • Hoofy will have to hope so. Professor Reamer believes the recent yield curve inversion is signaling deflation.
  • Prof. Succo has warned that the alternative to deflation may be hyperinflation.
  • With the ECB tightening rates, and the Bank of Japan meeting this week to determine the fate of their "quantitative easing" program, U.S. rates may be forced higher to keep investors abroad interested in owning U.S. assets, hence a steepening yield curve.
  • Oh, and don't forget the U.S. Dollar/yen, and the euro. And, of course, the large mortgage players who use Treasurys to hedge - Fannie Mae (FNM) and Freddie Mac (FRE). Yes, there are a lot of moving parts here.

2. Bank of Japan

The Bank of Japan is meeting this week and most expect that if not this month, then certainly by next month the BoJ will announce a conclusion to its quantitative easing policy. Regular readers of "Five Things..." know what quantitative easing is; like a friend who dropped in for a weekend visit... and never, ever left, part of the family now. So, is quantitative easing really about to take, literally, a hike?

  • First off, the level of inflation in Japan is, sit down for this, a whopping 0.5%.
  • The core inflation rate, excluding food and energy, things we need for survival, is all of 0.1%.
  • BoJ forecasts for future inflation are published each April and October.
  • In October 2005, forecasts were for 0.5% inflation through fiscal 2006 (April 1006 to March 2007), but according to the Financial Times that forecast was based on no change in monetary policy. In other words, it was based on the expectation that quantitative easing would continue.
  • Meanwhile, Prime Minister Junichiro Koizumi urged the Bank of Japan to "make a careful decision'' before changing a five-year policy of fighting deflation, according to Bloomberg.
  • The BoJ last raised the benchmark short-term interest rate from near zero in August 2000, against government opposition. Seven months later they lowered it again.

3. Oh Yeah, OPEC

The Organization of Petroleum Exporting Countries are meeting in Vienna this week to discuss terrorism threats to supplies and whether current levels of production should be maintained or cut.

  • The threat of terrorism as a disruptive force to current production levels is front and center after last month's attempted bombing in Saudi Arabia.
  • Losses caused by unrest in Nigeria have eased OPEC's concern that rising stockpiles will erode prices, the group's President Edmund Daukoru said.
  • Kuwait wants the 11-country cartel to maintain its production ceiling "just to help the prices be more stable," the nation's energy minister, Sheik Ahmed Fahd Al Ahmed Al Sabah said.
  • Meanwhile, Venezuela is demanding a production cut of between 500,000 and a million barrels a day when the group meets this week, claiming the market is oversupplied.
  • Iran, OPEC's number two produce, remains mired in nuclear talks, increasing supply uncertainty, especially after hints over the weekend the country is not beyond using oil as a weapon.

4. All My Exes Live in Texas

Last night after the bell, Texas Instruments (TXN) warned that first-quarter sales may miss its highest forecast, disappointing investors who were anticipating a more optimistic outlook.

  • TXN said sales will be $3.22 billion to $3.35 billion, compared with a prior forecast of $3.11 billion to $3.38 billion.
  • Profit will be 31 cents to 33 cents a share, compared with a Jan. 23 forecast of 29 cents to 33 cents.
  • Nokia Oyj, Texas Instruments' largest customer, had been making market share gains, prompting raised expectations heading into last night's call.
  • The report comes after last week's announcement from Intel that revenue may fall $600 million short of its highest forecast originally made in January.

5. Greenspan More Important Than Pope!

The bids for rights to publish the memoirs of former Federal Reserve Chairman Alan Greenspan have reached a feverish pitch, with the winning bid believed to be somewhere in the $8.5 to $9 million Burger King junior bacon cheeseburger range, according to the New York Post.

  • In 1994 Pope John Paul II received an $8.5 million advance for "Crossing the Threshold of Hope."
  • Alan Greenspan's memoir is believed to have been won by Penguin Inc. with a bid in the $8.5 to $9 million range.
  • Of course, the all-time record holder remains the $12 million paid to President Bill Clinton for "My Life."
  • According to the Post, one publisher called Greenspan "the face of prosperity" for his 18-year stewardship of the Fed through the terms of three presidents.
  • Hmmm, better write it quick, bubble boy!
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