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Rates Becoming a Problem for Stocks


We all know that rising rates are bad for stocks, eventually anyway. Even if REIT's won't fall - yet - just look at housing and utilities imploding and you will understand what I mean. It kind of spreads like cancer until the high rates eventually get to the major indices, as I discussed in yesterday's Buzz. It was funny, I walked into my Club at 5:30 and a VERY rich friend of mine says 'How did the market do?' I said you mean the DOW or the MARKET? He said 'the Dow' and I said 'up 20 or so.' He asked what was bugging me and I told him the Advance/Decline line was like -1000. Even he understood that was bad.

Over the years, we have relied mostly on 'boutique research' and our own research, instincts and methodology. (One of the firms' research that we use, as you have seen, is Ned Davis Research.) They graciously allow us to share some of their research with you. Two charts on their site caught my eye yesterday that are UBER BEARISH for stocks. Again, not advising anyone to sell anything, just what I see with my two eyes.

Links to the charts are below. The NDR Bond Benchmark Model and their T Bills/SPX yields charges are in serious danger territory. It explains why we have been calling for 1) a fall in bonds and 2)a drop in stocks that follows. NDR says that 4.90% in 10's is the tipping point. Well, we are almost there my friends.

Note that this is in direct contrast to many 'strategists' that I hear on Bloomberg Radio, etc. who say 'stocks are cheap compared to bonds.' They take their guess on 2006 or 2007 P/E ratio, invert it to get an earnings 'yield' and then compare it to the 10 year note. I hate to say I find that to be a foolish way to invest other people's money. We continue to be defensive across the board and can't wait to get bullish - honestly - but only when I get the fat pitch to hit. In either bonds (late April - early May) and stocks (October?). Just educated guesses and not advice.

S&P 500 Stock and Total Return Indexes
S&P 500 Stock Index
Position in T-Bills

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