Sunday, July 16, 2006


Wall Street Hears The 'R' Word

With a dicey week ahead for the markets, an editorial from US News and World Report. "A discouraging word is beginning to be heard on Wall Street: the 'R' word, as in recession. After 17 straight interest-rate hikes by the Federal Reserve Board over the past two years, many now fear that the economy is cooling down rapidly. Merrill Lynch economists, for example, believe there is a one-third chance that the U.S. economy will slip into recession sometime next year."

"The June labor market report, which showed a worrisome drop in the number of new jobs created, only fueled fears that consumers, already strapped by rising gas prices and higher interest rates, will pull back even more. 'The blocks are in place for a recession in 2007,' says James Stack, editor of the InvesTech Market Analyst newsletter."

"One key indicator is that treasury notes and bonds are now yielding less than the federal funds rate, which is what banks charge one another on overnight loans. Today, the federal funds rate, the shortest form of debt, stands at 5.25 percent while 30-year bonds were paying just 5.11 percent last week. While not a perfect predictor of pending recession, this type of yield-curve inversion 'is a strong signal that growth is going to slow measurably,' says economist Mark Zandi. Zandi, though, does not predict a recession, noting strong corporate profits."

"In the past quarter century, treasury bond yields have slipped below the Fed funds rate only four other times. 'And each of these preceded either a downturn in the economy, a major financial strain, or both,' says David Rosenberg, North American economist for Merrill Lynch. The last time treasury bonds were all yielding less than the federal funds rate was March 2000, just before stocks fell into a grisly bear market and about a year before the 2001 recession."

"Ironically, it was as recently as May that economists were fretting about inflation, not recession. But history shows the economy can go from too hot to too cold in a hurry. Since 1920, the time between the last in a series of Fed rate hikes aimed at slowing the economy and the first in a series of rate cuts to spur growth has been just 5.5 months, according to Ned Davis Research."

Coming soon to a stock market near you... the 'D' word.

Why Gold Will Break All Records
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