At Arm's Length - A Daily Market Commentary - Before the Bell Rings Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 04.20.04
The bond markets have been under some considerable pressure of late. When the Consumer Price Index was released last week, that pressure became even more burdensome creating opportunities in some markets, exposing lies in others, and otherwise signaling the end of easy money.

Opportunities come along every now and again. The problem has always been simple. Whom can you trust? When Bill Gross of the Pimco Bonds recently pointed towards purchasing insurance against inflation in the form of Treasury Inflation Protected Securities, many folks followed that advice and the result came in higher prices with lower yields. Now, these securities may not be better than owning equities that have rich dividend yields.

But Mr. Gross didn't stop there. In a newsletter released on April 10th, the bond guru warned that duration could become a problem for bond investors as the economy re-inflates. In other words, in an interest rate rising environment, the deficit becomes more cumbersome. Currently, with inflation at 1%, this debt can be considered manageable. Anything higher, and the current weight of this nation's debt will be exposed for what it is - crippling at best.

But what worries Mr. Gross is duration. He called it thrice damned - "damned if you shorten, damned if you lengthen, damned if you don't do a thing". In his view, the U.S. and Japan have some serious issues to contend with should inflation begin to take on some serious upside. These two countries could be problematic for investors as opposed to fixed income investments in what Mr. Gross refers to as "vigilant" countries such as Europe and the U.K.

At Arm's Length: 04.19.04
Note from the Editor:
It was an interesting week. There were numerous emails to sort through as well as a few phone messages. The question was whether we should continue the section called At Arm's Length and what, if in anything could be done to improve it. Or should I can the idea all together. Your letters were all well received and many of your ideas will be implemented. Many thanks for your input.

Most of your letters came down on the side of "keep it", which we have decided to do. Many, like the following had a pointed suggestion and one, I might add, that we will also use:

"I'm not so sure we need another market recap of the numbers. By the time you get to them, they are stale and although you do a good job explaining them, they mean very little to the average market spectator looking to do something today." The writer did go on to add: "Perhaps you could just do a first of the week commentary and we'll be able to judge your skill as a market prognosticator."

That sounded like a good idea to us. So this week, we will make the segment permanent. We will continue to use the same premise as the beta test by taking the markets and holding them "at arm's length" in the hopes that they will provide a clearer picture. We will however write the column two to three times per week, rounding out the BlueMoney Report and in doing so providing you with five new insights into the world of money and investing.

With that out of the way and a week long sabbatical to assess the future, all that is left is the actual commentary. Which hasn't changed too much in a week.

At Arm's Length: 04.19.04
I am going to keep this short and sweet. As this week unfolds, there will be a lot of emphasis put on your ability to ignore what you are seeing in favor of what you should believe. Folks from Missouri may have some difficulty with this concept and we would all be wise to take note.

Everyone knew that the earnings currently being reported would be good. Not better than expected - but strong. Everyone is also able to comprehend that this was a perfect alignment on productivity, money supply which includes low interest rates and accommodative policy, and a steady amount of growth making earnings and estimates of those earnings easily attainable. Now everyone will be asked to look beyond this good quarter, now being referred to as "short term noise" in many circles, to a long term outlook based on fundamentals.

But the chartists and the people who pour over the details of market fundamentals are pulling back their long range optimism outlook and with good reason. Many of these astute analysts are now seeing the inability of the markets to go much higher than the highs achieved in March.

There is a correlation between the bond market and the growth of the economy. Without going into the gory details of how this is achieved - remember, I'm trying to keep this short and sweet - if the 10 year Treasury has a 50% bounce from the cyclical low, which was 3.10% back in June of '03, the growth of the economy will be halved when that security hits 4.75% or even 5%. Which means in an environment of 2% economic growth, that pesky $35 billion in debt will become oppressive as the service costs become larger but, on the other hand, it would also provide the right amount of breathing room to cool off somewhat without a major pull back.

You know we have some difficulties ahead when eyes are starting to look at the first Friday in May (the jobs report for April) and the possible slip of the tongue that the Fed governors may provide as they wander the country making speeches.

The past four week's articles.

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