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A Call To Inaction The Rude Awakening Wall Street, New York Thursday, February 10, 2005 ------------------------- The Rude Awakening PRESENTS: Forty-five economists and a unanimous agreement: When forty-five economists all reach the same conclusion, they must be wrong. But can you guess what they predicted… --- Advertisement --- These Small-Cap Jumper Stocks are Making People Insanely Rich The first time, I thought it was beginners luck. The second time, coincidence. But after 15 of these "jumper stocks" rose 757%, 379%, 405%, 353% and more…I knew this was the best way to pick stocks I've ever seen. Find out how to become one of only 3,000 people in the world to join this exclusive stock-picking service. But act now… the price to get in will soon double! http://www.agora-inc.com/reports/GRP/WGRPF203 ------------------------- You are receiving this email as a part of your FREE Subscription to The Daily Reckoning. Should you wish to unsubscribe please follow the instructions at the bottom of this email. ------------------------- A CALL TO INACTION In a recent edition of the Rude Awakening, Eric Fry, your street-savvy New York editor commented that we might be "too contrarian for our own good." We had come to the sudden realization that bonds could keep rising. Soon after, we stated our opinion in the Rude Awakening. This prompted Eric's remark. We also closed out a short position in 30-year T-bonds that day…for a large loss. So far, closing the trade seems like a sound decision. We pulled the plug on January 21, 2005, with 30-year Treasury yields at 4.68%. Yesterday, they closed at 4.37%. As the reason for our sudden change in heart, we cited an interactive poll, conducted at Morgan Stanley's 2005 European Equity conference. 86% of the analysts present thought bond yields would rise in 2005, so we immediately took the other side of the trade. Yesterday we found this roadside bomb in the Wall Street Journal: "All 45 economists polled by Blue Chip Financial Forecasts expect yields to be higher a year from now. The average forecast is 5.2%, almost identical to the - inaccurate - forecast the economists made a year ago." Unanimity! We almost want to buy U.S. government bonds! Supreme trader, Dennis Gartman, also spotted the survey. "After this 'fact' we can be certain of one thing," says he. "Interest rates at the long end of the curve are heading lower, not higher…and perhaps much, much lower at that. Why? Because 45 economists say unanimously otherwise; that's why!" Of course, we'd never actually 'go long' of bonds. When you buy bonds, you lend money to the U.S. government. If you bought them today, you'd effectively receive 4.37% interest per annum, fixed for the next 30 years. As last week's issue of The Economist puts it: "Short-term interest rates and inflation are both rising, the current account deficit is huge and widening, the dollar has fallen and the fiscal outlook has worsened. Surely investors looking over the next ten years will want a better return that 4.2%?" Actually, 10-year rates have moved lower since the article was published, closing yesterday's session at 3.97%. It's hard to explain why bond yields are falling. In the recent Daily Reckoning Weekend Edition, we concluded the markets must be wrong. "Today we will commit financial heresy," we declared. "We will make the assertion that the market is wrong. Specifically, the bond market." The Economist also considers this possibility. "The financial markets have temporarily mispriced the risks involved," they write. "Investors are too complacent about inflation and about America's budget and current account imbalances." A market mis-valuation is not the only explanation we can find for this puzzling bond behavior. The Economist puts forward three other possibilities… 1. The economy is rather more fragile than the current statistics suggest. "Debt-laden American consumers, so the argument goes, will not be able to sustain their current spending patterns, particularly if the housing bubble bursts. Low long-term interest rates, far from being out of kilter, are actually a sign of incipient economic weakness." 2. Deep structural shifts in the investment markets have worked in bonds' favor. For example, a new theory on Wall St. says pension funds are shifting more of their cash into long-term bonds in advance of possible regulatory changes from Washington. Then there are the Asian central banks and their perennial battle against currency appreciation. 3. Investor confidence in the Fed as an "inflation-slayer." CPI-measured inflation remains low on a relative historical basis, and Mr. Bond Market may expect the 20-year trend to continue. That investors have it wrong makes the most sense to us. But whatever it is that makes bond prices rise, we're reluctant to bet on it, just for the sake of trying to capture a short-term, counter-trend move. But nor do we want to share a trade with 45 unanimous economists. The best action, in this case, is probably inaction. [Ed. Note: Chris Mayer, editor of the venerable Fleet Street Letter, used to be a commercial loan officer at a large bank, and has studied interest rate history… So when Chris says bonds are overvalued, it definitely pays to listen. Fortunately, he has a portfolio full of stocks set to benefit from higher interest rates, and he'd like to share them with you… The Fleet Street Letter http://www.agora-inc.com/reports/FST/WFSTEC24/ --- Advertisement --- Flash Alert: Get in before February 11, 2005 Stone-Cold "Profit Predator" Captures 534% Total Gains in 7 weeks. To make sure you take advantage of this remarkable opportunity, we're lowering the price of Doji Master for a savings of $2,905! Don't miss this limited-time offer: http://www.agora-inc.com/reports/DJM/WDJMF229 ------------------------- Did You Notice…? By GaveKal Research Japan: Two Reasons to be optimistic Momentum: After 10 quarters of uninterrupted growth (since the spring of 2002), cumulating in a total of 8%, the Japanese economy is now much stronger than it was in the aborted recoveries of 1992, 1994 and 2000. This should mean more resilience to external shocks or domestic policy blunders. A cautionary note, though: the cyclical position today is not very different from 1996, when Japan also briefly enjoyed a world-beating 4% growth rate, but was quickly knocked back into recession by Ryutaro Hashimoto's insane 1997 tax hike and the subsequent Asian financial crisis. Financial: Equity valuations are much lower than they were at previous recovery peaks. This means that even if equities fell sharply from present levels (which we think is unlikely) the downside is more limited and the risk of major damage to the financial system is slight. The restructuring of bank and corporate balance sheets gives even more reason for confidence on this score. [Ed. Note: This extract was taken from a GaveKal research note called, 'Anatole's Notes From His Japan Trip," by Anatole Kaletsky. Anatole Kaletsky is Principal Economic Commentator and Associate Editor of The Times of London, where he writes a twice-weekly column on economics, politics and financial markets. GaveKal Research is based in Hong Kong. GaveKal Research ------------------------- And the Markets…
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