Sunday's Notes From The Trading Turret: "This Time Is Different"..They Really Said That

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"The yield drew within 13 basis points of 10-year yields, the narrowest for this portion of the so-called yield curve since January 2001. The gap, which was 19 basis points a week ago and 176 basis points a year ago, is likely to invert ``in the next few weeks,'' said Jim Bianco, president of Bianco Research LLC in Chicago.

An inverted curve, where short-term yields exceed long-term yields, last happened in December 2000 and has preceded each of the past four U.S. recessions. Some economists say this time is different because it is more of a reflection of tame inflation." -- Bloomberg, August 26, 2005

"In his bluntest warning yet about asset values, Federal Reserve chief Alan Greenspan said Friday that housing and financial imbalances are becoming major issues in driving central-bank forecasting and policy. That implied that more rate hikes are ahead to prevent further overheating." -- Barron's, August 29, 2005

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Inversion?

Yes, despite the cries of denial from Street Econometricians, and the wacky and twisted prediction from PIMCO's Fed Expert a couple months ago that the Fed would Cut -- yes Cut-- .....yes Cut! by year-end.

That completely disregarded The Chief's history of always going too far -- whether raising or tightening -- and to the point of killing things and breaking people, and you must wonder how they got it so wrong.

But no matter, now we must think about what's coming next.

Do you remember way back to the 1994 tightening cycle when the Mad Scientist Treasurer of Orange County, California -- Robert Citron was his name I believe -- went off the deep end in the credit derivative lab and blew up the County's portfolio of inverse floaters and other exotica?

Something similar is coming, at least that's what I'm feeling, and we're going to eventually find out where the rotting, leveraged wrong-way bond bets are buried, that seems almost certain.

Makes you want to drop everything, put on a pair of overalls, and jump on the backhoe to start digging, doesn't it?

Good-bye To The Chief: Don't Let The Big Mahogany Door Hit You On The Way Out

Isn't it fascinating that The Maestrosity is suddenly getting religion about "imbalances"as he fades into the sunset? Could that be a case of "CYLL".... Cover Your Lousy Legacy?

No, that would be too cynical and I refuse to say it, nor will I mention the 2 Bubbles, Yes 2 Bubbles, during one tenure.

But you must admit that it's ironic when the progenitor of the imbalances -- created by always loosening too much, then tightening too much, then loosening too much, then...... -- warns his successor about "housing and financial" imbalances.

Chutzpah writ large in my opinion.

Meanwhile, in the world of Treasury traders, the C.O.T. report shows that Commercials have flipped to a Net Short position for the first time in several weeks.

October 30 Year..click to enlarge

We really must consider this Treasury trade and think about how to position for a money-making opportunity.

If you believe that The Maestrosity is going to tighten until housing and the economy crack -- that's my expectation -- Long Bonds are going to become a screaming buy at some point, but do yields first go higher?

That's the question, of course, and maybe the first clue was the manner in which the 30 Year Yield barely budged last week while the 2 Year jumped.

Long Treasuries will eventually telegraph the crack in the economic dam, and will become the go-to trade.

If we're not there yet, it is coming, so stay tuned.

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Housing And Nasdaq To Trade Places?

"These are the words of independent global investment research house BCA Research -- An inflection point is approaching in the economic and financial outlook. The current intermediate term rally in stocks should abort soon. Following what could be a sharp correction, a rebound and then a broad top in Equities is likely to form over a period of time that could take months."

"BCA's summation suggests the current uptrend in share prices should soon abort. U.S. policy will eventually go on hold and shares prices will rebound from levels that could be as much as 10% below current prices, BCA believes. But it remains to be seen if the current balancing act might be dislodged in a more prolonged way. BCA maintains that in the big picture, a prolonged top appears to be building." -- Australasian Investment Review, August 26, 2005

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"Housing and Nasdaq To Trade Places?"

That's the question Investors Business Daily is posing in Monday's paper, and the chart they show is very enlightening.

It shows Builders taking off just as the Nasdaq topped, and the opposite -- Nasdaq Up/Builders Down -- may be now setting up.

That fits into the scenario of those who are calling for a "seasonal Tech Rally", and also is reinforced by the recent relative strength of stocks like Apple Computer and Autodesk.

Right, and you can also see that the break of the Downtrend Line in a Toll Bros/Nasdaq relative return chart adds weight to the argument.

Ok, but those Bearish views expressed by BCA Research carry immense weight, and it sounds like a "prediction" -- anathema to me -- but I've followed them long enough to know that they will adapt to changing inputs, and their judgement will remain sound, reasoned, and logical

The very, very best market observers -- Marty Zweig (no longer active ), Ned Davis, Steve Leuthold, BCA Research, Bianco Research -- provide a probable scenario based on available facts, while the blubbering and blustering Street Grifters, Predictors, Poseurs, Stra-Tee-Gerists and Trader Celebrities -- The Greatest Fade Of All Times! -- are characterized by categorical, emotional verbal eruptions signifying nothing.

Meanwhile, did you notice that Barron's is shaking the Withered Dead Money Value Tree, calling for Large Caps to assume their rightful leadership again?

That's been a dead wrong call for months, and people still insist on talking about all these cheap gargantuan-cap stocks just sitting there ready to chaffeur you straight to EasyStreet, and it's no more difficult than, say, picking up Kopecks in front of Bulldozers, and hell, "even Citigroup may be nearing a bottom", we're told.

Citigroup..click to enlarge

Yet I'm hesitating to jump in and maybe it's because I know that some of these Value Proselytizers have seen more bottoms then Bill Clinton, and also because it's somewhat easier to pound tables when there is a pencil in your hand rather than a phone with a client on the other end and......

....you get the picture, right?

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I guess it's time to go to Charts Of Interest, then turn in early and be ready for what Monday brings.

Remember that Friday gushes in with the Monster Number, August Non-Farm Payrolls, and with much of Wall Street gone for Labor Day, the swings in Equities and Bonds could be huge and violent.

I can hardly wait.....how about you?

Have a restful evening.

Stephen

P.S. ---- Note that the Zweig/Davis 4% has swung to a SELL Signal on the Nasdaq Composite, QQQQs, and Russell 2000.....It is very close to a sell on the Value Line Index as well.

P.P.S -- October Crude is trading over $70 in electronic overnight trading

Not Oversold By This Measure

Advance/Decline Line Rolling

QQQQ 5 Day RSI<30 Still On Buy

S&P 500 cash

Dow Industrials

Semiconductor Holders

Morgan Stanley Cyclical Index

Nikkei 300

Consumer Discretionary Spiders

Chicago Mercantile Exchange

Proctor & Gamble

Google

Meritage Homes

Respironics

Apple Computer

Autodesk

Nabors

S&P Energy Spiders

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