RDX or TATP what does it matter ..if the summer rally continues?

July 17,2005
Hello,
This week it is all about earnings, hurricanes and takeovers. About 1000 companies report earnings, Hurricane Emily crashes a shore near Cancun and not to be out done investment bankers are capitalizing on the low equity valuations perusing the urge to merge. Going into the week Semi conductors and Bio Techs have been leading the way, but let’s see if this weeks earning announcements move this trend forward or make it yesterday’s news. There seems to be a lot of resilience in this market weather it be an act of international terrorism or a natural disaster.

The big news seems to be that China has begun the long overdue process to turn the Yaun into a fully convertible currency. This initial step of letting the Yaun fluctuate versus a basket of currencies first major effect so far has been to cause a sell down in the US treasury market, perhaps alleviating the flatness in the yield curve. The translation into plain English means long term rates ie…mortgage rates will begin to rise. Will rates raise enough to discourage home buying ,I am not sure .The Magic number with mortgage rates is like the magic number of the price of gas .What price will it take to discourage one type of economic activity and encourage another? What may hurt home buyers, may very positively enhance equity valuations because as the saying goes a flat yield curve leads to a recession. What is a flat yield curve? Again this is far less complicated than it sounds and simply means that short term interest rates are the same or more than long term rates, another words there is no time premium for the lender. The stock market views a flat yield curve very negatively, because it points to a slow down in future economic activity. How flat was the yield curve, well the 3month yield is 3.35% and the 30 years is 4.50%. That’s not exactly flat but for example July of last year the 3 month was 1.35% and the 30 year was 5.20%, now that’s a yield curve. Another issue that has crept up is the specter of inflation. A stronger Chinese currency means higher prices for Chinese goods. Again it is one of those magic number issues, another words how much of and increase in the Yaun would be needed to raise prices noticeably. This sounds like more of the sky is falling argument, in the current economic circumstances runaway inflation has about as much chance of coming back as Jimmy Carter getting elected president in 2008. There are many on Wall Street who continue to harp that inflation is coming, inflation is coming, given that fact that we had a market bubble bust in 2000, followed by the attack of 9/11, the FED and the Treasury used an enormous amount of resources to fight and avoid deflation (like the 1930’s) any inflation would simply be temporary as there is a slight boost to inflation after all calamities have subsided due to the excess liquidity created to fight the calamities.

Again since you asked, the average car payment in the USA is $385.00 per month, if you invested the same amount starting with zero in 30 years at 9% return you would accumulate $417,569 after $108,488 taxes at a 28% rate. (Historically the stock market has returned around 11% per year) .If you were to invest tax free of $4000 per year ($334 per month)in a ROTH or Traditional IRA at 9% for 30 years you would end up with $585,483. A car payment can get you started so call me……

James
1(888)599-1188