it's that flat yield curve again...as January goes so goes the market.

January 3, 2006
Hello,
The economy is growing, unemployment is low and inflation is tame so what else could some want for Christmas? Well how about the end of this secular BEAR MARKET. This decade has so far produced sub par returns and with the FED continuing to raise rates equities it looks like will continue to swim up stream and investors may continue to spit in the wind. The positive is that it appears that the rate increases by the FED may be nearing and end. What’s going to stop the FED you ask? Well the slow down in spending in the first half of 2006 due to the usually hang over from the holidays, and consumer exhaustion with disaster contributions as well as a slow down in rebuilding in the Gulf.

Well 2005 was one of those years, a year of creeping incremental disasters. It was hard for someone to not be affected by a hurricane, tsunami, and earth quake, transit strike or donation fatugue. It was filled with a lot of almost’s ,and as one of clients put it “a whole lot of nothing” .Lots of work and lots of promise but little gain from all the effort and for many it took a lot of effort just to stay even. So what did we learn form 2005 well hear is my very short list :

1) Dick Cheney is a big Johnny Cash fan.
2) Only Detroit doesn’t know that if you have a war in the Middle East gas prices go higher.
3) If you need an engineer don’t hire one that worked on the levies in New Orleans.
4) Airlines are always in bankruptcy.

So what about all the talk about a flat yield curve? Interest rates are based on risk and duration (time) .A flat yield curve is when short term rates say a 2 year bond, are the same as long term rates like 10 year bond. When the curve inverts the shorter rates are higher than the longer rates. This implies that there is more risk; say the risk of recession in the short term than the long term growth prospects for the economy. An inverted yield curve does signal a recession but the duration of the inversion is what is important. Lets face it the yield curve has been pretty flat for some time. No surprise, the FED has been raising rate for some time. So what does it mean? Right now It means a short term first Quarter economic slow down will lead to the FED curtailing the policy of rate raises and the stock market should take off signaling a return to stronger growth in the future.

My test will be simple, as they say, “as January goes so goes the market” so if January is up the market will be up and if not we will be in for another sub par year in 2006.

James