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March 08, 2007

A Classic Market Break?
by Bob Hoye

Excerpt from edition dated March 5, 2007.

• The yield curve (10s to 2s) was inverted at -15 bps on Wednesday, February 21, -12 bps on Friday, - 7 bps on Tuesday, February 27. Now it's -4 bps.

• While sub-prime spreads were under extreme pressure, traditional junk, which has been "bulletproof", narrowed to 446 bps on Thursday and then widened to 455 on Monday, February 6.

• The gold/silver ratio's recent decline made it to 46.7 on Monday, February 26, and the big move did not come until Thursday, March 1.

  The rise in the ratio to 51.2 this morning is a fast move and was coincidental with the overall break in the hitherto hot games.

• Cheerleaders have been plying their trade, with Barron's (March 2) front page featuring a cartoon of a grinning bull with a sword slashing a startled bear.

• Commenting on increasing financial concerns on Wednesday, February 28, New York Fed President, Tom Geithner, said "Central banks need to stand prepared to make appropriate monetary adjustments if changes in financial conditions would otherwise threaten the achievement of the goals of price stability and sustainable economic growth.".

This means that the Fed is about to follow the decline in treasury bill rates with some grandstanding about cutting administered rates.

It is worth emphasizing that short-dated market rate of interest always increase with a boom and always decrease with the subsequent contraction. T-bill rates reached 5.18% on Friday, February 23 and have declined to 5.08% this morning. A confirmed downtrend would be bad.

• Outside the big percentage drops in stocks and commodities (CRB down to 304 from 315.1 last Monday), changes in the credit markets seem appropriate to the significant loss of abilities by speculators to drive prices up.

• On the brighter side, the ABX HE BBB crashed to a low of 73.06 on that fateful Tuesday and has recovered to 81.46 since. This is likely to be brief.

  The gold/silver ratio, which reached 51.2 earlier today, has eased to 50.7.

• Perhaps much of the initial panic is in the markets and, while some relief is possible, the overall action seems to be on a path that in the past has led to a liquidity crisis.

Bob Hoye
Institutional Advisors

The opinions in this report are solely those of the author. The information herein was obtained from various sources; however we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each securitys price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance.

Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or options or futures contracts. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.

Moreover, from time to time, members of the Institutional Advisors team may be long or short positions discussed in our publications.

Copyright © 2003-2008 Bob Hoye

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