Back at the last minute with some details

For once it was tough to get the motivation to post. Typically I can hardly wait to jot the thoughts down, but tonight I was feeling quite lethargic and an hour long talk with my sister was somewhat stressful and disheartening. Anyways...........I think I still have some insight re: bond yields and the current outlook.

Some important things happened today as the Fed tightened another quarter point and stuff is getting a bit clearer there with the yield curve picture. Here is the current table:

I think that we are seeing the spreads betwee long and short rates continue to compress and what is being heard out there right now is that is going to continue. One of the biggest calls being made by the big guns (including BCA research and Pimco) - they both know a little bit about bonds :) - they are both calling for falling long bond (re: 10/30 year) through the end of the year. Even in the face of the fed rate hikes and some potentially formidable CPI numbers coming?

We have a battle going on here between several parties and all have different intentions. We have the bond holders who believe that a recession will soon be upon us due to the Fed's aggressive tightening. They think the CPI numbers which have shown up huge over past few quarters are essentially red herrings becaus they think energy has falsely inflated the numbers and the CORE numbers are still looking great. (I am skeptical about this personally.)

Anyways the argument continues that the Fed is going to keep raising on the short term to 4.5% minimum. By the time they get there though - the economy should be slowing so much that inflation is going to be snuffed out completely and recession will already be beginning. From there on out longer term yields will be comparable to the short term yields (re: 4.5% or bellow) because bond investors don't need to be compensated on the longer end re: inflation, etc.

Now who is on the other side of this. I would say the Federal Reserve (at least by what they keep saying.) When multiple Fed Governors come out and make comments re: inflation fears after publicly stating earlier that long rates should be higher you have to feel they are really jawboning the bond markets. Other comments like bonds are priced for perfection and not enough credit risk premium is there, etc. also makes you think along those lines.

I guess another point of analysis - although I am not sure how it matches to these - is that inflation really is on the way and big time and it is showing up in the money supply. Even with 1/4 point raises in the fed funds - it is really doing nothing to slow the velocity of money and money supply has continued to expand over trailing 6 months. I don't have a clear answer here as I am already pushing the borders of my economics education - but makes sense to me that a big shakeout could be coming. Who is going to get it right - I am not sure.

The clearest and most vulnerable areas until things become clearer are the financials and anything related to discretionary spending in the economy - including unfortunately - housing. One possible explanation for the big move that we saw in the financials earlier this week and last week may have a lot to do with the first point of view. The goldilocks view may be that these miniscule rate hikes have really slowed things down and we need to just leave fed funds here for a month or two and then begin cutting again. Under that scenario we might see a healty yield curve manifest itself again and the Banks could go back to making money on the spread (the carry trade so to speak) and issuing mass amounts of ABS and MBS as usual.

I think this view is delusional - but some very smart people are calling it this way. The two biggest variables are:

1) What is really going on with inflation and
2) If inflation is really out there when are long-term bond investors going to start pricing that risk more rationally?
3) What is happening with the dollar?

If we can consider all of those and track the developments by watching the yield curve - I think we stand a chance. Not to necessarily - *predict* - anything - I don't believe that hype - but to keep tabs on what the setup is looking like so that we can track any major divergences as they are developing.

Now that we have gotten through all that BORING interest rate stuff.......we had a Q3 earnings release from a company called PDLI (Protein Design Labs). I have a few friends who follow this one closely and have made a boatload of money in it. It was down a few pennies in after hours - but I intend to spend some time focusing on this one when some more time frees up. They appear to have some really promising technologies and medicines.

I still have to come to jesus with some of their accounting procedures and reporting methodologies (re: GAAP and NON-GAAP discrepancies) before I feel comfortable making the plunge / plus the calculation of the possible dilution with two major convertibles offerings - but they are growing revenues quite nicely and appear to have some great things in the pipeline.

This will be next up after the NCTY speculation if I have any capital left at that point ;). Also fina final note (really) - I have corresponded with very reliable china internet investor earlier today re: NCTY and he has a much less rosy Q3 forecast. It is still good - but not the blockbuster I had expected and more or less in line with analysts forecasts. I am still buying sometime over next 7 days - but was not quite what I had expected and this guy is credible.

Anyways - best of luck to everyone finishing out this week - I will probably post less from here on out - but I am keeping an eye on things. :)

Regards,

BG