Keepin the focus real steady

Today the general trends continued. Bonds continued to sell off apparently in reaction to Greenspan's testimony re: the economy and interest rates. But on the flip side we had some nice moves in the market with the XLF hitting new highs and many of the more momentum type tech names continuing to ramp (re: Sandisk, Qualcomm, and Google).

There have also been some big bounces in the real estate related stocks (homebuilders, REITS, etc.) after being sold pretty hard the past couple weeks. I think the key thing to emphasize right now - is as far as we know the economic statistics as published and interpreted by the Government just aren't that bad. I personally consider the CPI numbers released last month quite alarming - but their appears to be a logical explanation there due to the momentary spike of oil to $70 and the refinery shortages post the hurricanes.

I think instead for the meantime investors and traders want to focus on what appear to be still good earnings numbers coming from many companies instead of thinking about what *could* happen with interest rates, the dollar, inflation, and a slowing economy.

I think the proof is in this chart right here:

Things to note:

1) Yields continue to rise across the board and quite rapidly
2) The fairly even rise across the different maturities

Main implications - as long as even the long maturities are being sold - healthy concerns regarding the economy are being voiced - mainly that the economy is growing and/or some inflation is out there - and interest rates are expected to be higher going out.

The only given that we have is that we "know" to some *degree* at least or maybe I should say - it is widely perceived that the Fed is going to take short term rates into the 4.5-4.75 range over the next 6 months. Now just by watching the longer term yields we should be able to get some feel for the strength of the economy. At a minimum we should be able to note investors expectations about the strength of the economy.

If longer term yields continue to rise then investors are not too concerned about growth and feel that growth/inflation will be sufficient to sustain higher interest rates. The flip side would be if investors see or expect slowing growth and begin to buy the longer-term bonds driving yields down. In that scenario where slow growth and low inflation is expected we could reach the flattened yield curve or inverted yield curve scenario that we last saw in 2000-2001. We know how that ended.........with a lot of pain.

But just as I was too early in making outlandish predictions of gloom and doom - stock market crash, etc. - it is probably too early to jump on the Bear bandwagon. The market will tell us by the moves in some of these key sectors that we are tracking.

Also of very important note - are the interrelationships - *sometimes* - a breakdown in a key variable - re: bond prices, exchange rates, commodities prices - may signal a major move to come in the equities markets. Often times though what is perceived to me to be a "significant" move is actually just noise. That is one reason I like to post these charts from Yahoo bonds - because they show not just the day-to-day trend but also the trailing month. This really helps to paint a picture of how far we have moved and how quickly.

That wraps up everything for tonight - I hope not too repetitive or unintelligible. I am going to try and add a link section to the site sometime in next day or two so that readers can see what sources I am reading weekly to help me get a feel for things. It may also be interesting to compare notes - as I have a feeling that my sources are heavily bearish. ;)

Regards,

BG