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[Islander]

The statistics say that the market is "on hold" waiting for something, maybe Bernanke, but maybe something more profound and longer lasting: The Four Year cycle, or a major multiyear correction? We can make such a case with ease. 1. The yield curve is today less inverted than it has been since last August 06. The spread shows the 3mo at 4.88 v. 10yr at 4.58 v. 20yr at 4.78. The curve has been inverted for 6,7 months. Bond sentiment is shifting toward fear of a market decline and stagflation. Slowly fears of Fed rate increases are fading and a forced fed easing seems possible. A more normal yeld curve appears to be in the making, but it will be lower (say 4.25%?) by fall. Bond traders can make things confusing: but remember they never take prisoners so don't get in front of them when they move to dump bonds. The dollar and gold will be the first, but only the first reaction to rate drops. (the Fed may get dragged into this one). When they sell it is the sign of not a buying opportunity, but a shorting opportunity. 2. The K-Shiller Index of housing in twenty cities says US housing prices are starting to fall. Add to that the sub-prime market, it says foreclosurers/liquidations are rule for the next two or three years. The message is that lower income consumers are about tapped out ( 1/2 of 70% of the economy if we are lucky). Bill Gross (April letter) suggested that on average US homes are 15-20% overpriced unless bond rates decline substantially. The Fed will likely be accomodative to avoid an economic route (assuming that is somehow possible). But equities will only have short rallying runs before falling again, and again. PCE spending rules the stock market! (If Congress steps in to save homeowners things could really accelerate down.Dollars out of airplanes might not be a figment of BB's imagination.) 3. Is the sentiment of equity holders shifting? Looks like it maybe. Equity owners are nervous; Volume in equities when the market is down are high. But when the market is up, volume is significantly less: Sentiment is "risk avoidance", not risk taking. The institutional buyers are waiting and watching before lightening up, and in the meanwhile someone is keeping a bid under gold, and energy. The market might be in for a long interlude of stagnation and cheaper equities. A long run short opportunity is coming, and that is new to me at least. I think it could be similiar to the 1920's if our leaders play it wrong, and I bet they will. Best, Islander.