OI Technical Staff : 6/4/2005 9:59:59 PM
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Jeff Bailey : 6/4/2005 4:24:35 AM
For what it is worth... I turned bullish the semiconductors on March 29 when the SMH traded $32.60 and feel that the SMH will trade at or above $35.70 by November 18, 2005. However, on May 10, I did feel, and still do to a point, that the SMH will not close above $35.65 on August 19, 2005.
Jeff Bailey : 6/4/2005 4:13:51 AM
Tab ... I didn't see a response from you regarding your question (06/03/05 at 12:00:57 PM) and my answer of NO, I don't see an inverted yield curve, when I asked you (Tab) if you did.
If you (Tab) do see an inverted yield curve, then you are probably NOT bullish on the NASDAQ, and you probably can't be bullish on the Semiconductors.
Tab: 1) Do you see an inverted yield curve? 2) I believe you are bullish the NASDAQ. 3) I'm somewhat confused if you're bullish or bearish the Semiconductors, considering your BEARISH DIVERGENCE comments regarding the SOX.X/SMH the other night. Are you bullish or bearish the Semiconductors?
Jeff Bailey : 6/4/2005 4:03:13 AM
How can we test ANY of this? (02:35:56) .... First we must look at something that would show various asset classes in the fixed income arena.
Let's TEST Tab!!!! Is Tab correct that the $FVX.X and the E V V, though TWO DIFFERENT ASSET CLASSES, but SIMILAR MATURITY LENGTH are performing the same? I would say RESOUNDINGLY, or with some conviction .... YES! Tab is correct!!!!!
Here's why I can say this to be true.
Here's the Beetle's Balanced Benchmark, but tonight I'm going to add the E V V to it, and take the closing price from 03/31/05 (end of Q1). We've always tracked the BBB with the ishares Lehman 1-3yr, which on a MATURITY basis is as close as I can get to roughly a 5-year maturity.
BBB at this Link
We should note the difference I stress between ASSET CLASS and MATURITY. Between the SHY (ASSET CLASS= U.S. Treasury notes, backed by the full faith and credit of the U.S. Govt) and the E V V (ASSET CLASS= Corporates, backed by underlying corporation, and under conditions of bankruptcy, second to lenders) most would deem the SHY "less risky" than the E V V.
If we agree that the SHY is a "less risky" asset class, then perhaps we should allow some RISK PREMIUM to the E V V. If an investor is willing to take on MORE RISK, what should they expect in return? More return. Right?
OK... SINCE 03/31/05 (see P/L %) it appears that the SHY and E V V show about the same PRICE gain. We do see some BETTER PERFORMANCE from the E V V versus the SHY over the past 5-days and 20-days. Still, pretty darned CLOSE if we were to add back today's -0.12% loss for the SHY to its 5-day and 20-day Net, and subtract today's 0.27% gain from its 5-day and 20-day Net. Again... understand that today's session was WILD in the TREASURY complex!
So.... I would, and I think MOST would agree that Tab is correct in his thinking that short maturities are moving somewhat in tandem, but perhaps we see an end result today of why I questioned the reasoning to be buying a shorter-dated maturity, when mentioned in unison with the 5-year note, somewhat equivalent to the SHY.
Yield Curve flattening ... When you look at the PRICE % moves from the P/L % (since 03/31/05), and even the 5-dayNet% and 20-dayNet% do you see the "curve flattening?" I'm talking ONLY about the SHY, IEF and TLT now. PRICE on the shorter-dated SHY is relatively unchanged, but as we lengthen maturity to 7-10yr and 20yr, we see greater PRICE appreciation. When do we know about YIELDS for bonds when PRICE is appreciating? Correct... YIELD must be falling.
So.... what type of yield curve action are we seeing since 03/31/05? Last 5-day's and 20-days? I'd say we're seeing something closer to scenario #2 (longer-term yields falling faster than shorter-term rates).
Do you see where the "scenario" doesn't necessarily match the "reasoning" to buy shorter-dated maturities?