[CANSLIM] Bond Market Overreaction?

From: <Chazmoore@aol.com>
Subject: [CANSLIM] Bond Market Overreaction?
Date: Mon, 25 Mar 2002 13:07:17 -0600

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I thought you might be interested in this report.

Good Market update.

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Capital Market Comment
Bond Market Overreaction?
M Capital Research
3/25/02

Written By:
Frank Mastrapasqua, Ph.D.
Steve Mathews

A sell-off in the 30-year bond last Wednesday helped re-ignite fears that the Fed may soon begin to raise interest rates, possibly as early as the May meeting. Equities felt the wrath of the credit market and declined, fueled by concerns that rising rates could stifle the forthcoming rebound. Although the equity market regained some of the losses incurred during the middle of the week, a more negative sentiment has begun to permeate the investment landscape.

Although investors have tried to focus upon the signs of economic recovery and the necessity that profits respond accordingly, the fear that such a rebound will induce interest rate pressures have left many market participants perplexed and non committal. Moreover, “credit” issues continue to surface, adding another element of uncertainty and contributing to a directionless market. Several banks have maintained tightened lending standards, and consequently a sustainable rise in commercial and industrial (C&I) loan volume has yet to materialize. Yield spreads between long-term Treasury bonds and corporate bonds rated Baa and below are wide by historical standards, indicating that investors are anxious and demanding higher returns. In addition, the commercial paper market remains closed for many companies, further illustrating the pervasive fear that has gripped the financial markets. Certain blue chip companies have encountered severe criticism when issuing bonds. Last week, General Electric’s (GE) finan

Adding little to clarify the Fed’s view or profit prospects was the February CPI report. Data released last week offered little evidence that inflation is on the verge of unexpectedly rising. Some prognosticators and the media tried to portray a greater than expected rise in the “core” CPI as a sign that pricing pressures might be building, thereby prompting a series of rate increases. However, a 3.8% increase in tobacco prices accounted for the entire upside surprise. Year over year, the CPI has risen only 1.1%, the slowest pace since 1964.

The CRB (Commodity Research Bureau) futures index, which some use as a gauge of inflationary pressures, rose 7% over the past two weeks. However, from an economic cycle perspective, this reading illustrates that demand is beginning to improve and deflationary pressures have started to dissipate. Despite the recent gain, commodity prices have dropped over 6% during the last twelve months and stand at roughly the same level they were two and a half years ago.

As the financial markets grapple with the many crosscurrents that characterize any recovery, the stage is set for a healthy rebound that should gather momentum as the year progresses. Competition, excess capacity, and the structural productivity gains achieved last decade should produce an environment where price increases remain contained. In addition, a strong dollar suggests that fears of inflation appear premature. Last week, the U.S. dollar recorded its biggest weekly gain against the yen since January 2000.

Volatility in the credit markets is characteristic of changes in the business cycle and policy shifts. Prior transition periods from recession to recovery have exhibited upward pressure on long-term rates in the early stages only to be followed by lower rates as fears dissipate. This time should prove to be no exception. Despite the psychological dilemma that have captured investors, the power of the recovery should in time dominate the investment landscape.

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Disclaimer
The information and opinions contained in this report should not be treated as fact or as insight that will produce desired investment results over time. Investment conclusions always bear risk, and that risk may not be reasonable for any particular reader. Obviously the writer, even assuming good intentions, does not know of the reader's particular financial circumstance and therefore is not able to assess the propriety of whether a named security makes sense as part of a given individual, family, or institutional portfolio. Mastrapasqua & Associates clients may, from time to time, own some of the companies mentioned. We hold out no obligation to give readers of this column advanced notification of when we may change an opinion. To our knowledge, none of the information contained in our column would, when it becomes publicly available, have an influence on the valuation of a particular stock. 'Buyer Beware' is a great rule for all investors to follow.
This caveat is perhaps best followed by 'do your own independent homework' and 'inflated expectations and short investment time frames are the curse of investment dreams.' Above all else you must take personal responsibility for your investments. Should you prefer to transfer this responsibility to this column, we do not accept any portion of that attempted responsibility transfer. Investors should receive investment advice based on an assessment of their own particular investment circumstances and not on the basis of recommendations in this report.

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VirtualMoneyManager.com is a financial service of Mastrapasqua & Associates, a prominent US money manager with over $1.8 billion in assets. At VirtualMoneyManager.com you can find weekly independent investment research including the Capital Market Comment and the company specific Focus Report.

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