More predictions on the economy
It’s the beginning of a new quarter and the Dow is up 300. Predictions of where we go from here differ widely. Here are two examples. First, the bearish Merrill Lynch economist David Rosenberg in the WSJ:
The two-year Treasury yield and Federal-funds rate: Rosenberg calls the comparison of the yield on two-year Treasurys and the Fed-funds rate “the best leading indicator” of a market bottom. Right now, the spread is inverted by negative 0.70 point, indicating that the Fed-funds rate is lagging behind, even after all the easing of interest rates. Rosenberg will be less bearish when the spread is 0.20 point on the positive side.
10-year Swap spread: This measure compares yields on 10-year interest-rate swaps to 10-year Treasurys. Right now, the spread is 0.61 point. Though that is down from the high of 0.87 point, it need to get to 0.40 point before the coast is clear…
Moody’s Baa corporate spread: This compares Moody’s U.S. Baa index to U.S. Treasurys. The current spread is 3.10 points and it needs to narrow to 2.40 points before Rosenberg will be more optimistic.
Junk-bond yield spread: Things already are pretty ugly in the financing markets; last week, Citigroup led a syndicate of banks that sold $1.45 billion of Harrah’s Entertainment’s debt at only 84 cents on the dollar. Right now, the spread between corporate high yield and comparable Treasury notes is around 8.50 points; Rosenberg said it would have to come down to 6.20 points…
Jumbo mortgage rate minus conventional 30-year mortgage rate: Rosenberg wants to see this spread narrow to 1.80 points from the current 2.20 points.
The three-month TED spread: The TED spread is a way to measure the liquidity coming into and flowing out of the U.S., and it measures the difference between the T-bill interest rate and the London interbank offer rate, or Libor. Right now, the spread between three-month T-bills and three-month LIBOR is high at 2.00 points. Rosenberg writes,”To signal a return to a stable financial market backdrop, and an improvement in economic fundamentals, we would need to see the spread narrow all the way back” to 0.35 point.
Doug Kass in Real Money:
This morning, I have decided to move both my short and intermediate-term market ratings to an all-out buy — my new market rating is now 10-10! — based on the following considerations:
* While I initially expected a 5% to 10% decline in the S&P 500 this year, my new year-end S&P target is 1,666, for a gain of 26% from current levels. I might be low.
* The writedown of toxic paper throughout the world’s financial system has dramatically overstated the severity of the credit issue. In fact, I fully expect, in the fullness of time, that a write-up of balance sheet assets in 2009 at the major money center banks and brokers will be a contributing factor to a surprising 25%+ rise in corporate profits.
* Shares of financials, which have been unfairly targeted by the short community over the last year (monoline insurers, banks, brokerages, etc.), could double in price by year-end…
* The 10-year U.S. note, with its 3.40% yield, is cheap and is likely to provide an overall return of close to 10% in the next 12 months.
* Oil prices, stimulated almost entirely by managed commodity trading funds and hedge funds are destined to drop below $50/barrel by year end.
Question: which prediction was made specially for today?
April 1st, 2008 at 3:27 pm
That 1666 looks suspicious to me. I say the RealMoney piece is for April Fool’s, and the WSJ piece is supposed to be serious.
Which is not to say that the WSJ piece is more likely to be accurate.
April 2nd, 2008 at 1:07 pm
… Oil prices, stimulated almost entirely by managed commodity trading funds and hedge funds are destined to drop below $50/barrel by year end…
If the banks are going to double, business will have to pick up. There is no way in a “roaring” economy that oil will be below $50.