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OUTLOOK FOR WEEK JUNE 4TH
by Stephen Tetreault
June 6, 2007

Folks�please alert your friends and family, to get their subscriptions to T-Waves, as in July the rates go up 25%, so take advantage of the grandfathered discount rate now!! Still the best investment site to obtain profitable ideas (in my opinion) for the outlay�I offer a free 2-week trial so your friends and family have nothing to lose if they want to kick the tires!!

For what it is worth I'm still seeing smart money selling into strength time and time again; a clear indication of distribution. As such please take on LONG positions very carefully at these levels as the risk to being long at these levels is compounding every day we churn upward...I believe that we are days at the days maybe a week or so away from a major stock-market correction....

I continue to see negative divergences developing everywhere and these signals are flashing Sell-Signals, and as such one would think that I would be net short right here, but I'm not, I believe we are very close to a huge-shorting opportunity, and that my bullish friends should keep their respective stops extremely tight�Despite the possibility of one more push higher that may be in the cards to massaged economic data this week I believe that we will start to take PUt-Positions this week in the major indexes� I am still a bit skittish and gun-shy of this giddy market folks�due the constant stream of M&A, LBOs and rumor activity, as liquidity is still sloshing around. I want to wait for confirmation, **I will probably start to leg-into puts on Tuesday due to the anticipatory rolling out of options pre-options expiration** before taking on a large-position as recently the volume has been lackluster and I have been bleeding from a bunch of paper-cuts of late trying to catch tops when hours later rumors circulate of a LBO or buy-out. rumor bloodies me .

The bulls have far too long ignored the looming contagions�as growth was quite pathetic in the first quarter, rising at only a 0.6% annualized pace, the slowest growth rate in over four years�nevertheless the markets continue to surge ahead. Housing continues to implode and the highly touted business investment side of the economic came in very anemic, and the ballooning trade gap continues to widen. As it appears from my read that that many businesses are finding they have misjudged demand as they clearly stocked way too many goods and they have had to prune back their inventories sharply; meanwhile much to my surprise the data suggested that consumers are still spending quite freely.

The hypsters continue to claim that the weakest sectors in the first quarter are likely to improve (they better), but the strongest of the sectors are now weakening. We saw that the government's pro forma revisions to first-quarter GDP actually puts our economy on a firmer growth path going forward (I do not concur) as they base this on the theory and premise that firms are experiencing more pain now in their efforts to clear their unwanted inventories; and as such they believe that this means less pain later�.but I believe that this is now the fourth consecutive quarter of sub-par growth, and that the main engine of growth (the consumer) is stalling out as higher energy (especially gasoline) and commodity prices chip away at their resilience, as from our vantage point we have seen business becoming very reluctant to step up and pick up the demand slack.

The hypsters on bubblevision have in my opinion misrepresented once again the fed-head minutes as they has consistently stated that Fed officials concluded that the growth figures were understating the true strength of demand in the economy, and that they stated they expected growth to pick up this year and next (I strongly disagree).

The host of so-called economists (they give us true researchers a bad name) continue to state that the economy will bounce back to 2.8% to 3.4% growth in the next 2-quarters, but then again, just five weeks ago, those same economists were expecting 2.3-2.6% growth in the first quarter so you see I have very little faith in their insight; as these are the very same so-called economists who have distinctly overestimated growth for each of the past four quarters�as we have continued to trend down.

I believe that the pro forma reports have been masking the real weakness of the consumer as they have likely all ready started to take a respite after their incessant spending giddiness and bullish run. The talking butt-heads on CNBC and the other various bubblevision media channels continue to state that a retracement in the consumers spending habits will not be a big thing as it will be more than absorbed by improving international trade (though the dollar has been strengthening of late a contagion), inventories, and less of a drag from housing. I believe they are dead-wrong, as I believe that the housing market sincerely has another leg down, and business have not been stepping up to the plate.

The giddy bulls have placed a huge weight on the recent data point suggesting a rebound in capital spending in the recent Institute for Supply Management index (its too bad they are so shortsighted as this is just a self-serving survey) and in the durable-goods orders report (which was littered with irregularities). The giddy bulls have been expecting and praying for many quarters now that business investments will take on the burden of leading the economy and give the consumer a much needed breather. I can tell you that the pro forma data has so far proved me wrong in my expectation that consumer spending would start to drag substantially (I misinterpreted the lag-effect) as I had expected a distinct contagion from the housing market and sub-prime implosion and higher gasoline prices, along with food; which should have started to weigh heavily upon the consumer long before now.

The $64,000 question that remains to be answered is how long the consumer is going to be able to keep on spending, at these break neck pace�I'm still perplexed as to where the consumer who has tapped almost all modes of credit will find the liquidity/money to continue to fund their quest for their spending-fix. Consumption has according to the data all ready started the second quarter of 2007 in a lackluster manner, with retail sales down 0.2% in the month of April. If spending stays weak, as I expect it to then the production side of the economy will eventually follow suit (the lag could shorten here) As such this makes personal spending the main variable to watch in the weeks ahead; and we will soon get the data (the week of June 12th)

The markets celebrated Friday's the porridge is "just right" goldilocks scenario as it was hyped as such incessantly and repeatedly on CNBC and subsequently the indexes churned higher to new highs were made across all the major indexes. Our so called Goldilocks economy appears to be experiencing the euphoria of spring is in the air and there are no storm clouds on the horizon (no tornados, or hurricanes either). The bulls continue to frolic and feed on proverbial locoweed in the form of huge buyout speculation. And many an old-seasoned grizzly bear (like myself) have been forced to eat their distasteful shorts on a consistent basis despite the deteriorating fundamentals and crumbling technicals as the euphoria surrounding the M&A/LBO activity has the herd stampeding full-steam ahead at the slightest rumor. Once again as the sellers were absent heading into the close on Friday nobody wanted to book profits (due to excessive greed) as no one wants to sell-early as they hope/pray they once of their holdings will announce a takeover when they tune in on Monday. This wild period of M&A/LBO speculation is creating a huge bubble-mania-scenario and its being propelled and fueled each week with the onslaught of new rumors, and actually takeout plays hell as I was discussing in our real-time-trading-chart room on Friday (MU) spiked almost 4.5% on BS rumors they were going to be bought; hell they sport a PE of 46-60 depending on the numbers you use and their earnings this next cycle will be in the cesspool. Numerous biotech companies ahead of the ASCO conference next week have also become the favorite rumor mill prospects of the hedge fund players as they attempt to exploit this euphoria. With a dozen buyouts announced each week the fear of being out of the market and missing an opportunity as merger Monday kicks off has been a powerful greed-motivator.

The global liquidity wave has continued to rise due to takeovers and buybacks being announced daily; as the overall pool of available stock (for the most part) continues to shrink while cash levels due to the buy-outs is increasing. It is a classic short squeeze but with a new-mania-twist. This increasing amount of cash (along with petro-dollars, emerging market trade imbalances and commodity rich countries/companies continue to chase performance and a decreasing quantity of equities, creating a temporary demand/supply imbalance. The recent onslaught of massive buyback programs like WMT�s $15 billion announcement, IBM's $12.5 billion and other firms with cash-hordes and no idea how to grow and improve their businesses have decided to just use the cash to buy-back stock, the age old premise of keeping cash on hand to weather the business down-cycles has mysteriously disappeared; hell many firms are even going into the significant debt cesspool to buy back stock....like IBM when at the same time they are laying off hordes of workers� and that has me very perplexed of late. I thought debt was primary rival of profits especially with a potential for increased interest rates, as with rates moving higher debt service on $11.5 billion would probably fund a more favorable dividend increase for years to come. IBM was finally after several weeks hit with a credit downgrade; I seriously doubt that investors will remember the rally in stock prices caused by the buybacks when earnings start to roll-over hard due to weakening demand, and higher debt service?

I believe that firms like IBM are embroiled in a major quandary as I believe that IBM is facing an earnings problem that has forced them to orchestrate a larger than normal late quarter buyback to bring them in line with expectations or to mitigate the short-comings when they report earnings in July�as historically they have played the manipulation of using stock buybacks to massage earnings.

The best performing sectors on Friday (mush to my astonishment) were Commodity stocks like oil, copper and steel they were responsible for leading the SPX and Russell-2000 higher. Emerging market countries have recently reported higher than expected growth rates (China, India, Brazil etc.) and that has resulted is squeezing these story stocks higher also there are incessant rumors surrounding potential mergers involving nearly every major name in the commodity sector so the herd has been whipped into a panic buying frenzy as nobody wants to be left out if a major deal is announced. We also saw that crude prices rebounded sharply after the week's inventory report showed a drop of 2 million barrels of crude and no material build up in gasoline. Crude had slipped to $62.48 on Thursday as geopolitical tensions in Iran and Nigeria abated�.but as the week wore on crude crawled higher. These type of develops (commodities rising) are not a positive development for consumers!!

In the days/weeks ahead we will see the bears and bulls wage a mighty battle for control of market sentiment and ultimately control of the short-term market direction. We are encroaching into the end of the 2nd quarter (1-month to go) which has been one of the best 1/2 being hyped as the extremely bullish inflection period by 80-90% of the paid bullish hypsters that promise the return to stock-market-land of milk an honey where everyday it will bring with it new riches and higher and higher highs, where over-extended valuations and deteriorating participation mean little, where diminishing organic and true growth opportunities mean nothing, where true supply and demand is just an illusion and should not cloud investors judgment as the supply/demand functions is entering a new found era and paradigm. Oh and I almost forgot, that as investors they want us to believe that earnings will continue to grow double digits indefinitely and that we should not concern ourselves with the fact that corporate insiders are cashing out in record numbers and at record levels (as corporations use their repatriated monies and pent up cash reserves to buy back stock�they have very little interest of growing and improving their business positions).

This type M&A activity is not new as in 1999-2001 we were seeing mergers and acquisitions increasing at an alarming rate, and the so called market guru�s are shouting that this time the reasons are different ad the outcome will be different (seems I heard that before); as firms us their inflated share prices to buy scraps of diminishing growth, and speculators and gamblers push stocks higher in search of the next buy-out candidate (again we have seen this type market topping event driven signal before)�.the only issue is how long will this mania last before the subsequent crash starts. In late November 1999 I was creaming about an impending crash, and was dead wrong for 4-months, but when it happened it was violent�so please be very careful folks as I have been signing a crash type tune for 2+ months now. This time it’s slightly different as short interest (see my thoughts in the technical section below) on the NYSE remains at an all time high. That is a huge bearish bet that the bulls are taking advantage of on a daily basis. As with positioning bears and bulls are both stubborn when it comes to changing their bias and currently bears (like myself at times) continue to attempt to sell-at every sign of weakness; meanwhile the bulls stampede back into the markets at every dip as though it was the last chance to buy before Dow 20,000; and unfortunately the bears are snagged on the wrong side of the market and are forced to cover and this covering (buying back shorted-shares) helps to fuel the bullishness. So far during the Month of May this scenario has repeated itself many times as the bears are being put on the extinction list.

So far the markets have been as resilient as the energizer bunny as they continue to surge higher overcoming geopolitical contagions, earnings worries (lackluster guidance), recession worries (inflation data stronger than expected), Fed-heads expressing concerns, Sub-prime housing worries coupled with credit restrictions, surging crude and especially gasoline to name a few roadblocks that have been navigated successfully by the bulls. This bull market has sure done a remarkable job of climbing a wall of worry.

This week the markets will basically trade on their own as the economic calendar is mostly devoid of any significant market moving data releases, however the fed-heads will be out pounding the speaking circuit. The week of 6/12 we will see a return to robust economic data releases this Tuesday's ISM Services is the only major report for the week and it better follow suit of the hyped and manipulated ISM-manufacturing report.

Reminder this is the week before option expiration and during the past 14-months we have seen additional whipsawing volatility as options are rolled out and unwound the week prior to expiration now as hedge funds and the new-herd of writers/sellers of premium rarely hold options until the last week and from the trend that I have been watching of late it appears they prefer to roll forward or reduce positions Wednesday/Thursday a week ahead of actual expiration. We saw some big swings in recent months leaving expiration week to be somewhat of a lackluster trading environment.

The FOMC-Fed-heads breathed a sigh of relief according to the minutes of their May 9th meeting, and when the minutes were released most on the financial bubblevision media channels were wearing their best spin-hats as they incessantly spun the FOMC minutes; they stated that the economy has stared to recover from the brief doldrums beset it in the first quarter (I interpreted the minutes slight different). The summary contained no discussion or reference about removing the inflation bias or the need for an interest rate cut; but you would not have known that from listening to bubblevision. If they are so right and the FOMC members are seeing an improving economy and out-look the need for any cut in interest rates would be significantly de diminished; and the one hope/premise that the markets have been rallying on in anticipation has been all but eliminated.

Those betting on the Fed-heads have been pressing their bets despite being oblivious to the statements from the fed-heads, as the herd still believe that rate-cuts are around the corner (hell Cramer assured us all that they would cuts rates before July) well I think if they (the fed-heads) are truly data dependent as they say they are that expectations/prayers for even a single rate cut this year were stamped out on Thursday after revised first-quarter GDP and a stronger-than-expected reading on the Chicago PMI report through a wet-blanket on the rate-cutting embers. Implied prospects for a single Fed rate cut in 2007 according to the fed-fund-futures fell below 28% from 44% overnight; and just think at the start of May the market had been pricing in between one and two quarter-percentage point cuts by the of year; now that that likely scenario has reversed the sustainability and health of this bull-market will soon start to deteriorate.

In short, with their focus on inflation risks, the Fed-heads continue to behave as an inflation targeting regime, (as they state publicly, however behind close doors they are still printing greenbacks like they are going out of style), currently due to bond contagions and debt storm clouds brewing they have no interest in boosting growth (cut rates) until they are convinced that the inflation rate will fall into their proverbial comfort zone. FOMC members judged downside risks to growth "to have diminished slightly," according to the minutes; again not conducive for a rate cut.

A Healthy Job Market/Economy�what am I missing?

(Below you will find some new layoff announcements just this week)

On Friday the indexes/markets were delighted to see that nonfarm payrolls increased by a better-than-expected 157,000 in May, and these numbers were provided by the fuzzy-math pro forma reporting Labor Department. The jobless rate held steady at 4.5%. The 157,000 increase in payrolls was slightly above the 150,000 expected as many-forecasters had reduced their estimate for job growth after the ADP employment report estimated that U.S. private-sector jobs grew by just 97,000 in May, their report, suggested that the nation's nonfarm payrolls rose about 123,000 during the month of May. We saw only minor revision as growth in March and April was revised lower by only 10,000 jobs/

Once again folks the service sector (wall-mart greeters, hospitality etc.) provided all of the job growth during the month of May�as the Goods-producing industries lost 19,000 jobs�and get this they reported that construction employment was flat (I almost choked when I read that as the numbers and layoffs just do not jive as the declines in the sector that have yet to materialize. Once again manufacturing firms lost 19,000 jobs, with over half of the lost jobs coming from the motor vehicle sector. Meanwhile service-providing industries added a staggering 176,000 jobs, including 54,000 in education and health services and 32,000 in professional and business services�while the retail sector lost 5,000 jobs; and remarkably the government segment added 22,000 jobs in (most likely IRS knuckleheads going after the little guy like me). Our government�s fuzzy-math birth death model, after adding in 317,000 jobs last month attributed to an additional 203,000 jobs this month so far they have added in using this model 588,000 new-jobs or 117,600 a month this year.

I was sickened to listen to the idiots on CNBC hyping this jobs report, as they only focused on the head line number, they almost never cut into the real meat of the report, they should rename the broadcast the �Highly Rated Spin-zone� where ass economic data no matter how bad will be hyped positively�.as we only want to help wall street fleece the next herd of unsuspecting sheep.

This past week we have seen nearly as many tech-related layoff announcements as during the entire fourth quarter of 2006�and I believe the trend is just starting (as more firms out source high-quality US jobs aboard to exploit cheaper labor). During the first quarter of this year we saw nearly three times the job cuts as during the last three months of 2006, suggesting an upward trend in slashing and burning US employees is charging full steam ahead thanks to free-trade and the policies of this administration they see no harm in the destruction of the American way of life (just my opinion)� This type of Chainsaw-Al Dunlop cost-cutting should be sending up warning flags about the state of our economy, and the health of the consumer that will be certainly adversely impacted as it appears that weakness is starting to spread from the housing and automotive sectors to other sectors.

Employers in April added the fewest jobs in more than two years�.and things are not looking like they are going to get any better as we progress into the rest of the year as the latest report from Challenger & Gray reveals that April's layoff announcements rose 18.4% over this time last year as layoffs by major U.S. corporations soared by 44% to 70,672 in April after falling to an eight-month low in March. It's the first time since September that layoffs rose on a year-over-year comparison. These layoffs in my opinion are a sign of a deteriorating economy, tighter sales margins, and the ability to easily outsource US jobs. These layoffs in high-technology jobs have a greater and more significant economic impact on our country than those from lower-wage sectors, and as such could continue to negatively impact the housing market.

**NOTE, you will not find this analysis on bubblevision, as its not a popular view point.** Of course my analysis delves deep into and unveils the hidden crap-filled-fuzzy-math accounting shenanigans that have been going on at the labor department for years, and under the radar as the numbers do not paint a pretty picture otherwise. We have been seeing a shrinking working week, while the pro form engineers-who now flip burgers (the bush administration is now counting fast-food folks (like MacDonald�s, Wendy�s and Burger-King) as new manufacturing employees) has been falling off the proverbial cliff despite these new inductees�as manufacturing jobs as a percentage of the total labor force has fallen to an all-time low (a level lower than the great depression) if it were not for the recent inclusion of these folks could it be that Bush and his cronies designed it this was so as to hide the overall embarrassment (that is it they would even be embarrassed at destroying quality US jobs and exporting them aboard); and the outsourcing of the American way of life as they help drop our standard of living�.I'm not so dumb as to not believe it was their full-intent to disguise and mask their underpinning activity and the real cancer-hitting our economy, why else all of a sudden would you include burger-flippers (fast-food) with real-manufacturing employees.

Despite what you hear day in and day out on the financial media bubblevision media channels and the hype that we constantly hear from the Bush administration America's once mighty and highly regarded industrial machine is struggling for its very survival as we ere once the premier leadership nation; and we have in many ways lost that distinction. And unfortunately for many Americans (The very same that this current administration neglects and has cast a blind eye toward) those I call the �working class� are heading toward extinction. And before a number of you write me and tell me that all the data points to a bright and rosy picture please hear me out first. then explain how I am wrong...i believe that the combination of inadequate and consistent sub par job creation the destruction of quality high-paying and benefited positions and their subsequent replacement with sub par and uniquely inferior lower-wage structured jobs with minimal to no benefits during the past 6-years. The fact that real wages are slipping downward (stagnate at best) has placed extraordinary pressures on the actual wage income-generating capacity of Americans. And when coupled with the facts that Americans are the world's most veracious consumers of the world's resources; and have been piling on debt quicker than congress has been running up our national debt the perfect storm a force 5-huricane is brewing.

Now you may already be thinking, I am just a doomsayer; or acting like that proverbial childhood character called �chicken little� I assure you that I'm not. Now of course, if you take your cue from the current administration or the hyping Wall Street media machines, the verdict will be nearly unanimous; all is fine on the employment front; and in my opinion this is so far from the truth which has been buried in pro forma fuzzy-math accounting techniques which are totally manipulated. During the past 66 months of the current economic expansion, private sector labor compensation has risen only 10.8% in real dollar terms far short of the 21% average gains from the comparable periods of the past five expansions. Had this gauge of income followed a similar trend/trajectory path similar to that of previous cycles, the numbers would reflect that real compensation would have risen by $390-420 billion higher than we have seen so far. In a nut shell folks this jobless and wage-less employment market has left most hard working American strapped tightly and behind the curve.

Americans have been lacking real income gains during the past 6-7 years and as a result of their addiction to spending have done so by racking up huge amounts of debt that they cane barely service.

As I have stated before Americans are living on borrowed time and money�.we will soon be called the "Plastic-Credit Card Nation� as the overall consequences of the growing addiction to credit is a deadly witches brew that will have dire consequences for our economy and society. I have used the analogy in the past that the average consumer is like a junkie (and the pushers are the banks seeking profits at all costs and the Federal Reserve, along with the current Administration in concert with Credit Card companies and various hypsters that promote the proverbial buy now/pay-later mentality. This scenario of buy-now...pay later is on its face is ok if wage growth out-paces inflation (as consumers will have the money to pay the bills when they are presented for payment) however this is not the case and this contagion is growing and it will be staggering for the economy�the problem can be directly tied into the fact that credit cards and credit have become the new "food stamp program" of the middle/lower class almost akin to a "middle-lower-class entitlement" rather than an earned privilege.

During the past 4-6 years financially overly-stretched consumers have been very forced to extract equity from their homes (many needed the equity to sustain their current lifestyles), by taking advantage of historically low interest rates to refinance their properties and mounting bills. What also disturbs me greatly is that so many folks have stripped away the equity from their homes (this was the last savings front for Americans who do not save also these assets in the past have been utilized for their retirements) and many of the better-to-do consumers utilized these new-found monies it to buy cars (especially SUV�s), new-furniture, appliances and other luxury goods (depreciating assets). And as such the ever-expanding housing market bubble {which has been stalling and contracting during the past 12-18 months} has become central to the culture of excesses for those who are caught up in this drug induced state of consumer euphoric ecstasy...the need to acquire things (Like Hi-definition TV's, Ipods, etc.) the housing market has/had been the primary driver of our economic rebound during the past 4-6 years and now that housing has likely topped the consumer will soon follow-it.

Hence I believe that the consumer-spending bubble (which I believe to be 6-9 times exponentially greater than the Nasdog bubble will undoubtedly be the last to fizzle or worse yet pop. Our culture is tremendously short when it comes to savings as we are excessively long on all kinds of debt, and when coupled with an aging population we must start to come to grips with the looming realities that many Americans will now be unable to retire. We must come to the realization that the great American consumption trends (where we consume the greatest portion of the worlds resources and goods) will eventually implode.

Now for the major issue I have with this bubble and how it will greatly impact our economy; just as rising housing prices helped to boost consumer spending and the economy, falling housing prices will cause significant economic pain. In my analysis of a number of earlier housing bubbles, I found that output losses after housing price peak and burst have on average been 2-3 times greater than those after stock market crashes. I have found that there are three primary reasons why a housing price decline (bubble bursting) causes more harm than a stock market bubble-bursting.

I have forecasted that within the next year (maybe 14+/- months at best) these bubbles are likely to start to seriously deflate (hopefully not rapidly; again most likely why central banks around the world are pumping in huge amounts of liquidity in an attempt to slow the contagions), and this deflation will lead to cascading drop in average real house prices of 14-25% over the next 2-3 years, which is in line with the mean-average price declines experienced during past housing-market declines. This time, however, with pro forma inflation significantly lower, house prices will most likely fall more rapidly in money terms than they did in the past. And as such significant numbers of home-owners may be left with homes worth far less than their current mortgages especially as the proportion of owners with mortgages exceeding 85-95% of the value of their homes is dramatically higher now than it was in the previous housing market down-turns.

Falling prices for DRAM

This should impact chips and microprocessors will hurt the global semiconductor market, which will likely limp to a sales increase of just 2.5% in 2007. Semiconductor sales were originally expected to rise by 6.4% over 2006 levels, according to the study from Gartner Inc. But semi-chip sales in the first quarter of this year came in more than 5% lower than in the fourth quarter of 2006, leading Gartner to cut their 2007 market revenue forecast to $269.2 billion. The numbers reflect a continuing price war between INTC & AMD as the processor vendors struggle for market share. That war has already taken a toll on AMD, which blamed slow chip sales for its $611 million loss in the first quarter of this year. Conditions are worst of all in the DRAM (dynamic RAM) sector of the industry, which will see revenue dropping a whopping 11.1% in 2007 to $30.5 billion, then limp to a smaller decline at best in 2008, according to Richard Gordon, research vice president at Gartner. This forecast should have meant trouble for DRAM and NAND flash players (SNDK, MU etc.) Gordon did stated that chip manufacturers do have some cause for optimism, however, as they have already begun to control the inventory gluts by cutting production. If their effort succeeds, the industry could return to modest in 2008 and 2009.

Bonds need to be watched as they could be the catalysts for the drop in stocks.

Positive yield curve could mean higher interest rates ahead, despite the incessant hype that the fed will come to the markets rescue and play the proverbial �underdog� character�if I'm right this will adversely impact corporate profits. The idiots on CNBC have been talking about an inverted yield cure so long that they really fail to understand the overall ramifications of a positive yield curve. Now please understand the potential factors as to how a positive yield curve can have on the markets and the economy. The negatively sloped yield curve, where short-term interest rates are greater than long yields, is now closing in on a possible reversal. From my vantage point the first clue that the term structure of interest rates was going to revert to its normal shape occurred in early March. That's when rates on the 30-year Treasury bond rose above rates on the two-year note; and I wrote about in back then; as this was a good indicator and predictor of where the rest of the yield curve was heading hence my bullish position on bonds. We saw that a few weeks after this occurrence, the spread between the 2 & 10-year note turned positive as well. Now, the last and most important part of the curve has entered the positive column. Currently the change in the curve reflects a run up in longer rates, which is not due to short-lived events, but to a sea change in factors affecting these yields on a longer-term basis.

There's the high rate of capacity use in the United States and the fast-growing economies of China and India. And these and other countries are also beginning to diversify out of Treasuries.

These inflation impulses are being aided and abetted by the dramatic growth in liquidity (The direct result of the fed-heads stomping on the printing presses) not just in the United States, but worldwide. Seeing this, bond buyers are now starting to demand higher interest rates to compensate for risk.

The good news is that a positively sloped yield curve, besides helping bank-stocks, benefits savers (maybe we can attract a few in this country), who can now expect to receive a greater return on their money. The bad news is that, borrowers (like corporations, broker-dealers and institutional trading desks, and of course those seeking home loans and loans for durable goods) they will all have to pay more and this certainly will not help the beleaguered housing market. And by raising the hurdle rate, business spending on capital goods will fall and along with it, overall productivity. Higher rates impact usually negatively corporate profits and provide increased competition for investor�s funds, hence the equity market could come under some distinct selling pressure; and this selling could intensify, once the markets realize that this environment is not one in which the Fed-heads would step up and cut short-term interest rates. As I have said for the past 3-4 months now folks with inflation well above the Fed's so-called "comfort zone" and heading higher, I sincerely believe that a rate hike is in our future.

For many quarters/years now the stock market participants have been literally ignoring the bond market, as the yields were low and businesses were able to finance borrowing at historically low rates and since rates were manipulated and depressed to levels not seen before we saw as a collateral affect that returns on fixed-income instruments were no competition for equities however this scenario may be changing. As the bond market is in a technical breakdown, on the longer-tern and daily charts as yields have been moving higher and that's not good for stocks in the long run, especially if yields surge up through the 5.05% barrier, there after the 5.245 barrier would be the next significant target to overcome. Please review the monthly-chart�.The 50-day moving average on the daily-chart 10-year bond comes in at 4.706%, breaking through the 200-day moving average around 4.685%, constituted a bearish signal for the bond, bullish for yield. Simply put the rising bond yields means stocks are nearing encroaching into the danger zone as any combination of lower earnings estimations and/or higher long-term interest rates yields leaves the indexes extremely vulnerable to a significant correction.

BOND-Market yields could adversely �negatively� impact the housing market?

Bond yields have begun to ascend, driven if we were to believe the hypsters on bubblevision by strong global economy�I believe its central-banks like China, India and Japan, along with Euro-land players that are losing their appetite for our ballooning debt and when coupled with inflation concerns such as rising food and energy prices could which should boost inflation expectations among consumers (hell I see these pressures all the time, and I'm not an avid shopper). So far the rise in yields has been on a slow crawl, and hopefully for the stock-market bulls they better pray that the train doesn't start to accelerate. As if this trend persists, it will most likely knock the stuffing out of an already depressed housing market and of course hurt borrowers of all types generally; in particular, homeowners looking to refinance their adjustable-rate mortgages, potentially adding another negative contagion to the already stricken housing market. The yield on the benchmark 10-year note rose to 4.956% as of Friday�s close. As you can see this rate has stealthily crept up from 4.473% posted March. Since mid-2002, the yield on the 10-year note has stayed consistently below 5% for a prolong period, except for a four-month span last spring/summer when it reached as high as 5.245% (and this could be the next stage for the bond bulls to assault. Please remember (I know this is old-school for most) nevertheless bond prices and bond yields work like a teeter-tot when prices go down, yields go up so shrinking demand (by foreigners as our savings rate sucks) for bonds of late has pushed their yields near their highest levels in almost 6-months.

Now if the giddy bulls were not stinking drunk from feasting on all that locoweed that they have been consuming they would realize that higher yields are not conducive for a continued bull-run because higher returns on low/no-risk bonds would as such make riskier stocks less attractive especially after such a sustained bull-run�.as the Dow is up almost 10% so far this year and the SPX, Nasdog and Russell-2000 are all up 8.3% approximately, and as such we could see smart money start to rotate out of Stocks into bonds to protect gains and get a guaranteed yield.

I believe that bond investors have also started to factor in the China contagion as I believe that China plans to invest more of their massive gains from their massive trade surplus into other instruments and into our bond-market, and that would be disastrous for equities and our economy. China's demand for our ballooning debt has been the main reason that bond yields have remained historically low. Recent news that a Chinese government entity invested $3 billion in private-equity giant Blackstone Group has me concerned that this could be the beginning of a trend away from buying our expanding-and ever-increasing debt as they may develop a taste for investing their huge-loads of trade-imbalance monies in instruments that gathers more of a return than bonds. It's like a pusher finding out his best junkie is now clean.

Is China in the driver�s seat? currently there is the threat that Congress could impose trade restrictions on Chinese exports to the U.S. Currently we are in a proverbial mutual hostage situation, and China holds the better position in my opinion, not a very comfortable thought to say the least. Currently China is using to dollars it receives from the sale of its products in the US to make large purchases of Treasury bonds, and this has resulted in holding down U.S. interest rates.

If Congress were to pass measures cutting off Chinese exports to the U.S., China has warned that they would or could quickly reduce these purchases (then who would buy our ballooning debt). China would still likely keep a high growth rate, but the U.S. **would have a serious contagion financing our huge deficits.** Of course we would find others to finance our deficits, but most likely at higher interest rates (as they demand more returns). Hence our markets could face a very quick and significant change in asset pricing and it could trickle in (until the dam-breaks) and create a huge disruption to the global economy. Also forcing China to revalue the yuan higher would just likely shift low-wage production (the process where corporations rape and pillage/exploit another group), so unfortunately the U.S. multilateral deficits would probably remain unchanged even though there would be an improvement in the bilateral deficit with China.

It is likely that we would find it difficult to find a new-source (like the junkies we are) to supply our soaring need for spending as our country would find in increasingly more difficult financing the huge twin-deficits. Another concern about the currency issues are that China would most likely not agree to appreciate its currency in part because it would lower agricultural prices and raise poverty in the countryside as lower-priced subsidized U.S. wheat exports would increase. So the U.S. argument that a flexible exchange rate is a free-market story probably is just smoke and mirrors, and the posturing to eliminate the un-free-trade manipulative trade practices has little teeth right now in my opinion as we need China more than they need us!

Recently Freddie Mac estimated that nearly $670-740 billion in first-lien adjustable-rate mortgages will be coming up to reset later this year and into next; and now many borrowers who took out these adjustable-rate mortgages in 2003-2005 with a fixed 3, 4 or 5 year fixed introductory rates (or worse yet those teaser rates that just asked for interest only payments for 36-48 months. And as such most will likely see their mortgage rates jump to about 6.8% from about 0-4.6% depending on the terms they secured (subprime of course will take the brunt).

© 2007 Stephen Tetreault
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Stephen Tetreault
T-Waves
Southern Maine, USA
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