A View of the Market

01/05/2007 12:00 am EST

Focus:

John Bollinger

President and Founder, Bollinger Capital Management

Economic guru John Bollinger regularly dissects the economy, various sectors, and the markets. In his latest issue, he gives subscribers an insider's point-of-view on exactly where we are today and in which direction we are heading...

"We see interest rates moving higher, so, the recent rally in the bond market presents another selling opportunity. We recently made a short-term low in ten-year Treasury rates near the bottom of the prevailing rising trading channel. Our short-term goal is the upper end, currently just above 5.30 and rising. We expect short-term rates to more-or-less stay put and for long-term rates to rise until a 'normal' inflation premium of a couple of percent is built into the structure, a process that should get underway as soon as it is perceived that we are not, in fact, facing an economic downturn.

"The Fed has stopped tightening, but there has been no effort to sponge up the excess liquidity sloshing around in the system. That liquidity is one reason why there has been a bid for stocks all through the tightening sequence. Much of that money that had been chasing the housing market is now chasing stocks, but with a twist. We think that much of it is going into the initial public offering market. The real question is, of course, where it will go next? Could it be common stocks?

"Gold looks to have tried and failed on this run. Clearly global turmoil hasn't been enough to drive gold higher, though any sane observer would have to rate tensions as very high. The recent economic statistics, though stronger than expected as usual, haven't been strong enough to rekindle the fears of inflation. What remains a conundrum is the desire to trash-talk the economy.

"For years now the buzz has been poor economic performance and the reality has been strong economic performance. There were times when this seemed politically motivated, with the Democrats trying to put a Republican administration's performance in a bad light, a task aided by a round-heeled media. However, that is only part of the story. More importantly, it is as if the bursting of the bubble in 2000 and 9/11 soured Americans, who then exchanged their perennial optimism for an unhealthy helping of pessimism. We now suspect that this pessimism is a normal part of a long-term consolidation.

"Vietnam was the centerpiece of the '66 to '82 consolidation and the Iraq war is the centerpiece of this consolidation, which we date to 1998. The late 60s and 70s was an era of self-doubt and we again find ourselves uncomfortable on the world stage. The parallels are many."

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