Yield Curve Signals Slowdown

08/11/2006 12:00 am EST

Focus:

Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

Income guru Richard Lehmann believes the inverted yield curve caused by the benchmark ten-year Treasury trading below 5% and the Fed discount rate at 5.25%, is a precursor to an economic slowdown…

 

“An inverted yield curve is also the market’s way of telling the Fed they’ve overdone it, which invariably leads to a recession. My guess is that the main question a year from now will be was the recession caused by oil prices, the housing collapse or the Fed. With that many choices, where do we look for some optimism? For income investors, the message is clear. Stay with income-producing assets and don’t get lulled by a stock market rally in August sparked by a Fed decision to pause. If you’ve got money in single B and CCC credits, its time to sell. Move at least to the BB level with only a select number of exceptions,

 

Goodyear Tire & Rubber Company (GT  NYSE), Coupon 7.857%; Maturity 8/15/2011; Current Price $96.43; Current Yield 8.15%; Exchange OTC; Rated B3/B-; Call None; Yield to Maturity 8.75%; Pay Cycle 2/8; CUSIP382550AH, is the world's largest tire company, manufacturing tires, engineered rubber products, and chemicals in more than 100 facilities in 29 countries, and with 1700 tire and auto retail centers in North America. GT reported second quarter sales of $5.14 billion, a slight improvement over the $5 billion reported last year. Net income decreased to $2 million compared to $69 million. The growth in sales is a result of improved pricing and product mix, as well as a focus on high performance tires, the most profitable segment of the market. I like this issue for high-risk income investors. Buy at or below 98.

 

Ramco-Gershenson Properties Trust (RPT  NYSE), 9.50%; Series B; Par $25.00; CurrentPrice $25.89; Current Yield 9.17%; Exchange NY; Rated NR/NR; Call 11/07 at $25.00; Yield to Call 7.19%; Pay Cycle 1b; CUSIP 751452400; Family REIT; Symbol RPT B; (need preferred designation), is a self-administered real estate investment trust that owns, develops, acquires, manages, and leases community shopping centers, and regional malls nationwide. The company has 79 shopping centers totaling 17.9 million square feet in 12 states in the Great Lakes area, East Coast, and Midwest. For the second quarter, RPT announced total revenue of $38.42 million, net income of $4.78 million, and FFO of $13.54 million, compared to revenue of $36.53 million, net income of $4.14 million, and FFO of $12.55 million last year. This issue is a good choice for medium to high-risk income portfolios. Buy this issue at or below $26.00.”

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