Is this this bottom?

Is this the bottom, or just the first leg down?

FIRST, the money numbers are favorable. None of the Ms - M1, M2, of MZM - show any signs of growth above 10% per year. Money is behaving itself after a disatrous decade under Greenspan.

SECOND gold prices have collapsed in the past five weeks from a high above $700 to today's prices below $600.

THIRD Interest rates have started making a bottom in the past five weeks.

FOURTH the stock market has taken a slamming, similar to the one Greenspan caused back in 1987, and it might not be over in stocks.

SUMMARY, managers must be cautious here, cleaning up their books and preparing for the next move.

LOOKING AHEAD

* Short term rates will continue to stay high for the next 6 months

* Long rates will stay below short rates

* Spreads between Treasuries and other instruments will widen

* Keep an eye on gold and money supply

TACTICS

* Lock in profitable long-term fixed spreads

* Hold back on lengthening long-term liabilities

* Let the portfolio contract

STRATEGY

* If gold takes off again, be prepared to lock in long term liabilities.

* If the Fed eases, pay close attention to gold

Time to sell bonds

The bond market has retreated steadily since major support was broken on March 3rd.

Prices have risen and rates have fallen slightly for the past few days as this CBOT chart shows.

This is not the end of the bear market. It is only a pause before rates start rising again.

All financial institutions should begin lengthening the maturity of their liabilities.

Encourage long-term deposits, borrow from Reserve institutions, and sell bonds.

As rates continue to fall, institutions should get aggressive in the cash market and prepare a futures, options, and swaps program. Educate the Board of Directors and obtain authority for the required actions.

Assets should be re-invested in Fed Funds or at worst, 90 day instruments. Short term assets will continue to rise in yield as the Fed continues to slow the growth of money

Asset pricing must continue to be aggressive, and spreads maintained, even in the face of declining new business, as liability costs will not be falling in the near future. Locking in a low-yielding asset right now is a mistake.

SENIOR MANAGEMENT
Senior management must address the asset/liability situation of the institution and provide the Board of Directors with a comprehensive plan for an extended bear market in bonds.

If the bear market continues, many institutions will fail, as they are unaccustomed to dealing with rising interest rates.

Recall, interest rates have been declining since 1986, and most managers are unfamiliar with the tools, techniques, and emotional requirements for dealing with inflation and rising rates.

See www.paterson.com for help managing your A/L situation.

Classic Bear Market Signals

The bond market fell sharply today after the US Treasury announced a $34 billion refunding package of debt securities.

This is a classic signal of a bear market.

In a bull market - or at least a stable one - markets sell off in anticipation of refundings, and bounce back as Primary Dealers stabilze their books.

Fed Blunders Again

In the tradition of incompetence established by his predecessor, Fed Chairman Bernanke mistakenly suggested the Board of Governors might be done raising short term rates.

When the news got to the markets, gold and stocks jumped, and bonds fell.

Now Bernanke says he was misunderstood.

Here's part of the quote:

WASHINGTON (MarketWatch) -- Federal Reserve Chairman Ben Bernanke says that the media and the markets had misinterpreted his words last week as a signal that the Fed would stop after one more rate hike, according to CNBC anchor Maria Bartiromo on Monday.

Bartiromo said she asked Bernanke in a conversation during a formal dinner on Saturday night whether "the markets got it right last week in speculating the Fed is done raising interest rates" after his testimony to Congress.

She reported that Bernanke replied no, and that he went on to say that he and his colleagues at the Federal Open Market Committee were trying to "create some flexibility for the Federal Reserve, saying the Fed may pause but the data will really dictate whether more rate hikes will occur at future meetings.

Market Analysis April 2006

BEAR MARKET IN BONDS CONFIRMATION

In one week market participants confirmed our analysis that we are in an inflation-driven bear market for bonds.

Bonds were setting new lows for the cycle,

Gold spurted ahead $18 on Friday alone, closing above $650.

NYSE composite closing over 800 for the first time.

Bernanke announces possible end of rate increases