Market Observations 06/07/07

Last week: "if 10 year bond yield breaks 5 and 5.10... somethings gonna give".

Today, the largest single day drop in 2 years. with the 10 yr hitting 5.12.

Greenspun's "great conundrum" continues to unwind as mortgage servicers are unwinding their "rate decline" hedges.

Witnessed by the 10 year interest rate swap spread increasing from 4bps to 60bps. And the yield curve completely flipping and rising to correct itself.

Financials account for 21% of the S&P market weight and higher rates mean lowered profits.

In addition, lending costs rise for the new equities bubble: small, mid caps & LBO's.

This "low risk" debt market appears ready to implode and could take equities & the already plunging real estate market into a black hole with it. But not so fast Joe..

Jaw's Police Chief Martin Brody: "Your going to need a bigger boat." Runaway rates, energy stagflation & a tanking non durable economy are setting up the perfect storm.

Tonights hypothetical & heretical offering, submitted for your perusal...

current consolidation terminates around 1460-70 and is followed by a dead cat bounce run up to even more insane heights at 1575 by late October.

Worse yet, it just keeps sinking until October. Either way, thats when the Fed is forced to do exactly what everyone thinks they wont: lower rates.

Rates will have to be lowered for a multitude of reasons, while Japan has to raise, giving the final haircut to this parabolic overliqified global asset runup.

As you scoff and say its different this time... remember four little things, 45 years after rising from the ashes of the great depression...

in 1977 for the 1st time in its history the US became a debtor nation;

in 2004 the US Federal Government officially ran out of money;

in 2005 the last of the social security trust fund money was spent, being replaced in todo by IOU's;

in 2007, 40 years after becoming a debtor nation...

US government combined spending on education, homeland security and healthcare is dwarfed by the INTEREST ONLY payments on the national debt.

Who do you think is going to be hurt the most by rising interest rates? Something to contemplate, and to be found filed under D for Debauchery, in the Naybob Zone.

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