Economy

Expect economic recovery to pick up a little steam in early 2007, before slowing down in the second half. A 2008 recession is a possibility. 

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Bond yields continue to fall as economic reports have tended to be on the weak side. Massive global liquidity and the search for yield have also helped to push yields lower. We have been way off the mark with our predictions for higher rates.

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Our call for a bond market correction did not pan out in October, but yields did back up in early November as weak productivity and a surprisingly low unemployment rate were released.

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Bond market remains ahead of itself and is vulnerable to correction.

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On a long term basis, we continue to be concerned about the sustainability of the current economic expansion, and we expect a significant slowdown by mid 2007.

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Bond market seems to be anticipating three key developments: Fed’s stance could switch from tightening to easing, the economy is slowing significantly, and inflation is licked.

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Six of eight recessions since 1957 saw signals registered by the Transportation Divergence monitor. Recent divergence may be warning of an impending economic contraction.

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Half time update. Leuthold looks back at December 2005 predictions. Additional comments on Inflation, Corporate Earnings, The Dollar, Oil Prices, Gold, and Federal Budget Deficit.

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Continue to project higher interest rates over the next six months, particularly longer maturities. Further Fed action will be more “data driven”.

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Continue to project higher interest rates over the next six months, particularly longer maturities. After rate hike in May, Fed’s actions will be more “data driven”.

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This month Steve again lays out both the Bull and Bear cases.

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The traditional definition versus the new definition of an inversion...How real GDP has responded historically to past yield curve inversions….Effect of inversions on Financial stocks.

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Based on our 6-12 month yield targets, short end of the yield curve looking more attractive.

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It may be difficult for the economy to prolong its expansion, with the auto and housing sectors weakening and consumer spending being a big question mark.

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Real GDP in Q4 was not too robust, but the numbers will likely be revised upward.

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The current economic expansion is considered late stage.

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Still view long rates as potentially vulnerable to strong economy and unexpected inflation.

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Within the current cycle, the stock market recovery is mature, but based on the average post WWII recovery could still have some upside (S&P 500 to 1400?). Currently, earnings growth is well beyond historical averages, but the economic expansion is below the norm.

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The perils of speculation in Housing…..lessons people are now learning. Also, client questions....and Leuthold's answers.

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Still bearish on the bond market. Boosting bond market target yields based on rising inflation and further Fed tightening.

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