With economies strong and interest rates still historically low, the market perceives bargains to be had; the world is on sale. Whereas around the globe – from Los Angles to Moscow and Sao Paolo to Shanghai – most people are paying more for food, clothing, utilities and housing than they did six years ago, a large pocket of the capital markets has experienced little to no inflation. In fact many companies are cheaper now on a relative basis and even on an absolute basis than they were six years ago. In addition, cash is plentiful:

  • Massive global liquidity is searching for better than mid-single digit returns
  • Loans to corporations continue to disregard most risk indications
  • Interest rates are relatively low and growth is strong

Therefore, companies, private equity funds and hedge funds are on a momentous shopping spree.

There is global grassroots pressure for social and political improvement.

  • France: Students and young workers protest proposed employment law changes. Government actually has the right idea here to promote job growth, but will have to cave-in to the demonstrators.
  • Israel: As acting Prime Minister Ehud Olmer declares victory for the new Kadima party, homeland protection remains the critically unifying issue; however, potential coalition partners will clash on social and economic matters.
  • Nepal: Unrest may lead to a government overthrow.
  • Spain: Eta is disarming in Spain; this is as big as the voluntary disarming of the IRA, but is receiving much less publicity in the US. Spain’s parliament has approved a definitive version of a plan for greater independence for the north-eastern region of Catalonia
  • Ukraine: Orange revolution enters a new era with latest elections; the revolution is still alive, but so is corruption, therefore some of the names and faces are changing.
  • United States: Hundreds of thousands protest proposed immigration laws and seemingly hypocritical migrant worker policies.

Expect to see continued social unrest through the summer accentuated with increasing global political emphasis on Iran’s nuclear ambitions.

The yield curve has flipped back from an inverted to a positive slope. At the end of February the yield curve was inverted with the 2-year Treasury yielding 0.12% more than the 10-year Treasury. Over the last few months, the press and market commentators had resuscitated the conventional wisdom that inverted curves lead to recessions. However, by the end of March, the 2-year Treasury was 0.03% less than the 10-year.

Figure 1.   In March, the US Treasury yield curve shifted significantly

March 2006 Treasury Yield Curve

Although a 0.03% difference is relatively flat, the flip in the shape of the yield curve is significant; it alleviates the market’s trepidation of an imminent economic recession. With the yield curve’s positive slope the market can now refocus on its usual see-saw debate between hoping for positive economic growth versus fear of Fed over-tightening.


Greg P. Pellizzon
Managing Director

Michael Ashley Schulman, CFA

Hollencrest Capital Management