T.E.D.’s Excellent Adventure!

You’re probably wondering why Bill wasn’t mentioned in the title of this segment. Well, the TED I’m referring to is the TED spread. The TED spread is the difference in the yields between T-Bills and the short term bank lending rate. When the sh*t hit the fan last fall, the yields on T-Bills were beaten to death by the sharp increase in demand due to the rotation of investors out of stocks and into T-Bills to wait out of the storm. Historically, the spread in a normal market is about 10-50 bps (0.1%-0.5%), but last fall saw record spreads over 200 bps (2%). Generally, the spread fluctuates according to the supply and demand of T-Bills.

So, you’re probably wondering why the hell I’m writing about this. Well, here’s the deal. The spread has been gradually shrinking since the end of the 1st quarter. As of the end of May, the spread was sitting at around 60 bps (0.6%), which means that the yield of the T-Bills is increasing. So, what does this tell us? The supply of T-Bills is increasing, which means that more investors are starting to take the money they parked into the T-Bills and are investing it elsewhere. What else does this tell us? Well, it tells us that folks are feeling more confident about the market and are starting to put money back into stocks, which could signal a broad rally and not suckers rally. It also tells us that companies are starting to issue bonds again, which gives rise to the credit freeze thawing. Several companies had bond issuances ready to go, but held them out of the market until they felt the demand was there.

Remember what I’ve told you before. The market tends to recover well in advance of the economy. If you wait for unemployment to drop and some wing-nut from the Fed. declaring the recession is over, then you will have missed the boat on the rally. If you recall, around this time last year, the Fed. finally announced we were in a recession that started in November 2007. I declared it in January 2008 as it was happening, not 8 months into it. Am I saying you should jump in with both feet? Hell no. Do your homework and buy in incrementally. Be aware of inflation and keep a healthy amount (20%-30%) on the sidelines in case things go south, so you can remain flexible and be able to scoop up any bargains that may come or at least increase any current positions and lower your cost per share. Tune in next time, when I discuss inflationary hedges and why gold may be a poor choice, let alone the consensus best choice to hedge inflation. Until then……Be excellent to each other and party on dudes! (you know I had to come back to that!)