In other words, I wouldn't do what I brought up above. I was just more or less mentioning
what some institutional portfolio managers are doing right now.

Well, yields sure did break 4.6% haha. With yields now at 4.5%, some are thinking that the
best way to play eventual rate cuts is to purchase straight-out 2008 eurodollar contracts
(with the bet being that the Fed will cut below 4.25% by sometime in 2008... not sure the
exact date on this thing). If the Fed cuts below 4.25%, you make money. If they don't, you
lose money...

The reason why some are using this method rather than treasuries is because they believe a
correction in the current account deficit will put upward pressure on treasury yields,
which won't allow them the "full advantage" of using treasuries to play a rate cut.

However, the strategy discussed above is only for very active (and very wealthy)
institutional portfolio managers, and doesn't take into account the other benefits of
bonds (steady income, etc...). Rather, they simply try to maximize returns in the bond
market, rather than actually using bonds to create steady wealth (for typical investors, a
laddered bond portfolio proves much more effective than the method discussed above, as it
allows for less subjective risk, and greater benefits of diversification)

HAHA I LOVE IT!

short-term, they would have to aggresively move rates higher, i think, for there to be a
sizable correction due to this. however, medium-term and long-term, I think this can't
help but have a negative affect on asset prices. Also, short/medium term, I think this
adds support to already rising treasury prices (which might not be reflected in rates
going down below 4.6%, but should be reflected in adding additional pressure, so that
rates wouldn't rise above, say 5% again. It should even keep pressure from rising above
4.9%).

When do they make the announcement?

Could be the catalyst for the correction.

Last edited on: 02-20-2007 11:52 pm

So the yen would be a good buy? If we refer back to the May correction the Yen rallied and
assets around the world corrected for the first half of the summer. So basically if the
rally continues then we must expect the Yen to weaken further. But they cannot let this
go on forever because the risk is increasing.

Bill Gross the real KING! All of the PIMCO content is very good reads and especially when
they are free to read. I believe that carry trade would correct all assets. Who knows
exactly how much leverage it has created in the system. But I have my shopping list ready
and I like discounts!

That Gross story is a good read. I would assume your Portfolio 1 is an answer to that
although I would spread out among 3 or 4 of those choices tops.

Also, my favorite reading last year: Alpha/Beta Anemia, by Bill Gross.

Check it out here:
http://www.pimco.com/LeftNav/Featured Market Commentary/IO/2006/IO November 2006.htm

Thus: Fear (search for safety, liquidity) plus Fed Cut = Bullish for US treasuries.

Have good exposure on the front-end, and keep ur duration high right now.

All this being said, I don't think the end-affects of this eventual unwinding will be as
bad as many beleive. I think the market is smarter than people give it credit for.

Also, all this could already be priced in by the market, thus making all this "less
bullish" for treasuries. If this is, it would be bullish for equities if Japan stayed
nuetral.

What do you guys think? Which way will japan go? Will it be bullish for equities, or
treasuries? Or neither?

Alright, I'm out until Friday/Saturday, so I look forward to see some people's answers to
this. If Mr. Altucher has time, it'd be awesome to see his answer as well.

Last edited on: 02-21-2007 12:17 am