Your Daily Profit

May 18, 2009

*****Bond Yields and Buybacks

*****TradeMaster 60% Gains

*****Graham’s Gap

Fellow investor,

Fed Chief Ben Bernanke has his hands full. He’s got enough balls in the air to keep an octopus busy. Consider his prime directives: raise money and keep interest rates low. These are diametrically opposed goals.

If you’re selling Treasury bonds, the yield is your bribe. The Fed has to offer buyers an incentive to buy the bonds, thereby lending the government money. So, the Fed pays interest to the bondholder.

In good times, when the economy is strong and riskier assets like stocks are appreciating, the Fed has to pay a higher interest rate to entice investors to buy bonds. Conversely, in bad times, investors don’t give a darn about the yield; they want their money to be safe.

As I’ve said, the recent rally can be described as a “risk” rally. As the economy stabilizes, investors realize that they can take on more risk in their investments. In other words, they can sell their bonds and buy stocks with a reasonable expectation of making more off their investment.

In this environment, the Fed is compelled to offer higher interest rates on bonds to stay competitive.

*****Unfortunately, higher interest rates are not good for a weak economy. To stimulate spending and growth, the Fed wants interest rates (the cost of borrowing money) to be low. That’s especially true in regard to the housing market. Homes—and the rates on loans to finance their purchase—need to be as attractively priced as possible to encourage buyers so we can work off the bloated housing inventory.

To accomplish this, the Fed is buying back Treasury bonds. This action is intended to keep prices for bonds high and interest rates low.

*****So far, bonds have lost 3% in 2009, according to Merrill Lynch. That’s because borrowing last years drove bond prices higher.

But investors understand the economy is still struggling and continue to want to own bonds. And so the Fed is keeping a tight leash on supply to boost prices and lower yields. The next bond sales come on May 26^th, but will be buying bonds on the 20^th and the 21^st.

*****Jason Cimpl, the technical wizard at TradeMaster Daily Stock Alerts is at it again. After taking 12% on the US Oil Fund (USO) and 17% on Chinese hog farm and feed company AgFeed (Nasdaq:FEED) last Wednesday, he followed up with a 16% one-day gain on Dry Ships (Nasdaq:DRYS). TradeMaster Daily Stock Alerts bought on Thursday and took their gains on Friday.

Member Mark G. said: "Thanks for the lead on the DRYS play. I worked an option and logged a 60% gain in a few days. Like those fast moving large volume stocks...more of those!"

For more on TradeMaster Daily Stock Alerts, and to see a video chart analysis of a compelling Chinese infrastructure trade, click HERE.

*****Finally, Graham Corp. (AMEX:GHM) is on the upswing today, as are many of the oil plays we’re keeping an eye on in our various services. There’s resistance at $15, but after that, there should be some good upside. I’m looking at the gap between $21 and $17 that was established on November 4^th. As you may know, gaps tend to get filled. And it will be worth sticking around if this one gets filled.

If you’re interested in finding out more about the oil sector and some of the oil sector stocks we’re following in my SmallCapInvestor PRO service, just go HERE.

That’s it for today; I’ll talk to you tomorrow. Feel free to send in your questions, comments, rants, jokes, observations or just a plain old hello to editorial@247investor.com. My email inbox is always open to you.

Ian Wyatt

Editor

Daily Profit

P.S. I'm still getting questions from readers about best stocks for retirement purposes. I've recently finished up some research on dividend stocks paying out very well right now and with massive upside when the economy turns around. You can find out more at the Top Stock Insights home page HERE.