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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: Bond-Buying Due Diligence? Date: 3/8/2009 7:36 PM
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In plain English, is the yield-curve going to turn down...?

I need to restate that question.

A falling yield-curve is an inverted yield-curve. Inverted yield-curves are a nearly-certain indicator that the company intends to file Ch 11. (How certain is simple a research problem.)

OK, back up a step. How often does a rising (aka, "normal") yield-curve give way immediately to an inverted yield-curve? Again, that's a simple research problem. And guessing why it might is also easy: a "price shock" occurred.

The next question --and the one relevant to understanding Pru-- is how often does a flat YC give way to an inverted YC? Again, a simple research problem.

Once enough legwork is done to get a feel for how things have happened in the past, it becomes easier to see the future in the present.

The reason I dragged Markov chains into my discussion of YCs is that I need a way to sythetically generate YC's. This isn't a very original idea on my part. I'm simply doing a knock-off of what Mandelbrot has done with fractals for stock charts. But I need a "generator". A Markov process seemed like a good tool, so I wanted to "sidle up to it" a bit. Hence its extraneous introduction.

I can then match their variations up with what actually occurs to create a table of expectations. Not predictions, just rule-of-thumb estimates that have to be checked against the specifics of the company currently being investigated. Again, just simple research, and that's all I'm doing with all of the stuff, just stumbling my way toward a set to tools to make my bond investing a bit easier. I'm working hard now, so I don't have to work hard later.

Eventually, markets will turn themselves around. It might be four years from now; it might be fourteen. I don't care which. But, eventually, markets will turn themselves around, and there's going to be a lot of very safe money to be made by those positioned to take advantage of the inevitable recovery. And I'm willing to bet a lot of my time that the key to taking advantage of the upswing won't be having money to invest, but the tools to see it when it does happen, so that what money one does have can be put to work.

I want to be my own trout and to know "the difference between genuine opportunities and those that are only fancy feathers and a hook". Reading Smart Money Magazine isn't going to get me there. But trying to learn how the bond market really works by digging into its facts as deeply as I can just might help me to see and to understand.

"You can observe a lot just by watching". (Yogi Berra)
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