Today"s Topic: Divergent Economic Forecasts
The stock market has staged one of the most impressive short-term rallies (starting early March), since The Great Depression. A rule of thumb is that if the March lows hold, the economy should touch bottom (GDP wise) in this year's 3rd or 4th quarter. The stock market is watched by many more people than the bond market.

Watching the bond market is more tricky. An analyst can't just look at the yield on the 10-year Treasury bond (the bench-mark for the bond market). Treasury bonds have no, or very low, default risk (but that could change after 2009). Corporate bonds have higher yields than do comparable (in maturity) treasuries, ranging from relatively low spreads, for a company like IBM, and much higher spreads for a company like GM.

Three economists are publishing a paper on bond spreads. The essence of the study is that the wide spreads between corporate bonds and treasury bonds suggest this down-turn still has a way to go. Another economist pointed out that the gap between BBB-rated corporate debt (just a notch above junk bonds) and 10-year Treasuries remains high and has not improved due to the stock market rally. He claims that when the two markets diverge, in his opinion, frequently the bond market is proven correct. As a bond analyst, I concur.

Going forward then, stocks are flashing green lights and bonds are flashing red lights. Until this is resolved, the economic outlook is unusually uncertain. For the economy to do much better, bond spreads need to narrow. Then, companies will begin to increase investment in plants and equipment and re-employ workers.