16 June 2005

The tightening of interest rate spreads, oil consumption - production
spreads, and wage - day to day living spreads.


Outside of loan origination fees, it is getter tougher for banks to make a
profit as the differential between one of their primary money sources, short
term fed fund rates and the ten year note has become less than one percent.
And with the next few fed funds rate increases this margin may become even
smaller as China and Japan have an ongoing ample supply of current account
deficit generated US cash to compete for the long term notes and bonds. Just
a few mortgage or car loan defaults could erase the banks' collective small
profit margins. 

As Ghawar and other Saudi oil fields begin to produce more injected
seawater than oil and join a multitude of other older oil fields in other
countries past their prime in both peak production and remaining
overestimated oil reserve assets, foreign owned US dollars and foreign owned
US debt will come in very handy to compete for the remaining world oil with
its demand/production rate numerical ratio of greater than one. A review of
the fractal pattern of oil valuation since 1998 foretells the story of end
oil in terms of years rather than half a dozen decades that some
'mainstream' forecasters project.

In spite of GM's remarkable dead horse bounce, the DJIA has been
underperforming the larger Wilshire 5000, although their qualitative fractal
patterns are identical. Since reversal day 130 ending the second fractal of
a 52/130/33 of potentially 104 day final growth sequence(X/2.5X/2X) starting
in August of 2004, there have been 33 days in the third and final growth
fractal with a first sub fractal sequence of 12 days (the first day was up
going) and 23 of potentially 24(Thursday June 16, 2005)the top with then 6
days down going to complete the ideal second sub cycle fractal of 29-30
days. In the larger weekly fractal sequence this is week 45 of a 22/54/45 of
44 week overly ripe growth sequence. The overripe apple could fall from the
tree at any time with a break point between the second and third terminal
sub cycles.

Will the housing market with its plethora of recent mortgage applications
hold up to further support equity fractal growth with the anticipated
additional .25 per cent fed fund rate increase or will banks and lending
agencies begin to better scrutinize potential borrowers recognizing them as
potential defaulters in the current environment of the lower profit margins
created by the flattening yield curves?

The fed funds rates are still below real consumer inflation rates
encouraging borrowing and discouraging savings, the latter whose future
buying power is further diminished through interest earnings' full taxation.
As long as the condition exists where the fed funds rates are below the
inflation rate and borrowing power persists even in an environment of
smaller increasing wages, there is a potential for further asset bubble
expansion and equity growth. The minutely top exhaustion gap with multiple
day follow through in RMS, a REIT index, exemplifies a classical top
blow-off sequence in an asset bubble 

G. Lammert