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Friday, September 08, 2006

Profiting From Economic Weakness With Treasuries & EuroDollar Calls

By Yaser Anwar, CSC of Equity Investment Ideas

Latest data from the Federal Reserve and U.S. government signal a continuation of slowing growth and a pick-up in wage inflation, thus more stagflation. Will the Fed in the Sept. 20 meeting decide to keep rates on hold ? Next week's CPI & PPI numbers will be crucial.

Yesterday's beige book revealed that five out of twelve of the bank’s regions experienced slower growth over the past weeks due to falling housing related demand and consumer spending. At the same time, unit labor costs for the second quarter were revised upward from 4.2% to an annualized rate of 4.9%.

On Monday, the single-family home prices increased at only 1.2% in the second quarter, the weakest gain in almost seven years. More significantly, home prices actually fell in nearly one-fourth of U.S. metropolitan areas.

Economic growth could continue to weaken due to additional pressure from housing markets, as well as expected car production cutbacks for later this year, previously announced by Ford and GM, and massive lay-offs by Intel, Dell etc.

This results in a potential buying opportunity in the five-year Treasury note and Eurodollar call options.

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