Dr. Jimmy and Mr. Jim

UBS announced a $19 billion writedown. Deutsche Bank wrote down over $3 billion and investors reverse their flight-to-safety. Does this seem counterintuitive to you too? It was at me at first until I realized what was happening. The market was testing a bottom.

Notice I said testing a bottom, not that it had reached bottom. With more writedowns yet to come and two Wall Street giants set to report earnings, more volatility could be on the way, but there were some very positive signs.

First, Private Equity firm Blackstone Group announced that it will raise $10.9 billion to purchase real estate. This could signify that prices have fallen to the point that speculative money is entering the market.

Secondly, corporations are raising money in the capital markets and their deals are being well-received by investors. Several deals, including the much-maligned (buy short sellers) Lehman convertible deal, was oversubscribed.

Lastly, investors sold the heck out of way overpriced U.S. treasuries and moved into other areas of the market.

All this probably would have happened sooner if the housing market was permitted to find a bottom, but better late than never. A recovery right now would be a major disappointment to the nanny state crowd, but I digress.

Not all investors are on the right track. Today, I still fielded calls from brokers looking to buy TIPs or T-bills for their clients. This makes me wonder what on planet some brokers reside. T-bill yields are so low that one would need 1970s-style interest rates to make up the difference for buying T-bills at today's yields.

TIPs are even worse. Breakevens are so out of whack with cash treasuries, one would need Weimar-like inflation to make buying TIPs in this environment worthwhile. To make matters worse, TIPs are so rich that a possible bout of deflation down the road could result in losing money on TIPs, even if held to maturity.

What shoudl fixed income investors do? Ladder or barbell. Mix it up. Don't just use treasuries. Include agencies (not going away) corporates and preferreds. Start by weighting things on the short end. As short-term bonds mature, investors may be able to rebalance their ladder or barbell by investing at higher long-term rates. If rates do not rise, maintain the short-term overweigtht and be thankful that you locked in at higher rates (and wider credit spreads) farther out on the curve.

Credit spreads are another touchy subject with me. I still answer the same question over and over again: "Why did corporate bond and preferred yields rise when treasury yields fell?" Maybe if Wall Street firms actually educated their brokers in the way of product and market knowledge instead of "client care" clients would be better cared for?