Weekly Market Commentary
fyii.net
by Jerry Welch, writer and publisher of Commodity Insight, a futures advisory service for grain, livestock, metal, currency, stock and bond futures markets.
Aug. 27, 2001
The bearish combination of a strong US dollar coupled with global economic weakness are the two primary fundamental forces keeping hard and paper asset markets on the defensive. Those two fundamentals joined forces last Fall, and since, the board as a whole has been unable to mount and sustain much of a rally. As a result, this year has been a major disappointment for those bullish towards commodities such as grains, livestock and metals as well as equity markets such as the Dow Jones, the Nasdaq or the Nikkei.
It was my belief the primary fundamental needed to spark a rally in the commodity markets was a weakening of the US dollar. However, since July, the dollar has slipped by 6% but thus far, most commodity markets remain depressed. Commodity prices are still unable to rally! The dollar has been grinding lower in large part because the Federal Reserve continues to push rates downward in an effort to spark an economic recovery. Lower rates and a lower dollar go hand in hand.
This past week alone, the Fed lowered rates by another one quarter point. That was the 7th time this year the Fed has pushed rates lower. Unfortunately, the markets as a whole viewed the drop in rates as a, 'ho hummer.' Now, it seems, even the Fed lowering rates cannot turn the markets higher.
What then, will it take to spark higher prices for hard and paper assets? What new force must surface to usher in a scenario that makes for bull markets? What should investors, agricultural producers and speculators look for that suggests the board as a whole is finally going to move upward?
There is no doubt that lower US interest rates along with a softer US dollar are positive, bullish forces. However, I have come to the conclusion that along with those two forces, lower rates must also be seen for Treasury bonds which are, in essence, long term interest rates. The rates the Fed manipulates are short term ones not long term. The Fed has no control over long term rates such as Treasury bonds. That may be the missing ingredient in the recipe for bull markets across the board!
Short term rates such as T-bills have rallied sharply since last Fall. And thanks to another cut in rates by the Fed, T-bill prices ended the week at their best levels since March, 1994. T-bill prices are doing exceptionally well in other words, with the market now at its highest level in 8 years.
Treasury bond prices on the other hand, are no higher today, than they were in March, five months ago. T-bill prices may be in the midst of a rip roaring bull market thanks to lower rates but Treasury bond prices are not.
My fundamental work however, suggests that Treasury bond prices are poised to move upward very quickly. A bull market is at hand. If so, that means long term interest rates could plummet. Long term rates effect home mortgages and such. Drop long term rates low enough and every homeowner in America will see their monthly mortgage payments peel off by hundreds of dollars a month.
Not long ago, the Bush Administration gave US taxpayers a one time rebate of approximately $600. It was done to help spark a recovery with the economy. Though greatly appreciated, it pales in comparison to what lower long term rates will do to home mortgage payments. A drop in long term rates similar to what short term rates are doing could mean immediate and substantial savings for all homeowners.
What I am suggesting is that a major bull move for US Treasury bond prices could soon be underway. Investors, speculators and agricultural producers should watch the Treasury bond market carefully.
As Treasury bond prices rise and long term interest rates fall, most all hard and paper assets should benefit. The missing ingredient in the recipe for a sustainable economic recovery rests with lower long term rates.
Treasury bond prices may indeed be on the verge of a huge bull move! Time will tell. Those that need daily information regarding every market on the board should log onto my website at www.commodityinsight.com. There is no substitute for timely information. |
