29, 2006 -- The Third Quarter of '06 is over and two events took place within that period that were note worthy. One, the Fed for the first time in 17 months did not hike rates because the economy was showing signs of slowing which in turn, they claim, allows inflationary pressures to subside. The other noteworthy event was the dramatic decline in the value of the CRB index, its worst quarterly showing since 1981. Let's take a glance at the Big Four: stocks, bonds, currencies and commodities and see how each is positioned with the the final quarter of the year at hand and in light of the decline with the CRB index and the Fed being far less hawkish than anytime since mid 2004, regarding interest rates.
STOCKS -- when the Fed decided not to hike rates, the Dow Jones began to rally and it is now a few points from an all time high. The media cannot get enough of this story and they tout how well the Dow is doing a hundred times a day. What they do not disclose even once a day is that the S&P is still 13 percent its all time high while the Nasdaq is 50 percent below its best levels. Are stocks, really doing all that well?
BONDS -- prices have rallied from a low of 105 in May, to a high of 113 this week. The market believes deeply the next major maneuver by the Fed will be to lower rates, not raise them. It needs to be understood, however, the fundamentals bullish for bonds are not necessarily bullish for stocks. In view of the fundamentals as I perceive them for stocks and bonds my bias today, is no different than it was in early spring. I would rather own a bond portfolio than a stock portfolio. The bond market is going to benefit regardless of what the Fed does but stocks may not. In the case of the Dow Jones, an important peak should be seen at some point in October, as I first forecast five months ago.
CURRENCIES -- The Chinese yuan just hit a 12 1/2 year high against the US dollar. In theory, that should lift all other Asian currency values as well. In reality, that is not happening as the yen remains depressed. In my view, the yen is the most undervalued of all currencies and is at bargain basement levels. The US dollar, on the other hand, is on the cusp of major decline as slow economic growth, the potential for lower interest rates and fears of stagflation cause the mighty greenback to erode in value.
COMMODITIES -- The CRB may have more to go on the downside since the metal and energy markets remain at lofty levels. Then again, it may not weaken further because one group of commodities has yet to appreciate in any significant manner. That group, of course, are the grain markets which by any measure are cheap. If the grain prices can rise, the CRB could easily shrug off the ugliness of the last quarter. The grain complex is in the same position as the metal and energy markets were four years ago. Gains are cheap and supplies historically tight. Equally important are the commodity funds that are probing the grain complex from the long side after months of sitting on the sidelines waiting to pounce. Within the past two weeks, the funds were as aggressive on the buy side as any time in can recall this calendar year. The key fundamental that sent metal and energy prices to sharp gains each year since '02, was they were demand driven markets, the very force now surfacing for grains. Those that know the character and history of markets understand that the most profitable and reliable markets of all are demand driven markets. That is the exact position the grain complex is right this very moment.
Regardless of the whims and ways of CRB, the bias of the Fed or the fate of the US dollar, "the die has been cast" for the grain complex. The final quarter of this year and into the First Quarter of next, a demand driven bull market will unfold. It will not end until the Spring of '07, at which time a correction will unfold. A correction, not a long term peak in values.
No other group of markets within the Big Four; stocks, bonds, currencies and commodities offer as many low risk, low margin opportunities to make money than the grain complex. Buying the markets, spreading them, forward hedging years into the future to lock in profits are just a few maneuvers available to producers and traders. The next six months will make or break many a pocketbook.
If you wish to receive my twice a day newsletter, call me at 406-682-5010. You may enjoy what I publish. Then again, you may not. But you will be able to stay on top of what is going on each and every day.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)