10, 2007 -- Not since the September 2001, terrorist attacks has the Federal Reserve and the central banks of Europe, Japan, Australia and Canada pumped so much liquidity or money into the financial markets as they did this week in an attempt to bring about stability. The subprime mortgage crisis and enormous hedge fund losses have pummeled stocks for weeks but the actions by the central banks was strong enough to halt the slide and allow the markets to post modest gains. A financial meltdown was avoided. For now, anyway.
To understand how panic stricken the markets have become here are the thoughts of a well known chief market strategist; "our market is rapidly swinging from manic to depressive and back to manic in nanosecond moves with each headline acting as a trigger." He is right, as uncertainty is always bearish. Mood swings from "manic to depressive" are even more bearish in my view as it fosters more uncertainty.
This is not the first time fear and panic has gripped Wall Street or Main Street. In 1998 there was the Asian Crisis, in 1987 was the largest sell off with the US market in history and in 1929, a stock market crash was so severe it led to the Great Depression that lasted a decade. One hundred years ago in 1907, an attempt to corner the market in shares of United Copper Company went awry and a number of banks were pushed to the brink of collapse. Fears leading to panic selling have been around for a long time. Let's look at The Big Four; stocks, bonds, currencies and commodities to see how they have been doing the past few weeks and the outlook ahead now that the world's central banks are attempting to calm the markets and bring about stability and reason.
STOCKS -- The dow just hit its lowest level since late April, approximately 1000 points off the high set in July. A rally should be at hand based on the amount of liquidity pumped into the system this week. But is the rally a dead cat bounce or the resumption of the bull market? Dead cat bounce gets my vote!
BONDS -- If the, "manic to depressive swings" continue in the stock and commodity markets I would bet the Fed will lower rates in the September meeting. If so, the current rally with bonds will continue as the market should have the legs for a further run up. Bonds tend to do well when all is gloom and doom and it may also do well in a, "manic to depressive" environment that promotes gloom and doom.
CURRENCIES -- The cash pumped aggressively into the financial markets allowed the US dollar to gain ground against the yen for the first time in a month. The dollar is certainly not out of the woods but it does seem poised for further gains as investors and traders rush to the greenback as a safe haven.
COMMODITIES -- The CRB index, the most widely followed gauge of commodity prices hit its lowest level since early July this week but stabilized as $90 billion was dumped into the financial system. At some point hard assets in general will rise sharply as such a maneuver is inflationary, pure and simple.
Metals -- Gold prices rallied hard the final day of the week because flooding the marketplace with money for is bullish the yellow metal. More gains are likely.
Livestock -- Cattle prices have dropped $6 to $7 the past few weeks, following the dow and the CRB index downward. My rule of thumb is; in a bull market for cattle, buying any $5 is a low risk opportunity with the potential for a high rate of return. Cattle are a buy, with December futures now trading at $97.45.
Grains -- Soybean and corn prices are $.80 and $1 a bushel off contract highs while wheat is $.26 off its best levels. If timely rains fall in the Grain Belt the next 10 days as I feel will happen, the summer low for all grains are not yet in place. Avoid the long side of the market for now. The Fed has drawn a line in the sand by opening the money spigots to halt panic selling in the stock and commodity markets. If panic continues, both markets will succumb to even lower levels. If calm and stability do not soon become the dominant market psychology, the Fed will have no choice but to cut rates aggressively. And a rate cut at this point, will indeed bring an end to the hemorrhaging.
The Fed usually gets what it wants. Right now, it wants orderly markets void of manic and depressive price swings. If adding liquidity to the system does achieve such a goal then lower rates will. In either case, at some point down the road the Fed action this week will prove to be a bullish force to be reckoned with.
Call me at 406-682-5010 for advice about mood swings flipping from manic to depressive. I've been there. Heck, I'm there now!
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)