30, 2007 -- The CRB index ended November by posting a monthly downside key reversal while the Dow Jones lost a whopping four percent for the month. Both markets would have done far worse had not rumors surfaced the Fed was going to cut interest rates no later than their next meeting on December 11. Nonetheless, the monthly "k-r " to the downside for the CRB bodes ill for commodities. And though the dow jones rallied sharply this week, it remains to be seen if the rally has legs or is nothing more than a dead cat bounce.
Fundamentally, stocks and commodities are stumbling due to the problems with the housing industry and in particular because of the subprime mess. Regardless of what the Fed does on or before it's next meeting, those ugly problems are not going to go away quietly. Nor soon I might add.
Irwin Kellner, chief economist for MarketWatch and for North Fork Bank is one of my favorites to heed. Here are his thoughts in an article entitled, "Oldies But Goodies." He starts by saying, "if home buyers, sellers, lenders and investors had only taken heed of some of the old expressions we all learned as we grew up, the subprime-mortgage situation might not have become the mess it has. They include:"
**If it sounds too good to be true, it probably is.
**What goes up must come down.
**Home is where the heart is.
**Be careful what you wish for.
**Beware of the law of unintended consequences.
**You can't make a silk purse from a sow's ear or kiss a frog and turn it into a prince.
**There is no such thing as a free lunch.
**What, me worry?
**This time it's different.
**There is a sucker born every minute.
**The only thing we have to fear is fear itself.
Following each, "old expression" Mr. Kellner offered advice that was pointed. The one that struck home with me was; "there is no such thing as a free lunch." He wrote; "it boggles the mind how many money managers, investors, and just about everyone else thought these securities (subprime mortgages) could be rated almost as high as super safe US Treasuries without any added risk. No wonder people from all corners of the planet, from sophisticated hedge funds and banks to the proverbial man or woman on the street, put chunks of money into these mortgaged backed issues." Therein lies the problem stocks and commodities face at this juncture. The sub prime mess, credit crunch, housing debacle, foreclosures or whatever you wish to label it, the bottom line is sobering. The problems are not going to go away anytime soon because there is no free lunch. Certainly, the Fed cutting rates frantically will soften the blow to the economy and lend support to most markets. But investors, traders and agricultural producers need to realize that cutting rates frantically is not necessarily bullish any market other than bonds or the debt markets. And that of course, goes back to another old expression of Mr. Kellners, "Be careful what you wish for."
For the old expression, "this time it's different" he says, many feel "there have been all kinds of bubbles in the past, but this can't happen to housing, since all real estate is local and at any rate, people need a place to live." For the expression, "there's a sucker born every minute" Kellner states, these are the folks who believe that, "this time it's different."
The media and Wall Street may be whipping themselves into a bullish frenzy by forecasting and wishing for more rate cuts, but I am in Mr. Kellner's camp on this when he says, "be careful what you wish for"; it is unwise to believe that, "this time its different." And, "there is a sucker born every minute."
An expression I often use is not an oldie nor a goodie but history shows it to be accurate. It is: Lower rates may be bullish bonds and the debt markets but they are not necessarily bullish stocks and commodities.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)