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No More Food for Hoofy!


I'm too thin to go on a diet!!!


Since yesterday's markets were even more lackluster than the day prior and investors are going to be waiting on Friday's Non-Farm Payrolls number, I thought it prudent to offer-up some food for thought on the economic front. I mean, why not? It seems to be the topic we're all most interested in at present.

Over the last couple of months you have seen the professors discuss commodity prices, the dollar, their relationship to the condition of the general economy and the Fed's action - or should I say "non-action?" Last night Professor Fleck, I believe, hit the nail right on the head with his "Fleck Rap" article. (A must read if you haven't already) I'd like to continue his thought and give a graphical picture of just exactly where these inflationary numbers are today.

I'll start with the CRB (Commodity Research Bureau) Index. Once again, this index is comprised of 17 different commodities that are believed to accurately represent the overall commodity price trends. This is a monthly graph dating back to 1977. Notice how the commodity prices have been in somewhat of a downtrend since 1980. This 21-year downward trend was broken in October of 2003 and is currently butting up against horizontal resistance set back in 1983.

In essence, commodities prices have gone from a 25-year low to a 21-year high in less than 2 ½ years. This rate of increase has only been surpassed by the move in the late 70's when the U.S. eliminated the "Gold Standard" and there was an Oil Embargo. At this time inflation was at 18%. Holy ing)" target=_blank>Schivitz!

However, just in case you haven't heard, the Fed and BLS say there isn't an inflation problem.

Wonda Copyright 2004 William O'Neil + Co. Inc. All rights reserved

For those of you who don't remember, or were too young to remember; the Fed, trying to fight off inflation, raised the Fed Funds rate to a high of 19.1% ending in June of 1981. Yup, that's right - I said 19.1%. The Treasury Yields hit a high of 17.15% a few short months later. Once the mad-dash inflation, which peaked at 18%, started to get somewhat under control, the Fed started lowering rates and the Equity Markets broke out of a 17-year consolidation (1966 - 1982) - Now that's a consolidation! (Graph below)

One last point... Notice how once the CRB index started bottoming, the Equity Markets broke their uber LT upward trend for the first time in over 23 years.

Wonda Copyright 2004 William O'Neil + Co., Inc. All rights reserved

On another note... I think it's important to understand just how long the Fed's been feeding Hoofy. Besides a few short periods of time - listed below - the Fed has been lowering rates ever since (23 years).

Feb. to Sept. 1984 ( 9.5% to 11.0% )
Oct. 1986 to Oct. 1987 ( 5.75% to 7.25% )
March 1988 to April 1989 ( 6.5% to 9.83% )
Jan. 1993 to July 1995 ( 2.95% to 6.0% )
Jan. 1999 to October 2000 ( 4.63% to 6.5% )

All of these dates precede a market consolidation or decline within the upward trend. What happens when the Fed raises rates when the market is already in a decline or consolidation? That's the 64 Thousand Dollar Question!

Now that the Federal Reserve Bank has the Fed Funds rate at 1% and the CRB Index is pushing on a 21-year high - where, o'where; do we go from here? Anyone, Anyone, Bueller, Bueller?

Just for one second, imagine this...

-- Inflation increases -- Interest rates increase -- Economy slows -- Corporate profits decline -- Increase layoffs -- Individual bankruptcies increase -- The unwinding of the Carry Trade -- ????

Can you see an ever spinning downward cycle that feeds on itself?

Over the last 3-months the markets have been having a very difficult time banning together and making a concerted effort at busting through resistance. Does this mean they won't? No, not at all. The markets could very well bust through resistance and continue on their merry way, even with the looming economic backdrop. However, just remember the old adage, "The bigger they are, the harder they fall." In other words, if the equity markets continue in their upward direction, without the underlying state of the economy being resolved, one day it's still gonna happen - one way or the other.

As Fleck alluded to last night, the Fed's got themselves in quite a pickle.

Just more economic "Food for Thought"

Until next time...


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