Wednesday, September 03, 2008


Yesterday's huge jump in 10-year treasury bonds, 2.86%, sucked the air out of the stock market. The move in bonds since July 07 has been better than 40%. The move since July of 08 is better than 15%. UK Guilts are soaring even more. Money is flowing out of Gold and resource stocks and into bonds.

The drop in long interest rates and in commodity prices is giving financial and consumer cyclical stocks a boost. Today, these two groups were only up .45% each, but still up on a down day. Over in England, big banks like BARC and HSBA are on a tear. BARC has moved from 260 to 363 in two months.


The current yield of the 10-year treasury is 3.73%. Bond and stock market rallies overlap. For example, the stock market turned up on October 10, 2002 almost two years after bonds started moving. The market soared strongly after a retest of the October low in April of 2003. The bond market rally lasted into June of 2003 when the ten year fell to around 3.33%. The following months were great months to own stocks. Since so many countries are fighting inflation by holding short rates high, the bond market rally will continue, however, the bond market rally is already long in the tooth. This bond market rally started in July of 2007.

There will surely be a few bumps in the stock market road in the weeks ahead. Congress convenes again on September 8, another aircraft carrier departs for the Middle East on September 8 and OPEC meets on September 9. Western Europe has decided to delay a meeting to consider "punishment" for Russia's invasion of Georgia. The US has suggest it may scrap the nuclear 123 agreement negotiated with Russia and Australia has said it will reconsider its agreement to provide Russia with yellow cake (uranium). The British, after the Russian threatened to reduce oil and gas shipments to Europe, have suggested that they are ready to go all out to find other sources of natural gas.

Another potential bump looms in the negotiations with Iraq. Maliki has said he will submit the troop agreement to parliament in 10 days. The problem is that there is still no agreement to present. Maliki is attempting to push the USA around by suggesting that he will seek parliaments approve on a deal that is not acceptable to the USA. The USA turned over the 10th of 18 provinces to the Iraqi government this week. The Anbar province was controlled by al Qaeda two years ago. Progress continues but political progress is often more difficult than military progress.

In the meantime, according to the good folk at, the USA is negotiating with Turkmenistan and Tajikistan. If the US can secure airbases at these neighbors of Afghanistan and Iran, the need for troops to remain in Iraq will not be as great. The last thing America should do is depart from the arena after putting a big hole in the middle of Islamic Fascism. Hard won ground should not be surrendered easily.

The US has one base in Kyrgyzstan. It is negotiating for two bases in each in Turk and Taj. Russia will not be happy if either country agrees.


Russia continues to cooperate with the west in several ways while walking a new path. The new prime minister has just outlined the "new" Russian policy. It boils down to saying that Russia is the only country permitted to negotiate deals with the former Soviet States. The US, Europe, Australia, China, Japan and others will continue to challenge the issue. In some cases, China in particular, will go along with getting the Russian stamp of approval on deals with former states. If China can quietly contract for more resources, they will not stir the pot. Europe has a strong interest in good and independent relationships with the countries that border both Western Europe and Russia. The primary motivation of the USA is to jump right into the middle of the terrorist camps so that terror can be divided and concurred. We want no confrontation with Russia, but we want international law to be followed by Russia.

By hanging out in the Arabian and Indian Oceans, the US 5th fleet can support actions in the hot spots of the Middle East. When the USS Abraham Lincoln and the USS Ronald Reagan sit within striking distance, no country is going to support or permit a plot on America that could be traced back to its soil. Another 9/11 can certainly happen, but the improvement in Americas intelligence capabilities in the past 7 years has been remarkable. Hardly a day passes without the death or capture of a terrorist leader. It is the steady rain on these terrorist that makes them well aware of the serious rain that would come down if America is attacked again. A presence on the ground must be be maintained until at least a couple more countries switch sides. By killing leaders and not masses of people, the US is making it easy to see who is on the just side of these fights.

Russia's Navy is not close to matching the US Navy. Its military strength is land based. Its Air Force is strong at home but not up to US capabilities, particularly from Air Craft Carriers. Furthermore, Russia has had its fill of Islamic Terrorist. It has fought battles with terrorist for many years. One of the reasons is to keep the drug trade as low as possible. As a result, Russia has supported the UN Security Councils measures against Iran.


The allied players are not apt to release the brakes until the deal with Iran is secure. Even Russia will bark but its short rate is now above 11%. Russia, like the rest of the world, wants to keep the pressure on Iran until a deal can be made. It is still possible that a deal will include a settlement of nuclear issues between Russia and the west and in regard to Georgia and other former Soviet States.

The rapid fall in the price of oil, suggests that the brakes can be released. The quarter point move in Australia illustrates great patience. The bond rally should continue until the Euro short rates fall. The spread between the 6 month Euro Libor Rate and the US Libor Rate is about 2%. This gap will narrow. When it does, it will mean a whole lot of stock market fun.

Japan will be a major beneficiary of lower oil prices. The country imports about 100% of its oil. Investors should consider owning shares in big consumer goods companies such as Sony.