Tuesday, December 28, 2004


BONDS ARE CHEAP? (click on image to enlarge) Posted by Hello

The above chart of the 30 year bond price relative to industrial metals prices, shows that BONDS ARE CHEAP! Yes I am a bond bear and yes BONDS ARE CHEAP!

The chart tells the story. Each of the bottoms shown on the chart above were wonderful times to buy bonds. The two lows back in 96 and 97 were also wonderful times to buy stocks. Another fact is that each of the prior lows in this chart were terrible times to buy industrial metals.

When the economy comes off a recession, it takes a while for the mines to catch up. In the early stages of the recovery, companies will buy metals at any price as there are profits to be made. When the mines catch up, the price of the metals settle back to a function of what it cost to mine them versus a price based on a short supply.

The chart below shows that the SPX has been cut in half since 1999 relative to industrial metals. This is a huge cut because over the long haul commodity prices go down. I know a lot of you do not believe that commodity prices go down and I am not going to produce a chart to prove my point here. If you don't believe it, do a little homework and then reply with a comment.

Right now, a lot of folks are afraid that inflation is about to jump because of the decline in the dollar. The fact is that a decline in the dollar is not inflationary. Yes the price of gold and foreign made goods may cost more in terms of dollars but this is simply a function of the terms of trade.

The key point here is that the charts show that interest rates are not ready to take off to the moon but if anything industrial metals prices are about to decline. The decline in metals prices will be the opposite of inflation. The increase of cheap textiles coming to America is also a dis-inflationary input.

The above factors will to some degree offset the price pressures induced by strong economic growth. The result is a sweet spot for stocks; moderate inflation, moderate interest rates, high productivity and strong revenue and profit growth. For some time, it has been my belief that one should avoid bonds not so much because bonds will lose value but because stocks will gain so much value.

Ken Fisher has written about the coming melt up. If bonds do indeed rally from here, can you imagine the amount of money that will look for a home in high yield stocks that pay dividends that are 85% income tax free? The market always presents two risks. One is that if you buy stocks they may go down. The other is that if you don't buy stocks they may go up. Right now the risks of being out of the market appear to be greater than being in the market.