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Fed On Mission To Lower Rates

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Jerry Welch, Commodity Insite!
Call me at 406 -682 -5010
Ennis, Montana 59729

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Below is a chapter from my book, Haunted By Markets entitled, Fed On Mission To Lower Rates I penned on November 10, 1998. I decided to reprint it here because of the collapse underway with Treasury bonds and the implications such a scenario hold for stocks and commodities. I hope you find something of interest in the information below.


November 10, 1998:

Fed On Mission To Lower Rates

The markets that never ceases to amaze me are the U.S. equity markets. They have been on the rise since August 1982 (yes, 1982) and since, have never had a meaningful set-back. When they do set-back the break doesn't last long. It is a perfect market for true believers.

Take the most recent break in the equity markets, for instance. On September 1, the Dow fell to 7400 after rising to a historic high on July 20, at 9367. In essence, the Dow fell 1967 points or 26 percent in the short space of six weeks.

The Dow was pounded lower as fears that the Asian Crisis would push the U.S. economy into a recession. But in early October, Fed Chairman Greenspan lowered interest rates not once, but twice, to keep U.S. economy from succumbing to the same bearish forces hampering all other world equity markets. As a result of lower interest rates, the Dow Jones staged a monster rally with prices rising back to 8990, a high last seen on July 31. The Dow rose 1590 points.

The S&P 500 was exceptionally volatile during this period since it did not hit a low until October 8, as opposed to the low the Dow that was hit on September 1. From the low set on October 8 of 929.00, to the high set on November 6, of 1148.50, the S&P 500 futures contract rose $54,875 per contract.

In 22 trading days, in other words, the S&P futures contract rose $2,494 per contract per day. The rise was breathtaking. It was also amazing since it didn't so while bond prices were on the decline. For corn, wheat, oats or soybeans to experience such a dollar rally prices would have to rise $10.97 a bushel. For cattle futures to experience such a dollar rise prices would have to rally $13.72 cents. Get the picture?

What makes the rise in the U.S. equity markets all the more amazing is the fact that during this time period the U.S. debt markets were actually working lower. Bond prices did not rise when the Fed cut rates. Bond prices dropped hard on good news. Not a good sign.

When the Fed cuts rates, bond prices or the debt markets should rise. But they did not rise they dropped like a rock. In one month of trading, bond prices fell more than 10 full points.

Since 1986, there have been six large breaks in bond prices. One break was 29 full points that took 18 months to complete. One break was 26 full points that took 14 months to complete. One break was 16 full points that took 8 months complete. One break was 10 points that took 5 months to complete and the most recent break that took place between October 5, and November 6, was 10 full points and it took one month to complete.

But the equity markets have chosen to ignore the recent collapse in bond prices. That is simply amazing since bonds tend to be a leading indicator for stocks and not the other way around. As bonds go, so go stocks. That is a historical fact. If you don't believe me...look it up!

Few, however, are paying much attention to historical facts since the Fed recently lowered rates and the Dow jumped 1590 points. The general consensus is that the Fed will continue to lower rates in an effort to keep the U.S. economy from sliding into a recession. The result should be further gains for the Dow. But keep this in mind, bonds tend to be the leading indicator for stocks. Not the other way around.

With the U.S. Treasury bond market in the midst of one of the largest breaks since 1986, it remains to be seen if stocks can continue their torrid rally. After all, as bonds go, at some point in time stocks are certain to follow.

If bond prices do not soon rally, the stage will be set for a very bearish year for the equity markets in 1999. Once again, the fate of the equity markets will rest with the direction of the debt markets. That should not be much of a surprise. That is the way it has always been.


If interested in my twice a day newsletter Commodity Insite drop me a line at Or, call me at 406 682 5010. I would enjoy hearing from you.

The time is 9:07 a.m.. Chicago, November 10.

This material has been prepared by a sales or trading employee or agent of Midwest Market Solutions and is, or is in the nature of, a solicitation. This material is not a research report prepared by Midwest Market Solutions Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.


The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Midwest Market Solutions believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice.There is no guarantee that the advice we give will result in profitable trades.

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About the author

Jerry Welch has been in the futures industry since the late 1970's and is a true veteran of the markets. He has been quoted often in Wall Street Journal and is author of Commodity Insite, one of the longest commodity futures newspaper columns in history. His weekly column has been published each week since the mid 1980's and is one of the most recognized names in the world of commodities.

Mr. Welch is also known widely as a, "so so" flyfisherman.  

His column is published by the Illinois Agri News in La Salle, Illinois, Cattle Today, in Fayette, Alabama as well as Consensus, in Kansas City, Kansas.

He can be contacted at 406.682.5010 for a view of his, "twice a day" market column that includes price forecasts and trading suggestions.

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