Tuesday, April 15, 2008

Follow the money

I'm putting up the chart of the CRB again, this time with an S&P overlay. Since Oct. the general stock market has been in a bear market and during this time the Fed has been furiously slashing rates and pumping liquidity into the system. So over all what has been the effect?

Well they've managed to stem the decline in the stock market but in the meantime commodities have been in anything but a bear market. As a matter of fact it looks like commodities have been on a diet of nitro the last 5 months. All bull markets have corrections. It's just natural because all bull markets get ahead of themselves from time to time. That's just human nature at work. So we got a correction in the commodity markets recently. Of course all the doubting Thomas's of the world immediately came out to let us know the commodity bubble was finished.

So what really happened? We got 4 down days. That's right 4. Somehow 4 down days equates into the end of a 7 year bull market. A bull market which BTW is now only about 1% from making new highs. You want to know why the commodity markets are resisting any decline? Because commodities are still not expensive. The fundamentals still haven't changed.

You want to know why stocks aren't rocketing to the moon after this decline? Because stocks are expensive. At 20 times trailing earnings stocks are at levels that have capped many bull markets. Never in history have stocks shown great long term returns or even good long term returns at these valuations. Now when stocks get cheap and by cheap I mean P/E's in the single digits, then I will be selling my commodities as fast as I can to buy stocks. Probably biotechs as I think that will be the next major growth area like the Internet was in the 90's.