Wednesday, September 26, 2007

Interest Rates - The U.S. Dollar Index - S&P 500 Thoughts

Recently while going through some older charts from April 1995 it was interesting to note that interest rates on the 10 year Treasury were around 7% and the U.S. Dollar Index was at 80.05. During the time frame from 1988 to 1995 the S&P 500 Index basically doubled in value from 250 range to 600. This all happened when interest rates were range bound between 6 and 9 percent. Below is a chart of comparing the S&P 500 Index with the yield on the 10 year Treasury.

(click charts to enlarge)

One potential difference between now and then is the psychological perception of interest rates. In 1984 interest rates on the 10 year were 14%. It almost seems impossible to think of the crying that would go on by companies today that are so use to low interest rates and cheap money. Great companies were formed under the environment when interest rates were high. Great companies still executed their business plans with great success with rates double what they are today. Great ideas and great companies can flourish under any business environment. It does not take low rates for companies to succeed. If rates are too high to make borrowing fiscally efficient, they will seek capital other means. In a recent interview Alan Greenspan was asked about CEOs of General Motors and Ford requesting and begging for the Federal Reserve to cut rates, he mentioned they should focus on making better products and selling cars. Our economy has become so obsessed with interest rates it is almost insanity. There are times the talking heads on TV can make it sound that if interest rates were 6-8% that the world would come to an end. It might feel like it at first because as a country we are so leveraged and in debt, but the initial pain would eventually fade and life would continue.

Below is a chart that of the U.S. Dollar Index and the S&P 500 on a monthly basis. As the dollar goes lower, will it act as fuel for the market? At what level will it cause foreign investors to think twice about investing in our markets? It is possible to hedge, but there is a cost in doing that. If the decline maintains an orderly sell off, is that enough to keep things from turning awful?

Below is the current chart of the S&P 500 Index with support and target levels. It seems that with all the turmoil the solution is to just close your eyes and buy. It won't last.

Some triangles that showed up on a recent scan. Some of them look a little heavy and a break to the downside could make for some decent moves. The middle pane shows the M1 indicator which is based on pivots and volume.

DNB - Dun & Bradstreet

BAC - Bank of America

BMY - Bristol Myers

The action is still in commodities. Because of the leverage used, the sell offs in this group can be so much more volatile compared to stocks. It feels like things are going to zero, and with leverage of 10 or 20 to one zero comes fast. Look for 15-20% retracements, and then technical set ups should start appearing.

CRB Index

Economics on the Daily Show!

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