Chart Presentation: 1990 and 1998

We often write that the market is similar to some prior time period. When we are feeling extra gloomy we tend to use comparisons based on 1987 but recently most of the work has focused on the 1990equity bear market and the U.S. dollar’s bottom in 1995. Today, however, we are looking at 1990 and 1998.

The chart below shows the stock price of General Motors (GM) and the ratio between the CRB Index and crude oil futuresprices. In 1990 GM was trading at a low concurrent with the relative strength peak for crude oil prices. Into early 1999 GM was at a high concurrent with a relative strength bottom for crude oil prices.

The equity bear market in 1990 ended at the peak for crude oil prices while thestock market plunge in 1998 did not end until long-term Treasury prices reached a top. Since oil AND bond priceshave been strong into the start of this year we can argue that the current situation is a bit like both 1990 and 1998.

The chart at top right compares Merrill Lynch (MER) and the TBond futures from 1998 while below right we feature the same comparison for the present period. The basic point is that at the end of the current rout we should see very sharp weakness in the long end of the Treasury market. Intrading yesterday the TBonds moved to new recovery highs followed by a cascading decline in the equity markets into the close.

Equity/Bond Markets

The charts at right have been set up so that we can examine the issue of ‘time’. In other words we are looking at how long the current equity markets ‘bear’ has run compared to the last bear market that stretched from 2000 into the final quarter of 2002.

The charts include the U.S. 30-year T-Bond futures, the U.S. 5-year T-Note futures and the Fed funds target rate.

We will mark the start of the equity ‘bear’ as the point in time when bond prices began to rise at the start of 2000. This was when thebond marketbegan to discount the very real potential for a slow down in economic growth. Keep in mind that this was close to three months ahead of the actual peak in the Nasdaq and a full year before the Federal Reserve even realized that there was a problem.

In the current cycle the bond market began to lift back in the spring of 2006 even as the Fed continued to push the funds rate higher. In terms of ‘time’ we are now close to 7 quarters into the correction. We mention this because 7 quarters into the correction that began at the start of 2000 the markets were deeply involved in a state of crisis surrounding the September 11th terrorist attacks. In any event the argument is that cyclical strength may not turn truly positive until some time in early 2009.

Below we show the TBond futures and… the sum of 3-month eurodollar futures and the Fed funds target rate (using twomoving averagelines).

The premise of the chart is that the peak for bond prices tends to be reached once the SUM of 3-month eurodollar futures and the Fed funds rate moves above ‘100’. For this to happen the yield curve has to invert at the short end with 3-month eurodollar yields moving well below the overnight funds rate for some length of time. At present Feb. eurodollars are trading at 96.285 and the funds rate is 4.25% giving a ‘sum’ of 100.535. With the sum above 100 the moving average lines are swinging higher but have yet to reach levels that in the past have marked bond market price peaks.