Weak Housing May Drop Rates, Spur Stocks
04/17/2007 12:00 am EST
Mark Leibovit, chief market strategist for VRTrader.com, says the Fed will be forced to cut rates to stave off a housing crunch, and that will be good news for stocks and precious metals but bad news for the dollar.
The US Treasury is happy with Japan's super-low interest rates because they help to keep US long-term rates artificially low at a time when the Dow Jones Commodity Index is up near 25-year highs (the Federal Reserve’s conundrum). Meanwhile, should Japan normalize its interest rates, it would send the US Treasury yield well above 5%, creating a US housing train wreck.
The next shift in Fed policy may be toward lower interest rates to rescue the US housing market at the expense of a weaker US dollar. The longer the Fed holds rates steady, the more adjustable rate mortgages will reset at higher interest rates that many sub-prime borrowers cannot afford, resulting in more home foreclosures and further downward pressure on home prices.
The Fed is stuck between a rock and a hard place, because rate cuts to prop-up US home prices can sink the US dollar and send gold soaring to new highs. A 5% to 10% decline in US home prices this year will likely force the Fed to lower the federal funds rate by 50 basis points to 4.75%.
A big story the past couple of sessions (virtually unnoticed in the press) is the sharp decline in the US Dollar index, which touched 81.96 on Friday. The big, big low since the 121.29 high in July 2001 was 80.48 in December 2004. The potential now exists for a move to 80.00 and by some negative counts to 68.00 over time!
I've been pounding the table regarding the fact the broad-based New York Stock Exchange index posted a series of new record all-time highs last week. This is quite profound and more significant than the action of the Standard & Poor’s 500 and certainly the Dow Jones Industrial Average.
Coincident with this important breakout is the fact that the Dax (Germany's Deutsche Boerse) traded at a new bull-market high Friday of 7212.07. The all-time high formed back in 2000 is at 7600.00, but we appear to be well on the way to getting there!
I am still targeting the S&P 500 to 1550 in the months ahead, which should translate to the Dow around 13,200. (That’s about a 4% move from current prices—Editor.)
Precious metals soared late last week and are continuing to track along with the stock market. June gold settled up 10.20 [last Friday] at 689.90. Positive Volume Reversals (tm) were seen across the board in the metals stocks as buyers stepped up once again. This is very bullish for the metals.
The bulls are in control and don't look ready to give it up any time soon. Since I am bullish on stocks and perpetually bullish on precious metals for the next ten to 20 years, there is only one position to take--Buy!