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PTR's BOND MARKET ANALYSIS
1
Revisit the 5-Year Cycle
in U.S. interest rates
Page 1 of 3 "scroll down or click
for main graphic below"
9/20/2006
The chart below is a simple linear chart of the "interest rate"
for the U.S. 5-Year T-Note...from 1960 to 9/20/2006.
On this chart, we have placed our "best estimate" for a dominate
cycle within the data as based on PTR's Visual Elliptical Fitting Method
(VEFM), and our full Spectrum Cyclical Analysis.
As based on this visual fitting, AND our
full Spectrum Analysis
, using the
Fast Fourier Transform
and
Sine Regression
methods, we have concluded that there is a "very well defined,"
and moderately periodic, "5-YEAR Cycle" in this 5 Year T-Note; as well
as, the whole broader band of U.S. interest rates, from these 5y T-Notes
to the 30y bond.
The results from PTR's full Spectrum Analysis, as performed by our three
statistical programs: ORIGIN PRO, DPLOT, and MS-Excel, are shown at
the links above...with the final, "advanced sheet," limited to subscribers
only.
Based on the sum of these analysis, we can "expect" the following
path for longer term U.S. interest rates, eventhough, there are no guarantees
that the future will follow the past indefinitely.
While we have discussed the "major bearish implications" for that long term
falling wedge (triangle) pattern here many times at PTR, we also note that
even though the probability is "very high" that we are NOW in the process
of "breaking out" from that 22 year BULL MARKET in bonds, rates going down
and bond prices going up since 1981, this "breakout" could take a long time
to confirm since it's just "squeezing" out the apex...end point. Over
the next year or two, or three, the following analysis will be a KEY.
IF YOU "look closely" at the 5Y T-Note's "rate chart," below, and study
that "last wave" movement "up," from the 6/2003 low to the 7/2006 high,
YOU CAN SEE for yourself that this wave moved "much more sideways" than
any of the rate rallies from the 1980-82 high to date. SEE IT?
Now look at the rate rallies on the other side of the 1980-82 peak, from
1962 to 1980...SEE IT NOW?
The rates from 2003 to 2006 did NOT jump up like they did every other
time during that long fall from 1980-82 to 2003...what does that tell you?
IT tells me that bond prices are VERY LIKELY no longer in a long Bull
Market Down, and they VERY LIKELY DID start a new BOND BEAR at that
6/2003 low...which was a 47 year low going back into the late 1950's.
AS FOR this current trend in rates, as of 9/20/06, we "should" still be
inside the first correction down, in rates and up in bond prices, after
completing the first new Bear Market leg up...from 6/2003 to 6/2006. IF
correct, then after this correction finishes, somewhere "near" or
"just above" the 6/2003 low at 4.3% in the 30Y and "well above" the 2.1%
in the 5Y, we "should" see a major "lift off" in rates that "should" carry
them up into the 6%-7% area by mid to late 2008.
THAT IS TO SAY:
1) Rates have very likely PEAKED on 7/1/2006 for this current
5 year period...what a surprise and THANKS to our FED A#*H-^*# friends.
2) U.S. rates will VERY LIKEY remain "very soft" or even drop
"materially" from here to the next "mid cycle" trough (low), and that
trough is most likley to come in somewhere between mid to late 2007 or
very early 2008. While it's still a little early to project that
low in rates, I think it is likely to be made somewhere near 4.0% in the
shorter term bonds, like the 5y and 10y.
NOTE THAT this low, expected in mid to late 2007 or early 2008, IMO WILL
NOT be the major cycle low, which is still expected for somewhere between
late 2008 or early 2009. THAT low, we suspect, will come in ONLY AFTER
the next 5Y high offset "top" in rates, which is expected sometime in early
to mid 2008.
YES that's right, you got it, the current 5Y HIGH will come in near the
far back end of this 5y cycle, which started near the 6/2003 rate low, and
the correction after that next peak will drop down very quickly and tag the
cycle low trough...projected for late 2008 to early 2009.
In order to visualize this, all you have to do is look over at what rates
did from 1968 to 1970 to 1972, or from 1978-1980-1981. GET IT NOW?
The reason I "estimate" that offset period is that I now "highly
suspect" we are starting a whole new Bear Market in bonds (rates going
up), for the "longer term," and the "offset" between a cycle peak and it's
own next cycle trough will be short to very short.
In other words, the rise side of the cycle will be long and drawn out
to the upside, or rising direction, and cover nearly the whole cycle period,
while the trough side will be short downside corrections...much the same
way that a stock cycle performs in a bull market.
Based on this "assumption," the next 5y cycle peak "low" should
come in near 5 years from 6/2003 or 10/2003, which is "sometime between"
6/2008 and 10/2008. These "estimated" lows are BASED ON the prior rate
LOW made on 6/2003 and the prior "forecasted low," which was not due until
10/2003.
This is my "exception," and it is based on this very well defined and reliable
cycle plus my "wild assumption" that at some point in late 2007 to early
2008 rates will "spike up" and terminate the big STOCK BULL once and for
all. However, just keep in mind that IF rates should go below "about"
half the distance of their 2003-2006 rally, THEN we need to then consider
the alternative view for this cycle high and low.
THAT is to say, by looking at the chart, there is also the "lesser" possibility
that the FED and their Boyz could use the tried and true "quick boogeyman
con game" out in 2008 rather than 2007...as "I" expect. That is, they
could let rates drift on down and hold them down until the "expected cycle
low," more likely in early 2008 based on this scenario, and THEN spike rates
straight up...like 1998-1999-2000!
While the "cycle" period and offset would actually be near "picture perfect"
under the alternative scenarios just present, rates going on down and staying
down all the way into 2008 before "the spike up," I'll stick with the prior
concept, rates making a "premature" cycle low in late 2007 to "very early"
in 2008, and strong and steady rise right on up through all of 2008 and
2009... we just have wait an see "how" the FED will play this.
THE one big open question here centers on the possibility
that the Bull Market in bonds from 1981 HAS NOT ENDED, and while the
probability of that is less, the possibility is still very real...about
40%-50% as I see it.
While the FED FUNDS hit 1% in 2003, with short and long rates
making 45 year and 47 year lows in the most aggressive manipulation of open
markets in the modern history of the world, I'm still not convinced that
we couldn't get an even lower re-run of that manipulation...or at least
a "solid re-test" of it. Kind of like a long term "base building
process."
Since PTR "strongly expects" a massive economic recession or depression
sometime during the period 2010-2014, or even all during that period,
then another round of extremely low rates...or even a re-run of Japan's
FREE MONEY period (zero interest rates for over two years) is VERY DOABLE.
While I can envision a scenario where EITHER "stag-flation," inflation,"
OR "deflation" triggers this recession-depression, I still do not have
any "solid SIGN" pointing to which it will be...if anyone does at this
point? Never the less, the evidence is "clearly" building that it
will be one of the them.
HOWEVER, based on this chart, it sure looks like rates will double bottom
in early to mid 2007 and then "start" their final BLAST straight up above
6% by the end of 2008...and terminate the 2nd longest Bull Market for stocks
in U.S. History. Note that 1974 to 2008 will be another 34 year Bull
and "about equal" the Bull Market up from 1932 to 1966...at 34 years up.
Get it?
BB
The majority of comments pertaining to this analysis is
on the graphic itself, but a few "extra" maybe posted in the text
box below it.
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MORE COMMENTS
TEXT BLOCK (IF ANY)
IF YOU look at the comments
in the bottom right hand corner of the chart, you can see that I THINK there
is a "very good chance" that the FED will end up giving away FREE MONEY
sometime "AFTER" the big recession-depression hits...JUST LIKE Japan did
from 2003 to 2005!
While my chart shows that not happening until way out near 2020, that is
nothing but wild speculation at this point, and I can see that "retest" coming
in just as easily either a lot sooner or NOT AT ALL. In other words,
don't pay "too much" attention to that long term projected rise in rates that
I show, in red above, since it is not supported buy any "solid evidence" at
this point in time.
SO, what would a "deflation" scenario be saying to Mr. FED?
IT WOULD BE SAYING that "U" have hosed down the world with so much
loose money that the lending OUT of capital is no longer worth anything,
or very little, in return. GET IT?
It also means that there are going to be far less "new things" to build
and manufacture "in comparison" to massive amount of FREE CAPITAL available
to fund those projects...as support by both a topping in world population
growth and future periodic demographics.
IN addition, it would be saying that "U" have destroyed the supply-demand
balance in favor of FREE money in order to SAVE and manipulate every little
market DIP that "should have occurred naturally on it's own"...Now LIVE WITH
IT!
AT THAT point, and for the first time in 2000-10,000 years of World history,
labor and "new ideas" will be worth FAR MORE than the capital needed to
bring them to market.
In general, this "should" be "a good thing," since all this loose money will
be put to work actually making something useful rather than being shifted
from the corner of one investment bankers disk to another...as it is now.
To Mr. FED I say and ask: Thank "U," as I can surely live with that!
CAN "U," or your B Buddies...banker buddies? I hope
NOT!
BB
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