In yesterday's issue we commented that we were bullish on the equity markets because... each and every significant low for equities since the Asian crisis in 1998 had been made with a concurrent low for yields. In other words... as long as long-term Treasury yields are not headed lower it makes sense to hold to a bullish posture on stocks.

The chart below compares 30-year Treasury yields with the S&P 500 Index. The point, of course, is that when yields bottom... stocks tend to bottom as well with the temporary exception of early 2009 when the SPX continued to decline for a couple of months after yields swung back to the upside.

However... to make the argument that stocks should resolve higher because yields have bottomed rests in large part on the assumption that yields have actually bottomed. We would be grateful if the Fed would stop making brash and, in our view, somewhat irresponsible statements about 'how long' short-term interest rates will remain at current levels. Our contention is that the Fed actually has no idea whatsoever how the funds rate will hold near 0% because that decision will ultimately be made by the markets. The markets lead and the Fed follows. To suggest that policy will not change until mid-2013 or late 2014 is, in technical jargon, balderdash and piffle.

Our concern has something to do with 10-year yields and 2%. We have argued for well over a decade that Japan will truly escape from deflation when its 10-year government bond yields move back up above 2%. This is our 'line in the sand' denoting the tipping point from marginal inflation over to the dangers of deflation. 2.0%. Last seen Japanese 10-year yields were .99% suggesting that deflationary asset pressure remains alive and well in the land of the rising sun/falling commercial real estate prices.

Next is a comparison between the ratio of crude oil to gold and 10-year U.S. Treasury yields.

The point is that each time the Fed tells us that growth is so tepid that the funds rate will remain at current levels for years to come... long-term Treasury yields decline and with yields dancing back and forth around the 2% level the implication is that we shouldn't be too comfortable about making sweeping assumptions about yields having reached a bottom. If stocks bottom with yields then a bullish lean depends on yields not losing touch with the bottom of the recent 1.7% to 2.3% trading range.

Equity/Bond Markets

And now for something not so completely different.Below is a chart of the S&P 500 Index and the ratio between the share price of Johnson and Johnson and the U.S. 30-year T-Bond futures.

The argument is that when the SPX is 'high' the price of JNJ is more than 55% of the price of the TBonds. When JNJ rises to more than 60% it tends to be close to a peak. This relationship has held over the past 10 to 12 years.

The point would be that with the TBonds north of 140 JNJ would have to trade up to somewhere between 77 and 84 before the ratio would rise into anything even remotely resembling a 'top'. To the extent that the ratio trends with the SPX the assumption is that the SPX is closer to a bottom than a top at the present time.

We wish the Fed would stop trying to be transparent because, in our cynical view on all things economic, it does more damage than good when it tries to 'think'. Put a bunch of academicians in a room, feed some them outdated data, and then entrust them to do the correct thing and... you end up with a white-knuckle series of oversteering corrections on an icy road ending ultimately in the ditch wrapped around a sign pole.

Anyway... below is a chart of the ratio between gold prices and 10-year yields and the ratio between the Bank Index and the SPX. If the point of the exercise is to support the banking system then what possible good is it to make statements that lower the dollar and yields .

Quickly... below is a chart of the Greek stock market and the ratio between Johnson and Johnson and the SPX. The markets shifted from the defensive stocks back to the cyclicals at the end of the third quarter last year. This tends to go with a rising BKX/SPX and has recently been helping to push the Athens SE General Index upwards.