Nasdaq 2300 or Bust -- or 2300, Then Bust

A rising 30-year bond yield is negative for stocks: I expect U.S. Treasury yields to continue to move higher as the Federal Reserve raises the federal funds rate. The trend to higher yields is propagating out to the yield curve, ending both the bond "conundrum" and carry trade.

The bond conundrum began as the Fed started to raise the federal funds rate at a measured pace on June 30, 2004. As the funds rate moved higher, the yield on the 30-year moved lower. That's the conundrum that's ending now. The carry trade is also being reversed -- it becomes more difficult for speculators to borrow short-term and buy long-term as the funds rate rises. Wednesday morning, the U.S. Treasury announced that it will auction its first new 30-year bond in February; this added supply could aggravate a rise in yield. A higher 30-year bond yield is a negative for stocks, as that yield is an input to my calculation for the fair value for all stocks and thus would make every sector more overvalued or less undervalued.

Commodity prices are topping out, led by crude: The main reason for this, in my judgment, is the unwinding of speculative positions. Speculation was fueled by the FOMC's low interest-rate policy, which pushed the federal funds rate to 1% in June 2003, franchising commodity speculation via the same "free money" environment that propelled the carry trade.

Over the near term, lower commodities prices are a positive for stocks, and given the bond market's weakness, the hot money is getting back into stocks: That's why a Nasdaq 2300 is possible before higher yields trump this trade and push shares lower. The consumer is still reeling from higher energy costs and faces higher mortgage payments. In addition, future tax legislation puts interest deduction and state and local tax deductions in jeopardy. This could lead to a slower-than-expected economy; this would cause the Dow Transports -- which reached an all-time high at 3983 Thursday morning -- to fail, just as utilities did in early October after a new all-time high.