- 1997: Volume 6, No. 4 Are Bonds Due for a Correction? Gasoline Prices Could Tumble

The June U.S. jobs report showed the lowest U.S. unemployment rate since 1973 at 4.8 percent. Such a low unemployment rate is remarkable considering the technological advances achieved during the past 25 years and a shift in the U.S. economy to one of a service industry.

We see no reason why U.S. employment won't continue to expand over at least the next three quarters. The U.S. is competitive in world markets and U.S. consumers are willing to keep adding to their already record large debt load based on the optimism over each individual's economic future.

We have also seen the bond market rise on tranquil inflation pressures. The PPI (Producer Price Index) and the CPI (Consumer Price Index) have fallen to historically low levels. So, we feel that the bond market has already priced in a tremendous amount of good news in regard to inflation.

Because the bond market has priced in a great deal of this positive inflation news and because we still feel the economy will continue to grow nicely over the next three quarters, we feel the Federal Reserve will tighten interest rates over the next three months which should weaken the bond market. Look to sell bonds on further strength.

How to Participate

U.S. T-Bond futures and options are traded on the Chicago Board of Trade in standardized contracts of $100,000. Every one full point move (equivalent to 32 ticks; one tick is equivalent to $31.25) in price results in a $1000.00 profit or loss. Sell September Bond futures at 115.10. Place a stop at 116.12 ($1062.50 loss) and take profits at 109.10 ($6,000.00 profit). If you're not familiar with futures contracts or this strategy contact us or your broker before participating in any trade recommendations. This is a long-term trade for us that we feel has great potential.

On Tuesday July 15, the American Petroleum Institute issued a stocks report after the close of business. This report was expected to show a decline in crude and gasoline stocks. In anticipation of this report and in tandem with concern over supply tightness in the Gulf of Mexico, Tuesday's trade added good premium to both the crude oil and gasoline prices. As anticipated, the report confirmed the decline in stocks. We view this price action as a temporary price run-up.

There is continued progress in negotiations over the re-start of Iraqi crude shipments which we feel signals the imminent return of Iraqi crude oil onto the world markets. As this becomes reality we feel prices will begin to fall as the concern over supply tightness diminishes.

Other possible indicators of lower values are weak prices in Asia, weak deals in Europe and the opening of additional refineries-namely Poland's Plock refinery, their largest refinery-starting a new facility. Chinese demand is expected to be relatively low over the next six to eight weeks due to a high level of leftover stocks at domestic refineries. We noticed sluggish purchases by them for the July time-frame and feel that this trend will continue. This surplus will need to be reduced before China's demand patterns return to normal. European gas and heating oil demand continued to be weak as well.

As a result of this near term increase in price we feel it is an opportunity to sell the market as this proverbial bull will need to be fed and we feel the "food" just isn't there. Look to sell sharp price rallies.

How to Participate

Gasoline futures and options are traded on the New York Mercantile Exchange in standardized contracts of 42,000 gallons. Every 1 cent move in price results in a $420.00 profit or loss. Sell September Gasoline Futures at $58.50, take profits at $54.50 ($1260 profit) and risk: place a stop at $59.00 ($210.00 loss). If you're not familiar with futures contracts or this strategy contact us or your broker before participating in any trade recommendations. (In order to participate in the futures and options markets, a minimum investment of $5,000 is required as well as signed risk disclosure documents. Call our office for more information.)

Tory Quiggle and Peter Georgantones are commodity specialists of Commodity Resource Corporation, a licensed futures and options brokerage firm. Tory and Peter advise and trade for individuals. For additional information, call CRC at 800-241-8878 or fax 612-333-1668. Reasonable care is taken to assure the accuracy of information contained herein, but neither the publisher or CRC is responsible for errors or omissions. Readers should recognize that there is risk of loss and the subjects discussed in the column are not appropriate for all investors. There is no assurance the recommendations in this column will be profitable and past performance is no guarantee of future results. Tory and Peter may have positions in the markets mentioned herein.