- 1998: Volume 7, No. 2 What's Hot and What's Not

The Clinton sex scandal began to die down allowing financial markets to re-focus on the Asian crisis and the strong U.S. economy, resulting in up moves in the dollar and U.S. stocks. Other hot markets included the petroleum complex, silver, and lean hogs. Some potential "hot" markets are the agricultural commodities, as the spring planting season has arrived in parts of the Northern Hemisphere and the weather has been a bit dicey.

Currencies

After moving indecisively for two months, the U.S. dollar began to get hot, breaking out to the upside of a trading range, embarking on what might be a major bull trend. The long range dollar fundamentals have been arguably bullish for quite some time. The U.S. economy is likely to outperform Japan by a wide margin and also remain stronger than Europe. In addition, interest rate differentials favor the dollar. There's an increasing chance for a U.S. rate hike later this year due to a stronger than expected economy (which continues to do well in spite of Asia) while Bundesbank officials have hinted there might be room for a German rate cut due to the sluggish German economy. In addition, Japanese rates are likely to remain rock bottom due to Japan's recessionary economy. The dollar is also likely to garner continued safe haven support due to ongoing economic woes in Indonesia and Japan.

U.S. Stock Market

The U.S. stock market broke out to the upside of its wide trading range and never looked back, propelled by unwavering investor confidence that the U.S. economy will remain strong in spite of the Asian financial crisis (which it has) and be accompanied by low inflation and low interest rates. The only concern has been corporate profits, but the Dow and S&P 500 barely waver in response to warnings of lower earnings from some of the major technology companies. It appears that unless earnings disappointments spread to other sectors, the bull market will continue. The only caveat is that the overwhelming bullish sentiment leaves the market vulnerable to a sharp correction at some point.

Petroleum

Not only did a record warm winter across the northern U.S. contribute to low heating oil demand but other factors conspired to trigger a sharp decline in the petroleum complex. For starters, a potentially dangerous dispute between the UN and Iraq on weapons inspections was resolved at the last minute, averting U.S. military intervention. On top of that, not only did the UN more than double the amount of crude oil Iraq can sell under the food-for-oil deal to $5.2 billion dollars worth, but Iraq will need to sell much more than originally anticipated to reach its monetary quota due to the low price of crude. Finally, Saudi Arabia said it will fight to keep its market share, pumping crude regardless of price in order to bring OPEC quota cheats back into line. Because of that, there are widespread forecasts for crude oil to fall below the $10 per barrel level. Of course, OPEC might get its act together and cut production to support prices. Also, Iraq is likely to cause more problems eventually and the seriously ill King Fahd of Saudi Arabia adds uncertainty to the Middle East situation. However, the outlook for burdensome supplies is likely to keep a lid on prices for a while longer.

Silver

A month ago silver jumped sharply higher on tightening supplies and news that Warren Buffett had amassed nearly 130 million ounces of silver, about 20 percent of world annual supply, through his Berkshire Hathaway holding company; then prices pulled back sharply. However, with all of that silver in strong hands (Buffett said his silver purchase is a long-term play), the supply/demand balance has probably tightened enough to support prices for quite a while. In addition, the global economy is performing better than expected in spite of Asia which bodes well for silver demand. We wouldn't be surprised to see silver embark on another bull phase.

Lean Hogs

Hog prices collapsed under the weight of big supplies. Producers continue to expand output despite the loss of Asian export markets and domestic demand has been lackluster at best. In addition, pig crop expansion is expected to continue into next year as big corporate producers reportedly plan to remain positioned to supply the Asian market when economic conditions there improve. Since there's no telling when Asia might turn around, hog supplies could outstrip demand for quite some time. The only bullish item is the oversold technical condition. However, lower prices are favored, possibly an eventual slump to historical lows in the 3000-3500 area.

Markets That Might Get Hot

Many of the agricultural markets have the potential to become "hot" if adverse weather develops in Northern Hemisphere crop areas. There are already concerns that above normal precipitation from El Niño will disrupt spring planting in the U.S. (it's already doing so for corn in the southeastern U.S. and cotton in the southwest) and that El Niño will be followed by La Niña (cold water in the equatorial Pacific) which often causes heat and drought in the Great Plains and Midwest. Even though current supplies of cotton, corn, soybeans and wheat are not tight by any means, continued planting delays or any hint of La Niña most likely would trigger strong rallies. Markets tend to discount the worst case scenario then wait to see if crop problems pan out.