- 1998: Volume 7, No. 4 What's Hot and What's Not

Hot commodity markets remained pretty scarce; there have been pretenders but not many contenders. That's partly due to the deflationary forces unleashed by recession in Japan and southeast Asia. Due to slower demand for many basic commodities, prices have eroded or stayed in trading ranges. The only big movers and bona fide hot commodities have been cotton and live hogs. US stocks, of course, have continued to grind higher in what has become the "mother of all bull markets." Moderate trends in financial markets have been less than exciting.

What's Hot

Cotton: This market rallied sharply until just recently due to, what else, hot and dry weather in cotton areas of the U.S. which should reduce production significantly. Little rain has fallen since early summer in west Texas and temperatures have hit record highs almost daily. Hot and dry conditions also held sway across much of the South and Delta until this week. However, the arrival of more moderate temperatures and showers triggered a sharp pullback. The USDA also raised next season's carry-over slightly in spite of the lower crop on the projection for reduced U.S. exports due to ample supplies elsewhere around the world. At this point it's best to assume cotton has topped out and that prices will enter a volatile two-sided phase, underpinned by ongoing crop uncertainty (crop size won't be known until harvest) but restrained by major technical resistance and the outlook for adequate global supplies.

Live hogs: Even though hog prices were strong this spring and early summer, a succession of pig crop reports showed that farmers were expanding hog production at a rapid pace and that pork supplies would be huge. And a few weeks ago the bearish "you know what" finally hit the fan resulting a precipitous 1100 point decline. Although a rebound is likely over the near term for technical reasons (oversold condition) and improved demand due to low prices, the outlook for big pork supplies to continue into early next year is likely to keep the hog market in a bear phase.

Wheat: This market hasn't been particularly hot but has been stuck in a prolonged downtrend in response to ample supplies and sluggish demand. Although a seasonal bottom is due, lower prices are favored until feed grains turn around, which doesn't appear likely any time soon based on favorable crop weather across the Midwest.

Stocks: There's no sign that the incredible bull move is near an end. In fact, the stock market has climbed the "wall of worry" for so long it's tough to guess what might surface to shake investor confidence and trigger a top. Asian concerns, disappointing earnings, a slower U.S. economy, the potential for Chinese and/or Russian currency devaluations have had minimal impact. The only note of caution is that stocks tend to top in August.

What Might Get Hot

Corn: A big U.S. corn crop appears likely due to relatively favorable weather across the Midwest (ideal in many areas) which offset problems from heat and dryness in the southern U.S. and Delta region. However, even with adequate moisture, it only takes a few days of extreme heat (100 degrees) during the critical pollination phase to cause significant yield losses, so there's still the small chance of a weather bull market in corn. However, the window for a disaster is closing rapidly as pollination will be over by the end of July in most areas.

Soybeans: Soybeans are heat and drought tolerant and another big soybean crop is likely this year since less than favorable conditions in the South and Delta have been offset by favorable weather in the Midwest. Like corn, there's the chance for extreme heat to occur at the critical reproductive phase of flowering and pod filling in late July through mid August, but the odds of a weather bull market appear low.

T-bonds/U.S. dollar: Direction in these markets hinges on developments in Japan and Russia. Ideas that Japan might get serious about economic and tax reforms in the wake of a government shake-up have begun to spark liquidation of huge safe haven long positions in T-bonds and the dollar. Of course, on the other side of the coin, Japan's next prime minister might be ineffective, worsening the Japanese and Asian crisis, possibly leading to a Chinese currency devaluation. There's also concern that recent IMF loans won't be enough to bail out Russia which might eventually result in a ruble devaluation. Either of which could send bonds and the dollar sharply higher. At this point, it's a coin toss.