- 1999: Volume 8, No. 2 What's Hot and What's Not

The stock market remains relatively "hot," and several other markets appear to be bottoming after protracted "deflationary" down trends. However, the biggest price moves occurred in the petroleum complex in response to another round of OPEC/non-OPEC crude production cuts.

Stock Market

The Dow broke out the top of a massive trading range, but quickly ran into trouble at the psychologically important 10,000 resistance level. The bearish excuse was disappointing earnings for hi-tech companies. However, we have a feeling many investors merely decided to book some profits once the 10,000 milestone was reached. There's been no change in the long-standing bullish fundamental story of sustained U.S. economic growth accompanied by low inflation and low interest rates, i.e., ideal conditions for stocks. If this market does establish a top, a much better bearish excuse would be Y2K concerns. Although the pundits feel the U.S. is relatively well prepared to avoid major problems from the Y2K computer bug, the global economy is another thing. And investors might not want to risk big profits waiting to see what happens. Because of that we'd expect the stock market to suffer a big sinking spell at some point this year. Basis the June S&P, a close below 1230 would signal a major top.

Petroleum Markets

Crude oil jumped sharply higher in response to another round of OPEC/ non-OPEC production cuts, signaling an end to the protracted bear market. However, it remains to be seen whether prices will be able to keep moving higher since there are doubts that oil producers can reach the pledged 2.1 million barrels per day in reductions. For one thing, adherence to last year's big production cuts has been running at only 65 to 70 percent, according to estimates, and the latest cutbacks will be even more difficult to attain. It's probably safe to assume that the crude market has established a major bottom, but we don't expect a major up phase until the global economy starts to improve and boosts energy demand, which isn't likely until next year.

Copper

The strong rally in copper signaled at least a near-term bottom. There's no sign that the bearish fundamental story of ample supplies (London Metals Exchange stocks jumped to a huge new record high of 707,000 tons) and sluggish demand has changed, but the funds have begun to cover short positions, triggering talk that the "smart money" is anticipating an improved global economy and a move out of paper investments (debt issues and equities) into "hard" assets such as basic commodities. Even though those arguments haven't caught hold in other markets (silver and gold remained weak), there's plenty of room for more short covering in copper and the chart is bullish so it's best to look for higher prices.

Wheat

Wheat prices have steadily moved higher in response to a tightening global supply/demand balance due to reduced crop prospects in China and Russia from unfavorable weather. Even U.S. crop output should be down, mainly due to reduced acreage. The demand side of the equation remains bearish due to the outlook for consumption to remain "routine" at best. However, higher prices are likely over the near-term as long as weather remains a problem in some major producing areas of the world.

Soybeans

A jump in soybean prices sparked talk of the need to establish a weather premium ahead of the U.S. growing season. However, due to the overwhelming bearish fundamental story, there's really no need for a weather premium, and most of the support has come from fund short covering. Basically, soybean supplies are huge; the U.S. has big stocks from last year's record crop, South America just harvested a near record crop; and demand is likely to remain sluggish. On top of that, U.S. acreage is expected to jump sharply to a new record in March 31 planting intentions. Barring a bona fide crop threat, which won't occur for a while (planting in the main belt is a month away), there's little reason for this market to sustain rallies.

Corn

Unlike soybeans, the argument of a weather premium has some validity for corn since acreage is likely to drop significantly (two to three million) due to a shift to soybeans. On the other hand, supplies are ample and demand is sluggish so there's little need for this market to embark on a major pre-growing season bull phase (e.g., it won't buy acreage from soybeans due to the much higher soybean loan rate). Once the funds have finished turning around from the short side to the long side, we'd expect corn prices to settle into a range pending weather developments.

Currencies

The U.S. dollar is likely to remain in a bull phase since favorable interest rate differentials should remain in place for quite some time; i.e., the U.S. economy is likely to outperform Europe and Japan (by a wide margin in the case of Japan), resulting in steady to possibly rising U.S. interest rates (which will attract capital to the U.S.) versus probable rate reductions in Europe and Japan.