- 1999: Volume 8, No. 3 What's Hot and What's Not

The stock market remained hot, as usual, as did the petroleum markets. Joining the club were lean hogs, copper, and T-bonds. Commodities that might get hot are coffee and silver and those that aren't likely to get hot, at least for a while, are grains and soybeans.

Stock Market

The rate of climb has slowed but the Dow still managed to knock out new highs with regularity over the past month, despite increasing concern that the strong U.S. economy will cause the Federal Reserve Board to tighten monetary policy. On the other hand, over the course of this massive bull market, previous rate hike talk has been rationalized away with the argument that a tightening move would merely slow the economy to a sustainable growth rate (generally thought to be in the 2.5 to three percent range) and would keep inflation under control, i.e., ideal conditions for stocks. In addition, even though technicians are worried that the big divergence between the stronger Dow and struggling broad market indicate a classic flight into blue chips prior to a major top, that's also happened before and didn't presage an end to the up phase. As mentioned before, in our view, Y2K concerns seem capable of triggering a big downturn. Even though the U.S. appears 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 on January 3, 2000. 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 1290 would signal a major top.

Petroleum Complex

Crude oil, unleaded gasoline and heating oil stayed in strong up trends over the past month, still discounting the outlook for tighter supplies due to recent OPEC/non-OPEC production cuts, before finally faltering this week. Despite the big up move, which was partly due to short covering, it remains to be seen whether crude oil supplies will decline enough to warrant current high prices. For example, OPEC production cuts in April totaled only 1.3 million barrels per day compared to the 1.7 million in pledges, and cheating on quotas is bound to increase dramatically due to high prices. In addition, global oil demand is expected to remain sluggish all year. It's obvious that a major bottom has been established, but we wouldn't be surprised to see petroleum prices do some significant back-tracking, then settle into a range pending a better fix on OPEC/non-OPEC output.

Lean Hogs

A combination of fund buying and anticipation of tighter hog supplies starting in June triggered a sharp rally in lean hogs. However, the situation might not be as bullish as it seems. For one thing, packers and retailers have been stockpiling frozen pork due to the outlook for reduced supplies later this year, and record large stocks are likely to result in reduced pork demand later on. In addition, it remains to be seen whether farmers have reduced production as much as they indicated in recent pig crop reports, particularly since big corporate producers, which are starting to dominate the industry, don't want to lose market share and could be quick to increase output. Firm prices are favored for now but we'd be careful about jumping on the bull bandwagon.

Copper

This market jumped sharply higher on ideas that the global economy is bottoming and in anticipation of mine shutdowns due to low prices. However, most of the buying was short covering by the speculative contingent and it remains to be seen whether the fundamentals have really turned. For one thing, even if the global economy has bottomed, any recovery is likely to be painstakingly slow. In addition, copper stocks are huge, a record high in London. However, perceptions are everything, and the crowd is likely to believe in the bullish arguments as long as prices keep going up. The next technical target is the 7700.

T-bonds

After trading in a wide range for months, T-bonds broke down sharply on concerns the stronger than expected U.S. economy will trigger a Fed rate hike. Of course, this market has discounted that argument before, and it still appears that Fed monetary policy will stay on hold, partly due to the outlook for inflation to remain under control despite the jump in energy costs, and partly due to fears of plunging the global economy back into turmoil. In addition, the U.S. economy appears to be slowing to a more "sustainable" 3.5 percent growth rate during the current quarter. However, the technical breakdown in bonds presages a decline to the 116.00 area basis June.

What Might Get Hot

Coffee-Even though current supplies are ample, the Brazilian frost season, which runs from June through early-July, is fast approaching. And due to the much smaller Brazilian crop this year, prices might begin to build a weather premium. Not long ago, the odds of a frost were thought to be much greater than usual due to the La Nina weather phenomenon, but La Nina is fading fast, meaning weather in Brazil is likely to be normal. Obviously, if a major frost occurs, coffee prices could explode.

Silver-Ideas that the deflationary spiral in commodity prices has ended and that the global economy has bottomed and that demand for basic commodities will improve could put silver into a bull phase, particularly if it turns out Warren Buffett still holds a massive silver position (he declined to comment on his silver holdings at the Berkshire Hathaway annual meeting early this month). In addition, the chart has turned bullish, favoring higher prices over the near term.

What (probably) Won't Get Hot

This is the time of year when visions of heat and drought dance in the heads of grain traders. However, due to huge supplies of soybeans and ample supplies of corn and wheat, plus favorable early crop and planting conditions, plus the outlook for sluggish demand to continue all year, there's no need for prices to establish a weather premium. And even if some adverse weather develops (conditions are never perfect), rallies aren't likely to get far. It would take a long stretch of hot, dry weather (two weeks or more) to constitute a bona fide threat, and the odds of that are slim. Basically, grain and soy prices are likely to languish all summer.