- 1999: Volume 8, No. 5 What's Hot and What's Not

Commodity markets settled into the summer doldrums, but several remained in major trends including the energy complex, stock market and the Japanese yen. Some of the agricultural markets showed signs of life (soybeans, cotton) due to dry weather in the U.S., but fireworks have been few and far between. Financial markets appear to be getting skittish on Y2K uncertainty and might stay in trading ranges.

Energy Complex—Crude oil continued to move higher in response to tightening supplies caused by OPEC production cuts. American Petroleum Institute and Department of Energy stockpiles have steadily declined over the past few months, and that's likely to continue as demand picks up from a turnaround in the global economy. However, crude oil prices aren't likely to run away on the up side. For one thing, the peak gasoline demand season has ended so supplies should begin to build, and distillate stocks (heating oil) are big, around 140 million barrels, which is considered a bit above "normal" going into the peak winter heating demand season. For another thing, OPEC officials have hinted that they have an upside limit in mind for crude and might boost output to keep prices from getting above there. Because of that, the bull move is probably on borrowed time.

Stock Market—The great bull market in stocks stayed in gear but action has become more two-sided, mainly due to a rate hike and Y2K concerns. We don't think the Fed will raise rates again this year because of uncertainty surrounding Y2K, e.g., the Fed will be adding massive liquidity to the banking system at year-end to head off problems, so why tighten just before that? In addition, the economy appears to have cooled a bit and wage inflation has backed off in the past two employment reports. However, that stuff won't necessarily stop investors from worrying. As we all know, it's the perception that counts; and we wouldn't be surprised to see the stock market go into a Y2K swoon despite all the assurances that the U.S. won't have major problems. Why stay in the stock market when China, Russia and South America are unprepared for Y2K and could implode, dragging the U.S. down?

Japanese Yen—The yen stayed in a strong up trend, supported by ideas Japan's economy is on the mend and that Japan is the place to invest, evidenced by a 12 percent rally in the Nikkei Dow this summer. On the other hand, Japan's second quarter GDP is expected to turn negative after a strong first quarter, and Japan will probably need to keep stimulating the economy via government spending, i.e., the economic recovery doesn't appear to be sustaining. However, as mentioned above, it's the perception that counts, and the "smart money" hedge funds and many institutional investors are likely to keep pouring money into Japan, favoring continued strength in the yen.

What Might Get Hot

Corn and Soybeans—Under most circumstances heat and dryness in the Midwest would trigger sharp rallies in corn and soybeans. However, things are different this year. Not only are stocks of grain and soybeans already at high levels due to recent big global production and slow demand, but U.S. corn and soybean crops are still expected to be large in spite of drought in parts of the corn belt and Delta, resulting in another build-up in carryover supplies. At some point there might be demand led rallies as the global economy recovers, but those are usually sluggish, boring affairs. The best chance of some fireworks comes from the potential for crop problems in South America since it's turning hot and dry down there. However, for now, prices are likely to languish.

Copper—The copper market has heated up, breaking out to the upside of a massive trading range. Conventional wisdom says that current huge copper supplies will be drawn down due to increasing demand from an improving global economy. On the other side of the coin, producers might ramp up output due to higher prices. And since most of the recent buying in copper has been by the speculative contingent, i.e., hedge funds, we're not convinced this market will stay "hot."

Gold—Everybody's bearish, the U.K. is selling its stockpile, the funds hold a massive net short position and inflation is expected to remain under control, however, we have a feeling the gold market is due a bounce. About the only reason to look for a rally is the potential for Y2K safe haven buying, but if that causes the funds to cover shorts, prices could jump sharply.