- 1999: Volume 8, No. 6 What's Hot and What's Not

There aren't a whole lot of markets that fall into the "hot" category. Some have been in gradual trends or have made moves of short duration, making them tepid at best. Others have remained in choppy trading ranges. Only the Japanese yen, gold, coffee, and hogs have registered major price moves.

What's Hot

Japanese yen—From July until late September the yen zoomed into the stratosphere in anticipation of a turn-around in Japan's economy. Since then the yen has pulled back and consolidated but now appears poised to break out to the upside again. As mentioned in a previous commentary, the extent of a Japanese economic recovery remains up in the air, e.g., Japanese and U.S. officials have consistently warned that there are major trouble spots and that current economic improvement might not be sustaining. But has that discouraged foreign investment? Of course not! The "smart money" hedge fund crowd as well as institutional investors appear willing to pile on board Japan Inc. even though U.S. and Europe are likely to outperform Japan again next year. However, as we said before, it's the perception that counts, and everyone is bullish on Japan which favors continued strength in the yen.

Gold—News that European central banks wouldn't sell any more gold (except for previously planned Swiss and UK sales) triggered a massive rally. The explosive move was led by fund buying as they scrambled to unwind a record large net short position. In fact, the funds now hold a big net long position, according to the latest commitment of traders report. However, prices have been on the decline lately , raising the question, "is that all there is?" The answer is, "probably not," and it's best to assume that gold has established a major bottom. For one thing, there's likely to be more short covering and significant bottom picking as prices near the recent major low. For another, there's probably enough concern about inflation, Y2K, and a "too strong" (some say overheating) U.S. economy to underpin prices.

Coffee—Even though Brazilian coffee regions had been dry for quite a while, prices finally jumped sharply higher to discount the outlook for reduced production (loss estimates range from 10 percent to 25 percent). And even though some rain has arrived, driving prices back down, it's best to assume that the coffee market has established a major bottom around 8000. Obviously, if dry conditions persist, which the ongoing La Nina weather phenomenon favors, much higher prices are possible. In fact, some agronomists compare current conditions to the 1988 drought which triggered at $1.40 per pound rally.

Lean Hogs—The hog market has been in a steady uptrend for months, discounting expectations for an eventual reduction in pork supplies. The up move has been aided by surprisingly good demand, both on the domestic front and improving exports to Asia and U.S. pork donations to Russia. However, there have been bearish arguments too, like the huge slaughter rate which has belied projections for reduced in hog marketings, and record large frozen pork stocks. As things stand now, this week's sharp price drop probably signaled an end to the up phase.

What Might Get Hot

T-bonds—The bond market has eroded due to widespread expectations for another Fed rate hike before year end. However, since many economists, including some Fed officials, expect the economy to cool late this year, and the Fed isn't likely to tighten monetary policy while at the same time adding massive amounts of liquidity to head off a Y2K cash crunch, the stage is set for a big corrective rally in bonds on any sign of a slower economy.

Natural gas—This market has gotten into the habit of discounting a worst case winter weather scenario by rallying in the fall, and it's that time of year again and prices appear poised to break out to new highs. It doesn't matter that the ongoing La Nina weather phenomenon favors "average" temperatures across most of the northern US during the December through February period (which occurred last winter) or that storage supplies are at an acceptable level. The speculative crowd is likely to jump on board in hopes of another ice age, even though this market has also gotten into the habit of falling apart during the winter months when the cold weather doesn't live up to all the hype.