- 2000: Volume 9, No. 1 What's Hot and What's Not

The threat posed by the millennium computer bug proved to be vastly overblown and civilization, as we know it, came through unscathed when the calendar rolled over to the year 2000. Due to the lack of Y2K problems, many commodity markets quickly shrugged off a year-end malaise and staged major moves. One of the biggest came in the stock market. After an initial profit taking hiccup, stocks roared higher. The U.S. dollar turned volatile, mirroring action in U.S. stocks, falling initially on the argument that the U.S. was a bad place to invest, then rallying when the U.S. suddenly became a good place to invest. T-bonds stayed in a major down phase in anticipation of Fed rate hikes. Finally, after trending lower for most of 1999, many agricultural markets including cotton, soybeans, wheat and corn came to life and rallied.

What's Hot

Stock Market—A slump on millennium profit taking didn't last long and investors quickly resumed buying equities with a vengeance, driving all indexes, except the S&P 500, to new all-time highs. The stock market is expected to have another good year since all of the bullish fundamentals are likely to remain in place; strong economy, continued big productivity gains, benign inflation and relatively low interest rates. However, stock gains aren't likely to be as spectacular since interest rates should be pushed higher by the Federal Reserve Board several times to cool the economy to its "sustainable" pace of 2.5 to three percent, increasing the chance that rising bond yields will siphon investment from stocks. In addition, sharply higher energy costs will boost inflation somewhat. Because of that, stock action is likely to be more two-sided.

T-Bonds—Bonds have already fallen sharply in anticipation of a series of interest rate hikes by the Fed this year, starting with the February Fed Open Market Committee meeting, but further declines are likely unless consistent signs of a slower economy show up, which don't appear to be on the horizon. In addition, bonds traders are likely to worry about the inflationary implications of sharply higher petroleum prices.

Currencies—The yen had been a hot currency, gaining sharply on the dollar and euro on the notion that an improving Japanese economy made Japan a good place to invest. Of course, that's just a rationalization because Japan's economy should underperform the U.S. and Europe in spite of Japanese government plans to spend $850 billion this year to make sure the economic recovery is sustaining. Spending your way out of recession usually doesn't work and investors (actually the "hot money" managed fund crowd) appear to be losing their appetite for Japan, and the yen could be topping out.

Copper—Copper broke out of the top of a big consolidation range in early December and has been in an up trend ever since. The bull move is still based on anticipation of better demand due to a stronger global economy. On the other side of the coin are huge warehouse stocks and the outlook for continued increases in global mine production. However, since copper stocks are expected to be drawn down, prices are likely to keep working higher, probably to major resistance around 100.

Petroleum Complex-Crude oil zoomed recently in response to comments from OPEC oil ministers that production cuts may be extended through year-end. If that turns out to be the case, prices could reach the low $30 area. On the other hand, it remains to be seen whether OPEC producers will be able to adhere to the reduced production quotas. There has been evidence of slipping compliance (down to 80 percent in December from 86 percent the previous month and the low 90s during the summer) and that might continue due to high prices. In addition, Venezuela is under pressure to boost output to pay for massive damage from floods late last year. We have a feeling the $30 level will keep a lid on this market.

Pork Bellies and Lean Hogs—These two markets have been in major up trends due to strong demand and the outlook for tighter hog and pork supplies this year. Producers have been cutting back and hog numbers are down about six percent from a year ago. Unfortunately, hog numbers a year ago were at a record high. In addition, lower hog numbers haven't translated into as big a decline in pork production due to a significant rise in pigs per litter and record high slaughter weights. Still the price outlook is favorable and the major up trend is likely to continue.

Soybeans—Just when it looked like burdensome soybean supplies might push prices to the lowest level in 20 years, parts of Brazil and Argentina were hit by a drought, triggering a moderate rally since the beginning of the year. However, the odds of a major bull move remain low since other areas of Brazil have received ample rain, helping to offset losses in dry areas, and the U.S. has plenty of soybeans available. On top of that, global demand isn't expected to improve much and U.S. planting is expected to rise another one million acres this spring, setting the stage for a record U.S. crop if the weather cooperates. It takes major crop problems in the U.S. to trigger sharply higher prices, and that's a ways off.

Grains—The wheat market has gotten a boost from dry conditions in the U.S. hard red winter wheat belt, and appears to have established a major bottom. Winter wheat acreage is down a bit from last year and the threat of weather-related crop problems has increased. But, like soybeans, the odds of a major bull market remain low since wheat stocks are large in major producing countries and wheat demand is expected to increase only slightly this year, i.e., there's just not much need for prices to build a weather premium. It should also be kept in mind that it doesn't take much in the way of rain to produce a good crop, one or two big early spring storms would do it. It most likely would take major crop problems elsewhere in addition to the U.S. to put this market in a major up phase. Ditto for corn which has gotten a boost from strength in wheat and soybeans but is likely to be limited by big supplies and less than impressive demand prospects.

What Might Get Hot

Gold—This market had a spectacular but brief short covering surge in late September then reverted to its bearish ways. However, it's a reasonably good bet that a major bottom has been established and that the gold market will hold major support in the 270-275 range and probably find a way to move higher again.

Cotton—Cotton has already gotten a major boost from short covering and bottom picking in response to forecasts for tighter supplies later this year. Demand is expected to rise and acreage is expected to decline in the U.S. and China. Of course, if prices get too strong early this year, acreage will no doubt increase. However, due to the tighter supply/demand profile there's the potential for some upside fireworks if crop problems develop in the U.S. or elsewhere.

Coffee—Not long ago coffee was the hottest market around, exploding to the upside due to a drought in Brazil. The crop is expected in the 25 to 29 million bag range versus early season projections around 40 million, which is quite a drop. However, prices have turned two-sided lately since ample rain has arrived, reviving prospects for next season, and warehouse stocks remain big. Despite that, any further threat of crop damage or surprisingly low crop estimates later this month could easily send this highly volatile market into the stratosphere again.