- 2000: Volume 9, No. 4 What's Hot and What's Not

The ranks of the "hot markets" thinned considerably over the past two months. The stock market settled into a trading range due to mixed ideas on the economy and Fed monetary policy (i.e., will it keep raising rates?). The petroleum complex, which had been in a strong up trend, was hit by indications that OPEC was ready to boost crude production for a second time this year. Many other markets shifted gears and changed direction, resulting in indecisive action.

What's Hot

Equities —The stock market, a perennial trending "all-star", cooled off as investors became cautious in response to signs of a weaker economy and on concern the Fed may raise rates again later this year. However, it can be argued that a slower economy is actually a good thing; a moderate growth rate would be "sustainable" and inflation would remain under control, despite higher energy costs, preventing further Fed tightening. If investors embrace that rationalization the Dow, S&P and NASDAQ are likely to embark on another up phase.

Petroleum Complex—The possibility of another OPEC production hike (the second this year) finally put a halt to the massive uptrend in the petroleum markets. There are rumors some OPEC members won't agree to another production hike since global crude stocks have been rising. But assuming OPEC production is increased, and since the peak gasoline demand season is nearing an end, and there's time for heating oil supplies to build ahead of winter, it's a good bet that the up move is over and that prices will move back down to the $25 per barrel level, which is where Saudi Arabia wants them.

Soybeans and Corn—Steep downtrends in corn and soybeans over the past few weeks put them in the "hot market" category. The great drought of 2000 turned out to be just the opposite. Ironically, ever since the NOAA and National Weather Service issued a strong mid-April warning of a spring and summer drought in the Midwest, it has done practically nothing but rain across the corn belt east of the Mississippi River, with many areas receiving three times the normal amount of precipitation. Most western areas of the corn belt have also received ample rainfall. Of course, that just proves what everyone already knew, that long range forecasts aren't much more accurate than a coin toss. Unfortunately, many farmers held onto production from last year in anticipation of a drought, leaving a big overhang of supply. That means things could get ugly this fall during the harvest of massive corn and soybean crops, currently estimated around 10 billion and three billion bushels respectively, but likely to end up much higher. In years of big supply, grain and soybean markets usually slump to historical support levels then settle into prolonged trading ranges waiting for demand to eat into stockpiles. That price level in corn is 160 and in soybeans is 450.

What Might Get Hot

U.S. dollar—Not long ago the U.S. dollar appeared to have embarked on a major downtrend on ideas the U.S. economy would underperform Europe and that interest rate differentials had shifted in favor of the euro. Then a strong rally in the dollar over the past two weeks cast doubt on that assessment, however, since there's been no overt change in the fundamental story (Europe is still expected to be stronger than the U.S. and U.S. interest rates are likely to stay unchanged), the dollar may resume its downtrend.

Japanese Yen—The yen has been weak on concerns Japan's economic recovery may falter and that, contrary to recent expectations, the Bank of Japan may maintain its zero interest rate policy. However, there's the potential for Japan's economy to improve over the next two years if Japanese consumers spend some of their massive savings that are locked up in postal savings accounts which begin to roll over late this year. The yen is famous for turning on a dime and staging explosive moves, and that's just the type of thing to change sentiment and trigger a big turn-around to the up side.