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COMMODITY FUTURES FORECAST
WEEKLY REPORT
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Commodity Futures Forecast
Bonds Touch 11912 Objective
Apparently the good inflation news coupled with stock market uncertainty pushed our December bonds to our first objective. Currently, our stop is our entry and exposure is eliminated...assuming no “gap” surprises. In addition, we included March Eurodollars as a precaution against continuing equity market volatility.
At this stage, anyone's guess is as good as the experts. The massive Japanese Nikkei recovery on the news of its first large commercial bank failure was a striking contrast in logic. Here in the U.S. stocks suffered with the prospect of the Continental Bank of Illinois failure and rejoiced upon the government bailout. The Japanese reaction appeared to be the complete opposite. Analysts struggled with twisting logic to fit the occurrence. The best they could do was to correlate the failure with some form of government liberalization of financial markets.
The fundamentals may be obscure, but reasonable logic suggests a bank failure is not a good sign. I see no virtue in allowing shareholders to “take it on the chin.” Surely, this should strike fear in the hearts of any bank shareholders. If this event inspires an exodus from bank shares, other Japanese equity sectors could be adversely affected. Yesterday, traders appeared to pursue this view by taking Japanese stock back down 5.3%. This “yo-yo” effect I previously covered is coming dangerously close to discouraging the investing public.
Our panic hedge in interest rate contracts should be a sound approach. I feel confident that volatility will boost bond values. Investors may perceive the current global equity arena as a “trading range” with less upside potential and miserable dividend yields. This makes government paper (particularly U.S. paper) attractive.
I was talking with two large equity fund managers who finally admitted that they were weary of the daily gyrations and their customer bases were becoming anxious. The “buzz” on the street is about “defensive strategies.” Managers are not sure how to deal with risk, but the ease with which the market dropped on October 27 is viewed as a strong warning.
What About Deflation?
Those familiar with Robert Prechter may have read his latest work about the new deflationary “wave” that will take the stock market down to unthinkable lows. Gold will suffer, too. When Bob's book was released, readers chuckled. His predictions could not have seemed more absurd. Yet, Fed Chairman Greenspan broached the “disinflation” subject during his last talk before Congress. According to the diction analysts, “disinflation” is the slowing of inflation whereas “deflation” is an actual price index retreat. It is unclear whether one leads to the other, but the prospect for a flight to the U.S. Dollar and a move toward financial consolidation hints that a negative Consumer Price Index is possible.
A key stumbling block is labor. Most economists still believe that wages are not about to be rolled back. First, the minimum wage has been increased. Low skilled labor simply costs more. Then, unions are beginning to flex muscle for higher pay and better benefits. This is hardly a picture of diminishing labor costs. On the other hand, computers are finally recognized as a driving force behind improved productivity and lower costs in general. New technology is reducing everything from energy consumption to mining production. Efficient automated processes may take a toll on manufacturing jobs as well as white collar positions.
The jury is out on our economy's “next step.” I have avoided stock market positions because the excessive daily and weekly ranges are too much for a weekly service to monitor. Margins are outside the reach of many. For now, interest rate and currency positions must be sufficient.
Gold Toys With $300
Anyone visiting commodity chat rooms on the internet or on-line services knows how hot the debate rages over gold's future. Die-hard gold bugs cannot accept the possibility that gold can challenge $300. This venerable metal has been hit by a series of negative events including the Australian central bank inventory liquidation, the Pacific Rim market unrest, and prospects for European central bank divesting.
As we approach the holidays, some precious metals advocates insist jewelry sales will heat up. Unfortunately, the big picture discounts any hope for a consumer-related rally. A second point of encouragement is silver's strength. However, silver can be as fickle as gold and fundamentals do not support a strong bullish argument for the white metal. Absent inflation or a monetary meltdown, precious metals have little to brag about.
Grains
We are still trading the seasonal tendency toward lower prices despite the contra- seasonal action. Wheat has weakened in quiet trading while soybeans broke out above last week's downward pennant. There is always the possibility that a flag will continue in the “pole” direction as beans demonstrated. Yet, the strength of the rally may be limited by the latest dip. We have been trying to capture a bust below $7.00 before potential tightness after the January expiration. Constant talk about export sales has supported beans and corn while supply figures point to a $6.70 bean objective and $2.50 for corn. We will try to be conservative while staying with our convictions...for now.
November 20, 1997Philip Gotthelf
Commodity Futures Forecast
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