wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(December 12, 1997) COTTON: Good-bye, December. I'm sure a lot of people are glad to see you go.
This has been a sad experience for much of the industry. With Christmas less than two weeks away, and Hanukkah one day in front of it, there should be almost unanimous joy around. I'm just back front New York, where there's not a hotel room to be had, and you have to fight your way into the stores. Down on the farm, though, these are not happy times. On the other side of the equation, these bargain prices are of no use to the buyers. They mostly took advantage of them a few cents ago. And why not, prices being cheap by most measures, certainly profitable to the user.
Despite all the prosperity in Wall Street, cotton prices have been in a bear market for a full six months. From time to time, traders, have tried to console themselves by saying that prices were in a trading range. That might have been true for the spring months, but prices for this crop have been steadily sinking. Since the November crop estimate, things have been particularly cruel. Six cents were sliced off values in just over a month, something that had taken almost six months to achieve before that. The bear market has now picked up momentum just like in the old days. Can it get much worse?
The last time we had thus sort of experience was in 1981. December made its contract high of 8610 on the first day of the year, its low of 5967 on its last trading day, By then, we were pointing to a carryover of better than million bales. And even back then, growers had the last four months of 1980 and the first four months of 1981 to fix prices with December above the 80¢ mark.
What's been so particularly cruel this season is that growers had exactly two days during the two-year life of this contract in which to get better than 80¢ and that was on the first two days of May 1996, a long time ago. A year before that, there was a three-month window, and the year before that, a few weeks with prices above 90¢. Once the crop was in the ground this year, there was only one 3¢ rally, and after the Fourth of July, only two 24¢ rallies. In short, there wasn't a decent weather scare all year long. Forget droughts in China, monsoons in India, viruses in Pakistan, early freezes in West Texas. A few minor problems were obscured by a good all-around year.
Now what? Did the sellers a few months ago foresee what is happening in Asia? I don't think so. But hats off to the traders who remember one of the best rules in the business; “The trend is your friend.” The specs have gone to the bank with that one. It has been a good year for the big-picture boys, those who didn't worry about the inside games and minor fetishes, that the market obsesses with. We don't know how bad things will get in Asia. We don't know if China will follow through on its plan to force a reduction in stocks. We're not smart enough to know how low is low, but we don't think its over with yet.
Herman S. Kohlmeyer For Ernest Simon
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