Prepared by

Commodity Futures Forecast

From a technical perspective, charts indicate stocks made a top. However, adding volume to the analysis suggests Tuesday represented a “reversal.” Overall, few are able to make a definitive prediction. On the Public Broadcasting System show “Charlie Rose,” Paine Webber's CEO and fellow industry representatives assured viewers that all was well with the U.S. economy. Henry Kaufman, the former economic Guru of Soloman Brothers, painted a less encouraging picture whereby deflationary pressures begin to erode high-flying stock values.

Certainly, Thursday morning's action has chilled Tuesday's optimism. Many believe the correction may not be over. In fact, if there is a retracement of Monday's decline there will be a technical confirmation of a bear trend. Clearly, bulls and bears are in a face-off that is likely to carry into next week. The recovery from early morning trading is simply another yo-yo effect that leaves traders wondering about their eventual fate.

Consider that as the S&P 500 recovered from morning lows, put options increased in value. Volatility and uncertainty is likely to fatten puts and calls if anyone is willing to take the exposure to sell these options. Under normal circumstances, I would be tempted to sell a short strangle. The 900 put/950 call combination was yielding approximately 3500 points. This means prices would need to move beyond 98500 or below 86500 before losses accumulate on an expiration basis. November options expire in three weeks. The November at-the-money puts and calls were selling at 7000. For those with real confidence, the short straddle is a hair- raiser!

There are very few times when volatility presents such exceptional premiums. However, caution is in order. In January, 1991 I saw a similar “opportunity.” The March 320 puts and 350 sold for a combined 2000 points. At the time, it appeared virtually impossible for the S&P to skyrocket above 37000 or plunge below 30000 by the March '91 expiration. I recommended the short strangle. As tension mounted just before Operation Dessert Storm, the S&P dropped like a stone below 32000. Had I been prudent, I would have covered the call and concentrated on the put.

As soon as we commenced Dessert Storm, the S&P took a straight shot above 36000! We got out just off break-even licking our wounds! By today's standards, that entire incident was a blip.

The current health of the U.S. economy is obvious. However, the stock market reflects prospective thinking. The debate centers around global liquidity and our ability to lead the world away from panic. Investment patterns are too confused and data too massive to come to an accurate conclusion. Some believe foreign money will pour into the U.S. as a safe haven. The end result should be a surge in our equity markets. The contrary view is that losses from foreign stock markets will force liquidations in the U.S. This would send prices down.

While news media have shown the “average investor” remains confident, it is the large manager who dictates major price movement. The traditional rule is that small guys exit last. If so, individuals could be sitting upon an unexploded bomb.

We were stopped out of our long gold position. The liquidity question coupled with rumors that Switzerland is contemplating selling inventory sent prices to significant interim lows. The consensus is that gold cannot remain below $320 for any time because average production costs are above $350. My research indicated that gold costs less than $270 on average. Equally important, major producers are on campaigns to reduce costs while increasing production. To be sure, central banks are keenly aware of production trends. If central banks determine that future production threatens the value of their inventories, we will see selling. I do not anticipate dumping, but I do believe there will be slow liquidations.

I was disappointed in the fact that I was fundamentally bearish in both silver and gold, but bought gold on its technical strength. That strength has faded, but stock market uncertainty makes another short side attempt too risky. For now, we will stay with our 500 December silver put.

Another problems stems from copper which has dipped below the 7 cents in premium we collected for selling 110 calls and 100 puts. We have a 3 cent exposure. The Pacific Rim weakness points to a possible drop in copper demand. Again, I have been a bear, but believed the metal would maintain above $1 through December. I am inclined to agree that prices could fall further.

Copper production costs have been declining and major South American producers like Peru and Chile are eager to raise cash. Last year I predicted copper could fall to test below 8000. Hopefully, this won't take place before we unwind our strangle. Japan is a major platinum and palladium buyer. So far, the Russian factor has supported these metals. Perhaps it is time to reevaluate the situation.

October 30, 1997Philip Gotthelf

Commodity Futures Forecast

7000 Boulevard East, Guttenberg, New Jersey

Financial Commentary

THE ALLENDALE ADVISORY REPORT | ASTRO-TREND | SPRING OUTLOOK
COMMODITY FUTURES FORECAST WEEKLY REPORT
THE OPTION ADVISOR
COMMITMENT OF TRADERS ANALYSIS-CURRENCY CONTRACTS
MYERS ON FUTURES | NIKKO MARKET COMMENTS | NIKKO MARKET COMMENTS
SORTING IT ALL OUT | INTEREST RATE WATCH | FINANCING AND THE “NEW” CANADA
U.S. TREASURY BOND TECHNICAL ANALYSIS
ITALY: WILL MARKET OPTIMISM BE REWARDED
SEEING THROUGH THE ILLUSIONS IN STRUCTURED FINANCE
EL NINO OUTLOOK | THE REAPER MARKET COMMENTS | WEEKLY OUTLOOK
YOU SHOULD BE FULLY INVESTED FOR THE NOVEMBER-DECEMBER-JANUARY RALLY

Consensus National Futures and Financial On Line Index

Copyright 1997, by Consensus Inc.  All American and Pan American rights Reserved. editor@consensus-inc.com

Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com

wmeubank@ocp.kcmo.com