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Trading
Range Uncertainty
Last
week, spirits were lifted as old and new markets seemed to exhibit
positive signs despite a continuous flow of bad news.
Bonds and notes eased as media reported consumer confidence was
strengthening. However,
technical patterns did not reveal sufficient momentum to conclude
bottoms had been made in equity indices or tops were established in
interest rate contracts.
Stock
analysts balance on needles and pins as major brokerage firms like
Merrill Lynch reveal copious bleeding and rapid tourniquet application
through employee reductions. Of
course, Merrill is not alone. Charles
Schwab, eTrade, and a host of other brokerage entities are feeling the
pinch as retail participation grinds to a halt.
The
DOW Jones has displayed remarkable resilience as it bounded back from
the September 21st 8062 low.
As I had mentioned in previous REPORTS, I anticipated a test as
low as 7500 after 9500 and 9100 support had been so dramatically broken.
Now, the 9500 to 9600 range offers technical resistance.
While the 20-day average has turned up, the 40-day is less
encouraging. The DOW’s
failure to pop above the 40-day has raised technical concerns. Bulls hope the current formation is a “continuation
flag.”
Based
upon fundamentals and the anthrax escalation, I anticipate a stall below
9600 with a possible trading range forming between 8900 and 9600 through
Thanksgiving. This assumes
no further attacks within the U.S. before the major retail shopping
season. There is also
a question of anthrax versus suicide bombings.
Apparently a trailer full of “volatile materials” was
hijacked somewhere in New Jersey. The
truck contained very large quantities of fertilizer that can easily be
converted into a bomb similar to the ones used in the 1993 World Trade
Center attack and in Okalahoma City.
If not recovered, my best guess is that major New Jersey malls
will be targeted.
Concurrently,
there is a concerted effort to disrupt package services as we move into
the most heavy consumer shipping period.
Any disruption of U.S. Mail, Federal Express, United Parcel
Service, and other carriers will have a major negative impact.
The economy runs on mail. Retail
increasingly relies upon delivery carriers.
Strategically,
this pall hanging over the market points to a stall.
I do not see an anticipatory tone to current terror-driven
tension. This means
equities have not discounted potential bad news.
It also means stocks are highly vulnerable to anther wave of
attacks… whether
explosive or biological.
It
is interesting and frightening to note how vulnerable the U.S. economy
is to extremely minor terrorist incidents.
What’s the saying? “Keep it simple stupid!”
(KISS) Although
there is powerful evidence that terrorists wanted to spray anthrax using
crop dusters, we rapidly locked the door on that plan.
However, a simple distribution through the mail has had a potent
effect upon postal workers, mailroom operators, and recipients.
Consider the disruption in the New York Governor’s office not
to mention the House of Representatives.
Hey, a dozen letters is all it takes.
Suddenly,
those warnings of a few years ago that were ignored as “alarmist”
have had their prophecy fulfilled.
It is not a pretty picture.
Can equities and interest rates remain reasonably stable under
such volatile circumstances? If so, option strangles offer comfortable retunes.
I am not sure “comfortable” premiums are worth the risks of
another meltdown. However,
I will examine the various spreads.
Meats
Face Similar Uncertainty
Large
cattle and hog operations have been warned to be diligent about
foot-in-mouth and/or hoof-in-mouth disease.
Although absent from media (for now), the U.S. food supply is
highly susceptible to chemical and biological terrorism.
Recall the Tylenol cyanide incident approximately two decades
ago. It changed the entire
generic drug and food packaging industry…
adding hundreds of millions to packaging costs.
Anthrax is a naturally occurring disease in livestock.
While we’re focusing on human contact, terrorists might be busy
seeding our meat and poultry. We
have virtually no controls over feed supplies and transportation.
The
first hint of a threat to cattle and pork supplies sent live cattle
plunging.
Although
supply fundamentals are not indicative of a crash in red meat values,
the public would be quick to shun steak if there was any chance of
widespread contamination. The
potential “flag” projects to a 4¢ dip from approximately 6600 in
the December contract. A
sip to 6200 is not beyond imagination…
even without an outbreak. We
remain short live and feeder cattle, but didn’t take the hogs.
December
lean hogs display a very similar pattern.
The question debated among livestock experts is whether a plague
upon U.S. animals would generate higher or lower prices.
I believe the answer is obvious… Lower!
In each instance of a scare like the Jack-in-the-Box e coli
incident, meats took a major hit. The
difference is that a plague will eventually reduce viable supplies.
The extent of the reduction sets the stage for a major recover if
we don’t all become vegetarians!
We
cannot monitor every supermarket and every meat package.
With a syringe and the right stuff, a handful of operatives in
various cities can ignite a total food supply scare that would plunge
consumers into total panic. Another ugly picture. Imagine…
Without sophisticated nuclear weapons…
no Cruise missiles, no fancy laser guided bombs, no gun ships or
aircraft carriers, a few hundred maniacs may be capable of bringing the
United States and Western allies to their collective knees.
I
was skeptical of last week’s story that the U.S. military was stocking
up on massive amounts of food for a prolonged campaign.
After checking with sources, I was informed that the aircraft
carriers and mobilized troops are already stocked and ready to go.
Food supplies are part of the everyday activity, regardless of
any campaign. While a
modest amount of additional food is required for eventual ground forces,
it is not sufficient to drive meat prices higher.
International
Softs
All
eyes have been on coffee as prices dipped to life-of-commodity
lows last week. I spoke
with one bottom seeker who exclaimed, “When will traders acknowledge
an ‘oversold’ condition?” The
lack of reorganization by coffee producers has the supply/demand
equation stuck in the same place as a decade ago when prices bottomed in
1991/92. Believe it or not,
coffee is second to crude oil as a traded commodity.
Global addiction is rising.
Yet, production has expanded and there are no quotas to limit
flooding the market from season to season.
This
year’s output placed another burden upon prices.
However, a rumor that our military action would produce a hefty
boost in consumption popped prices higher.
Hmmm… sounds similar to rumors in the meats!
Ancillary information was also associated with coffee’s
reaction. Growers’
unrest, another meeting to establish export quotas… the list goes on and on. Finally, the fact that is was time
for some traders to take profits may have been enough to lift December
coffee for a day or two.
Technically,
December has not held above the 20-day average.
Fresh selling towards the afternoon erased most of the gains and
yesterday’s gaps loom as targets to fill.
Some
analysts anticipate a breach of 40¢ for a test as low as 3800.
Are producers going to give the black beverage away for free?
Wait a minute…. Another
item has crossed my desk. Ah
ha! It seems we should expect an increase in coffee consumption
based upon a study that determined that consumption rises when the
population (in general) becomes depressed.
Will wonders never cease?
We
remain short sugar that had a lift from more encourage export potential
and a continuing hope that a hurricane will eventually make landfall in
a sugar-producing region. Looking
remarkably similar to cattle and hogs, sugar’s “V” bottom has met
resistance at 6.70. A
breakout above 6.80 is required to confirm an interim bottom. With our stop at 6.77, we have a small profit locked in.
Even if 6.80 is challenged, I am not enthusiastic about reversing
to a long because I don’t see a fundamental basis for higher prices.
If
6.70 holds prices at bay, I look forward to a test below 5.00 within the
next four weeks. A move
above 6.80 could pave the way for a rapid advance to fill the 7.30 gap.
Energy
We
sold December crude oil at 2290 seeking to add at 2390 that was reached
Friday with a 2420 high. I
suspected a rally as high as 2400.
Hence, I placed the stop at 2566 to provide sufficient room…
noting exposure, of course.
We have been fortunate. While
prices failed to make our 1967 objective, the formation appears
encouraging. Those who wish
to protect at breakeven now may do so.
However, there is a chance volatility will produce $1.00 to $2.00
ranges. The “flag”
points to an incredible $17.67 approximate objective.
Perhaps
it’s not so incredible. My sources tell me OPEC is highly jittery about
Kazakhstan’s overwhelming willingness to form an U.S. association. This former soviet state holds the richest untapped oil
reserves in the world. Properties
are rapidly being developed. With
a “Western alliance” between upcoming Kazakhstan and the U.S., OPEC
could truly be rendered obsolete.
What
happens in a price war? Observe the May 1986 crude chart.
From
a high above $28, prices sank below $10 in about five months.
I don’t expect such action with a third world war pending, but
any signs of terrorist abatement could easily precipitate such a plunge.
Email:
Phil@commodex.com
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