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Surprise!
No More 30-Year!
Well,
not exactly. Despite the
Treasury’s surprise announcement that it has discontinued selling
30-year bonds, there’s still plenty of paper out there.
Yet, the significance cannot be underestimated.
Long-term portfolios are looking at a 10-year maximum window for
the full faith and credit of the Federal government.
The only equivalent time frames reside with municipal and
corporate paper.
Recall
my discussion of how the long end of the yield curve was unusually
stubborn. Short-term rates responded to FED cuts, but the longer issues
refused to budge to the extent necessary for “jump-starting” the
U.S. economy. There is
little doubt that Uncle Sam was planning the demise of 30-year paper for
a long time. Following in
the footsteps of corporate America, our government has determined it can
save billions by lowering its own interest rate.
I
suspected bonds would eventually be forced to respond “big” to the
lack of adjustment in long-term rates.
That is why I decided to buy the interim correction last month…
even with the bearish chart formation.
Prices had busted below the 20-day and 40-day averages, however,
they were testing an interim consolidation area seen in August.
Essentially, the fundamental consensus was that the September 11th
attack would prolong economic uncertainty…
a powerful ingredient for higher long-term rates.
From my viewpoint, it seemed apparent the Treasury and Federal
Reserve were going to realign monetary ratios.
I ask my standard question.
If you controlled interest rates, would you raise or lower them
in anticipation of borrowing? The
answer should be obvious.
I
recommended buying the dip indicated by the arrow and we achieved an
average entry of 10230 in December.
Admittedly, I did not expect the spike seen yesterday nor did I
have a clue the Treasury was going to suspend 30-year sales.
On the other hand, last week’s 10817 objective was made by the
October 30th 10819 high before yesterday’s announcement.
We
are in new high territory and I am inclined to protect the delicious
profits we have achieved with a more progressive stop.
The enthusiasm is, by no means, overdone.
The interest rate plunged from 5.22% to approximately 4.88%, yet,
there is still room for improvement.
The supply of 20-year Federal paper is capped.
The spread between short-term and long-term rates remains wide. We are not going to see investors paying interest to the
Treasury for the sake of lending the government money!
The only logical decline in the spread must come from diminishing
long-term rates.
Further,
we have touched the lows of 1998, but not necessarily the lows needed to
inspire a recovery. Let’s
not kid ourselves. Uncle
Sam is the ultimate insider trader.
The dramatic dip in GDP coupled with a far gloomier consumer
confidence index warns of a much more powerful and lasting recession.
The only hope is to pump, pump, pump available discretionary
income. So far, the pumps are working in three areas; interest rates,
energy, and tax cuts.
Can
Energy Save Us?
Last
week’s REPORT provided an energy outlook that is apparently shared by
this week’s World Bank report. It’s
nice to be ahead of time. I
pointed to the obvious. A
slowing economy is running head on into higher global capacity.
OPEC’s grip is dubious as Russia aggressively seeks to fill any
supply gaps left by OPEC quotas. This
is not a time for cooperation among producers.
Energy markets have deteriorated into “every man for
himself.”
Of
course, there will be progressive attempts to talk oil higher or cut
production. In the end,
spigots will turn to the left and oil will flow.
As with any monopoly or oligopoly, once competition enters a
market with finite demand, prices accordingly adjust downward.
The World Bank does not foresee an upturn until third quarter,
2002. I believe this is
optimistic. If Halloween
sales and “spirits” are any indication, we are in for a dismal
holiday shopping season. Consumer
lethargy is at an all-time high. Fear
of mall bomber or anthrax sprayers mounts with each renewed terrorist
warning issued by Attorney General Ashcroft.
The last economic stronghold of real estate crumbled in October
to an extent that low mortgage rates can’t even be a motivator.
Already,
there are pamphlets circulating instructions on cutting heating bills
and conserving electricity. Restrictions
in New York City access have actually dipped local gasoline prices
further than the national decline.
Americans are hunkering down.
Less travel, less energy usage…
believe it or not, even WEB surfing numbers appear to be down.
People are shutting off the electronics and spending more time
socializing… like the
good old days.
All
this spells more trouble for OPEC.
Ironically, the radical Islamic Fundamentalists have indirectly
targeted their own brothers in bringing on a global recession.
Oil sales and prices are likely to decline more as the battle
intensifies. Radicals have cut off their own nose to spite their face.
Equally important, the war on terrorism has galvanized
Western-minded Islamic nations into action.
Moderate Muslim provinces want to join the main-stream economy.
They have the oil to afford participation.
Looking
back to 1985/86, crude oil astounded everyone by cascading from $30 to
less than $10 between October and April.
Gasoline prices almost mimicked pre 1972/73 energy crisis levels.
It was a pre-elixir that I believe was instrumental in tempering
the post 1987 stock market crash. Cheaper
energy is exactly the catalyst needed to prove the World Bank’s
recovery prediction true.
I
pointed out a technical continuation “flag” that has been followed
by a bust from a modestly symmetrical triangle.
This contrasts with the smooth and steady decline occurring in
1985/86 when the bottom culminated in a similar, albeit less pronounced
pattern.
We
moved our stop to protect against another rally.
In view of the present technical picture, prudence is in order.
Copper
Base
metals are a precursor of recession.
The relationship is fairly obvious.
As consumption drops, so does demand for these raw materials.
In particular, copper reflects adjustments in industrial
intentions. When
fabricators realize a dip in sales, they adjust purchase commitments.
I have stressed that copper suffers from diminishing demand and
more efficient extraction. While
some may run from Phelps Dodge, copper retains its profitability all the
way down to 50¢.
It
is true that some aging capital needs to be retired with falling prices,
but the replacement equipment and techniques make up for this
depreciation. Electro-winning
solvent extraction produces a pound of copper between 25 and 35 cents…
depending upon ore quality.
Along with copper come ancillary silver and gold.
Copper producers have a choice…
produce more as prices fall or try to cut back.
Understand that copper mines are in the business of producing
copper. They don’t simply
shut down when prices decline… unless
there is a total meltdown.
Copper’s
inability to maintain its most recent upward channel signals the
potential for a dip below 6000. This
would set up a test of 55¢… a
fundamental objective I have anticipated since the Sumitomo copper
scandal a number of years ago. Copper’s
collapse adversely impacted gold and silver.
Unfortunately, my foresight in copper did not spill over into our
lousy gold trade.
Meats
Lean
hogs staged an impressive comeback after seemingly seeking new lows.
Formations are similar in live and feeder cattle, however,
neither of these have broken out above consolidations, yet.
We are protected with an entry point stop in live cattle, but
remain exposed in feeders.
Patterns
are understandably similar for both red meat contracts as the chart
demonstrates. Conversations
with premium meat distributors lead me to believe restaurant consumption
has rapidly declined. Steaks
and roast beef are foundations of upscale dining establishments.
Stay-at-home cooking is generally more pasta, burgers, and dogs.
Retail beef sales are not as weak as I expected, however, we hear
less about wholesale restaurant orders.
Unlike
hogs, live and feeder cattle have had time to rest.
Absent an upside breakout, I still believe January feeders can
slip below 8000 while live finds support at 6800.
Unfortunately, both shorts have stops that are easily within
range. A short covering flurry could easily bang us out just before
the downtrend resumes.
The
fact that lean hogs failed to penetrate above the 40-day average is
reason to suspect a false reversal.
I admit lean hogs are cheap when using the old live hogs as a
comparison. Yet, Bellies are not. This is why I placed the hog – belly spread when it widened
to 27¢. We are at a more
normal 1850, however, I would not be surprised to see 13¢ or less.
Subscribers
were wondering why I did not sell the pork complex as I did in cattle. If you look at the intra-day volatility, the answer should be
clear. Frankly, I am
inclined to sell hogs and bellies, but for the spread.
I simply don’t trust the floor traders at the moment (no
offense).
Softs
I
am hoping we received a strategic December coffee entry.
Any time you attempt to pick a bottom, you are taking a chance…
no matter how low the price may seem.
I
am hoping we have seen a “rounded” bottom.
Chartist will criticize me because the length of this alleged
bottom is modest. We remain below the 40-day and fundamentals don’t favor a
rally. Still, roasters
should find current prices enticing enough to stock up before weather
turns appreciably colder. I’m
happy if we can test 50¢!
Email:
Phil@commodex.com
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