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Has
A Recovery Taken Hold
As
the DOW finally rocketed above 10,000, scores of analysts have switched
back into bullish mode. This was the event they were anticipating.
Before turning from doom to boom, investors wanted to see if this
landmark could be achieved before year-end. Further, the Nasdaq
pushed beyond 2,000 to set a mood of pre-holiday glee. In the
meantime, bonds sacrificed the progress made on the heels of FED
implications that another downward rate adjustment was necessary to put
finishing touches on monetary stimulation.
It
was not a great week for my prognostications as everything from grains
to interest rates took an opposite direction. Now, the temptation
to follow the crowd is increasing. After all, the investor mood
appears to be more anxious about missing the next huge upward thrust
than about falling into the abyss of another downward spiral.
Essentially, the mantra is “Make it back!” The only way to
accomplish this task is to be in the market. Thus, the argument
for taking on position or increasing existing holdings is powerful.
In
addition, progress in the War On Terrorism has bolstered consumer
confidence. Despite stern warnings that the forces of evil intend
to strike within the U.S. again, images of the crumbling Twin Towers are
fading into complacency. Indeed, Americans are getting back to
business as usual and it is reflected in the move toward stocks, the
shopping malls, and productivity. Adding to potential excitement
is the resurgence of our military industrial complex. The
Republicans insist that we are involved in a long campaign with an
elusive victory. Democrats appear to concur. The war effort
has put a crimp in politics because popularity or “approval” ratings
are high for President Bush and his Administration. Just when the
Democrats had an opportunity to overturn Republican influences, the war
changed perspectives.
This,
too, holds promise for a stock market recovery. There should be
little doubt that a Republican agenda is substantially more favorable to
big business. This is more perception than fact since we have not
seen a Republican Congress team up with a Republican Administration
since the 1950s. It was close this year, but both branches
flip-flopped. The military build-up was conducted under Democratic
rule from the Kennedy years through the Johnson term. Although
these back-to-back presidencies were identified with civil rights and
the Great Society, they also marked Cold War escalation.
Major
military contractors benefited under Democrats, not Republicans.
Certainly, Reagan was a hawk and pushed military spending proposals to
an extreme. However, much of his desire was curbed by Congress.
The former Soviet Union took threats of escalation more seriously than
the reality. This brought Russia to the brink of financial
disaster and forced the relinquishing of power in favor of the
Commonwealth of Independent States (CIS).
Identity
Crisis
The
CIS is extremely young. For the past seven decades, the United
States and its allies have perceived Russia as having the same
population with different political and economic ideology. From
Lenin to Stalin, the image of Russia has been portrayed by Western
European figures. Kings of Russia were integrated with queens of
Europe. Peace and harmony were a function of royal marriages.
The image of a Christian society contrasts sharply with the reality of a
predominantly Muslim population. The relative autonomy of
Commonwealth states brings this to the foreground.
What
is the CIS? Ask the average U.S. citizen and you get a blank
response. Even those who know it is the reconstitution of the
Soviet Union, few can name the states and fewer, still, know about
indigenous populations. The CIS is predominantly Muslim.
Over the next decade, it is increasingly likely Russia will lose its
grip on CIS members to the extent that we may see one or more
reorganizations and even attempts at total independence.
What
does this have to do with commodity trading? The CIS constitutes
the largest landmass on earth. It spans eleven time zones and
encompasses the most diversified and substantial natural resources from
fossil fuels to forest products… not to mention platinum,
palladium, silver, and gold. If we were to revert to colonial
measures of national wealth, CIS has the world beat. Were it not
for Russia’s former communist economic structure, it is doubtful the
United States would have its current monopoly as a super power.
Communism
was the first progress retardant. Islam may represent another
hiatus in a bid for world dominance. The lack of motivation
toward Western standard provides a competitive advantage to the United
States and Western Europe. What would happen if the CIS mobilized
resources to compete head on with the West?
Nothing
exemplifies this more than the pending oil price war. Russia
consented to a 150,000 per day cutback to avoid an immediate retaliation
from OPEC. Yet, writing is on the wall. Russia holds the key
to energy as much as Saudi Arabia once did. Either of these super
producers can sway global prices… almost immediately! This
single commodity has a major influence over world economies.
Despite the FED’s assertion that energy plays less of a role in
determining overall economic health, energy prices helped drive the
recession well before terrorist attacks.
The
War on Terrorism may have served as a wakeup call to producers like
Kazakhstan who view this as an opportunity to capture market share while
establishing stronger ties to the West. Following the announcement
of Russia’s weak compliance with OPEC’s reduction request, crude
prices sank back from a challenging 21.00 resistance. Of course,
this did not help us in our short March position since our stop was
cautiously shy of 21.00. An upward channel is in place.
Still, today’s action is testing the bottom of the channel and could
prove fatal to any bullish trend. A bust below 18.75 sends a
technical signal for a test as low as 16.00. Thereafter, producers
might be forced into a price war.
This
adds to a bullish economic prospect. Low interest rates, low
inflation (for now), lower employment, retreating energy costs, and
recovering DOW component stocks all aid the economy. This is why
the DOW has been able to make its impressive recovery. In two
months, both the Nasdaq and Dow have recaptured the momentum that drove
investors in the fall of 1999 through March, 2000.
This
momentum can carry to 10700 in the cash DOW. Notice how the
channel is narrowing as prices approach the former June through
September trading range. The behavior reflected by the chart
suggests that the range may take hold again. Absent any unusual
news, I see equities entering another uncertain period until we have an
accurate assessment of consumer spending this holiday season.
While Chanukah is close at hand, there has not been a measurable rush to
buy out the stores. Three weeks ago, news stories identified a
potential shortage of merchandise based upon retail cutbacks and weak
wholesale orders. This was supposed to translate into a problem
with modest retail demand. So far, I have not seen this situation
materialize. With nineteen days to Christmas, plenty remains in the
stores.
Easing
Was Too Little Too Late?
Once
the FED decided to ease, the action was swift and decisive.
Experts still ask whether it was too little and too late.
Certainly, current near term rates are as low as we might reasonably
expect. However, longer term rates have been stubbornly high.
This
week’s review of mortgage delinquencies cast aspersion over the
recovery by hinting that real estate was finally succumbing to recession
pressures. We touched the highest delinquency rate since 1991.
The prior bottom came in 1993. However, stocks had already entered
a major bull market before real estate finally regained momentum.
Frankly,
it would not hurt to see real estate ease. Like stocks,
residential suburban homes have become overpriced. Examine the
divergence between identical structures in rural versus suburban areas.
The range is as wide as 300% to 500%! This means that a $250,000
house in Tempe Arizona has a $750,000 to $1 million counterpart in
Alpine New Jersey or Vienna Virginia. Urban populations could use
some relief. If my assessment of Census 2000 is correct,
Generation X is still moving up into family housing while Baby Boomers
are holding. However, within another 3 years, the numbers may
reverse. As the leading edge of Baby Boomers begins scaling down,
supplies should see some relief. This, in turn could ease mortgage
pressure.
I
could not have been more incorrect about bonds in the aftermath of a
stunning reversal. The flight from quality was astounding.
After making a “V” reversal, I was convinced March bonds would
challenge 10516 resistance. But, stocks overwhelmed government
paper. Not even Enron’s demise could discourage the switch.
With
prices hovering at 10116 support, it’s more than difficult to switch
gears again and sell. Certainly, if this support is busted, there
is a technical argument for a dip below 100. But, this is not what
the FED wants. What about the saying, “Don’t fight the FED?”
Of course, the meaning is that we should not fight the influence lower
interest rates have upon equities. On the other hand, FED board
members have reiterated that they could lower rates another notch.
This places us in a never-never land. I don’t believe there is a
single technician that does not feel anxious about interpreting this
pattern!
China’s
Surprise
Just
when I was feeling comfortable about the long side of grains, we were
stopped out with a decisively bearish pattern. Just as we joined
the shorts, China surprised the trade with sufficient purchases to
reverse the market. Where to now?
China’s
purchases were the first indication the U.S. might regain export
potential. However, one order does not control long-term price
direction.
A
powerful upward channel filled the 10˘ gap left in October.
Just as prices reached 4.55 resistance, they collapsed. Our timing
could not have been worse. China propped prices, but the chart
suggests another exhaustion. Overall, I lean toward the short
side. Supplies are ample and South America appears to be in good
shape. It’s early in the season, but China and other buyers will
have alternatives to U.S. grain by April.
Oats
receive honorable mention in The Wall Street Journal today. Often,
such recognition is the kiss of death. Indeed, March oats dropped
more than 5˘ today.
Email:
Phil@commodex.com
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