Instantly, notes and bonds responded with a leap in rates and associated decline in principle values. A new consensus has emerged that the Fed is likely to bump rates higher in June rather than waiting through August. However, the narrow focus upon prospective Fed intervention fails to consider the seasonal tendencies I have alluded to in previous Reports.
The seasonal propensity for rising rates is believed to be associated with increasing cash demands through the spring. Obviously, April 15 marks the bulk of tax requirements. However, this has been increasingly extended through June with the advert of late filings and June 30 fiscal ends. Nonetheless, monetary pressure builds during the vernal accumulation.
Notice the spiked lows occurring around April. While the seasonal appears imprecise, it is clear that selling June calls through the spring yielded successful results as long as the strikes were realistically out of the money.
Understand that nothing like the present weekly consolidation range exists for the T-note contract, or, for that matter, any interest rate contract. This is because the contract began in the 1980's and we have not experienced such low yields since the 1950's.
The longer-term perspective provided by the weekly continuation chart suggests a secular trend since the demise of our economy in March of 2000 to provide a rally from 9400 to 12100 last June. Support exists at 11000. If challenged, we can feel relatively confident monetary policy has shifted back to a more "normal" application. Interim support within the current consolidation stands at 11000.
Of course, a significant turn in events can disrupt the pending pattern. A new terrorist attack or stock market scandal can alter perception and reverse the economy's present course. However, these events do not appear boldly on the current radar screen. What we do see is a consistent rise in raw commodity prices and several non-monetary developments that can impinge upon the Fed's plotted economic destinations.
We have the highest CRB Index in more than seven years. Perhaps some investors recall when President Clinton was toying with the idea of changing the Consumer Price Index (CPI) to more appropriately reflect inflation. Wasn't that around 1996/97?
The point is that these commodity prices must translate into rising consumer prices. But for cheap mortgages and credit, consumers would feel the pinch from higher commodity prices. The question is, "Where to now?" If inflation rears up by surprise, the Fed will have a difficult time balancing the recovery against inflating money. Add a ballooning deficit to the natural price trends and you have a collision course that seems unavoidable.
I believe this administration was, and is counting on deflating energy prices as a catalysts for continuing prosperity. Freeing Iraq and releasing their oil is an intricate part of the formula that has failed to equate...so far. In particular, the oil flow has been stymied by continuing sabotage and reconstruction inefficiencies...not to mention global politics. Then, an extended cold snap has placed mounting pressure upon domestic supplies and refining capacity.
So, the "oil card" has yet to be played. Thus, the Fed's presumed intention to raise rates earlier rather than later becomes a more critical timing issue for this president in an election year.
Recently, the CRB has dipped on a bust in grains, meats, and other markets. However, the weekly chart shows long-term support at 25200...a considerable distance away from the recent relief afforded by a handful of commodities. This brings us to the subject of avian flu.
Birds Of A Feather Flu Together
As an aside, I read a report that postulates avian flu to be an Al Quadea plot. Operatives are strategically placing sick birds among dispersed flocks to generate a global pandemic. You gotta love it! What sensational imaginations.
The timing of avian flu could not be worse. Just as the U.S. reels from its first substantial Mad Cow scare, a worldwide purging of chickens and ducks promises to leave a supply void over the next six to nine months. My contacts in the bird industry inform me that there is already a pop in interest for U.S. poultry. Indeed, if the U.S. is called upon to fill Far East requirements, we could see rising domestic meat prices regardless of Washington state's Mad Cow.
The disruption in rising U.S. grain prices could prove temporary if chicken and duck producers move into overdrive. Beans did not rise above $8 because there are plenty of beans. To the contrary, high soybean prices have been generated by low global supplies and a cheaper U.S. Dollar.
Brazil is wet and Argentina is dry. South America's crop will offer modest interim relief. U.S. farmers will plant from fence to fence. They may even encroach upon parts of the road. But, the eventual outcome will depend upon Mother Nature and the extent of demand spurred by regenerating flocks of edible birds.
Thus, the summer is shaping up to be a very interesting season for commodity traders. We cannot know the eventual course avian flu will pursue over the next few months. If all goes well, the purge will be modest and short-lived. If not, a serious burden will be placed upon producers to regenerate. This suggests a cyclical digression whereby demand drops in response to culled birds and subsequently surges during the rebuilding process.
Aside from the impact upon birds, the jump to humans poses another threat...albeit small. Just as the Spanish flu swept 20 million people away during World War I, so too might a virulent new flu decimate several populations. While we are told the danger is minimal, there is a frantic effort to develop a human vaccine against the H5N1 virus "just in case." I have already reviewed two diametrically opposed epidemiological opinions about how H5N1 might impact the globe.
On the one hand, there were no vaccines during the Spanish Flu pandemic. Today's robust technology has the potential to nip any outbreak in the bud. In contrast, there was limited global mass transit in the early 1900's. Planes, cars, trains, and other transportation were just evolving. Today, a new disease can rapidly circulate the globe to the extent that our distribution of any vaccine would prove insignificant. Only the privileged would survive. Yikes!
Doom and gloom aside, SARS appears to have been contained to less than 2,000 cases. This years normal flu will take more than 10,000. I weigh in on the side of encouragement.
Unfortunately, the iced broiler contract no longer actively trades on the Chicago Mercantile exchange. So, we must look to cattle and pork for any related reactions.
Gold
Two weeks ago, we sold gold at approximately 40890 on Friday, 2/16 open. Subsequently, February gold was contained below 41600 resistance reaching a high of 41510. With our stop set at 41930, I was leaving plenty of room for an expansion of the range, however, the consolidation below the 10-day and 20-day moving averages set up a downside bias.
I know some subscribers were disappointed and skeptical of shorting gold. In particular, the pop in silver to 66500 raised eyebrows and fears. Yet, I believed the interest rate seasonal and felt comfortable that the position was worth the risk. Silver's formation is actually similar to gold's with the exception that the range is far more volatile and support remains unbroken in March at 61000.
Moving from the January high to the consolidation measures to a 39000 support. I know gold bugs do not want to see $400 breached, but this is the picture.
The March U.S. Dollar Index is retesting 8800 resistance and the correlation with interest rates suggests this test will be proven. March Eurocurrency is below the 40-day average and should test 12300 support. A bust below this level could give us a drop to 12000.
As mentioned earlier, the Fed has hinted it is changing its schedule for U.S. rates. With this in mind and the understanding that trading is prospective, the Dollar's reversal may be underway.
Having enjoyed the slide on several occasions, it is time to seek the reversal more aggressively. My only regret is that the Canadian and Australian Dollar did not have an ample opportunity to regain position against the Greenback.
January 30, 2004
Philip Gotthelf
Commodity Futures Forecast
P.O. Box 566, Closter, New Jersey
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