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We are actually glad to be able to suggest that certain commodity prices look a little expensive, as the end of 2008 seemed to be presenting the markets with a rather bearish and at times dire outlook for 2009. Clearly it is too early to be embracing a sustained brightening of the economic skies, and we expect the December payroll report (released shortly after the writing of this publication) will have brought some of the macroeconomic sentiment back down to earth. We are not discounting the favorable influences of falling retail gasoline prices, declining mortgage rates and the prospect for massive global fiscal stimulus, but we are doubtful that the US economy is poised to forge a “V” bottom. Furthermore, one shouldn’t underestimate how quickly commodity oversupply can be corrected. We have already seen producers in copper, natural gas, crude oil, wheat, cotton, cattle, hogs and possibly even corn either reduce their output ormove into a position to do so for 2009. This suggests that some commodities won’t need a robust economic recovery to see improved pricing structures.
All things considered, we think conditions overall are infinitely better than Paulson, Bernanke, Bush and some members of Congress were expecting just two months ago. Even though tough times remain ahead, the further we can get from the implosion of the credit and housing markets without a full blown cascade of events, the better the chances are that the debacle can be mitigated.
While it might seem ridiculous to suggest that the predictions of an explosion in the US deficit might be way off the mark because the cost of US borrowing is falling sharply and the US government supposedly bought hundreds of billions of distressed financial assets at fire sale prices, it should be noted that even a slight rebound in the economy could result in much less of a budget drag. We would even suggest that the initial bailout allotment (so far) ended up being adequate. In the dark days of the crisis, many players expected the reserve to run out quickly, but instead the reserve remains intact and is apparently enough to be used in other sectors like autos, auto financing and perhaps even in supporting the housing sector. It is a long shot prospect, but if the US government buys in big and the worst doesn’t happen, there could be a very surprising shift in the track of the US deficit.
In our opinion, the anticipated government stimulus package won’t add as many jobs as expected, but the mere presence of the package is both a distraction from the weakness in the economy and something that creates hope. However, in the wake of residual slowing evidence in the coming weeks, the new President will indeed need the audacity of hope to keep sentiment from turning deflationary again.
On the other hand, unlike the former Administration, the new one probably won’t have the majority of the talking heads in the press hyping the severity of every bad number. While that may sound like a political commentary, the fact of the matter is that the lead-up to major elections usually brings about aggressive attacks on the incumbent economy, and if there is a liberal bent in the media, one should expect to see the talking heads tone down their use of adjectives in the face of bad numbers or even attempt to spin the negatives into something more positive at the start of this administration. In short, if there is a media bias in the US lets hope that bias lends a hand in the news coverage over the coming months.
In a recent Hightower daily commentary on the US equity markets, we suggested that March S&P pricing down at the November low of 737 projected a continuation of credit market turmoil and severe, unrelenting slowing. We also suggested that the late December lows of 853 in the S&P seemed to indicate that the economy would have negative growth to the end of 2009. However, it also appeared that the early January highs of 942 in the S&P were suggesting that recovery was possible by mid-year. While a mid 2009 recovery might be somewhat optimistic, seeing another setback in oil prices, mortgage rates fall to fresh new lows and a major stimulus effort pass quickly could help to minimize the damage of job losses already in the pipeline.
In short, many commodity prices have forged very impressive recovery bounces, and we suspect that several “best of class” commodities like sugar, cattle, unleaded gasoline, coffee, copper and platinum might end up with fairly impressive gains on the year. However, given the “ongoing” threat from the economy, the near term potential of strong Dollar action and short term overbought technical conditions, traders need to utilize strategy to weather volatility and remain in position for an eventual recovery in commodity prices.
We would suggest that traders strongly consider utilizing calendar call plays such as:
- Long out of the money longer term calls that are partially financed by short out-of the money near to expiration calls
- Long futures/long double out of the money put combinations
- Long futures/long out of the money put/short out of the money call combinations.
