This weekend Fox News reported the stock market--as measured by the S&P 500--is up 70 percent since the bottom of the bull market, which started in October 2002. However, according to The Wall Street Journal, the stock market is trading at the same level it was nine years ago, making it one of the worst investments over the nine-year period.
If you factor in inflation, itâ€™s a loser. (Oil prices were $16 per barrel in 1999.) And if you loaded up on stocks last October, you would now be down about 20 percent. Bull or bear market, your perspective is contingent on your timing. Perhaps the worst is over for stocks, but it doesnâ€™t feel that way yet.
So the question is: Where should we put our money for a decent return?
Although the S&P went nowhere over the past decade, commodities have been in a bull trend. Recently, the volatility in the commodity markets has increased dramatically.
Last Friday, the CME Clearing House raised corn margin requirements by 50 percent to $2,025 per contract. Soybean margin requirements rose by 30 percent to $4,388 per contract. Wheat margin requirements remained unchanged at $6,075; however, wheat margins were below $1,500 just six months ago. These increases in margin requirements are a symptom of the volatility.
Another symptom is the increase in daily price limits. Beginning last Friday and for the first time in history, daily corn price limits increased to 30 cents per bushel up from 20 cents, and soybean price limits rose by 20 cents to 70 cents per bushel.
Volatility raises the risk levels but also increases the array of opportunities. What about commodities? A global recession would be bearish commodities. But the Federal Reserveâ€™s monetary policy is inflationary, and thatâ€™s commodity bullish.
Today is the end of the month and quarter. And as you read, the most important crop report of the year was released this morning. Because I wrote this over the weekend, I donâ€™t know what the crop report will say or how the markets will react. The important thing, however, isnâ€™t the report numbers themselves but how the markets react to the numbers.
That said, here are my predictions for grain.
Wheat is transitioning from the tightest supplies in 40 years to a much larger crop to be harvested in early summer. The report should confirm the winter and spring wheat acres up sharply this year. And although wheat prices have already come down $3 per bushel from the highs, I wouldnâ€™t rule out additional weakness into the summer harvest period.
Soybean prices sold off last week in anticipation of a bearish crop report. November (new crop) prices are now $3 per bushel below the high hit in the beginning of the month. Old crop (May) prices are down about the same. Yet old crop supplies are close to the tightest on record because of unrelenting demand, primarily from China. If the report turns out to be bearish and the market drops as a result, it could be a buying opportunity.
Corn demand should be up sharply this coming year. Demand for corn for ethanol production is projected to be up 30 percent to a new record going into 2009. Hogs are a major consumer of corn, and the March quarterly report released Friday afternoon indicated the largest hog inventory in more than 30 years. Pork production looks to remain record high well into 2009, adding more fuel to the corn demand story.
The market is expecting a bullish crop report. Farmers are expected to plant 7 million or 8 million acres less corn because of high fertilizer costs. Soybean makes its own nitrogen and doesnâ€™t require fertilizer. If the report confirms this number, weâ€™ll use more corn than we produce next crop year. And as a result, new all-time high prices will be justified.
Speaking of ethanol, production from sugar will reach record highs again this year in Brazil, allowing less sugar for export from the worldâ€™s largest producer. Sugar looks cheap right now, but the chart remains bearish. All we need now is some sign of a turnaround, perhaps a break above the downtrend line, for a new buy signal.
Energy prices are caught between a recessionary economy that will hurt demand and the start of the big driving season, traditionally a time of rising gasoline prices moving into the summer. This is the reason prices remain near all-time highs and nearly $1 per gallon higher than one year ago. Look for a trading range; however, if world events cause the market to break above the resistance to all-time high prices, there could be a short-term, severe spike higher.
Finally, gold remains my premier commodity pick for the most long-term upside potential. Along with the Fedâ€™s recent action (lowering rates, creating money, debasing the currency and allowing investment banks to gamble with borrowed Fed money), inflation should heat up. But based on recent fund-induced liquidation to raise money, the trend appears to be down for gold.
Consider buying either on momentum strength (a break above the $960 resistance) or if the market can successfully make a higher high at some point above the $909 support. In either case, look for the $880 level to hold. A break below that level would place this long-term bull trend in doubt, at least temporarily.
Good luck, and good trading.