9, 2007 -- According to the Associated Press, on November 6, the Eversons of Manson, Washington were leisurely driving their minivan back to a hotel, enjoying their first wedding anniversary when suddenly, "wham!" something landed on the hood of their van. Later, Charles Everson said, "I actually thought it was a deer." But it was no deer. It was a year old cow named Miranda weighing 600 pounds that tumbled 200 feet off a cliff. At the scene of the accident the cow was euthanized.
Miraculously, Everson kept driving although the minivan had extensive damage to the hood. A mile down the road, he pulled over, unhooked his seat belt and yelled, "it's a cow!" According to his wife, he repeated at least 20 to 30 times, “I don't believe it. I don't believe it." Immediately, I sympathized with Mr. Everson because on November 2, I found myself saying the same thing when cattle futures, falling with a loud, "thud" hit their lowest levels in 10 months. Prices tumbled badly from high above when South Korea stopped buying US beef, a string of "beef recalls" due to quality concerns took place, cheap pork flooded the market offering stiff competition and fears that consumer spending on gasoline would cut further beef demand. I did not believe what I was seeing. But the lesson was clear; always buckle up for safety when driving, investing or speculating in the marketplace. Falling cows, real or on paper or any other object cannot overcome the pull of gravity. It is a law of physics.
In the week ahead, Wall Street will inspect carefully three major reports. Retail Sales, Producer Price Index, and the Consumer Price Index reports will determine if the Dow Jones can avoid the same fate as the cattle futures market and Miranda. Or, as Reuters News Agency writes, "any new signs that the economy continues to decelerate could make it hard for stocks to regain their footing after a bruising week that saw market indexes down sharply, and left consumer confidence at a two-year low." Another falling object and one that needs to be watched carefully in the coming days is the copper market. History shows that copper prices are oftentimes a leading indicator for the housing industry as well as the US economy. At weeks end, high grade copper prices fell sharply to close at the second lowest level since early April. For stock market investors here is the rub: so did the Dow Jones.
Looking at a chart of the Dow Jones this year compared to a copper chart and you see they are near identical, having moved in tandem since January. After this bruising week of declines, both markets are on the cusp of, "breaking out to the downside." All that means, of course, is the Law of Gravity is catching up to values. And if the three major reports this week are not to the markets liking, investors and traders are going to be yelling, "I don't believe it. I don't believe it."
The most widely followed gauge of commodity prices is the CRB index and so far, it not being impacted by gravity. It posted a new all time high a few days ago thanks to soaring crude oil, a new 28 year high for gold and sharply higher soybean prices. There were several falling bodies this week making loud thuds but the CRB index was not one them. The best known of all commodity indices continues to do well.
It is worth noting, however, that the Dow Jones carved out an all time high in early October and the CRB index before this week had an all time high etched out in the final days of September. All year, the Dow and CRB have rallied and declined in unison until the past month when the parted ways. Now, the Dow is hugging a level not seen in eight months while the CRB it trying to post another new all time high. They are trying to divorce themselves from each other.
But how long can the CRB index defy gravity when markets such as the Dow Jones and copper are poised to "break to the downside." Not long is my guess because there is nothing bullish for the Dow or the CRB when the economy begins to weaken. In a speech before Congress this week, Fed Chairman Bernake said that economic growth will slow noticeably in coming months with a rebound by mid 2008.
Falling bodies into mid '08! Economic weakness into '08! No rebound until mid '08! I don't believe it. I don't believe it! But he's the man, so I have to believe it. And you should too.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)