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What happened on February 16th? With commodity and equity markets forging a distinct upside burst, one almost got the impression that some form of robust recovery was back in place. However, while we suspect that the US economy is still progressing toward self-sustainable growth, we also doubt that the economy has achieved that status yet. It is also possible that news of a 30 day grace period for Greece debt issues provided an across the board showing of optimism. However, news that a key Midwest Democratic Senator (Evan Bayh) would not seek re-election also seemed to have noted repercussions. In addition to another seat from the majority being called into question, the widely respected Senator also suggested that Washington was broken, and that would seem to challenge all incumbents in the next election. Since the Democrats hold historical majorities in both governing bodies, it would seem like the latest news is worse for the Democrats. In fact, even the President was ridiculed by portions of his party and by liberal media talk show hosts that voted for him, and that in turn could force a move back toward the center.
If the power block in Washington is dissipating, that could mean that extreme change that has been feared by the markets won’t materialize. While it might be too simplistic, we think that stocks and physical commodities were dented in January and early February and US Treasuries futures were lifted as a result of fears that US banks would be unable to trade, and we think the reversal of those fears provided some of the relief gains posted in many markets on February 16th. While Congress is being taken to task for choosing politics over common sense in many policy initiatives, the White House has also take heat for what small businesses say are unfair changes. Seeing that Washington even tossed around the idea of eliminating the mortgage interest deduction to high income Americans is a classic example of Washington looking for revenues without considering the market ramifications. With sagging US real estate values, ongoing foreclosure problems, fears of problems in commercial real estate defaults swirling in the background and very serious European debt concerns still in place, it just doesn’t make economic sense for the US government to kill any portion of the US real estate market. In fact, removing new buyers from the US real estate market before the economy has gained momentum would probably be revenue negative to the budget. In an overly pessimistic view, we suspect that a move toward political gridlock in Washington might actually create enough clarity for business and consumer confidence to begin to improve.
We think that traders should view the February 16th action as foreshadow to the eventual trend in US physical commodity prices. But, given the ongoing uncertainty toward the recovery pace and the potential for a derailment of said recovery, traders have to be sure to buy physical commodities after periods of noted weakness. A temporary shift to using technically-orientated overbought and oversold indicators might be an effective trading tool until the US economy exhibits a stronger a pattern of growth.
Continued gains in physical commodity markets will probably come from demand-driven views, but as the end of February approaches, supply side issues have the upper hand in many markets. Given our near term bearish/long term bullish views, we advocate short futures versus long multiple call position plays in markets like cattle, corn, sugar, orange juice, gold and silver.
