Liquidity and fear-the major driving force in the markets
Sep 29, 2008
Today is one of those days where if (you are right) the market your ready to eat steak and drink champagne! If you were wrong, you are ready to head for the outhouse to puke your guts out! Equally, the prudent trader with money is sitting on the sidelines waiting for the great buys to develop.
The major driving force right now is liquidity and fear. Fear that the financial package is not going to get pasted, fear it’s not going to be implemented quick enough, fear it’s not going to be big enough. Today we saw the financial crisis deepen to some European banks. As the economic crisis broadens, concern over future demand gets worse. How restrictive will banks become on lending? As borrowing standards tighten over the next six months and everyone holds their breath to see how deep the financial crisis will get, it’s going to make it difficult for producers. The net impact is the high cash flow crops like cotton and corn may have difficulty getting the acres it wants and lower cash flow crops like wheat and beans may actually see greater acres than needed.
As for the current situation, today technically is about as black a day as you can get for commodities. All commodities were near or at their limit down price moves. In the case of crude oil, cotton, wheat and beans broke below a nice double bottom formation with corn potentially following suite tomorrow.
The risk of these technical moves is it’s suggesting a major shift is taking place in the underlying fundamentals. The sharp gap lower price action below strong support has now opened up Pandora’s box of exactly how much down side risk does exist. Now that the house has voted down the bail out, it’s going to take more time to get the bail out bill passed. Second, we are into harvest and cash is starting to hit the market. Third, credit is drying up which is forcing many of the trading funds that use borrowed money to run their operations to reduce the size of positions due to margin calls.
So in summary: we are now seeing fear. I’m not saying we will not go lower tomorrow but the market will be unable to sustain this level of bearish tone for much longer than 8 to 15 days. I’m suggesting all clients who have a solid financial footing and have cash to invest be getting prepared to buy 2009 corn, cotton and live hogs between now and the end of the month.
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