Since weak cotton fundamentals don't make a case for higher cotton prices, any bullish impulses may have to come from macroeconomic developments! There is little doubt that the world's financial system is in trouble. Daily headlines about escalating deficits and rising debt levels all over the globe, defaults of counties and entire countries, unemployment and a weak housing market are all depressing economic activity and have forced policy makers and central bankers into taking extraordinary measures. Money printing and a zero-interest rate policy for years to come are now the weapons of choice, something that was unthinkable just a few short years ago.
While many feel that weak economic performance will invariably translate into lower commodity prices, we don't necessarily agree with this train of thought. Instead we believe that the weaker the economy gets, the more money the world's central banks are going to print, which in turn will lift nominal prices of finite resources.
Then there is the price of crude oil, which in 1999, during the height of the tech bubble, was at only 11 dollars a barrel and which today, in tough economic times, costs about 10 times as much. The emergence of China and India, geopolitical issues and reckless money printing all contributed to this rise in crude oil prices. Since the price of energy factors into everything the world produces, we believe that it will be nearly impossible to see commodity prices fall unless crude oil drops first.
So where do we go from here? With China apparently willing to absorb the seasonal production surplus into its strategic stock, the market's downside should be well contained. At the same time we don't see a lot of upside potential either, unless there is a significant improvement in mill activity or some bullish developments on the macro front, like a weaker dollar for example. We therefore feel that the most likely course of action in the near term is a continuation of the current sideways trend.
The Dec/March spread, which inverted again today, does not make much sense to us given what's in the certified stock. We keep hearing that some traders might be short high grades against existing commitments, but they probably won't find what they are looking for in the certified stock, which by now has increased to about 52'000 bales (counting bales under review) of mostly undesirable qualities. We therefore still expect carryings to return to the board once the Goldman roll, options expiration and mill fixations are behind us.