FROSTY FUTURES
MARCH 24, 2005

Extract from THE HIGHTOWER REPORT
(www.futures.research.com) By permission

Given the size of the mid-March washout in the CRB Index, the lackluster progression of the US recovery and the periodic concerns of rate hikes in the US, it would not be surprising to see the CRB Index forge a correction similar to the slide that was seen off the November 2004 highs. While the CRB and many other broad based commodity measures continue to be dramatically influenced by the energy complex, we think that periodic fund profit taking is also a fact of life. The fact that the long positions in non-financial, commodity markets exploded over the last six months is possibly a sign of an overdone status.
Furthermore, it would seem that two main components of the sharp rise in commodity index levels, the energy and grain complexes, have already begun to show temporary failures on the charts. While some might suggest that rising inflation concerns will provide support to many commodity prices, we are not convinced that the US economy is expanding as rapidly as it was during certain periods of 2004. Historically, it is unusual for markets to go straight up without periodic corrective action, and therefore we think that traders should brace for a general washout in prices. The grain markets are fresh off a significant appreciation brought on by a late season drought in Brazil and now must look ahead to the North American planting season, which by most accounts is expected to bring about an increase in corn acres. On the other hand, declines in soybean and wheat acres, the threat of rust losses and generally strong demand could mean that spring price declines will end up extracting too much weather premium from the markets. We suspect that energy prices are also set to slide temporarily, as OPEC slowly raises production and seasonal demand in North America takes some of the pressure off supplies. However, it would not seem like the energy bull market has ended, as the world still isn't sure that OPEC and non-OPEC production can effectively expand to meet the rising tide of global demand. In conclusion, a temporary letdown from the mostly favorable economic outlook front could combine with an extremely overbought technical condition to foster an extension of the recent declines in physical commodity prices.

CONTACT ME: williamfrost@comcast.net or call 615 331 8567.
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