FROSTY FUTURES

SATURDAY SEPT. 9, 2006

www.frostyfutures.com

Loretto, TN 38469
931 853 5008

PREFACE
The hiatus is over and it’s time for me to get back to work. So now the question becomes: What can I add to your store of knowledge that you cannot get from the multitude of talking heads on TV, the banks of analysts available to you through the brokerage firms, banks and insurance companies and the business section of a variety of newspapers or business newspapers, themselves AND get you to pay for it? The answer, in a nutshell, is synthesis.

The current power behind economic growth is demand coming from China and India and to a lesser degree Eastern Europe as those underdeveloped countries accelerate their economic and social progress. The coastal cities in China and India have reached near full capacity as indicated by the “crane count.” Those cranes, once appearing as a multitude of mushrooms in the port cities, are moving inland to reach even cheaper labor, cheaper land and fresh water. The slight slowdown in demand for copper, concrete, steel and other basic materials is only a temporary phenomenon as this relocation takes place and demand is spread across a larger land area. It’s one thing to have demand located in concentrated areas along the seacoast, it’s entirely something else to have that demand spread out hundreds and even thousands of miles as growth spreads inland. There are limited suppliers of the machinery of growth and workers capable of running that machinery. As one catches up with the other there is an ebb and flow of demand as reflected in price. This leaves the advanced countries scurrying about expending energy and resources looking for new venues of growth and protecting old sources of supply to appease domestic demands. This is a much slower process than development in the early stages. And this is the cause of the current friction between the developed nations and the newly developing nations and the suppliers of energy.

STOCKS
Domestic stocks as largely reflected in the Composite, S&P and Dow 30 are stuck in a broad (depending on one’s perspective) trading range. These markets are delegated to roles of providing a “safety net” for capital as that capital searches for new growth and larger returns. Money will move in and out as that search takes place and new sources of growth are found, matured and profits taken. If we look closely at charts of the major indices we note that they are currently in a bullish configuration but in the upper regions of their trading ranges. As the micro-economic interact with the macro-economic different patterns will develop on daily and weekly charts. These patterns will not be completely reliable, as they rarely are anyway, but they must be acknowledged because they will be indicators of what to expect in the not distant future. For example, the current pattern on the Dow 30 daily chart indicate a test of 11,600 should be forthcoming. However the pattern on the weekly and monthly charts show a market that is overbought and in danger of rolling over. These latter patterns becomes more pregnant as we get deeper into September and into deadly October.

INTEREST RATES
Rates along the entire yield curve have recently dropped, the long end (30-year) more dramatically than the short end with the curve showing signs of possible recession. This may be a false positive caused more from the withdrawal of capital from developing economies as they rearrange their machinery of growth and put it into “safe-keeping” in developed countries where there is transparency and some guarantees. As development and capital investment return to the developing countries this money will be taken out and rates will go higher across the full spectrum of the yield curve. It’s “when” not “if.” When we see a renewal of the acceleration in the curve of capital growth in developing countries we will know it’s time to sell-short the interest rate markets.

METALS
The price of gold is not just a measure of inflationary expectations against any given currency but is also a measure of the strength of those governments backing up that currency. As we have seen domestically gold price can rise at the same time a disinflationary environment is extant. As our middle class is weakened gold price will rise, as our middle class is strengthened gold price will fall. So the projection of gold price will be dependant on the outlook of our middle class along with inflation expectations. Silver and copper however, are growth demand driven. Both will continue their upward trend as momentum in growth curves of developing countries is re-established.

DOLLAR INDEX
For the past several months the Buck has traded inside a range from 8300-8700. I see nothing to change that for the time being, but once resolved I expect it to decline further. It will maintain value above 8000 as a currency of safe-harbor during times of capital movement but will eventually sink to the 7000-6800 level as developing countries economic systems mature and become themselves transparent and safer. I am reasonably certain that was the premise of Warren Buffet’s bet against the Dollar. He was just premature in placing his bet.

MEATS
Export demand for our red meat has maintained a level surprising to many, including myself. In developing countries higher standards of living and fear of poultry have combined to shift the demand curve to beef and pork, lamb and goat. There is no end in sight. For the time being, therefore, charts can be relied upon to reflect micro-economic factors and traded accordingly. In other words, believe the daily charts.

ENERGY
There is some fear among the energy producing countries and refining companies that the consumers in developed countries have been milked about as much as they can be without affecting other areas of the economy. No one wants to kill the goose of golden egg mythology. It had to happen at some point and it appears that point has been reached. The trend in crude, heating oil and unleaded is down. Natural gas is hurricane dependant and we are not out of the season until the end of September, early October. Absent a hurricane in the Gulf of Mexico natural gas price will maintain a low price level.

SOFTS
With the decline in energy prices it will take a serious shift in either supply or demand to stimulate softs prices. Cocoa is vulnerable to a drop into the 1300’s. Deferred coffee prices are a drag on nearby price so we can’t look forward to much of a price increase in coffee. Sugar, whether from cane or beets, is in good supply and with the drop in energy prices is not likely to find much support for a significant rally on its own. Like cocoa sugar has discounted much of the bearish news but is still vulnerable to more downside price action. Orange juice is discounting hurricanes, tree damage and who knows what else. Price is too high for amateur speculators to participate.

GRAINS
The best bet for a bullish market remains wheat. Corn harvest has begun and beans will follow shortly. There is nothing in the latter two markets to compel me to get long at this time.

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Trading futures is for individuals willing to assume greater risk for the opportunity of greater rewards. Only speculative capital should be used. Past performance is no assurance of future profits. Information contained herein is believed reliable but original sources of data have not been independently verified therefore is not guaranteed. Ideas and suggestions are just that. Nothing herein should be construed to be a solicitation to trade futures or options. Hedgers should have a defined plan.