Long term commodity bulls may have another reason to cheer. But this time many analysts point specifically to grains to lead the way in 2007. Some are predicting that in the next two to three years, grains will see record highs. Wheat and corn are at the forefront of grain traders’ minds.
This year wheat’s ending stocks were near record lows and next year’s wheat market will depend heavily on whether the crop will see improved production around the world. Droughts in Australia, the Ukraine and the United States sent wheat skyrocketing 50% this year. “I would say if we have another year of poor production, [the] record highs of $7.50 seen in 1996 would not be out of the question for wheat in 2007,” says Mike Zarembski, futures analyst with Xpresstrade.
Corn also could be another big mover in 2007. “The market that could be really explosive is the corn market. I am very bullish on corn because of the ethanol demand,” says John DeMartino, co-director of customer trading with Goldenberg Hehmeyer & Co. Zarembski adds, “No telling how high corn prices can go,” explaining that with a weather scare, seeing new crop prices go to $4.00 to $4.50 per bushel is not out of the question.
But what about soybeans? In 2006, beans have been the least active grain crop, but some changes in 2007 might give the market some potential. For one, bean exports are expected to be strong going into next year. “In 2007, beans could be the one that surprises traders to the upside,” Zarembski says.
Besides short supplies, demand for renewable fuels and a growing global population, some also point to hedge funds as fueling grains’ fire. “Funds are involved in wheat and corn. This has been driving a lot of the volatility, especially in wheat. I do not see this changing anytime soon,” says DeMartino. He explains global shortages and increasing global demand will benefit grains, and for that matter, all of the commodities for some time. “There will be great opportunities next year and in the foreseeable future for all commodities. They all will be very active,” he says.
While not quite as hot, Cordier expects coffee to see an increase in prices in 2007. Coffee has experienced neutral to negative prices mainly due to oversupply and relatively stagnant demand. However, Cordier notes that growing demand for coffee in Asian countries may have a strong influence on prices in 2007. “I don’t see skyrocketing prices, but I see an increase in the neighborhood of 20% to 30%,” he says.
While grains and softs traders will contend with weather as the largest unknown next year, energy traders’ list of wildcards expands with each passing year. Wars, nuclear threats, terrorism and an uncertain global economic outlook will wear on energy traders in 2007. For instance, if the U.S. economy continues its soft landing, energy markets may trade slightly higher or sideways. On the other hand, if economic growth slows quicker than expected, energies may end up being labeled as a hot bear for 2007.
But according to Phil Flynn, energy analyst with Alaron Trading Corp., energy prices probably will edge up next year. Flynn says an expanding economy will provide the opportunity for high oil prices again in 2007. “It would be better to see it happen because of positive economic fundamentals and strong economic growth than due to geopolitical fears,” Flynn says.
Zarembski says, “As for the general trend in energies in 2007, the market will go up, but not to the extent we saw in 2005 or 2006,” adding that a $15 trading range can be expected for next year, as opposed to the nearly doubling energy markets we have witnessed in prices in the past two years.”
But will crude be the hottest energy market in 2007? Cordier says gasoline may witness the biggest moves next year. “We could challenge 2006 gasoline highs. Gasoline could very well be the leader of the energy complex.” He explains that if the Federal Reserve is able to produce a soft landing, it could provide a path for gasoline to go higher. “But if the Fed causes a recession, all bets are off and we might only have a small seasonal rally,” he says.
Flynn, on the other hand, says while gasoline witnessed an incredible spike this year, partially due to the switchover to ethanol, he doesn’t expect this market to be quite as hot next year.
“I expect to see a more orderly run-up, not the spike we saw this year.”
The economy, of course, also will be driving equities in 2007. “The 2007 stock market will really depend on how well the economy holds up,” Zarembski says. Will stocks continue to make new highs or will multiple cycle lows win out? One thing is certain; the stock market appeared strong and resilient this fall. October is remembered for the Dow’s record setting string of new highs, including closing above 12,000 for the first time. From July until October the Dow and the S&P 500 gained 8% and the Nasdaq increased more than 13%. What factors account for the growth? The Fed’s pause in interest rates, strong corporate profit growth and lower crude oil prices supported the rally.
Can this stock market euphoria continue in 2007? Many look to the housing slowdown for the answer. While in August, September and October a weak housing market offered little evidence of dragging down the economy and seemed to almost have zero effect on the stock market, many analysts say it is only a matter of time before the stock market feels the effects of the housing slump. In October, the National Association of Realtors reported that existing home sales fell for a sixth successive month in September. Sales at that time were 14% lower than a year ago. Another factor that may contribute to a hot stock bear market is a negative savings rate coupled with an increase of U.S. home owners tapping into their home equity. And this as home equity is depleting. The median sales price of a new home fell 9.7% in the 12 months ending in September, which was the fastest price decline in nearly 36 years.
Jeff Greenblatt, editor of Fibonacci Forecaster, explains the rallies in 2006 make sense due to the theory that market years that end in six often perform well. And for that matter, he says years ending in seven also often have a good chance of strong performance. But while past history is somewhat of a predictor, there are times that something can come along to ruin the tendency. Instead of a hot bull market for stocks, 2007 might bring a hot bear market.
Greenblatt points to the fact that while the Dow and S&P are making new highs, other indexes, including the NDX, Nasdaq 100, and PHLX’s SOX Index are not confirming these highs. Greenblatt believes the SOX, which is a price-weighted index composed of 19 companies primarily involved in design, distribution, manufacture and sales of semiconductors, is one of the best forecasters of the markets available. In a healthy market, Greenblatt says NDX leads, followed by the Nasdaq and the SOX, with the S&P500 and the Dow pulling up the rear. The NDX can lead up and down. In 2006, from January to May the Dow was leading to the upside without the benefit of NDX, SOX, and Nasdaq, which prompted the large sell-off in June and July. “If we have the Dow and S&P 500 continuing higher without the SOX, NDX and Nasdaq catching up, we will have a repeat performance of that sell-off,” Greenblatt says. He adds, “If the current environment continues, 2007 will be like 2004. We could see a high early in the year and some kind of large corrective action later in the year.”
Bo Yoder, editor of the 5MinuteInvestor.com, doesn’t see the fall rally extending through the beginning of the new year. “Markets need to breathe,” Yoder says. “It seems we went too far, too fast.” He adds the mainstream media’s fairly uniform bullish outlook in the past has been an accurate contrary indicator. In late October, Yoder expected the market to pull back in a couple weeks time and then for support levels to end up moving higher sometime between the middle of December and the beginning of January.
“[The year] 2007 will see an increase of trading activity as money comes in from overseas and domestically from the liquidation in the real estate market. This will promote bigger rallies, scarier sell-offs, and generally increase the earning potential for speculators across all markets,” Yoder says.
Currencies may not see the biggest moves next year, but some markets may get hot. According to Brian Dolan, director of research for GAIN Capital, the largest potential moves for currencies will be in the British pound and the Japanese yen. Many currency traders have been waiting for the last two years for the yen to appreciate and Dolan says 2007 will likely be the year. Dolan points to China increasing the yuan’s flexibility and interest from central banks looking to raise its holdings of the yen as factors that will boost the Japanese currency. As for price points for the currencies, Dolan says the area of 180 to 185 will likely be a critical support area for the British pound. He says the currency will likely hold above 185. However, if the market does see weakness, there will be a buy opportunity in the low 180s. Regarding the yen, Dolan sees a long-term top at 120. “This looks to be a critical level going into 2007,” he says.
However, while some analysts point to non-U.S. currencies as movers in 2007, others say the U.S. dollar will be the market to watch. Joseph Trevisani, chief market analyst with FX Solutions, expects two constants in 2007: a dynamic American economy and a strong U.S. dollar. “I expect economists will be revising upward U.S economic predictors in the new year, which will lead to dollar strength in 2007 rather than dollar weakening,” Trevisani says. On the flip side of the coin, Trevisani sees continued weakness in the yen and says the British pound will fall, because it is currently overpriced.
Carla M. Bauch is a freelance writer in Chicago.