We’ve been talking about commodities and the forces that affect futures trading on the commodities markets. As a futures trader it’s important to have an overall grasp of how the economy, business cycles, social forces and governments affect the availability and control of the natural resources we trade on the commodities markets. Events of the past week are a case in point.
Black Friday, the day after Thanksgiving, is the make or break point for U.S. retailers. A good sales day puts retailers in the black for the year. A bad day and you’re done. Worry about consumer spending this holiday season, when retailers ring up the majority of their annual sales, has been borderline suicidal. Retailers tried to galvanize holiday spending with Christmas displays showing up in store aisles as early as September. But consumers failed to respond. A volatile stock market, high gas prices, a slumping housing market, record mortgage foreclosures, credit industry problems, the sliding dollar value — it’s been a tough year and consumer confidence is low. In fact, it’s at its lowest point in two years, according to the New York-based Conference Board which publishes the index.
Not since 2005 when hurricanes Katrina and Rita devastated the Gulf Coast has the Consumer Confidence Index taken such a nose dive. This week the index dropped to 87.3, continuing a four-month slide and dropping nearly 8 points from October. (Analysts had expected an index reading of 91.5.) It’s the lowest reading since 85.2 in October 2005 when the hurricanes shut down many of the nation’s oil refineries causing gas and oil prices to skyrocket. It also marks the sharpest drop since September 2005 when the index went into freefall, plummeting a whopping 18 points from the previous month.
“Consumers’ apprehension about the short-term outlook is being fueled by volatility in financial markets, rising prices at the pump and the likelihood of larger home hearting bills this winter,” Lynn Franco, director of the Conference Board Consumer Research Center, told the Associated Press. “It doesn’t mean that shoppers are not going to spend,” explained Joel Naroff, president and chief economist at Naroff Economic Advisors Inc. “It implies they are going to be cautious. To me, it will be a mediocre season, not a terrible one, but not a good one either.”
So what does this mean to futures traders? As we’ve explained in recent posts, the commodities markets are driven by supply and demand. If people aren’t buying, there’s less demand, and, therefore, less need for the raw materials that are used to make the things people buy. For example, the subprime mortgage fiasco has nearly brought the housing industry to a screeching halt. Fewer home starts means less demand for home building materials which means less demand for lumber, stone, steel, petroleum, sod and all the products used to build homes.
Commodity futures contracts reflect changes in supply and demand. Everything is linked in the world economy in which we live. An economic force in one part of the world can affect the need for a natural resource in another part of the world which can improve or deflate the economy in that sector of the globe which can create a need for a resource somewhere else … and on and on. Futures traders who are able to see the big picture can position themselves to profit from ever-changing forces in the global economy.
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