The Backwoods Route of Fundamental Analysis
f you’ve ever gotten lost on a backwoods country road, then you know that asking the locals for directions can often take you further off course than before.
* Stop One: Guy says go right until you come to a fork in the road. Then, hang left and in no time, you’ll hit the highway.
* After 20 minutes of no fork, you stop again where guy two says: turn around, drive past guy one, veer right at tractor depot, and follow signs back to interstate.
* Seven tractor depots later, you finally realize: This is the Twilight Zone.
Nothing comes close… except asking the mainstream financial natives to explain why the prices in a certain market are where they are.
Take, for example, cocoa. On July 6, prices in this sweet soft soared to their highest level since March 2005. As for why — well, we suggest leaving a trail of breadcrumbs while reading through these recent news items:
“In the face of a stronger US currency, cocoa futures pushed to a new 16-month high.” (Forbes) — VERSUS — “A slip in the dollar is providing some support.” (DJ Market Talk)
“A 10% drop in cocoa stockpiles is raising supply concerns.” (Houston Chronicle) — VERSUS — “Ghana, the world’s second biggest grower of cocoa, has produced a second harvest that is one-third larger than last year’s crop.” (International Herald Tribune)
Ongoing conflict in the embattled Ivory Coast continues to add to the bullish backdrop in cocoa — VERSUS — A July 5 meeting between UN Secretary Kofi Annan and Ivory Coast President to discuss ways to disarm the divided country.
In the words of one cocoa trader, “it’s difficult to justify this price surge when looking at fundamentals.”
You can say that again. And, over a week ago, in the June 28 Daily Futures Junctures, editor Jeffrey Kennedy proposed that the upside cocoast was clear with this analysis:
“A strong case can be made that the current move up is wave 3 [the most powerful impulse of all]. If so, instead of seeing prices slow down, an acceleration higher will occur.”
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