La Nina to Vanish by June, Returning Pacific to Normal
Comment of the Day

March 10 2011

Commentary by David Fuller

La Nina to Vanish by June, Returning Pacific to Normal

This is an interesting report from Bloomberg, on a fascinating subject. Here is the opening:
The cooling in the Pacific Ocean known as La Nina, which can influence Atlantic hurricanes and U.S. drought, is expected to keep fading and vanish by June, according to U.S. forecasters.

Observations and computer models agree on the weakening of the phenomenon, which also has been blamed for flooding in Australia, the U.S. Climate Prediction Center said today in a report on its website. Forecasters can't predict whether it will remain weak or pick up strength after July, the agency said.

Neutral temperatures in the Pacific won't do anything to diminish the number of Atlantic hurricanes this year, said William Gray, who makes seasonal hurricane forecasts at Colorado State University in Fort Collins.

"We're forecasting a pretty active season for this year and we probably won't change that much," Gray said. "We can have very active seasons when it is neutral."

The phenomenon peaked in early January and has diminished since, according to the Australian Bureau of Meteorology, which also tracks La Nina.

Global Impact

Rain linked to La Nina halted coal shipments and swamped cotton crops in Queensland earlier this year, after wet weather last year cut sugar output and downgraded east Australian wheat quality. La Nina has soaked rubber plantations in Southeast Asia, disrupted Indonesian tin output and brought dry conditions to corn and soybean areas in Argentina.

"La Nina will continue to have global impacts even as the episode weakens through the Northern Hemisphere spring," the U.S. center said. In the U.S., the effects from March through May may include below-normal rain across the South and Plains, and higher temperatures for the southern half of the country.

David Fuller's view The article also points out difficulties in forecasting during March, April and May, prompting one meteorologist to predict that La Niña will not fade at all, confirming that this is an inexact science.

Investors are accustomed to divergent market forecasts and have learned that unanimity of opinion is usually a contrary indicator, telling us far more about what people have done, rather than what the markets will do.

The outcome regarding La Niña is likely to be important because more 'normal' weather conditions in the world's main agricultural regions would be a welcome event, boosting crop yields - all other things being equal - and reducing one of this year's inflationary pressures in the process.

It will be interesting to see what Evelyn Browning-Garriss has to say about this in the March issue of The Browning Newsletter on climate, which we hope to post shortly.

Weather forecasts aside, speculators appear to be experiencing some vertigo, having helped to drive prices of many commodities to nose-bleed heights. They may also be concerned about possible action to curb commodity speculation by the CFTC and other regulators. Some of the recent price chart action is very interesting.

The Continuous Commodity Index (Old CRB) provides the best representation of the diversified commodity sector, in our view, because it has more constituents and is unweighted. With one day to go in this week's trading, it is currently showing a weekly key reversal.

The Old CRB is also very overextended relative to its medium-term trend mean represented by the rising 200-day moving average. Mean reversion by freely traded market prices is the closest we get to a natural law of physics in the social science of investor sentiment.

Among some of the more overstretched commodities, rubber (TCM) has fallen sharply over the last three weeks, confirming a top of at least near-term and probably also medium-term significance. Watch for a lower high following the next bounce, if this forecast is correct.

Cotton has yet to confirm a peak but the advance is slowing once again and at a much higher level. A close above 220¢ would open the door to some additional strength but the next significant move is likely to be downward mean reversion.

Corn arguably has the most bullish fundamentals within the important grain and bean complex but currently shows a loss of momentum and a close above $7.50 is required to reaffirm scope for a challenge of the 2008 peak.

Milling Wheat (Matif) has fallen back sharply from its 2007-2008 peaks but may encounter some support from prior trading and the rising MA. Watch for a possible lower rally high following the next bounce, which would provide additional evidence of a topping out process.

Tin was the runaway leader among LME industrial metals recently but lost upside momentum following its mid-February high and has seen a downward dynamic this week. A new closing high would be required to delay current scope for sideways to lower ranging in an additional process of mean reversion towards the rising MA.

Copper is less overextended than the commodities above but it has broken its consistent short-term uptrend and is susceptible to an additional phase of mean reversion and could test lateral trading near $4.00

Palladium experienced a big downside key reversal in late February, checking the latest advance which had become quite overextended relative to the MA. That suggested a peak of at least near-term and probably medium-term significance as further sideways to lower mean reversion occurs.

Among stock markets:

The S&P 500 Index is resuming its mean reversion towards the MA.

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