Live Cattle: Another Foray into 4A

• The live cattle market seems to be defying gravity at this time, with the futures market holding at high price levels despite futures spreads growing more bearish. 
• This has been in place for most of the last year, with the Feb-April futures spread implying February futures are roughly $25 overprice heading into the end of the year. 
• The cattle/beef market is as good an economic indicator for the US as anything else, and right now the market reflects a strong economy. 

As you might recall, I’ve developed a short list of seven rules I apply to markets to help them make sense. These developed over the course of 30-some years and are generally straight forward. However, Newsom Market Rules 4A and 4B are intentionally vague because the underlying principle is vague. And as we see playing out in live cattle these days, this vagueness is actually serving us well. 

Newsom’s Market Rule 4A states, “A market that can’t go down, won’t go down.” That seems painfully obvious, I know, but think about how many times you’ve heard a market analyst or reporter say something to the effect of “there’s no reason this market should be doing what it’s doing”. You read, see, and hear it all the time. But the reality there is a lot going on in any market that we simply aren’t privy to, which brings us to Rule 5: It’s the what, not the why. 

Turning our attention back to live cattle, the market is a bearish wreck fundamentally. Using my analysis of futures spreads, the February-April live cattle spread closed Thursday at (-$4.90) as compared to its previous 5-year low weekly close for this week of (-$4.225). Things don’t improve further out with the April-June spread closing at $5.80 versus the previous 5-year low of $7.825, and the June-August finishing the day at $1.175 as compared to its previous 5-year low weekly close for this week of $0.55. The bottom line is live cattle fundamentals look bullish at least into the summer, if not beyond. Yet the futures market refuses to break, with February (LEG22) closing Thursday at $139.975, putting it in the upper 14% of its price distribution range (based on weekly closes only) dating back through the 2015 contract. 

If live cattle fundamentals, supply and demand, are so bearish, then what is holding the market up? We don’t know, hence the application of Rule 4A. It could be a number of things, including my belief the beef cutout market is as good an economic indicator as anything else used these days. Given that, the fact the cattle market refuses to go down could be no more complicated than the US economy remains strong. Thursday’s weekly initial jobless claims number came in at 198,000 versus an expected 205,000 while continuing claims were reportedly 1.72 million as compared to the previous reading of 1.86 million. 

This puts the spotlight on the idea of supply AND demand. Futures spreads continue to tell us supplies are large, a factor confirmed each month by the latest USDA Cattle on Feed reports. The issue is the US remains in a red-hot demand economy where consumers have an insatiable appetite for everything, including beef. Recall the November trade deficit grew to a record 97.8 billion and markets didn’t even bat an eye. Therefore, the invisible hand holding up the cattle market when its spreads say it should be going down, is that of the US consumer demanding another hamburger.