FT Alphaville � Blog Archive � The stock is dead, long live commodities - and China
This is the latest from Jimmy Rogers.
There is nothing very new but it is still a good read. He pounds the table on China with no mention of a potential 30% decline that he said he'd be willing to ride out. I doubt that means he has changed his mind about the potential but still.
He also said the commodity bull market could last until 2022.
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17 comments:
Bloomberg has video of interview that gives JR comments that are superior to link.
I've never seriously studied commodities because from a long term perspective they didn't look like a great investment (also, ETFs have only recently been available). I'm not saying you can't make money in commodities over certain periods of time, but they don't look like a buy and hold investment to me. Now I'm interested, especially after reading Mebane Faber's paper A Quantitative Approach to Tactical Asset Allocation.
I have a lot of questions.
DBC seems to be a very popular commodity ETF. It tracks the DBLC Index - here's the composition:
Crude - 35%
Heating Oil - 20%
Gold - 10%
Aluminum - 12.5%
Corn - 11.25%
Wheat - 11.25%
I also looked at the GSCI index as a comparison:
Energy - 70.12%
Ind Metals - 10.71%
Precious Metals - 2.34%
Agricultural - 10.87%
Livestock - 4.95%
Quite a difference, eh?
Keep in mind I don't know squat about commodities, but my general thoughts are these:
Ag products seem to be heavily dependant on weather or other supply side issues. I can't imagine there are huge shifts in demand. On the surface it seems these commodities wouldn't really benefit much from global industrialization. If anything, supply might even increase because of "climate change" and advanced technologies/machinery hitting emerging markets.
Industrial metals seem like a good bet, but their weights in the indexes above seem quite small. Also DBLC only includes Aluminum.
I would guess products like timber would benefit but I don't see that represented anywhere in these indexes. And while gold is techically a commodity, I assume industrial demand has only a minor impact on it's price.
Energy - both indexes are heavily weighted towards energy. Obviously energy prices are largely driven by demand.
I suppose my real question is this: Assuming you buy Jimmy Roger's argument, that China, India, etc. will continue to drive demand for commodities, does anyone have thoughts/rationale as to a more logical mix than just buying DBC?
Also, can anyone point me to a webpage with correlation comparisons between each commodity group?
That seems a bit extreme to have a bull market all the way until 2022, don't you think? If that were the case, then we'd likely see a great deal of substitute products hit the market. Oil is certainly the top of the list when I think of a continued commodity market and a potential of replacement products hitting the markets.
"Ag products seem to be heavily dependant on weather or other supply side issues. I can't imagine there are huge shifts in demand."
THat's the beauty of unpredictable commodity markets. One word: corn.
A 15 year bull market DOES seem wacky, but the world's population, esp. China and India, is going nowhere but up. It's hard to see a new product keep up with massive growing demand for natural resources even if we have a big breakthough in, say, an alternative fuel car.
Tom, Just moments ago I posted a question, puzzlement about my holding of DBA..at billcara.com.
DBC looks to be the most diverse and eqully weighted commodity index.
If you want an etf more closely tied to GSCI, did you look at GSG?
DBA, USO, and GLD would allow you to pull them apart...but still missing other metals and paper. Ideally, we'ld have new etf products with matching indices that we can track and use as proxies.
I bought DBA. I was told on the phone that it tracks $GKX Agricultural Prices - Goldman Sachs Commodity Index.... .84 correlation. Went down over 4percent this morning. Hard to figure role of oil and currency. If it's more expensive to grow or if weather is bad, is this not good fro the dba? Prices go up, right? If there's inflation, prices go up, right? Is that not good for DBA?
Roger...can give us one of your nice comprehensive posts on how to use etfs to capture commodities....another pt of view may be frontier countries...commodity laden.
http://etf.seekingalpha.
com/article/25746
I really would like to have access to something like the ETFS family (trades on the London Stock Exchange). Here are a couple examples:
ETFS Energy:
Crude - 40%
Natural Gas - 36%
Unleaded Gas - 12%
Heating Oil - 12%
ETFS Industrial Metals
Aluminum - 38%
Copper - 32%
Zinc - 15%
Nickel - 15%
ETFS Softs
Sugar - 33%
Cotton - 34%
Coffee - 33%
PowerShares DB Energy Fund
DBE
AMEX
1/05/07
$30.5m
$0.4m
0.75%
PowerShares DB Oil Fund
DBO
AMEX
1/05/07
$29.7m
($0.8m)
0.75%
PowerShares DB Precious Metals Fund
DBP
AMEX
1/05/07
$26.1m
$0.5m
0.75%
PowerShares DB Gold Fund
DGL
AMEX
1/05/07
$26.1m
$0.5m
0.50%
PowerShares DB Silver Fund
DBS
AMEX
1/05/07
$26.1m
$0.7m
0.50%
PowerShares DB Base Metals Fund
DBB
These could help in the mix, either dba is a great buy or much further to go down if world growth slows, imho.
Here's where my head is:
Would like to test something like Mebane's TAA timing strategy, but overweight with more commodity exposure and dice it more finely. Mebane's paper used the following asset classes with a 10 month moving average timing overlay:
S&P 500 - 20%
EAFE - 20%
US BONDS - 20%
REITS - 20%
GSCI - 20%
Here's the idea:
S&P 500 - 10%
EAFE - 10%
EMERGING - 10%
US BONDS x1.5 - 10%
REITS - 10%
ENERGY COMMODITIES (crude,NG,HO,UG) - 10%
INDUSTRIAL COMMODITIES (minus energy) - 10%
AGs + SOFTS - 10%
PRECIOUS METALS - 10%
I don't want to drill down so far that I'm owning stuff like GLD and SLX, but I don't want something as broad as DBC.
Roger,
As I mentioned a couple of weeks ago, I got a chance to hear from Jim Rogers and asked him what he was long and short. He did not directly say what he was long or short but did say what he liked...
He basically said he liked soft commodities (especially sugar, corn and coffee) and disliked the subprime folks and brokers. I was surprized by this since brokers such as GS are trading reasonable valuations given the event driven ladden market expected this year... It seems like he is in the subprime contagion camp and feels that we have only seen the tip of the iceberg.
AI
Well tomk, this investment model would look to me like a move toward simplicity, but I assume that this one would be inaddition to your other models. Each asset is either in cash or not depending on timing criteria, no ranking.?. Jim Rogers is fond of telling folks to just figure out how to but each commodity separately. "It's easy" (he says).
Anon 10:00
DBA probably went down 4% today on this news about corn:
http://www.marketwatch.com/news/story/corn-futures-drop-their-lowest/story.aspx?guid=%7B65313045%2D322E%2D4A18%2D9739%2D10BEF73FC78D%7D
Jim Rogers has confessed publicly that he's bad at timing. You can trust him on the what and the where, but not on the when.
Oil ETFs range from bad to worse, so play it through OIH or skip it. Basic metals are hostage to emerging markets' industrialization and are therefore vulnerable to a slowdown. However, a combination of DBA and DBP should fill your allocation quite nicely.
I'm with you, Tom K, hard assets are a waste of capital over the long pull. I believe commodities move with inflation. Over time, that's the way it's been since the industrial revolution began. Between pulls, I guess it's possible to make money.
The Farber monograph was very interesting, using a moving average to get out of asset classes, individually, makes sense. And it improves on Roger's idea, which ignores asset class components.
My problem with it is, how would you deal with whipsaws? Any solutions here? Whipsaws weren't dealt with in the Farber paper.
So, how does one find "A Quantitative Approach to Tactical Asset Allocation"? Easy, go to "Social Science Research Network" (SSRN) , become a member and download Farber's paper from there.
The link is:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461&high=%20A%20Quantitative%20Approach%20to%20Tactical%20Asset%20Allocation
Whipsaws are inevitable - there's no way around them. The hit rate on most trend systems that aren't the result of a data mining excursion is about 50%.
Assuming you buy Jimmy Roger's argument, that China, India, etc. will continue to drive demand for commodities, does anyone have thoughts/rationale as to a more logical mix than just buying DBC?
DBC looks to be the most diverse and eqully weighted commodity index.
The most diverse and equally-weighted commodity index is probably the CRB index. Unfortunately, as far as I know there is no mutual fund or ETF based on the CRB.
The Dow Jones AIG index is also diverse and fairly equally weighted. In my view, the problems with both DBC and definitely the GSCI index is they are too heavily weighted in energy.
With all the new commodity ETFs that have been introduced one could conceivably select their own allocations to energy, precious metals, agricultural, etc. That is well beyond my capabilities. I don't have the time or expertise to be an active commodity picker.
In my view, the best way to get exposure is via a broad index like the Dow Jones AIG index:
http://www.djindexes.com/mdsidx/index.cfm?event=showAigAbout
"The most diverse and equally-weighted commodity index is probably the CRB index. Unfortunately, as far as I know there is no mutual fund or ETF based on the CRB."
Have you looked into GCC? I think the volume is kinda low... but for a buy & hold, instead of trading, it may do good? I'm considering it for my IRA.
http://www.greenhavenfunds.com/
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