A lot commodities got pasted yesterday but you probably know that by now.
iPath Nickel JJN down 2.96%, iShares Silver down 2.69%, PowerShares Base Metals DBB down 2.39%, DJP down 2.08%, PowerShares Ag DBA down 2.61% and a lot of the related stocks were down too.
One bad day obviously means nothing in the long term but the upward price action that we have seen of late, the this time is different mentality, the awareness of the space by people who 12 months ago never had had exposure and the intense media attention are all a rerun of the same movie.
To address one thing up front, this time might actually be different. It makes sense to me that the supply and demand equation, especially for industrial and agricultural materials, is evolving and that the types of prices we saw a year or two ago will never come back. But parabolic price rises, especially throughout an entire segment of the market, are a sign of excess and a big drop should not be a shock even if it is now different.
Let me also clarify most clients have exposure to gold, a seed stock, a diversified miner, economies that benefit from the commodity boom and one or two folks own DBA. Sentiment wise I am as on board as anyone but I have also disclosed shaving down positions in a couple of names as they have run up and would suggest that you take inventory of what your exposure is and think about the consequence to your portfolio if there is a nasty correction.
If you truly believe this time is different and we really are just a few years in to a two decade run then you have to understand that even if the ultimate run exceeds your wildest expectations it cannot be in a straight line. During the emerging market boom we have seen a handful of 25% corrections and there will probably be more.
I am not making any sort of prediction in the post nor am I doing any analysis. The point is to understand market behavior and what sentiment can do to prices on the way up and the way down. The fundamentals of commodities could be unlike any other part of the market but the behavior of people placing buy orders is not.
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9 comments:
On a daily basis I see articles like this:
http://www.winninginvesting.com/commodities.htm
It makes you wonder if everyone is jumping in, and now everyone is writing about it after such a huge move...............
Wait for the Time Magazine cover.
Anon: I thought the same thing as I was typing! :)
Of course there will be potholes, but you can make a persuasive argument for commodities intermediate and long term, and you can't make such an argument for stocks.
Right now, stocks are like pushing on a string. Commodities are much more profitable, and even if the hot money leaves, the story remains intact.
Everybody suddenly jumping in is a negative, but it doesn't crimp the long term rationale.
Face it, stocks suck.
I think the ag, metal and oil commodities are truly
in a new era in terms of supply and demand in a way that other sectors are not. For the first time in my memory, people are not talking only about peak oil but about peak grains and peak metals. If you everget the chance to listen to Don Coxe from Bank of Montreal speak, or read his articles, the experts in the mining and ag fields are serious believers in
a continued supply/demand imbalance for the forseeable future. Until more oil, fertilizer, good soil and mines (in politically stable regions) are
developed, the argument is hard to rebut.
Does anyone actually believe that the demand for
oil, metals or food is actually going to go down in
the next decade or two? Look at today's commodity
action. Anywho, way overweight in commodities
is beating the pants off of the major domestic and
foreign equity markets in the past quarter. Tell
me where I'm wrong.
Thanks,
Scoot
If you are exactly right about supply and demand you are assuming the market will always rationally interpret the fundamentals. Look at the last sentence of this post, human behavior is no different even if the fundies are.
Here is a link to the Daily Telegraph about a sugar glut.
Kudlow was on in the background tonight and I noticed Mr. $30 Oil Is Around The Corner appears to have capitulated. Keep one eye peeled for the exits.
Regarding supply and demand: how is it that with so many people in a market, supply and demand, in almost all markets, often stop or start at a particular level. Prices can fly up and then they suddenly stop at a resistance level. Then they start going down and suddenly stop at a support level. Then go back up and suddenly stop at a resistance level. This is definitely not random movement. What causes that? Does it indicate a certain manipulation of markets?
I think the $100/barrel price tag reflects the end of cheap oil NOT the lack of recoverable oil. There could also be a premium price above the mere supply/demand assessment to reflect the loss of purchasing power (and the anticipated further erosion in purchasing power) of the US dollar. The same can be said of any of the commodities including precious & industrial metals et al...let's not discount the impact of general market enthusiasm or pessimism regarding specific asset classes as a large component of its present price.
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