You probably caught the news that the global rice shortage has kicked it up a notch and is starting to impact retail outlets in northern California (Costco and Sam's Club I believe).The price action in commodities has been extreme for the last few years as perceptions or realities (take your pick) of demand have changed, investor awareness has increased dramatically and the space can now be accessed by retail investors through brokerage accounts with an abundance of choices with more product to come.
The commodity space has all the allure and intrigue of Frau Farbissina (pictured above). I have been on board with the theme and had exposure for the duration and will keep exposure (subject to the occasional tweak) but there are some important things to keep in mind about commodities now and these things will pertain to other spaces in the future.
The point here is not to analyze the supply and demand for any part of the space as I am as bullish as anyone but we do need to recognize the human/market behavior that has accompanied commodities over the last couple of years or so.
There can be no disputing the fact that commodities are up a lot in recent times, there are many people who are new who have bought in one way or another (mostly with ETFs and ETNs) and that the investment industry has created a lot of new supply in the form of investment products to meet demand for this "new" and exciting area.
Still not thinking about fundamentals for a moment something that can go up a lot in value in a short time frame can go down a lot in a short time frame. The Shanghai composite has cut in half in a very short time. People will say China is/was a bubble and they might say commodities are not. I think the word bubble is over used and prefer the word mania instead.
The underlying fundamentals can be great and prices still take on mania-like ups and downs. I think the fundamentals in China are great (I readily concede there are negatives) but that did not prevent prices from going up too far too soon and coming right back down (maybe too far too soon?).
Given the human factors cited above and what this has meant in the past a swift decline in commodities could easily happen even if nothing changes with the fundamental story. Jumping on me for suggesting commodities could encounter a dip is counter-productive as I am as bullish on the supply and demand as you are. But remember gold dropped 10% from $1000 in about half an hour (intentional hyperbole).
How much exposure do you have? If there was a six or seven month stretch that took prices down 30% (Shanghai dropped 50% in about six months) what impact would that have on your portfolio and how would you react? You should look in the mirror on that one now while everything is going gangbusters. I'm not trying to predict a big decline, I'm just asking what you would do if it happened.
The fundamental story for China looking out for a decade or more is fantastic but that did not prevent the market from cutting in half. Exploring the other side of your trade is crucial for risk management.
13 comments:
I think you are more than hinting you believe commodities are due for a correction. I think you are correct.
I wish I knew how severe and when that correction will occur. It should lead us with an excellent entry point for the long run.
I think your advice to most of us small investors to consider both sides of the trade and remember nothing (houses, commodities, etc.) is ever a one way bet.
Good post
I agree that mania is the right word. Time might save an investor from the bad effects of large swings but, it could be a long time.
"Financial literacy is a good thing, and most people would be better off knowing more about finances, so long as they can mix it with humility. I’m a professional, and I think humility is a key virtue in handling money."
From David Merkel at his blog alephblog.com
i saw david's post.
the counter consideration would be paralysis by analysis.
Roger:
Will appreciate your thinking on EZA - i-shares South Africa ETF.
On one hand the ETF holds lots of mining and minearls companies. But the country is having inflationary problem and its currency is losing its value.
How should one view this ETF? Are the inflationary pressures and currency weaknesses already figured into the current price of ETF. Hence it may be a cheap way to play commodities and gold.
Or should the investors stay away from this ETF due to the inflation and currency weaknesses.
How will you view this ETF. I greatly appreciate any insgights you may provide.
Stranger.
The rand is about the only currency in the world that is down against the greenback YTD despite rallying over the last couple of weeks.
A country ETF is a proxy for the country, obviously. It may or may not be a good proxy but it is a proxy nonetheless.
That being said do you want to own the country? You cite some issues, there are a couple more issues too.
I have been watching Sasol for a long time, never owned but I might in the future--not as proxy for the country but for its coal liquification.
I think many of the positives from SA can be had elsewhere.
Roger:
Many thanks for your thopughtful reply on EZA.
yours sincerely,
stranger
Roger your point is timely, I believe. It seems recent action in stock markets and commodities are linked by a Mr Bernanke and his likely decision in the next meeting. This also means the bond market rally is, possibly, over? And if the dollar starts to strengthen from here and the stock market does too, what's wrong with investing in America?
Or maybe I completely mis-understood what I've been hearing. Some of your thoughts, as always, are appreciated.
Roger,
Why did the stock POT get hammered over the last two days even after it posted unbelievable numbers for the first quarter? In your opinion will it recover in the short term?
Thanks,
BWJR
what's wrong with america? hopefully nothing but...
i don't think a fundamental case can be built for ongoing dollar strength. Snap back rallies happen all the time and even if the dollar cuts in half from here over some period of time there will be snap back rallies.
of course the dollar could have a protracted rally regardless of the fundies.
for the issue is about probabilities. i think there is a better chance to keep my clients plans on track with heavier foreign exposure.
I don't follow POT that closely but it was up 49% for the year when it closed at $214 earlier this week. Some sort of retracement is only logical isn't it?
Well, I'd like to think I'd grit my teeth and hold on, but it would probably depend on how swift the decline was. I actually trimmed some DBC last Monday.
CIBC sure has a scary or bullish report out today, eh?
Did you really need to include the pic of that incredibly unattractive woman (I think) on this article.
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