Commodity Markets Follow the Same Basic Rules as Equity Ones

By Jim Wiandt

Now I have been critical of Matt Hougan from time to time, but NEVER has he spouted such pure nonsense as he did yesterday.

The truth is that generally Matt and I—mostly—agree, and the arguments we do have are often on the margins. But not today. I honestly believe that Matt Hougan is as crazy as a lark with all his shrieking about commodities being different, the space not working for indexing, etc.

It's a bunch of nonsense. POPPYCOCK.

He spends the first half of his blog talking about index weightings. Like that has ANYTHING to do with commodities in particularly. Matt, I've got a surprise for you: The NASDAQ 100 is overweight Technology, the Dow had a leaning toward blue chips, the S&P 600 performs in a wildly different manner than the Russell 2000. Indexes VARY in their weightings. If you don't know that, you are not a decent index investor. You've got to KNOW and UNDERSTAND what's in your index and make an informed decision on that basis. If you want to be very Energy-heavy, go S&P GSCI. If you want broader exposure, go DJ-AIG.

Next, he tries to make the same ludicrous point about "the persistence of momentum" in commodities. Matt, why don't you tell an investor who bought commodities in April of 2008 about the persistence of momentum to December of 2009? And then he goes on in a convoluted way to try to explain why "commodities are different." Academics say so, so it MUST be so, right?

Your endorsement of long/short based on momentum to me is akin to putting it on black. And whatever effect that WAS there—if there WAS an effect there—is likely to be priced out of the market next week.

Dipsy Doodle Land

You can have a debate with me about whether commodities are a legitimate asset class. Commodities can't produce wealth, they have no natural expected rate of return, all that. That I can tolerate. But saying that the commodities market operates in some other sphere where everyone is above (or below) average just doesn't make sense. And saying it doesn't have the same ebbs and flows as the equities market would seem disprovable on its face. If I buy a commodities ETF from someone and it goes up 20%, yeah, that was a zero-sum game. I made 20%, and the person who sold it to me DIDN'T make 20% (and if they sold it short they LOST 20%), ahem, much like a stock.

PLEASE tell me all the ways in which I "just don't get it." And next, get out all your pointy-headed spinmeister friends who have hypnotized you with visions of free money dancing in your head.

Let me tell you something. There IS no free money. And if you can accurately track the investable opportunity (and commodities indexes do track an array of them in the commodities space), then net-net, you'll beat everyone who tries to tap dance their way into milking alpha out of the market.

And THAT, my friend, is the way it is.