Commodity ETPs Closing in on a Bull Market 9 comments
Hard Assets Investor
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Over the past trading week, one thing's become quite clear: Risk trades are back. A resurgent stock market, for one thing, attests to a definitive shift in investor expectations. Monday's market action brought the S&P 500 Composite past the breakeven mark for the year after being down more than 33%.
The eight-week rally spilled over into other equity markets, but rising stock prices aren't the only marker of investors' sharpening appetite for risk.
Credit spreads have also tightened, indicating a greater willingness on the part of commercial banks to lend. Tuesday, three-month dollar LIBOR [London Interbank Offered Rate] slipped below 1%, shedding 44 basis points (0.44%) since the beginning of the year. At the height of the credit crisis in October, three-month dollar loans were priced as high as 4.82%.
Traders have moved from the relative safe haven of the greenback to higher-yielding resource-linked currencies like the Aussie and Kiwi dollars and the South African rand. Yields on U.S. Treasury securities, as a consequence, have jumped to levels not seen since November.
The Fed Funds traded rate - the actual price at which excess reserves are loaned between banks - has risen toward the top of the Federal Reserve's 25-basis point target range, after being offered at bottom-scraping rates for weeks.
Commodities - that is, certain commodities, such as crude oil, base metals and the softs - have awakened to turn upward. At the same time, interest in safe-haven gold has been eroding.
The renewed interest in commodities has been reflected in the price trends of broad-based exchange-traded products [ETPs].
Among the half-dozen notes and funds with trading histories of at least 200 days, five have broken to the upside of their 50-day moving averages. None has yet risen above its 200-day mark, the threshold for heralding a primary bull market. The one exchange-traded note [ETN] now trading below its 50-day average is paradoxically the one closest to starting a bullish trend.
So, which commodity exchange-traded fund [ETF] or note is the most sensitive bellwether of a nascent commodity bull market? Read on ...
ELEMENTS S&P CTI ETN (NYSE Arca: LSC)
The elements note is an obligation of HSBC USA and is designed to replicate the returns generated by the S&P Commodity Trends Indicator Total Return Index. As featured in "A Real Commodity Moneymaker," this long-short product simulates real-world commodity trading. The index tracked by this note comprises 16 commodity futures grouped into six sectors. With the exception of the energy sector, each segment is positioned either long or short monthly, based on its price behavior relative to its moving average. The index methodology countenances only long or flat positions for energy; shorts are not permitted.
Presently, and for some time, LSC's underlying index has been flat energy and, as a consequence, the ETN has outperformed the long-only products when petroleum product prices swooned.
iShares S&P/GSCI Commodity-Indexed Trust (NYSE Arca: GSG)
The iShares ETF tracks the performance of the S&P/GSCI Excess Return Index, by holding futures skewed heavily (66%) toward energy contracts. The fund's underlying index comprises two dozen different commodities and is production-weighted to reflect each commodity's relative importance in the world economy. Agriculture, excluding soft commodities and livestock, at 18%, is the index's second-weightiest sector.
iPath S&P/GSCI TRI ETN (NYSE Arca: GSP)
The iPath note, the unsecured debt of Barclays Bank plc, is based upon the total return version of the S&P/ GSCI, which includes incremental return earned from holding futures collateral in U.S. Treasury bills.
GS Connect S&P/GSCI Enhanced Commodity TR ETN (NYSE Arca: GSC)
Another variant of the S&P/ GSCI acts as the basis for an ETN issued by Goldman Sachs. The Enhanced Commodity Total Return Strategy Index reflects the returns earned by holding the same futures contracts that are included in the S&P/GSCI. This index variant, however, uses a roll mechanism in an attempt to boost returns and sidestep the corrosive effect of contango.
The index methodology employs a rules matrix that dictates specific roll strategies for each commodity in an attempt to take advantage of historical and structural pricing differences among the various contracts.
PowerShares DB Commodity Index Tracking Fund (NYSE Arca: DBC)
The PowerShares DB Commodity Index Tracking Fund is based upon the Deutsche Bank Liquid Commodity Index - Optimum Yield Excess Return, a benchmark comprising futures contracts on six of the most liquid commodities. To combat the pernicious effect of contango, index rules call for expiring futures held by the fund to be rolled into the most favorable contract available in the ensuing 13 months.
iPath Dow Jones-AIG Commodity Index TR ETN (NYSE Arca: DJP)
This Barclays-issued note is linked to the Dow Jones-AIG Commodity Total Return Index, a benchmark comprising 19 futures allocated to six sectors. Though the index is largely production-weighted, no one sector can represent more than 33% of the benchmark's total weight. Limited exposure to energy in 2008 thus provided some degree of cushioning compared to products based upon other indexes.
Broad-Based Commodity ETPs
Broad-Based Commodity ETP Performance As Of May 4, 2009
ETP Ticker |
Type | YTD Return | Return vs. 50d MA | Return vs. 200d MA | Average Volume | Liquidity Index | Reward-to- Risk Ratio |
LSC | ETN | -12.4% | -6.7% | -6.2% | 55,467 | 39,009 | -0.24 |
GSC | ETN | +1.9% | +7.0% | -21.7% | 26,352 | 14,549 | -1.36 |
GSG | ETF | -7.6% | +5.9% | -29.0% | 364,786 | 223,260 | -1.47 |
DBC | ETF | -1.0% | +5.5% | -18.6% | 1,227,178 | 767,997 | -1.50 |
GSP | ETN | -5.5% | +6.3% | -30.2% | 66,571 | 42,876 | -1.51 |
DJP | ETN | -0.2% | +6.4% | -15.1% | 589,714 | 425,726 | -1.67 |
Since its inception last year, the ELEMENTS S&P/CTI ETN has been the least risky commodity investment, aided in no small part by its recent avoidance of energy exposure. Though the note is presently underwater, it was, in fact, 20% above its launch value in last year's fourth quarter.
Oddly enough, the riskiest ETP, measured by its volatility cost, is the iPath Dow Jones-AIG Commodity Index TR ETN, a note whose current price is second-closest to its 200-day moving average.
So, what product reflected investors' increased appetite for risk?
A single ETP - the GS Connect S&P/GSCI Enhanced Commodity TR ETN - is in positive territory both for the year and when measured against its 50-day moving average. The Goldman Sachs note is the least active ETP in the group, swapping little more than 26,000 notes on an average day. Still, as indicated by the ETN's liquidity index, a trade of over 14,000 notes would be required to move the bid/ask spread 1%. There's plenty of room for fairly large trades to be accommodated by the ETN's market makers.
Although it's premature to call for a full-fledged resumption of the commodity bull market, these ETPs are, on average, only about 20% below their 200-day moving averages.
If nothing else, broad-based commodity ETPs are closing in fast on the bull's tail.
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If your currency had been crushed and you bought gold and enjoyed the ride up. this preserves wealth. but if you sold before you may be thinking of buying again because now gold has dropped so much it is an inflation hedge. the story on gold is not easy to ascertain.
our 10% drop could be a 30% drop in another currency so gold may be a deal again.
No mention of "Americans" much less "Jews" was made in the article. Ditto for "evil."
On May 08 05:10 AM UbaTuba wrote:
> Consider what you have said:
>
> 1) You're very first statement groups all individuals of a certain
> geographic region into one moral summary that they are all bad. You
> have placed yourself against Reality, because Reality is: people
> are individuals. Only individuals possess the trait of character.
> Character emanates from the bones of individuals, but labels; such
> as, "Americans" say nothing important other than your own mental
> error of over-simplifying Reality to meet your cherish of malice
> without responsibility for accuracy.
> 2) You've committed the same error with the label: "Jews" - convenient
> to label everything you hate under one name, but just out-of-touch
> with the real world. For example, some of the greatest physicians
> in the world are Jewish along with many other "nationalities".<br...
> Hatred is addictive and satisfying, especially so when your imagination
> allows you to falsely attach evil to a group rather than (rightly)
> to a specific individual committing or omitting specific moral actions.
> As such, Hatred for the imagined "groups" as you have described it,
> is just plain lazy, because "groups" can't be evil or good. Only
> individuals can be so. If you have a specific beef about a specific
> individual's actions, then I'm listening, but this "one-size-fits-all"
> thing is nuts!
The perspective is admittedly dollar-centric because that's where (the U.S., that is) the competition for assets is strongest. No other geographic venue offers so many choices for broad-based commodity exposure through ETPs.
Anybody investing in these securities ultimately must confront the dollar/gold cross rate.
On May 08 08:22 AM dcb wrote:
> when commenting upon gold you have to view it in different ways depending
> on the currency you are buying it in.
>
> If your currency had been crushed and you bought gold and enjoyed
> the ride up. this preserves wealth. but if you sold before you may
> be thinking of buying again because now gold has dropped so much
> it is an inflation hedge. the story on gold is not easy to ascertain.
>
>
> our 10% drop could be a 30% drop in another currency so gold may
> be a deal again.
The table, in fact, distinguishes each security by type.
The last Desktop (www.hardassetsinvestor...) piece on ags, in fact, highlighted a breakout of agribusiness stocks vis-a-vis a broad-based commodities (and relatively ag-heavy) index ("A Good Thing: Agribusiness Future Isn't Golden" at www.hardassetsinvestor...).
DBA's Friday close at $26.73 just cleared a 24% retracement of the ETF's 2008 breakdown. DBA's been at this level in 2009 before, though. An upside probe failed in January.
A close above $27.15 would signal strength, but there's a gap to be filled between $27.53 and $28.12. The market's buoyancy after that gap is filled (IF it's filled) would signal new buying interest.
On May 09 12:26 PM Brad Zigler wrote:
> Actually, we HAVE talked up agriculture recently at Hard Assets Investor.
>
>
> The last Desktop (www.hardassetsinvestor...)
> piece on ags, in fact, highlighted a breakout of agribusiness stocks
> vis-a-vis a broad-based commodities (and relatively ag-heavy) index
> ("A Good Thing: Agribusiness Future Isn't Golden" at www.hardassetsinvestor...;month=05&Item...
>
>
> DBA's Friday close at $26.73 just cleared a 24% retracement of the
> ETF's 2008 breakdown. DBA's been at this level in 2009 before, though.
> An upside probe failed in January.
>
> A close above $27.15 would signal strength, but there's a gap to
> be filled between $27.53 and $28.12. The market's buoyancy after
> that gap is filled (IF it's filled) would signal new buying interest.
No, we haven't run correlations between MOO and DBA, but we'd suspect a similiar volatility "premium" for the two ETFs as you've noted between GLD and GDX.
The reason? Much like mining stocks, once a company's goods command a market price above production costs, margins flow straight to the bottom line. Call it "leverage."
Doesn't happen often, but at times it's better to hold commodity stocks than commodities themselves. With a resurgent equities market, this may be one of those times.
On May 09 06:44 PM RiskReturnOptimizer wrote:
> Excellent. MOO is much strong, hoping it could serve as leading indicator
> for DBA. Have you guys studied the correlation / leading effects
> of MOO on DBA? Much has been written about GDX vs. GLD. I prefer
> DBA since it tends to be less volatile than MOO. GDX, on the other
> hand, tends to be more volatile than GLD. Why?