ETF Update: The Independence of Agriculture

One quest for the investor is to discover long-term trends. The idea is to match investment objectives to the time frames of likely developments. As long as one is willing to ignore the day-to-day results, this approach makes sense. Of the many who find this attractive in theory, few are willing to stay the course.

Some months ago, a client asked us to set up a long-term portfolio. He wanted market exposure, and he wanted edge. He did not want active trading. We always have ideas about long-term plays, and we were not surprised by the question. This is not the occasion for our entire answer, but we can state that agriculture was part of the portfolio.

Before turning to this week's featured sector, let us consider what other information can be gleaned from our weekly sector rankings. Each week we reveal our own ratings (with a one-day delay) for a universe of ETF's. We develop the ratings by looking for a combination of sector Trends, Cyclical moves, and a touch of Anticipation. Since we apply this system to a selected universe of ETF's we call it the TCA-ETF model. (The complete current rankings are at the end of the article, along with an explanation of our methodology).

We are not recommending that readers make trades based upon our weekly report. It is intended as a news supplement to your own analysis. Those who are serious about following the method can do better through our formal management programs. We are just trying to be helpful with the free information.

The conclusions from this week's list are similar to those we reached last week. The overall market is not strong. The leading sectors all benefit from a weak dollar, with emphasis on energy and foreign stocks.

Focus on Food

If there is a single known element in the worldwide demand picture, it would be food. World population is growing. Many developing countries may be expected to build stronger economies. Companies that provide agricultural products and services benefit from these secular trends.

We invest in agriculture via the Van Eck Global Market Vectors Agribusiness ETF (MOO). The fund tracks the DAXglobal(SM) Agribusiness Index (DXAG). It has about 50% US exposure. Chemicals (fertilizers, etc.) are the top holdings, constituting 44% of the fund, but agricultural operations and equipment are also important. The top five companies make up about 40% of the fund and the top ten constitute 2/3. The P/E ratio is about 12.5.

An attractive feature of MOO is the potential for independence from the general market. While strong markets can take all stocks up or down, during a period of consolidation there is a better opportunity for sectors that are not strictly tied to other market themes.

For those who like to compare their own chart reading with the model, here it is (click to enlarge).

Other Comments

We regularly seek out expert opinion on the top choices from the model. David Fry sees MOO as bumping up against resistance in a weekly chart he shows here.

We also like this article at ETF Grind. It shows the potential for some sectors to "decouple" during a recession in developed countries.

Weekly TCA-ETF Rankings

Only 21 of our 57 sectors are in the "buy" range, the strength is dropping dramatically for most. The index ETF's are all in the penalty box. It is a weak overall picture, but not yet bearish.

Despite our "neutral" posture, the daily portfolio had a great week, gaining over four percent and beating our benchmark S&P 500 by more than 50 bps. We were fully invested in energy and other weak dollar plays, as well as MOO.

Based upon the model signals, we continued our neutral position in the Ticker Sense Blogger Sentiment poll.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation. Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method. In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike. While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks. The fundamentals may be more difficult to assess. Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's. This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves. Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF. While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box." The basic elements are used by many, and widely reported. We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model. We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Comments

[rdondamike:]

Just the kind of information from this morning's updates, looking a period or time frame for targeted investing.

Jun 01 09:38 AM

[RiskReturnO...:]

Perhaps swapping DBA for MOO might help overcome the resistance issue identified above. DBA is just breaking out of 200 day EMA, volume is picking up, as has at least 10% to run until hitting the $24 level, roughly filling the gap (pre-Lehman). I'm sure Mr. Fry has better targets on this name, but my simplistic model suggests DBA to offer a better risk reward, as MOO has run up much more relative to DBA, and has higher correlation to SPY (in case the market pulls back). Just for your consideration.

Jun 01 08:02 PM

[T. Marc Sch...:]

I can't agree with the author more about food demand rising. It's such a give in that rising population and emerging economies will result in a higher demand for food. What supplies this food? Agriculture companies and services do and they are bound to rise as well.

Almost all food can be traced back to farmland as well. I definitely think that many ag companies are a safe bet right now like CNH, POT, & MON. I believe that farmland is going to be even safer though. I cannot guarantee you that MON will be around in 50 years, but I am quite confident that a piece of rural farmland will be, and crops will be grown on it.

Jeff, you wrote a great report above, keep it up. Be sure to check out farmlandforecast.colvi.../ It's a blog that hits on agriculture investments as well.

Jun 09 12:23 PM

[ceattlechris:]

I was searching for exactly the long-term-trend theme when I came across this article taking this approach toward agri. I couldn't agree more on focusing on the long-term view versus the short. My own experience in short-term trading, despite the thrills of the big hits, is negligible profitability. I should put my spreadsheet on my blog, but since 10/07 I've followed a medium and long-term trend which has yielded +25% annum versus SPY (the ETF, including dividends). This period included puts on things like Accredited Home, Novastar and Country Wide (remember them?), which helped tremendously of course, but now I'm looking for the next 2-5 year trends. I am long commodities and carefully following those, including metals, oil, (and food, thanks to this article), and water resources and management. These are the no-brainers.

The riskier / "we'll-see" stuff is trends that haven't begun to emerge yet like the end of WMT (probably hosed in 5), biotech resurgence as useful genetics and histological/computing integrate and begin to pass-over the sh*tloads of "what-not-to-do's" that have finally died in this last market gouging (I hold ELN, OXGI). Maybe big-healthcare too (hold MRK). I'm really looking hard over the next two months to re-balance my retirement portfolio to keep on chugging with the 25% SPY over-performance.

Jun 16 09:55 PM