Caution Reigns Supreme

Round numbers can be a tricky thing for markets. On its previous run up, gold hit $1,000/oz. on 2/20 of this year and then retreated, making another near attempt in early June before shying away again. If you include the one day close at 999.50 the day after its latest break though, the yellow metal has now spent 16 days above the 4 figure mark. Like gold the Dow’s initial attempts to get through 10,000 back in 1999 were an advance then retreat sort of movement as investors got used to a DJIA with 5 figures. This latest move through that level has seen the index move back and forth across the line as if it didn’t exist.

So with the S&P nearing the 1100 mark, the Euro touching $1.50/ yesterday in Europe and oil doing the same with the $80/bbl number, three became the charm and the markets took a breather; leaving until today or later to decide if the Fed is going to risk stepping on the paint which it has used to liquify itself into a corner.

When the Fed began its quantitative easing campaign the pundits and the press initially worried about inflation and the first run to $1K in gold this year was based on that concern. It would now appear that commodities are rising not so much as an inflation hedge but a deflation hedge and the thing that is deflating is the U.S. dollar.

At the end of September the Dow Jones Commodity Index was up 9% for the year having just had a 4% third quarter. While this might pale in comparison to the 63% that the S&P 1500 is up since the March low, it bears noting that as measured by the Euro that number is only 38%.

The demand for commodities are seen to be moving beyond China as Theresa Gusman, head of global commodities at DB Advisors recently said; “The rest of the world is likely to enter a restocking cycle soon, as the global inventories are currently very low.” Goldman Sachs (GS), in a slight spin on an old ad campaign, proclaimed in a September note to customers: “It’s not just about China anymore,” when discussing the burgeoning global recovery.

The energy sector is one of the largest in the CEC Portfolio with exploration and drilling, refining and marketing, pipelines and refiners all represented. The Portfolio also has names representing industrial metals and some agriculture names. As such it is possible to get a feel for how the credit markets are viewing the prospects of the companies in these various “hard asset” classes.

With oil sniffing $80 a barrel and profits for the folks in the energy business seemingly better for it, the Portfolio is currently long roughly 65 of the 79 names it tracks in this sector. It is also long half of the six names it tracks in the Ags.

What is interesting is that yesterday’s “breather” took a heavier than expected toll on the metals sector and among the 20 longs that were cut across the Portfolio yesterday - AKS, CMC and X were included as was DF and MON in the agriculture area.

The markets this year and last have not rewarded those giving a long leash to positions unless it seems as if that leash is so long that it is no leash at all.

As such, the M.O. has been: cut now; add back later if need be and this was the motivation behind the risk management that took place yesterday.

With 218 longs and just 14 short positions it is not as if the CEC Portfolio is at risk of missing any upside. Still, within the bounds of October, caution reigns supreme.