There is little news in the commodity space today except for a few divestitures and capital financings that are taking place. In all instances it is a big company reducing exposure to a smaller company either via selling a position outright or allowing the subsidiary to do a rights offering to raise capital for projects.
Janet Yellen, President Obama's nomination to run the Federal Reserve, is on the Hill today to give testimony to the Senate Banking Committee regarding her confirmation. It is a formality and based on what leaked last night it appears that easy money is here to stay for the near-term, regardless of what other FOMC members are saying.
Chart of the Day:
The bear market in coffee is real, and has been real for years now. After failing to break through old highs the price action has been either sideways or down ever since with only a few attempts to break out of the downtrend.
Commodity prices this morning are as follows:
- Gold: $1285.40/ounce, up by $17.00/ounce
- Silver: $20.74/ounce, up by $0.298/ounce
- Oil: $93.28/barrel, down by $0.60/barrel
- RBOB Gas: $2.6477/gallon, up by $0.0197/gallon
- Natural Gas: $3.51/MMbtu, down by $0.056/MMbtu
- Copper: $3.1585/pound, down by $0.001/pound
- Platinum: $1454.10/ounce, up by $22.10/ounce
We had a couple of questions which arose from our comments on coffee in previous articles so we figured we would address those today as there is little commodity news out there. First we want to clear the air and state that we never invest in futures. Futures are far too risky for our blood and really do not fit within our portfolios when we look at how risk is allocated among investments. We generally play commodities via stocks and/or ETFs which are set up to benefit from price swings up or down. As one would imagine this usually means that we find ourselves buying shares of highly leveraged commodity companies when expecting a move higher in the commodity that they produce or are looking to produce.
Sometimes it is not that easy and requires us to look into other areas where the commodity is more of a role player in the overall business. As it relates to this trade in coffee that is exactly what is going on.
Our play for coffee has long been to be long Starbucks (SBUX), a name we first highlighted for readers two years ago when we started writing our daily general market commentary. We have been long and strong the name since, and although we have advised readers to take profits along the way still like the story behind the name. It is not a pure play on coffee prices and the direction of the commodity, however Starbucks' margins are impacted by swings in the price of coffee (usually only highlighted during conference calls when this is negatively) as has been the case in years past.
When one compares this to the previous chart it is easy to see that they have moved in completely opposite directions. Perfectly opposite? No. But the point is that this trade is what has worked during the bear market in coffee and shall continue to work so long as traders remain bearish on coffee.
This is not a perfect play by any means, but the company is running on all cylinders and as coffee prices decline margins are given a boost. Investors benefit from this and the trade really speaks for itself thus far. As coffee prices have remained in a bear market, Starbucks shares have continued to increase. This is why we are of the opinion that one needs to be long names which benefit from the current bear market in coffee prices. After an upward move is confirmed and one can safely say that we are no longer in a bear market in coffee, then we would transition out of Starbucks and into some ETFs or other equity positions that would benefit from coffee prices heading higher.