Stock Returns Not Keeping Up With Increasing Commodity Prices

by: Michael A. Gayed, CFA

Every now and then I put articles out here on SeekingAlpha which point out which ETFs/ETNs are hitting extremes relative to some moving average. I ran a screen this morning on my list of over 800 ETFs/ETNs to search for those parts of the investable landscape which are furthest away from their respective 200 day moving averages. The purpose of this is to try to identify if there are any common themes occurring and try to analyze what the message of the markets is.

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Cotton (NYSEARCA:BAL) remains the most stunning performer and is most extreme relative to its 200-day moving average. For the year alone (which is literally just a month and a half), cotton is up a whopping 29%. Its been well publicized recently that Brooks Brothers' cotton dress shirts have gone up 10% in price in an effort to pass down the cost of higher cotton prices to consumers. This potential increase in prices for clothing may very well be much more than what overall equities are returning.

Interestingly, the top 10 most extreme ETFs/ETNs are ALL commodity related. The increase in prices in soft commodities in particular has been cited as the tipping point for country unrest, as the prices of wheat, corn, etc. rise to levels that consumers in emerging economies are unable to swallow. Cost-push inflation, which is inflation on end-products driven by ever-increasing input costs, appears to be rising faster than stock prices. What this means is that in terms of real wealth, stock returns are actually not keeping up with cost increases, and overall wealth may actually not be increasing. Nominal returns which do not account for purchasing power can very much provide an illusion of wealth creation.

Where do we go from here? On one hand, one could argue that the price increases in commodities is unjustified given that the global economy is not in a super-boom cycle right now, and that prices have to come down to adjust for that. On the other hand, one could argue that the amount of dollars being printed is fueling hot money to go into tight supply markets, keeping momentum players in the game and resulting in higher and higher prices in the future.

All we know for certain is that prices go up until they don't - and that stock returns may not be able to keep up with increases in commodity prices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing.