Commodities: Storm Clouds Starting to Lift

I am on record as a long term bull on commodities. The near term risks that I see for this trade are:

• Cyclical: A US slowdown will spread to the rest of the world and reduce cyclical commodity demand
• US$ rally: A countertrend rally in the US$ will create headwinds for commodities

Cyclical risks are abating
A look at some real-time indicators for the world economy shows signs of stabilization and recovery. Dr. Copper, which is an indicator of world cyclical demand, is at or near new highs. The Baltic Dry Index, a shipping cost benchmark, fell from all-time highs in 3Q 2007 and has stabilized (see the chart here, click on the BDI & Copper link to see the two together).

While I continue to be concerned about a counter-trend rally in the US Dollar as the US economy shows signs of recovery later this year, the cyclical risk in the commodity trade is greatly lessened.

As an investor, I would be inclined to raise from an underweight to a neutral position in the commodity sensitive plays in my portfolio.

Comments

[tjschoenlein:]

Short ..to the point.., makes sense.. I agree. For me I would overweight on copper.

2008 Apr 17 09:15 AM

[sliman:]

Long DRYS it is just too cheap.

2008 Apr 17 09:29 AM

[maher:]

This is an "article"? More like late night hazy thoughts while dozing off in front of TV at midnight

2008 Apr 17 12:13 PM

[Jake2:]

ZZZZZ

2008 Apr 17 02:40 PM

[dorvedor:]

I really don't understand. With close to 1 Billion people entering the
middle class in the next ten years, why does it make sense to be "neutral" on commodities??? These are people living in what the Western world would consider to be severe poverty. Try to imagine 1 Billion people striving all at the same time to have what you have, i.e. better food, transportation, housing, clothes, clean water, more energy, etc. It has been 30 years since we've had a major oil find but let's say they find one tomorrow. It will still
be 5 years to bring it to market. Gasoline inventories are low before the driving season. Copper production is down. I can't think of a single commodity where there's an abundance. The stupidity of the ethanol program has taken valuable farm land out of circulation for food production. I could go on and on but I think I've made my point.

2008 Apr 18 03:58 AM