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I have an MBA in Finance from the Booth School at the University of Chicago and a masters degree in Industrial Engineering from the University of Cincinnati. I manage our investments and advice my friends & family on financial decisions. I work in Marketing Research using stats to support... More
  • Commodity Volatility & ETF changes 0 comments
    Oct 2, 2009 4:50 PM
    The continued fallout from the CFTC review of position limits is driving changes to Commodity ETFs as outlined by Matt Hougan's article on yahoo.
    http://finance.yahoo.com/news/DBC-DBA-To-Diversify-indexuniverse-230311872.html?x=0&.v=3


    ETFs have interplayed with the market price determination mechanism to use real, expected and perceived shortages to drive considerable volatility in the prices of these commodities.  These changes have the potential to drive the inflation expectations for input prices in a variety of industries and consumers.  The future effects on margins and stock prices need to be considered.

    Old DBC
    New DBC
    Commodity
    Weight
    Commodity
    Weight
    WTI Crude
    35.00%
    WTI Crude
    12.38%
    Heating Oil
    20.00%
    Brent Crude
    12.38%
    Gold
    10.00%
    Heating Oil
    12.38%
    Aluminum
    12.50%
    RBOB Gasoline
    12.38%
    Corn
    11.25%
    Natural Gas
    5.50%
    Wheat
    11.25%
    Gold
    8.00%
     
    Silver
    2.00%
    Aluminum
    4.17%
    Zinc
    4.17%
    Copper Grade A
    4.17%
    Corn
    5.63%
    Wheat
    5.63%
    Soybeans
    5.63%
    Sugar
    5.63%
     
    Old DBA
    New DBA
    Commodity
    Weight
    Commodity
    Weight
    Corn
    25.00%
    Corn
    12.50%
    Wheat
    25.00%
    Soybeans
    12.50%
    Soybeans
    25.00%
    Wheat
    6.25%
    Sugar
    25.00 %
    Kansas Wheat
    6.25%
     
    Sugar
    12.50%
    Cocoa
    11.11%
    Coffee
    11.11%
    Cotton
    2.78%
    Live Cattle
    12.50%
    Feeder Cattle
    4.17%
    Lean Hogs
    8.33%

    Some of action has been to diversify the specific future used. For example, DBC went from 35% West Texas Intermediate Crude, 20% Heating Oil to 12.38% WTI, 12.38% Brent Crude, 12.38% RBOB Gasoline, 12.38% Heating Oil, 5.5% Natural Gas.  This may result in a more broad movement in prices and/or subdued movement.

    These concentrated positions in Crude had driven the WTI prices and now that effect maybe muted unless there is a broader consensus among more market participants on the futures outlook.

    This also suggests that some commodities that were less volatile may indeed increase in volatility i.e. Retail Gasoline may become more volatile catching up with topsy turvy crude prices.

    This does dampen some of the market momentum for gold and spread it a little to Silver as well.  This may affect the largely downward bias in the US dollar and bring risk assets back into the dollar.

    From the broader economy and stocks, the effect on Metals and Agriculture maybe more important, given the ability to affect general input prices for manufacturing companies.  The shift in DBC from 11.25% Wheat, 11.25% Corn to 5.63% Corn, 5.63% Wheat, 5.63% Soybeans, 5.63% Sugar may shift pricing volatility away from Wheat and towards Sugar given some of supply problems in India especially.

    Overall this may shift volatility from specific future spikes to general spikes that may happen in commodities with historically lower volatility and challenge companies ability to manage production costs for Consumer Staples companies.
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