Commodities Beckon As Crises Increase

by: Emmet Kodesh

The major asset classes, equities, bonds and real estate are in rough seas and soon may be foundering. Since May 22, QE suppression of interest rates has become unsteady: as rates have risen, home ownership, re-financing (down 62% in 3 months) and mortgage applications have dropped and the nominal value of bond holdings has fallen. Taper talk and falling hours worked and income drove equities to a June 24 low and on August 6 their recovery petered out. The S&P (NYSEARCA:SPY) has broken through one trend line and is flirting with another at 1628 as I discussed here. A drop back to June 24's 1573 would be an 8% correction from August 2's 1709. Some analysts have predicted an approximately 20% correction which matches the trough at 1353 last November 15.

In my articles late in July and first half of August I noted that copper (NYSEARCA:JJC) was signaling strength but its immediate and secular status are not good. When Secretary of State Kerry fingered Assad's defense of his dictatorship as "a moral obscenity" and a US or NATO strike on Syria was put on the table, the indices and JJC fell. But while intervention in Syria might escalate (if it occurs) and push us toward a 10-20% correction, copper's secular chart has been signing global recession since 2Q 2011. I often have made the same point in noting the decline in retail sales growth during that period, a pattern that preceded the 2008 crash. When JJC bottomed June 24 at $36.87, it was a three-year low last seen in the first bounce off the crash in July 2009. Note copper's broad-based declines the last four trading days of August as perspective on near-term investing.

Jeffrey Saut, Chief Investment Strategist at Raymond James continues to predict a 10% 3-4Q correction which would return us to the April 18 trough at 1541. That was the aftermath of the atrocity at the Boston Marathon and market turmoil following the Goldman Sachs short sell call on gold. Saut also sees (previous link) gold soon giving a "buy" signal. With major fiscal (QE), geopolitical and political-governance frictions on tap, expect S&P in the 1541-73 range. If things get difficult we could see 1353 which few of us want, -- unless one has a substantial cash position. One could make a strong case for cash as a short term but not a long term strategy because most world currencies are bleeding value (Art Cashin sees "contagion" from ASEAN fiscal crises) and the future of the fiat regime is dicey, so one seeks alternatives.

In ordinary times one would suggest real estate, but lack of clarity about Fed purchases of debt makes that dicey unless you are buying a farm for income and/or a place to settle down long term. REIT's like MORT and VNQ remain depressed. Should you then cash out a large portion of your holdings in the main asset classes until violence in Syria and Egypt subside and the coming fight over the debt ceiling pass? To some extent that is prudent but there also are compelling buys in the commodity sector. At this time it is there that the best deals may be found and the thesis fits the times.

The Teucrium Grain ETFs for corn (NYSEARCA:CORN) and wheat (NYSEARCA:WEAT) seem to have found bottoms. CORN (fund net assets $49.2 million) found support two weeks ago after touching 4Q 2010 and 2Q 2012 lows at $36. WEAT has been in steep decline since 4Q 2012 and ten days ago made a low-since-inception at $16.21. Since then it rose to $16.70 and closed August 30 at $16.57. These essential commodities are buys whose thesis is strengthened by global currency disorder which in Southeast Asia already is collapse. I do not mean all-in plays on commodities but establishing a position while waiting for turmoil in equities, real estate and bonds to settle down.

Two other food-related ETFs invite attention. The Market Vectors Agribusiness (NYSEARCA:MOO) has sold down since late January to a 52-week low near $48.90 which is 17% below both its 52-week and secular highs. Even more compelling value in my view is in Global X Fertilizers (NYSEARCA:SOIL) which like MOO has fallen heavily YTD, down 24.4%. On August 28, SOIL hit a low-since-inception (May 2011). There is over supply, now, but depreciating currencies are making food pricey here and painful in many places overseas. So SOIL is worth a closer look.

SOIL has a total expense ratio of .69 and last December paid 1.52%. Its holdings are diversified geographically: American companies, like giant Terra Nitrogen (NYSE:TNH) are 25% of holdings while Canada, Israel and China respectively have 9.6, 9.8 and 9.1% of the fund. European nations including, Norway, Germany, Switzerland and Russia are 20% with the rest coming from Taiwan, South Korea, Chile and Turkey. Those who believe the commodity thesis is sound could take positions in WEAT and CORN now and watch SOIL for definitive basing. It closed August 30 at $10.61. Two of its major holdings, Saskatchewan Potash (NYSE:POT) and US-based Mosaic (NYSE:MOS) also are near 52-week lows. As Chris Bailey wrote on SA July 30, "good assets in the ground do not go away." I share this view and it applies to gold and to silver even more for its tech-industrial applications.

Note that SOIL is balanced in company-weightings as well as globally. With about $24 million in holdings, it has stakes of $1 million - $1.3 million in nineteen of its constituent companies.

Quick question: which commodity has surrendered the most value since early 2Q 2011? No, it's not silver and no it's not gold: it's Uranium. Global X Uranium (NYSEARCA:URA) has dropped 75% in 30 months. It is within a few cents of its low since inception at $15.90 and, absent the September 14, 2012 peak, has been bottom-crawling near its low since early June 2012. Major nuclear building and refurbishing programs worldwide make the case for a position in URA as the main asset classes face two months or more of rough sledding. As for the mid and long term, it is difficult to see a soft landing for the QE-fiat experiment. Related to this, Global X Copper Miner ETF (NYSEARCA:COPX) has had a harsh year, down 30.3%. Having barely come off a 3-year low (a low since inception) at $8.40 it had a rough week with the crisis talk. Like silver it has lost 55% of its price since 2Q 2011. Keep an eye on China's next PMI before buying COPX. You might prefer newly diversified energy giant Freeport McMoRan (NYSE:FCX) if it drops to $28 during the coming weeks, particularly since it again has had conciliatory comments from Muhammed Hidayat about smelting in Indonesia. Mr. Hidayat reiterated his comments from earlier this year that miners need only begin to increase local smelting capacity to comply with Indonesian law. His nation does not wish to increase pressure on the rupiah by squelching income producers like FCX.

A word on PMs (precious metals) and the crisis in Syria before closing: I mentioned the Global X Gold Explorers ETF (GLDX) and Silver (NYSEARCA:SIL) and Junior Silver Miners (NYSEARCA:SILJ) in pieces here and here. They remain good ways to play supply-demand shortages in PMs. However, Wave theory and hard-learned history of the sector suggest that there will be another drop before a sustained rise resumes. We had a glimpse of that at the end of August and, as with other assets, PMs are entwined with geopolitical-financial tensions. Silver may again fall below $22 and gold toward $1300 before resuming a rise. Remember that allowing for inflation and USD devaluation, both metals are grossly underpriced: 1980 silver at $50 would be about $155 in today's paper. Moreover, there has been an enormous rise in silver's industrial applications in the past 15 years and this will continue. When SIL approaches $14, SILJ $12 and GLDX $15, that would be buying time. To choose an outstanding mid-tier, if Endeavour Silver (NYSE:EXK), August 30 close at $4.98, approaches $4, have a buy order waiting. The same could be said for First Majestic (NYSE:AG) with a buy order below $12.50/share or Silver Wheaton (SLW) below $24.

Regarding Syria, it is only a few years since the current Assad was touted as a "peace partner" educated in Europe, etc. Similar accolades periodically were given his even more dictatorial father, Hafez al-Assad who put down lesser domestic unrest in fiercer fashion. As to effects on these shores, America produces nearly half its own oil with most imports from Canada, Mexico, Venezuela and Nigeria. So there is no need to panic. If there is a strike and it continues more than three - four days, Hezbollah might shoot missiles on Israel. No one knows if this would reach the level of July-August 2006. Aside from its proxy in Lebanon, it is unlikely that Iran will get involved. As with QE, to which this matter is linked at least indirectly (terror creates flight to the relative strength of the USD), it is likely that the managers of the system have not decided how to "unwind" their position and are reviewing options and potential outcomes. With fiscal, governmental and diplomatic policies managed by a global pathocracy, uncertainty and terror are the major modalities of the day. It is difficult to see this diminishing.

The situation says increase cash, perhaps substantially during what likely will be a volatile and difficult two+ months. Whatever your ordinary allocation to bonds, reduce it. Look for non-correlated assets like promising resource exploration company Reservoir Minerals (OTCPK:RVRLF), oil and gas developer Vanguard Natural Resources (NYSE:VNR), still steadily yielding 9%, paid monthly, and the Pure Funds Precious Gems ETF (NYSEARCA:GEMS). The last 6 trading days for GEMS have seen some volatility so use a limit order to catch it below $19.

Of the other plays discussed above, secular trends and basic needs say WEAT, CORN, URA and SOIL. Those who want bullion ETPs should look for Sprott physical silver below $9 and physical gold trust (NYSEARCA:PHYS) about $11 if you too expect a pullback before continued ascension. Energy - defense concerns point to positions in companies like British Petroleum (NYSE:BP), Chevron (NYSE:CVX), Schlumberger (NYSE:SLB), United Tech (NYSE:UTX) and Northrop Grumman (NYSE:NOC). The Syria matter will subside before currency and debt problems do. The great-power enabled crises in the region are part of our era's weather as are debt & a crumbling middle class. This is change for which to prepare.

Don't bail out of equities, trim them and move some to commodities: crises like the current ones can shift quickly with a few speeches, sound bites and the gale of a newly massaged dominant narrative. The President has asked Congress to consider the Syrian issue but Congress is on recess till Sept. 9 and the G20 Leaders Summit is Sept. 5-6 so there will be time for tensions to subside.

Disclosure: I am long SIL, SOIL, URA, WEAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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