Investors who positioned their portfolios thinking the Bull market in commodities was over were proven wrong in 2009. Several commodities saw multi-decade highs & a majority of commodity sectors showed above average returns as seen in the attached chart. There were a few standouts; Copper was higher by 140% trading back to levels seen in the Summer of 2008, sugar was helped by a world deficit and rose by 130% and it has since reached 29 year highs, finally RBOB prices almost doubled. We don’t want to cherry pick just the best performing commodities and to be clear there were no clients of MB Wealth that bought these three commodities at their lows and held them throughout the year. The point I’m trying to make is that the commodity bull is alive and well and investors should diversify a portion of their portfolios and allocate anywhere from 5-20% of their investment capital to this asset class.
We feel that with governments around the globe flooding the system with money and as long as some form of a global recovery starts to take foot there could be substantial appreciation in a variety of commodities. I feel it necessary to point out that commodities are not only long investments as well there are a number of trades we did last year that we speculated on commodity price depreciation.
Find below the highlights by sector we saw for 2009.
Agriculture: Corn was a tale of two stories: farmers planted what looked to be the second largest crop in history, however the problem was the crop went in late due to inclement weather and we had one of the latest harvests in three decades. This should translate to a sizeable crop but the quality should be less than present forecasts. As for trading the markets after hitting a 3 ½ year low in the fall, MB Wealth has had a “buy the dips” mentality. Prices have bounced almost $1 off their lows and after a mild correction we expect to see another leg higher. As for the soybean crop, they too went in late, but as opposed to supply being the story in 2009 it was more the considerable demand for soybeans out of China that was the main price driver. Soybeans had a much larger trading range on the year with prices for the most part moving in a $3 trading range between $8 and $11 on the year. Moving forward we would suggest being a buyer closer to the $9/bushel level. The record high prices in wheat in 2008 did their job by causing farmers around the globe to shift more acres into wheat to prevent a re-occurrence of the 2008 price spikes. The high was made last year right around Memorial Day and after that prices traded lower until they bottomed in the fall and started to creep higher. Since then wheat has been range bound and unless scalping it, wheat really has not seen the movement other Ag’s have seen. Being there was no defined trend the only large trades we’ve participated in for clients is long KCBOT wheat against a short in CBOT wheat which has yet to work. We expect KCBOT to trade at a premium to CBOT but to date it has been the other way around. All in all 2009 was a good year in agriculture but it was a tough act to follow after seeing record highs for most products in 2008.
Softs: As we indicated in last year’s report this sector remains one of our favorites and commodity investors need to start paying more attention. To steal words from the infamous Rodney Dangerfield “Softs” get no respect. That is not to take anything away from the other markets, but let’s get real, a 30 year high in cocoa, a 29 year high in sugar, a freeze in Florida that carried OJ to 2 year highs (this happened in early 2010), this sectors merits your attention. Value investors should love sugar because although 2009 saw a major price increase, sugar has traded double its current price. Are we forecasting that in the immediate future…NO but we do not see a top yet. We’ve pointed out a number of times that cocoa tends to track the British pound and have an inverse relationship to the US dollar; compare their historic charts and you will find it fascinating. For several years the US planted smaller and smaller cotton crops and though the demand has not really been there, cotton enjoyed a steady rise in price last year. This is one of the markets we did not really take advantage in 2009 and will try to in 2010. After bottoming early in the year cotton did not look back and traded from a low under 50 cents to as high just around 75 cents; a move of 50% with very little give back. Not every trade was a winner but we successfully navigated coffee from the long and short side in 2009 for clients. In 2009 when prices approached $1.20 it was a buy and as prices approached $1.40 it was a sell. What will 2010 bring?
Metals: Gold to silver, palladium to copper, metals surely grabbed the headlines last year and rightfully so. Gold was higher by 24%, silver by 48%, palladium 116% and copper a whopping 139%. Prices of copper, even at their highs, were a far cry from their 2008 highs but if the global recovery continues and the infrastructure build out picks up, this market could have further upside. I learned several years ago when I felt copper looked toppy at $1 that I am incapable of picking a top. We trade very little copper for clients but we do use it for a barometer on the overall health of the economy. Translation – we use copper as a guide to help navigate in other commodity markets. Gold started the year off high and only got more expensive as the year progressed trading to an all-time high in the first week of December. We remain bullish gold, but now with prices at elevated levels expect larger swings; a 10% move from $1200/ounce is much different that a 10% move from $700/ounce. Silver tends to follow the same trajectory of gold but it is a bumpier ride. Silver is not viewed solely as a precious metal but also as an industrial metal which could contribute to its amplified volatility. Silver’s appreciation in 09′ was impressive but being we’ve yet to get back to levels seen in early 08′ we think silver needs to play catch up to the “yellow metal.” The gold to silver ratio which will be discussed in more detail in our 2010 outlook still remains out of whack compared to historical norms. Past performance is not indicative of futures results. We trade very little palladium but after seeing the movement in recent years it will be a goal of mine to perhaps delve in, at a minimum give this market more attention. Looking at the weekly chart over the last few years it appears palladium may be a good candidate for trend followers. For much of 2008 the trend was down and for much of 2009 the trend was up…what will 2010 bring? Like palladium, platinum was on a track higher last year with virtually every 7-12% correction being bought. This market is too thin for our liking but we thought it deserved at least mentioning.
Energies: When most investors think commodities they think Crude oil. 2008 was a tough act to follow as prices of Oil soared past most forecasts but 2009 did not disappoint. What makes oil a great market to trade is there were opportunities for both longs and shorts to profit from last year. With prices bottoming in Q1 your bias would have needed to be long but oil is a market that does not move in a straight line. Oil prices have most likely gotten ahead of themselves now being 160% off their lows, but it is our opinion that in 2010 we will see triple digits once again so brace yourself. Oil is always a demand story but one cannot make light of the situation that the refinery utilization levels are so low. If this does not pick up and real demand comes back into this market BULLS will be in the driver’s seat. Though RBOB and heating oil markets have their own dynamic really and one needs to pay attention to Crude as it is the dog and the distillates are the tail. Rarely will you ever see a big disparity in directional moves. There is no denying that once RBOB and heating bottomed in Q1 the trends have been up but what is the most alarming thing to me was the divergence in pace; heating oil is 83% off its lows while RBOB is just over 150% off its lows. The RBOB wildcard that we’re still trying to work through here in the US is how big of a part alternative fuels will be in the equation. We have just started what could be a brutally cold winter so a demand spike in home heating oil use could be the wildcard for heating oil.
Currencies: There is so much negative media attention on the dollar and how the US dollar is being called into question as the world’s reserve currency which may in fact be an accurate insight but based on its performance in 2009 I think the naysayers may be premature being the dollar only depreciated 5% last year. The longer the Fed keeps interest rates at 0% the more risk we see in the dollar; it is pretty straightforward. Well I guess I’m being too elementary it also boils down to what other Central banks do with their interest rates. Deeper than just interest rates, investors need to pay attention to the overall risk appetite of other investors and the flow of money between different asset classes, i.e. debt, stock, commodities, forex. We continue to think there is just as much if not more problems to come in Europe and in the UK, so although both crosses were higher last year we expect both to be a sell rallies market into 2010. It is no surprise that the top three performing crosses last year were the commodity currencies; the Loonie gained 16%, the Aussie higher by 29% and finally the Kiwi profitable by 26%. If commodities trend higher these three currencies should reap the benefits, on a correction commodity wide they would be the crosses to suffer the most. For the most part throughout 2009 international currencies behaved with an inverse relationship to the dollar. The exception was the Japanese yen which had more of a relationship to equities than the dollar. The rationale we think is the “carry trade” and as investors risk tolerance changed they bought/sold the yen as this currency was used to fund a large number of the recent speculative moves.
Financials Prices going into 2009 were in the process of falling off a cliff but just as the bearish sentiment reached a new paradigm BEARS were stopped in their tracks and either a bear market rally occurred or a new bull market like no other got under way. The move higher in all three US indices; the NASDAQ, Dow and S&P have been nothing short of spectacular. The only problem I see is that unless you bought at that low with new money you may not be much better off then you were 1 ½ years ago. This violent move proves that market timing is not the answer as some jumped out on the way down, others failed to get back in while others did nothing but gripe about the volatility. I am not trying to overanalyze what we just experienced, my lone point is that the S&P for example traded down 58% in 18 months from its highs in 07′ to the low in 09′ to only do an about face and gain 65% in less than 8 months and I just don’t feel those massive swings are an accurate reflection of the overall economy. The market has changed and it has become a stock pickers market, we maintain that buy and hold does not work like it used to and that investors need to be much more nimble. We have been thinking a 10% correction is long over due and though as of now it has yet to materialize we are confident that early in 2010 it will; our only hope is we are positioned with clients to take advantage. 2008 was said to be one of the most disorderly and irrational years in modern history in the Treasury complex but looking back at 2009 was it really much different? As for 30-yr bonds the trading range in 2008 was 29’0 points while the H/L in 2009 was virtually the same just in the opposite direction. As for 10-yr notes the trading range in 2008 was almost 20’0 points while the H/L in 2009 was still 14’0 but like 30-yr bonds in the opposite direction. The overwhelmingly bearish trend that existed throughout 2009 was that money flowed out of Treasuries and into other asset classes, namely commodities and equities. Also there were rumors spreading that foreigners were less interested in buying US debt, but who could blame them at these rates. We were early on the Euro-dollar trade in 2009 and although we were able to navigate shorts a number of times, the main trend was up in Euro-dollars. A bulk of the 2009 trades we put on will not come to fruition and will be losers for our clients, thankfully we’re scale trading and only have a small percentage of their capital in this play. Our clients will continue to allocate a portion of their commodity portfolios in this trade essentially speculating that interest rates will be moving higher in the months and quarters to come. Look for more detail in our 2010 Outlook.
Livestock: Watching paint dry would be an accurate description of the action we saw in the cattle market in 2009. Prices in live cattle stayed contained within an 8 cent trading and for the most part did not wonder too far from the 83 cent level. This was of course after a 20% correction off the 08′ highs into the beginning of 09′. Looking at the weekly and monthly charts puts things more in perspective and a buy in the mid to low 80’s would be the way we continue to play this market. As for feeder cattle the trend was sideways from Q1-Q3, but around September prices started to taper off losing 12% until mid-December when prices rallied 7%. We are not as in tune with feeder cattle and though we sporadically trade them for clients we’re more interested in trading live cattle. This has a lot to do with open interest and the cattle traders we speak to, with much more experience then us, who tell us to trade live cattle not feeders. Going into 2009 the hog market had 2 bearish factors to contend with; surging supplies and a sharp drop in export demand and because of these, prices started the year on a sour note losing virtually 30% before they bottomed in mid-August. As things started to improve in the economy and supply & demand constraints started to normalize, prices caught a bid and through out the rest of the year found there way back to almost where they started in 09′. Prices may have a bit more upside but things appear to have gotten ahead of themselves and being that lean hogs never got the typical seasonal correction we get in December this could be a ripe candidate to short. We will explore this in more detail in our 2010 outlook.
Conclusion: It seems almost impossible but with another year behind us I’ve been trading commodities for almost 1 decade and although this makes me a seasoned veteran by definition, I am still learning almost on a daily basis. I consider myself fortunate because the bull market in commodities started around the same time I got into the marketplace. That is not to say it is easy and that prices are always moving higher but the demand from emerging markets, the industrial revolutions in the BRIC countries coupled with the loose monetary policies of Central banks around the globe, most likely will ensure another 10 years to you and I. We hope this brief summary helps outline the main points of 2009 and would suggest to all inventors that were captivated in this piece to instead of looking in their rear view mirror look out in front of you and read our 2010 outlook.
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.