9 Things to think about before playing the Commodities Sell Off via Attain Capital

Despite Twitter’s stock being at all-time lows (see our IPO post on that) – it’s still a great way to get the pulse on markets, as witnessed by some panic induced tweets that have been swarming around commodity markets reminding us that commodities are getting slammed, that commodities aren’t a good investment (depends on what exposure you’re getting), and that commodities = Crude Oil (not true). But the questions remains, are commodities as a whole really taking a hit, or is it just the “big players” such as crude oil and gold that are seeing a sell off?

Behold, the current commodity carnage cliff notes: (we averaged the cash price move for each time frame of the commodity markets seen on FinViz for each sector, and sorted by return over the last 12 months).

Commodities Table

Data as of 8/6/2015
Energy = WTI, Brent, Heating Oil, Gas RBOB Gas, Natural Gas, and Ethanol
Grains = Wheat, Corn, Soybeans, Soybean Oil, Canola Oil
Metals = Gold, Silver, Copper, Platinium, Palladium
Softs = Cotton, Orange Juice, Coffee, Sugar, Cocoa, Lumber
Meats Live Cattle, Feeder Cattle, and Live Hogs

Now, there are two kinds of people in the world. Those who look at the numbers above and want to ride the momentum lower and lower; and those who see the red above and start thinking about the inevitable bounce when the sell-off subsides and these markets start to rise. Do you Buy the Dip or Ride the Sell off Lower?

Buy the Dip?

If you’re the type of person who sees a falling knife and reach out to catch it, if you’re one of those looking to play a bounce, we’ll first point you to – How to Play a Bounce in Crude Oil. Next, we’ll offer these (some serious, some not) options:

  1. Buy a Commodity Index ETF like $DBC, $GSG, and $DJP, or sector specific ones like $XLE, $DBB, or $GRU. But only after you get fully up to speed and understand the ins-and-outs of Contango and Backwardation. If the market you choose to expose your portfolio to is in Contango, you’re going to be putting yourself through a roll yield cost and potentially be on the losing end even if the price is rising. And don’t Buy the Cocoa ETF ($NIB), which is actually sitting up +9.93% YTD and near four year highs. Not a candidate for your bounce theory.
  1. Like that idea? Then double it up with a double long Commodity ETF like $DAG. It currently is sitting just under $4 and is at all-time lows! Just beware those roll cost problems are magnified as well.
  1. Invest in a systematic managed futures program which, which is designed to participate in a meaningful bounce by bracketing the market, and entering into breakouts higher. They’ll lose money on some of those breakouts which don’t turn out to be the big rally higher, but in so doing will ensure they’ll participate in the big one which is a sustained rally higher. Learn more about those here.
  1. Buy farmland. It’s coming off of its 2013 high, but not by too much, via Marketwatch.“The average price for Iowa farmland fell nearly 9% in 2014 to $7,943 an acre, according to the Iowa State survey. Farmland data from regional Federal Reserve Banks also show a softening of prices across prime row-crop growing areas of the Midwest.”
    FarmLand
  2. Invest in a company that deals directly with commodities like $DE $AA $CAT. But what happens when the overall market is decreasing while the commodities they create their business from is also dropping? We talked about this issue with the energy markets vs. energy companies a while back, and see that the Argi-business ETF $MOO has actually increased the past three years (and past 1 year) despite the commodity sell off, telling us maybe this isn’t the bounce mechanism?  Maybe they may make more money with cheaper inputs? Maybe they trade more like stocks based on debt ratios and cash flow?
    MOO chart Commodities
    Commodities

    Chart Courtesy: Finviz

  3. Go on the Midwest Crop Tour and become a live tweeter. Before the days of twitter and social media, we used to have to rely on the (sometimes highly inaccurate Crop Report) from the USDA to let us know what crop conditions were like across the country. Now, just about everyone can get their hands on this information. But who needs reports when you can do it yourself? Recently, people set off around the Midwest and tweeted pictures of crops for a live update on conditions. You could certainly try your hands making your own decision on where corn or soybeans might go, but beware of the hundreds of other factors to consider such as international supply, a bad storm, etc.
  4. Invest in Monsanto ($MON) and risk the wrath of your non-GMO eating kids and California cousins. It has a patent on just about every crop seed around so as along you see corn growing (at all) more than likely it’s a byproduct of Monsanto.
  5. Enlist in a commodity focused managed futures manager like Four Seasons Commodities Corp. or Bocken Trading. These programs have decades of experience, not only analyzing crop data, but also digging an extra layer deep in talking to farmland insurance adjusters, talking to contacts in China, and more. If there’s a bounce coming, they could be just the ones who see the green shoots first (literally).

Or Ride the sell off lower?

For those who think this sell off will continue (and perhaps even contaminate stocks and bonds in a global rout), that’s RCM’s specialty: systematic managed futures programs, which are designed to ride such momentum until it ends. You can see this investment represented by the Newedge CTA Index below, where the acceleration in the commodity sell off the past twelve months (which was reported as mainly oil prices, but in fact was across each commodity sector as seen above) propelled the index higher. Conversely, the pause in the down move causing a retracement/losses in the CTA index this spring. Of course, that would require another sharp leg down in commodity prices ($30 Oil, anyone?).

Table of Newedge vs Commodity Index(Disclaimer: Past performance is not necessarily indicative of future results)

How will you choose?