Thursday, May 5, 2011

Out With Commodities?

Commodities have certainly been on the mind of investors as price gains have been astronomical since a big correction early in 2010. Agriculture stocks were up 70% since then to their recent highs, silver was up just shy of 100%, and even broad commodity indexes were up 37%. These are amazing price moves which have initiated talk of bubbles in the commodity space (which is certainly warranted regarding silver). And perhaps we have begun the inevitable bursting of the bubble as commodity prices have been plunging over the last few days. However, a look into the recent past may put this decline into context.

The chart below is a price chart of DJP (the DJ/UBS Commodity Index ETN) from 12/31/10 to 5/5/11. You can see at the far right that commodity prices have fallen 7.65% in just four trading days. This drop is definitely newsworthy, and could be the harbinger of things to come in commodity prices, but look to the left of the chart. As recently as March, commodities fell 8.09% in five trading days, and from that drop in price preceded to rally 12.02% over the next two months. So this correction is not out of the norm so far and could provide an opportunity to add to current commodity positions. At Pinnacle we are watching the commodity space intently, and having discussions regarding whether to make any adjustments to our commodity positions as I write this entry.

Anecdotally, in 2007, Blackstone Group issued their Initial Public Offering very close to the top of the buyout binge America craved in the 2002-07 bull market. Fast forward to today and Glencore could mark the top of the commodity craze that has led the market higher since 2009. Glencore is the leading integrated producer and marketer of commodities in the world. Only time will tell if the next bear market is about to begin but the similarity is eerie.