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Friday, 15 December 2017

On turkeys and other commodities

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Anthony Peters tucks into a thankless commodities market and what it means for bonds and equities.

Anthony Peters columnist format

Anthony Peters

SwissInvest strategist

So there we are; it’s Thanksgiving. I’m fairly certain that most non-Americans still don’t quite get the meaning of the holiday but it is broadly to the Yanks what Christmas is to us here and New Year is to the Chinese. The nation is on the move for the principal family get-together of the year of turkey and pumpkin pie. Just as traditional as those two delicacies is the stock rally on the Wednesday before the holiday and yesterday was no exception.

Nothing and nobody seems to be either willing or able to hold the rally in equities with the Dow now looking more than comfortable above 16,000 points and the NASDAQ equally untroubled north of 4,000 points.

Does it make sense? No. Can I afford to stand in its way? No. Nevertheless, I’d not be averse to buying a few out of the money puts which are probably, seen over the year, still neatly in the money yet cheap as chips.

Despite all the focus on the two main equity indices, it is the tech-heavy NASDAQ which has been the real performer this year. I keep having to remind myself that it is 13 and a half years since the tech bubble blew – you’d now have to be in your mid-thirties to both remember and to have been involved in that particular mess – and when the index fell from its March 2000 high of 5,132.52 points over the next 31 months to a low of 1,108.49 points.

It might be that some of the teenage rhetoric of the period has faded away, the best bit of which was the assertion that earnings meant nothing in the face of the “New Economic Paradigm”. Really?

However, the most scary line of all is “This time it’s different…”. Wasn’t I being told just that when I was being badgered left, right and centre to jump onto the you-must-not-miss-this-at-any-price emerging markets band wagon. “You don’t understand, this time it’s different…”.

It’s the commodities… 

I happen to act as a non-executive director for a small commodities hedge fund which has been struggling to stay in the black this year but which is still knocking the main commodity indices and the larger bench-mark funds into a cocked hat.

Many are arguing that the collapse in emerging markets is due to the more attractive return prospects back home – that’s the US in this case – where the economy is about to take off. However, the performance of the commodity markets does not at all support that argument unless one assumes that the April 2011 peak in the CRB index at 370.56 points was also just another bubble and that after the same two and a half years that it took the tech bubble to deflate and for prices to begin to track a more sanguine path, the CRB is set to begin a measured recovery from its current paltry level of 273.50 points.

Commodity prices are supposed to reflect something of the reality of manufacturing and growth. You could have fooled me. The first great trough to peak from January 2002 to July 2008 saw the index fly from 143 points to 473 points, as near as dammit a tripling of prices in just six and a half years. The Lehman crisis saw that collapse back to 208 points by early December.

I suppose the point I’m trying to make is that any market which is rallying can find a way of justifying itself as still being a screaming buy. It was the principal of the aforementioned commodity hedge fund who was looking at equities 10 days or so ago and who was wondering whether it might not be time to take a few chips off the table. He has experienced some juicy boom and bust scenarios in the past years and, being in a negative total return asset class this year, is naturally sceptical of those strident and vociferous proponents of one way markets.

Yield curves are continually steepening and, irrespective of how unattractive front end rates seem to be, investor demand remains firmly nailed to the short dates which are themselves evidently nailed down by central bank policy. Meanwhile, the longer end of the curve is waving around like kelp in a rising sea. Smart money has gone defensive as it appears not to trust the monetary authorities to be in touch with the wider world while the hunt for yield has been manifested by the less smart blind buying of risk assets, be that equities or high yield, while providing private equity with the largest fighting funds in years.

Does it make sense? No. Can I afford to stand in its way? No. Nevertheless, I’d not be averse to buying a few out of the money puts which are probably, seen over the year, still neatly in the money yet cheap as chips.

Apart from that, we’re in for a quiet two days during which we can begin to work on next year’s budget while asking ourselves whether High Yield can return 8% again next year or what to do with those Japanese equities which have risen by over 50% this year. It doesn’t get any easier to avoid becoming what our transatlantic cousins are about to tuck into.

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