Pull-back in commodities sets new buying
09/11/2005
Last week, commodity prices dropped like a stone. The $CRB commodity index
was down -2.42 pct Week over Week (W/W), to 323.32.
But, for those of you who think the Commodities Research Bureau (CRB) index
is now likely to cave in, signalling the end of inflation, let me give you
an important heads-up.
Until February of this year, not since the time I joined the securities
industry -- which, trust my wife, is ancient history (24 years) - was the
$CRB ever above 300. Its 40-Week Moving Average (M40) is now 302.22.
I don't like to talk dirty - but it ain't going back!
$CRB confirmed a secular bull market when it broke through the 300-glass
ceiling. And while secular means long-term, the term in this case is likely
to be 10 to 20 years.
That's not so long when you consider that the $CRB made its secular trend
bottom in October 2001, at 178.44, which was a 24-year low, going back to
1977.
The index had been falling since its all-time high, set on November 28,
1981, at 337.60 - a month before I joined Dominion Securities in Toronto.
And, in real terms, October 2001 was when commodity prices hit their lowest
levels since long before your great-great grandfather was born. In fact, of
the value that existed in commodity prices in 1800, probably half has been
lost, even at today's high prices.
The new secular bull trend, which started a month after 9/11, will likely
carry commodity prices much higher for the next generation. And depending
on your time horizon, $100 oil, and $1,000 gold, are not out of the
question.
Last week I wrote in my blog:
"$CRB shot up +4.49 pct W/W to close at 331.35. This is after all an
inflationary spiral that Talking Heads for both Wall Street and Washington
are telling you does not exist. A week ago, I posted graphs/charts of the
PPI/CPI data in the U.S. I did it (as I said a week or two before that)
because it is a fact that we are in an inflation cycle where commodity
prices are rising. Some days and weeks they may fall, but generally the
$CRB is headed higher."
So, after the Feb-05 break-out, $CRB quickly moved to a cycle high of
323.33, then down to 292.06 (which is the new floor support), then back up
to its present cycle high of 337.18 over a week ago. Note that $CRB has now
reached its all-time high (Nov-1980 @ 337.60).
With farmers and distributors hoping to move goods following Katrina, and
then the Force Majeures and the govt bail-outs from the strategic petroleum
reserves, and so forth... voila .. $CRB settled back slightly off its
highs, to 323.32.
But what's to happen if and when you can't get coffee or orange juice from
South America, and it takes months if not years to repair the energy
complex, and the emerging economies
(China/India/Russia/Brazil/Indonesia/etc) refuse to stop growing, and
demanding other commodities like steel and copper and forest products? ...
You really know, don't you?
Yes, and your employer and their customers are soon going to know this too.
Prices are going up. Way up.
My little genie in the U.S. PPI/CPI charts told me so.
In the next couple weeks, I will drill down into the stock beneficiaries
for the commodities complex, but for now I think it's wise to start looking
at an exchange-traded fund called the XLB. It is so far out-of-favor even
my friends and associates are calling it a dog.
XLB components are: (1) Chemicals @55 pct, (2) Metals & Mining @22 pct, (3)
Paper & Forest Products @15 pct, (4) Containers & Packaging @6 pct, and (5)
Construction Materials @2 pct.
Some of the leading stocks in this sector are up +10 pct or more in the two
weeks since Katrina. They are due for a rest. Others are not performing
well and will take some time to work through a cycle bottom.
Afterwards, however, I expect the Basic Materials sector to be among the
broad market leaders. I'll even let you know when.
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