3 Reasons to Love Commodities Now
The “Back to School” Month offers Opportunities for Investors New to the Asset Class
Is it me or are summers going faster? It’s September already and as the kids and/or grandkids head back to school or college, it can be a good time to consider your asset mix as the final 1/3 of the year begins.
Rodney Dangerfield and Will Ferrell both went back to school in the movies with hilarious results. But back to school on Wall Street can be serious business. July and August are months when a lot of the big cats go on vacation, leaving the mice to have their way with stock and commodities prices.
Rodney Dangerfield went “Back to School” in 1986. Back to School on Wall Street can mean less humorous results.
But come September, big kitty is back and school is back in session. September is the month you find out which price moves were real and which ones were a mid-summer nights dream. That means that markets that seem to have gotten a little out of whack often get whacked back into place. This is true whether you trade Apple, Euros or contracts of Cocoa.
This makes September a great month to take stock of your holdings and review investment basics. Knowing the investments you’re in and why you’re in them can give you the fortitude to hold through adverse moves or be a catalyst to start fresh in a potentially more lucrative direction.
September marks the beginning of the US corn, soybean and wheat harvests.
To that end, you’ll find this month 3 reasons to love commodities NOW. And by “love”, I do not mean “love” them to necessarily move higher in price. For as option sellers, we know there are many ways to make money in commodities other than simply buying them to move higher.
This month, however, instead of focusing on options – which are simply the vehicle, you’ll see the potential monetary benefits of utilizing the commodities asset class itself. Whether you’re a full time commodities trader or have never traded a contract of corn in your life, these 3 reasons to love commodities will be a wake up reminder of why diversifying is so important and why commodities should occupy a segment of any intelligent investor’s portfolio.
With that, here are 3 Reasons to love Commodities Now.
They’re Uncorrelated to Stocks
With the big traders coming back from August vacations, we’ll soon learn if the stock markets lofty levels are the real deal or simply mad with summer wine. But some ominous warning signs loom. Barron’s ran an article last month by Steven Sears suggesting option prices were pointing to a “cacophonous” fall and winter for stocks. For those of you who had to look that up (like me) that means “having a harsh or unpleasant sound.” Sears points to the VIX dropping to “excruciatingly” low levels (recently below 12) and suggests that when volatility behaves this way, it tends to “snap back” like a rubber band to reset at higher levels. Indeed, the VIX’s long term average is around 19.
But VIX aside, there are other reasons to be concerned about stocks (many highlighted in last month’s OptionSeller.) In particular, September and October are historically bad months for stocks. There are a growing number of high profile investors getting disturbingly bearish on equities as of late. These include names such as Soros, Drukenmiller and Icahn. Last but certainly not least, the Federal Reserve’s rate setting committee meets in Jackson Hole, WY on Sept 20 for a two day meeting. This could have a critical impact on equities prices as speculation has again arisen that a 2016 rate hike could still be in cards. All of these reminders that diversification from equities into separate non-correlated asset classes is a necessity, if not responsibility of high net worth investors. Commodities, especially a non-directionally traded commodities portfolio – gives you pure, real and valuable diversification from Stocks. While the leverage in commodities provides a unique set of risks, profiting in commodities can be just as easy in bear or bull markets. A rising chorus of investors are expressing concerns over stock prices as we head into September. The fact that commodities are an uncorrelated asset class is a good reason to love them now – regardless of if you are bullish, bearish or neutral to prices.
September – The Month for Seasonals
In The Complete Guide to Option Selling (www.OptionSellers.com/Book), you discovered why seasonal tendencies are one of the biggest advantages enjoyed by commodities investors in the know. September is an extremely active month for seasonal tendencies across the commodities spectrum. In grains, the new crop year begins September 1. Harvest gets underway in the US corn, soybean and wheat markets – often having an outsized influence on price.
September is a very active month for commodities seasonals
Energy prices can also see a big impact from seasonal inventory accumulation at the end of summer (See: A Crude Reality – Page 5). In softs markets such as coffee and sugar, end of harvest price pressure can come into play. As one of the most active months on the calendar for seasonal opportunities, September is a great month to love commodities.
Fundamentals Remain King – Even in 2016
Forbes columnist Gary Shilling predicts a chilling fallout on the global economy from Brexit and negative interest rates (The Brexit Effect is Just Beginning, August 23, 2016, p 57.) At the end of the day, Shilling thinks this will be bad news for stock investors – perhaps climaxing in another financial crisis. It may very well be. But when the stock market crashed in 1929, people still woke up the next morning (well, most of them did) and drank coffee, ate cornflakes and for the ones who had them, put gas in their cars. The same held true on Dec 7, 1941, September 11, 2001 or the financial collapse of 2008. Unlike stocks, which are truly one of the most emotional asset classes, commodities are more attuned to their core supply/demand fundamentals. If supply goes up and demand remains constant, prices should go down. And vice versa. Its economics 101.
Regardless of what happens in the world, people still need to eat, drink and put gas in the car. The supply/demand cycle carries on.
And while not always easy (commodities can trade emotionally, for a time, as well), the concept is quite simple. Prices will always, ALWAYS, ultimately have to reflect their true fundamentals. This gives advantage to you as an investor who knows these fundamentals. For example, on May 19th of this year, we published an article on the soybean market pointing out heavy expected supplies in the soybean market and suggested a call selling approach (www.OptionSellers.com/blogsoy519). This piece pointed out that 2016/17 would see a massive US soybean harvest (2% higher than 2015’s record crop) and the second highest soybean ending stocks in a decade. The conclusion was this:
The fundamental picture remains one of adequate, if not burdensome supply…Our outlook is that beans could possibly push between 11.00 -12.00 per bushel on a weather concern this summer (although none appear developing at current time) but could easily fall back below 10.00 per bushel into harvest…We suggest considering (selling) the November 14.60 calls for premiums of $500-$600 this month.
I use this example because we got a lot of feedback from short-sighted technical traders suggesting we were “wrong” because soybeans rallied in price the following month.
But would you have been wrong? November soybeans did indeed rally, topping out at $11.86 per bushel in June on a “weather concern.” The market price on August 12th as the market heads “into harvest?” $9.81 per bushel. The Wall Street Journal got around to reporting it on August 15th stating “US officials are expecting record corn and soybean harvests this fall, a bounty that would extend the multiyear slump in agricultural commodity prices…” Good to see they finally came to that conclusion :).
That’s what knowing fundamentals does for you in commodities. After Yellen. After Brexit. After election drama. After civil unrest in the US and terrorist attacks overseas. After all of the other summer “news,” soybeans still had to follow their fundamental master – supply and demand. They don’t care about anything else. As a commodities investor, you don’t have to either. That’s a good reason to love commodities, especially now.
Price Follows Supply and Demand
November 2016 soybeans showing 14.60 call strike.
If you’re seeking an investment that will always hold a value – regardless of news or geopolitical events, know you need to diversify, worried about too much exposure to equities, or simply seeking faster growth on your money, commodities are an asset class that can offer a plethora of unique benefits. If you’ve been putting it off, September can be a great month to finally take the plunge. You’ve just learned 3 reasons why it can be.
For more information on managed commodity option selling accounts with James Cordier, visit www.OptionSellers.com/Discovery for a free information pack. To schedule a confidential new account qualification interview, call 800-346-1949 (813-472-5760 from outside the US).