Have They Convinced You Commodities Are Dead Yet?

If you had a dollar for every article about how horrible commodities have been performing, well.. you’d be rich (or have about as much as if you had shorted said commodity markets).   The past few weeks have seen Gold drop below 2010 prices, WTI Crude drop back below $50, and Sugar hit fresh 4 year lows.  The result? The long only commodity indices taking it on the proverbial chin…

Here are just a couple headlines and charts associated with the articles:

Are We Nearing Peak Commodity Hatred?

Pragmatic Capitalism Commodities Chart(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Pragmatic Capitalism

Commodities: The Great Bear Market

Economist Commodities(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: The Economist 

Global Growth Worries Pummel Commodities

WSJ Commodities Charts(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Wall Street Journal 

There are 100s of Commodities Out There:

With headlines like these, you would never know that Canola Oil is at all time highs, Cocoa is at four year highs, or that Natural Gas has barely been moving this year while Crude Oil has been rocking and rolling.  Turns out, there’s 100s of different commodity futures markets out there – and more than 30 liquid ones beyond just Gold and Crude Oil.  All of these commodities are broken down into five main sectors:  Energy, Metals, Grains, Softs, and Livestock., which is about the order in which people think about commodities.  We all know Oil is a commodity, and Gold is sort of the commodity poster child, even though it acts a bit more like a currency at times.  But you’re deep in the weeds when you start to think of Cocoa or Cattle as commodities.

Commodity Index WeightsChart Courtesy: Barchart

The people who created product around commodities are no dummies, structuring commodity indices around such popularity (at times based on actual metrics like percent of global production value), with a heavy slant towards energy and metals, with the Coffees and Cattles of the world essentially being left behind. The chart above is a little old, from a 2010 BarChart article, but the point remains – there’s more than one way to track “Commodities” via an index. Here’s how the various indices have performed over the past 60 months, highlighting just how different these indices move.

Commodity Index ETF Bear Market
(Disclaimer: Past performance is not necessarily indicative of future results)

It’s not Whether it’s going Up or Down, it’s by How Much

Which brings us back to our little slice of the world in Alternative Investments.  You can read how Commodities aren’t all that Alternative in a recession in our ‘Truth & Lies in Alternative Investments’ whitepaper, and the charts above showing the big impact of energy in most commodity indices drives that point. If the S&P 500 has a large portion of companies in energy sector, and energy is a large portion of the commodity indices – does it follow that a large portion of the S&P is tied to commodities?  Food for thought.

Thing is – while economists and shipping companies may care how much of a country’s GDP is energy versus Cotton farming; giving value to a value weighted commodity index  is something alternative investment managers don’t really care about.

They just want a commodity market – any commodity market – to be moving more than average. We can all grasp how the stock market is more than just the Dow Jones Industrial Average. There are outliers to the upside like Netflix and Apple, outliers to the downside, and everything in between, forming an average; and creating room for ‘stock pickers’ to be able to pick the winners and pan the losers to add value.  Professional Alternative Investment managers working in the commodity space take a similar approach, albeit highly systematic and risk controlled as compared to the stigma of a “stock picker.” The commodity pros aren’t just investing in Commodities going up or down – they are looking for the outliers inside of the commodity complex. They are looking for the Netflix of commodities, or Enron on the downside.

So don’t cry for those in commodity futures when the Wall Street Journal waxes on about the big bear market in commodities. We may be crying if it is a slow crawl downwards interspersed with lots of fits and starts, or cheering it down if it’s a significant move in one direction over a few weeks to months.

For an in-depth understanding of how a long/short commodity strategy works, click here.

For a performance comparison of the Commodity Index ETFS vs. managers actively trading the ups and downs of the commodity market, click here.

2 comments

  1. […] Commodities may be under pressure but that doesn’t mean there aren’t opportunities. (managed-futures-blog.attaincapital) […]

  2. […] to be an expert in roll yields, cost of production, and South American Wheat supply to know that commodity markets plummeted in 2015. Most of the flak from financial media came from the energy markets (Crude down another 37.05% this […]

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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