CEA Portfolio Update – August 2015

| August 25, 2015

Equity Panic Has Commodities On The Ropes…

All I can say is… wow.

The past few days have been a whirlwind in the marketplace.

As I’m sure you’re fully aware, stocks took investors on a gut-churning rollercoaster ride over the past four trading sessions.

At one point, the Dow Jones Industrial Average (DJIA) plunged an eye-popping 2,930 points from the recent highs set in May 2015.

Most of those losses came yesterday morning when the DJIA collapsed just over 1,000 points on the opening bell.

If you’ve never seen what a real equity market panic looks like, now you have.

Investors jettisoned stocks left, right, and center as fears mounted over the strength of the global economy.

But most of the concern is coming from China…

We’ve talked at length about the economic uncertainty brewing in the world’s second largest economy in recent reports.

For months, important economic data points have revealed a startling slowdown in their once bustling economy.  Manufacturing has slowed substantially, as have exports. 

But the People’s Bank Of China (PBOC) took several stimulus measures early this morning that may stem the weakness… 

First of all, the PBOC cut their one-year lending rate by 25 basis points.  Secondly, they cut the required reserve ratio (RRR) by 50 basis points.  As you many know, the RRR is the amount of reserves banks must keep on hand in the form of deposits or vault cash.

By lowering interest rates and the RRR, the PBOC is trying to strengthen their economy by flooding it with capital.

When investors caught wind of the news this morning, they sent stocks sharply higher…

The DJIA rallied nearly 400 points in early trading today as investors scooped up deeply oversold stocks.

Are the markets destined to rally further from here?

I doubt it- at least not for a while…

This sudden swelling of exceptional volatility will likely stick around for a few more weeks.

As a result, I fully expect to see more wild market swings in the near future.

With additional equity market uncertainty likely heading our way, commodity markets are also at risk of further weakness…

As you’ve likely noticed, most commodities are still acting poorly.  Over the past month, there are only a few hard assets with gains.  Lean hogs are the month’s biggest winner with a gain of 4.9%.  Gold comes in a close second with an advance of 4.8%.

Every other major commodity is either flat or much lower.   The worst performers on the month are Brent crude (-21%), WTI crude (-19.8%), and palladium (-13%).

What do we do with the stocks and commodity ETFs in our portfolio?

As you know, we currently have two open positions- the US Natural Gas Fund $UNG and our newest holding in Cameco Corporation $CCJ.  

Both these assets held up rather well considering the historic market downdraft we just witnessed.  $UNG is only down 3.7% over the past week while $CCJ is down 11%.

Folks, that’s not bad considering some overvalued momentum stocks lost 30-40% of their value the past few days!

Of course, we still have to be very careful…

Since there’s still a risk of further volatility and downside in equities, we can’t let our guard down.   That means our risk control lines at $12.13 in $UNG and $12.17 in $CCJ should be watched carefully.

Make sure you honor your risk control rules no matter what.  Holding onto a losing position as it plummets in not only tough on the pocketbook, but tough on your nerves.

Now listen closely…

Despite the fact both $UNG and $CCJ are below our maximum buy-up-to-price, I suggest you keep these assets at a hold.  With the markets the way they are, there’s no sense in putting additional capital at risk in these trades.

Bottom line…

In what’s typically a tough few months for stocks on a historical basis anyways, September and October are shaping up to be one heck of a wild ride this year.

I suggest you keep your commodity portfolio risk at a minimum while this volatility plays itself out!

 

Commodity Review

Commodity Ticker Current Value Last Month Change
Energy JJE $7.29 $8.88 -17.9%
Grains JJG $32.69 $33.54 -2.5%
Industrial Metals JJM $20.31 $22.18 -8.4%
Precious Metals JJP $52.99 $51.17 +3.6%
Softs JJS $28.60 $30.14 -5.1%
Livestock COW $25.77 $25.67 +0.4%
ALL COMMODITIES DJP $23.85 $25.71 -7.2%
As of 08/24/15

 

Energy Commodities

Believe it or not, WTI crude has collapsed into the $30 a barrel range…

Investors sold the commodity heavily yesterday (-6.2% on the day) as fear gripped the equity markets.

This sub-$40 foray is the first for the commodity since early 2009. 

Without question, investor sentiment towards crude is absolutely horrific right now.  Not only is US production staying higher for longer than anticipated, but now there are serious concerns over the strength of the global economy.

As I mentioned earlier, the main worry is China.  The country is recording some of its worst economic readings since the 2008 financial crisis.  No doubt about, all is not well in the world’s second largest economy.

But here’s the real question…

Is this China slowdown really severe enough to cause the drastic selloff we’re seeing in not only crude oil, but other commodities as well?

There are plenty of opinions out there on this, but the fact is- only time will truly tell.

We need to see additional data to confirm the Chinese economy is really in as bad of a predicament as some believe it is.

For now, it’s best to just steer clear of WTI crude until we see US production really start to lose steam.

 

Grain Commodities

Grain markets have taken a turn for the worse after the strong late-June rally.  Corn is trading at the $3.77 a bushel area while wheat and soybeans trade at $5.00 and $8.77 a bushel respectively.

Do bulls have anything to look forward to in these markets?

At the moment, no…

The USDA recently estimated that while this year’s corn and soybean crops likely won’t be as big as 2014’s, they’re still going to be some of the largest on record.   Of course, that means there will likely be ample grain supplies come late Fall when harvesting machinery is put away for the long US winter.

For now, grains are best left to quick traders with a very short-time horizon.

 

Industrial Metals 

Copper just can’t catch a break.  The red metal is grinding lower as investors react to the seemingly constant barrage of negative Chinese economic news.

As you know, the recent downturn in copper has been rather severe.  The commodity is down 19% over the past three months and off a whopping 27% over the past year.

While it’s highly tempting to establish a long position in copper at these depressed price levels, we really need to see what happens with China.  Right now, copper prices are telegraphing the Chinese economy is in for a hard landing.  If that’s the case, copper could break below $2 a pound in coming months.

 

Precious Metals

The only glimmer of hope for the commodity space the past few days has been in the gold market.  Investors ran to the perceived safety of the yellow metal as panic overtook the equity markets.

The abrupt selloff in stocks sent gold surging from $1,100 an ounce in early August to just over $1,160 in recent trading.

Does gold have legs to run even higher?

Since the prime catalyst for gold’s recent rally has been equity market fear, the metal may trade a bit higher as this large dose of volatility plays out.  I wouldn’t be surprised to see gold tag $1,200 an ounce in coming weeks if stocks take another big nosedive.

However…

When investors finally come to their senses and start buying stocks hand over fist again, gold will likely succumb to heavy selling.  Remember, we haven’t seen compelling inflation data in quite some time, which is exactly what’s needed for a sustained rally in gold.

 

Softs

Cotton made its way back into the limelight in recent trading thanks to some surprisingly bullish USDA data.  According to the crop production report released August 12th, this year’s US cotton crop is expected to decline to 13.1 million bales.

That’s a 20% drop from last year.

Why the downturn?

Not only did US farmers plant less cotton than last year, yields on the 2015 crop are looking like they’ll be decidedly weak.  What’s more, the USDA lowered its estimate for world cotton stocks by nearly three million bales.

While it’s tempting to get long cotton, the demand side of the equation isn’t quite strong enough.  The USDA recently reduced its US export forecast- the world’s top cotton exporter- to 15-year lows.


Livestock

With the high-demand summer grilling season drawing to a close, the price of feeder cattle are dwindling back toward $2.00 a pound.

While this commodity may slump further in coming weeks, the looming downturn should be rather benign compared to the ongoing wipeout in equities.

Case in point, feeders slumped a mere 0.6% yesterday as the equity investors fell into the fetal position under their trading desks!

 

Category: Commodity Trading