Commodity ETF Alert July 2013 Issue

 

WALL STREET’S BULLISH COMMODITY CALL!

No doubt about it, the first six months of 2013 have been rough for the commodity markets.

With the exception of a few resilient assets like oil, natural gas, and cotton, most commodities are down firmly on the year.

What’s going on?

Commodity underperformance can’t be blamed on any one specific factor.  Instead, there are numerous reasons why hard assets have weakened in the first half of the year.

First of all, the US Dollar has been strong this year.  In fact, the greenback rose from 79.77 on January 2nd (the first trading day of the year) to a high of 84.50 in mid-May.

Of course, the main driver of Dollar strength this year has been Ben Bernanke’s tapering talk…

The Fed Chairman stated publically that the Fed would likely start tapering their quantitative easing (QE) program by the end of the year if US economic data met their expectations.

Of course, seemingly endless QE was a main driver of Dollar weakness over the past few years.

And now that the Fed is toying with the idea of taking the stimulus program away, investors are reacting by pushing the Dollar higher.

But a strong Dollar isn’t the only reason for recent commodity weakness…

Another large fear for the commodity markets this year has been weakness in Chinese economic growth.

You see, at the start of the year, China estimated their 2013 GDP growth would come in around 7.5%.  But recent purchasing managers reports out of China are showing considerable weakness.  And that has many experts starting to wonder if the world’s second largest economy will hit its yearly GDP target.

Obviously, all this information sounds gloomy for the commodity sector.

But here’s the deal. You have to remember that markets are discounting mechanisms. In other words, they discount past, present, and potential future information into current prices.

That means much of this negative news towards commodities has already been priced into the markets.

And here’s where it gets interesting…

There’s a very good chance that the two factors I mentioned above, China and QE tapering, won’t be as bad as the markets are currently pricing in.

In fact, I’ll go out on a limb and say the Fed won’t taper QE this year at all.  What’s more, economic growth at 7% or higher is still phenomenal.  And that means China is still going to need huge supplies of important commodities.

That’s why the second half of 2013, and beyond, will likely be a whole different ballgame for hard assets.

In fact, the head commodity analyst at JP Morgan, Colin Fenton, said now’s the time to go “overweight” commodities.

In case you’re unaware, JP Morgan is one of the most highly respected investment banks on Wall Street.  Mr. Fenton and his team made another overweight commodity call back on September 30th, 2010- right before numerous hard assets surged in price.

Which commodities is Mr. Fenton talking about this time?

Mr. Fenton suggests that this is the opportune moment for China to “back up the truck and restock supply channels where China is import dependent.”

Copper is one of those commodities…

Given the recent carnage in the industrial metals market, copper is trading at its lowest levels in years.  And that means there’s indeed an opportunity for the biggest consumer of copper in the world, China, to come in and scoop up the red metal on the cheap.

Folks, with copper trading at the bottom of a three year range, it’s the perfect to time to front run China and buy copper.

Here’s how we’ll do it…

ABOUT COPPER

The iPath DJ-UBS Copper (JJC) is the best way to get long the copper market via an ETF.  JJC is designed to give investors exposure to the Dow Jones-UBS Copper Sub-index.  This index reflects the returns potentially available through unleveraged investments in copper futures contracts.

TECHNICALLY SPEAKING

As you can see, JJC is trading at 3-year lows, just like copper.  What’s more, the metal is trading just above important technical support at $3.00 a pound.  It’s highly likely that copper moves higher in the second half of 2013 due to renewed and vigorous demand from China.

WHAT TO DO NOW

iPath DJ-UBS Copper (JJC) is trading at $37.66
Buy JJC up to $39.40 per share
Our profit target is $44.00 or more

COMMODITY REVIEW

COMMODITY	TICKER	CURRENT VALUE	LAST MONTH	CHANGE
Energy	JJE	$17.29	$17.34	-0.3%
Grains	JJG	$48.33	$51.39	-6.0%
Industrial Metals	JJM	$29.03	$30.17	-3.8%
Precious Metals	JJP	$62.87	$70.33	-10.6%
Softs	JJS	$46.39	$47.49	-2.3%
Livestock	COW	$27.02	$26.37	+2.5%
All Commodities	DJP	$37.14	$38.39	-3.3%

 

ENERGY COMMODITIES

Another uprising in Egypt is pushing WTI crude firmly over $100 a barrel this week.
I can’t cover all the details of the protests here, but it’s obvious the situation has the oil market on edge.

The main source of concern is a potential shutdown of the Suez Canal.

As you may know, the Suez is a key transportation route for global oil shipments out of the Middle East.  In fact, an estimated 2 million barrels per day pass through the canal bound for Europe, Asia, and the US.

It’s impossible to know how this situation will play out in coming weeks.  But if oil trades much higher, we’ll finally have a trade on our hands.  And as you may have guessed, it won’t be on the long side of the market.

As far as natural gas goes…

The Eastern US has been unseasonably cool and wet over the past couple weeks.  The lack of heat in this key gas-consuming region sent storage additions higher than expected in recent EIA inventory reports.

As a result, natural gas traded down to the $3.55 area last week before rebounding slightly on Wednesday.

If gas is to trade higher this summer, hot temperatures need to arrive in the Eastern US- and quickly.  Otherwise, we may see natural gas trade into the low $3 range in coming months.  Obviously, that wouldn’t be good for our trade in the US 12-month Natural Gas (UNL).

However, considering that a drop to the $3.25 mmBtu level would send UNL to the $16.00 area, we’re not going to close out this trade or put a stop loss order on it. Instead, we’ll wait for it to get there and buy additional shares.

I’m moving UNL back to a hold until further notice.

GRAIN COMMODITIES

The USDA is still very bullish on the US farmer.  As a matter of fact, the government agency estimated in a report released last week that total planted corn acreage is around 97 million acres.  That’s a higher estimate than the last WASDE report and 2 million acres higher than analyst estimates.

What’s it mean?

As long as Mother Nature cooperates, corn prices will likely keep weakening into the Fall harvest season.  In fact, the December corn futures contract is already trading at $5.00 a bushel.  That’s significantly below the front month July contract price of $6.78.

INDUSTRIAL METALS

Aluminum, lead, nickel, and zinc are all having a tough go of it this year.  Fears of a big slowdown in the Chinese economy, the main driver of industrial metal demand in recent years, have all these metals down on the year.

But as I explained in the copper analysis above, now is not the time to run for the hills.  In fact, now’s the time to start speculating on the long side in the industrial metal space.

PRECIOUS METALS

Precious metals suffered through another very rough month.  Gold set its lowest price in nearly three years and silver dropped below $20 for the first time since mid-2010. Investor sentiment towards these two metals is overwhelmingly bearish right now.

However, given the fact that both metals are drastically oversold on a short-term basis leads me to believe we may see a bounce out of them soon.

As far as platinum and palladium go…

Palladium is once again bouncing higher.  In fact, the metal is $25 higher than it was when I recommended buying the ETFS Physical Palladium Shares (PALL) in the June 25th update.  However, I’m moving PALL back to a hold since it’s now above the $66.00 buy up to price I mentioned a couple weeks ago.

Platinum bounced off the $1,300 technical support area a few days ago.  However, the iPath DJ-UBS Platinum (PGM) is still below the $30.50 buy up to price I mentioned in the last update.  If you haven’t already, go ahead and buy PGM up to $30.50.

IMPORTANT:  Another round of South African labor negotiations starts July 11th. Workers are demanding huge wage increases.  But with the recent downturn in metal prices, I don’t see any way mining companies will give it to them.  Expect fireworks out of South Africa, and an increase in volatility for platinum and palladium in coming weeks.

SOFTS

Coffee is still stuck in a vicious downtrend thanks to overwhelmingly bearish fundamentals.  However, this commodity is getting undeniably cheap and should start showing signs of bottoming at some point in the near future.  When it does, we’ll be looking to add it to the portfolio.

LIVESTOCK

Feeder cattle and lean hog markets remain strong as demand burgeons for the summer grilling season.  What’s more, an outbreak of PEDV, a hog virus, has experts worried that parts of the Midwestern US may see hog supplies disrupted in the fourth quarter of 2013.

However, with cattle and hogs trading at multi-month highs, it’s unlikely they trade much higher.  In fact, the 5-year high for hog prices is at $1.05 a pound, just above the July contract price of $1.01.  Regardless of the fundamentals, it’s likely that lean hog prices head lower into Fall.

Portfolio Changes

• This month we’re adding copper (JJC) to the portfolio.

 

Category: Commodity Trading