Commodity ETF Alert May 2009 Issue

I’ve never seen such a big fuss being made over a few people with the sniffles.

The swine flu is nothing more than an opportunity for newspapers and network news stations to make money.  Its sensationalistic journalism meant to scare people around the globe… and make them clamor for more news.

Now don’t call me crazy.  Hear me out.

I’m not saying the swine flu doesn’t exist.  I’m not saying it isn’t deadly or dangerous.

What I’m saying is the public frenzy is out of hand.

I mean really… do we need the President of the United States to tell everyone to wash their hands?  Do people realize the regular flu causes more deaths every year than the swine flu?

Really, last month more people died in car accidents than from the swine flu.  Where’s the public outrage or the media frenzy?

Do we need to close down schools, restrict foreign travel, or quarantine people in their hotels?  Do we need to be afraid of everyone who has been to Mexico recently?

All this over a case of the sniffles.

Now, let’s take a moment and think about the unintended consequences of this news fiasco.  Specifically, the impact it’s having on the commodity markets.

Let me explain.

The flu is a virus passed from human to human.  It makes people sick.  And unfortunately, it kills individuals weak from age or compromised immune systems.  This flu, however, is different.  It was given a name – the swine flu.

Swine. Hogs. Pigs.

It doesn’t matter what you call them.  Right or wrong, they’re being blamed for the flu.  Suddenly consumers are leery of anything pig related.  It’s not just consumers. Some governments have started slaughtering pigs… despite clear evidence pigs can’t transmit it to humans.

Right now, many consumers in the US are avoiding pork products because of the swine flu.  Talk about an unintended consequence.

Both the CDC and the US Department of Agriculture have announced the pork supply is safe!  Thank goodness!  They saved “Memphis in May”.  (For those of you who don’t know, Memphis in May is one of the largest BBQ competitions in the world.)  To say these BBQ competitors use a lot of pork is a gross understatement.

But I digress.

It’s common knowledge pork products do not spread the swine flu.  Just like the regular flu, it’s transmitted from human to human.

Yet, pork prices are falling.

Lean Hog prices went limit down on the Chicago Mercantile Exchange just a few days ago.  News that China, Thailand, Russia and the Ukraine are banning pork imports are feeding the fire.

In my mind, this is an opportunity.

Summer’s quickly approaching and that means summer BBQs.  Demand for pork, beef, and other meats moves higher this time of year.

Also, livestock prices (including Lean Hogs) are incredibly low after falling for the better part of a year.

According to the Journal, US hog suppliers lost money in 16 of the last 18 months. This leads to one thing… a shakeout in the industry.  As producers close up shop, or cut back supply, it means fewer Lean Hogs.  And that means higher prices.

Here’s the thing.  The swine flu is practically old news.

When the swine flu is forgotten (give it another 48 hours), demand is certain to jump. More demand plus less supply equals higher prices.  Let’s buy Lean Hogs now to profit from the coming move.

ALL ABOUT HOGS

Unfortunately, no ETF is dedicated exclusively to Lean Hogs.  There is, however, an ETF giving us exposure to both Live Cattle and Lean Hogs.

The iPath Dow Jones-AIG Livestock Total Return Sub-Index ETN (COW).  Now if that isn’t a mouthful I don’t know what is.

The ETF tracks an index composed of two commodities, Live Cattle (63%) and Lean Hogs (37%).  Honestly, I’d prefer an ETF more heavily weighted in Lean Hogs.  But, the alternatives have such small volumes I excluded them.  I don’t want to get into a situation where our entry and exit is complicated.

Right now COW is trading at $30.69.

TECHNICALLY SPEAKING

In the last three weeks, COW fell from $32 to just over $29.50.  The real drop hit as the swine flu news started spreading.  I think it’s a bottom for Lean Hog prices and I’d be surprised if it didn’t start heading higher.

The 5-day moving average turned up just a few days ago.  But, the real key is the 50-day moving average.  It’s starting to stabilize after falling for months.  The MACD is very close to a bullish cross, and the RSI is about to cross the center line to the upside.

One other thing worth mentioning is the volume in this ETF.  COW’s had five days of climbing volume – along with a higher price.  A great sign other investors are moving into the market.

Clearly, this is a bottom call.  Might we break lower?  Sure.  But with both technical and fundamental data pointing higher, I see this as a low risk entry point.

Establish a position now in COW.  We’ll watch for the market to move higher as more positive news surfaces, and the swine flu hysteria subsides.

 

The iPath Dow Jones-AIG Livestock Total Return Sub-Index ETN (COW) is trading at $30.69.
Buy COW up to $32.00 per share.
Our Profit Target is $40.00.
Don’t forget your position sizing.

ENERGY COMMODITIES

Energy prices are jumping higher, up 7% in the last month alone.  Oil continues to whipsaw the market while slowly working its way higher.  Oil prices are consistently shaking off bearish news.  Rising inventory levels are a big one virtually ignored by the market.  Oil’s above $50 and climbing… I still think $70 is fair value.

Our OIL trade is treating us very well.  This month we traded above the buy-up to price.  Everyone should have a nice profit on this position.

Natural gas on the other hand is continuing its down slope.  Storage data shows levels more than 22% higher than the five year average!  And as a result, prices are falling… currently hovering near a six year low.

GRAIN COMMODITIES

The grains continue marching higher.  Concerns over a wet planting season are driving up prices.  Renewed optimism for a quick economic recovery isn’t hurting either.  With the big three (Corn, Wheat, Beans) all up, the grain complex is showing a nice gain.

Beans, in particular, are moving higher on news China’s stockpiling, and South America is expecting a weak crop.  Our Grains position hit a new high this week of over $43.  This gives us a gain of more than 19%.  Not a bad start…

INDUSTRIAL METALS

The Industrial Metals markets continue to gyrate over the global economic outlook.

Copper is managing to stay above the $2 a pound level – a bullish sign.  China’s demand and a rebounding economy are driving factors.

Tin prices recently moved higher, putting the squeeze on tin can manufacturers.  H.J. Heinz reported tin costs up 40% in the last year.  Commodity prices are down, but few remaining tin manufacturers hold significant pricing power.

Steel producers, on the other hand, are expecting consumption to fall.  Several companies are idling plants.  A big component of steel, iron ore is looking at prices falling 30% or more in 2009.

The copper trade we set up last month is moving sideways.  I see this as a consolidation.  And, as long as the economic recovery continues, we should see copper and other industrial metals move higher.

PRECIOUS METALS

Precious Metals recovered losses from last month.  Gold once again is leading the group higher.  Crossing above the key $900 level gave the gold bulls room to run.  I think the Precious Metals group will continue moving higher on inflation fears.  A correction in the equity markets could spur a flight to gold as well.

News that China now holds upward of $30 billion in gold reserves (that’s more than 1,000 metric tons) should help the trend continue.  Clearly, their central bank is looking for alternate ways to deploy reserves.

SOFTS

Ahhh… Coffee.  My beloved drink is in the news again.  Truckers in Columbia are striking.  Transportation is grinding to a virtual standstill.  That means coffee shipments are in jeopardy.  Columbia is a major coffee producer.  They estimate 2009 production will top 11.5 million bags (each 60 kilos).

Coffee is one of the three key commodities making up the Softs complex.  The others – Sugar and Cotton – also are moving higher.  As a whole, the Softs are the best performing commodity group – posting gains of 16%.

LIVESTOCK

Livestock fell 4% this month as news of the swine flu dampened consumer expectations.  But, that’s about to change.  We’re entering the summer grilling season when demand for beef and pork traditionally moves higher.  Just watch.  In a few weeks, the swine flu will be forgotten and pork prices will be up.

We’re taking advantage of the recent downdraft by establishing a position in the Livestock ETF (COW).  Real all about it on page 1.

• This month we’re adding Livestock (COW) to the portfolio.
• Move OIL to a “Hold”, it’s above the Buy-up-to Price.

Category: Commodity Trading