Commodity ETF Alert November 2009 Issue

Just a few days ago, the high and mighty “Bureau of Economic Analysis” announced real gross domestic product increased at an annual rate of 3.5% in the third quarter of 2009.

That’s up from a 0.7% decrease in the second quarter.

This change in trend tells me the recession is over.

So, now what?

It’s kind of anti-climactic isn’t it?  The recession is over yet I don’t feel any different. I’m not suddenly rich, nor did I get a pay raise at the office.

You probably feel the same way.

While many people are still skeptical, I ask you to think about this for a moment. This news is sure to generate some interesting investment ideas…

And I have a good one.

Along with economic growth, comes an increase in industrial demand.  It makes sense. As the economy improves, businesses and individuals start spending again.

Cars need to be built.  So do homes.  Manufacturing equipment gets ordered. Shoppers return to the malls.  Retailers need goods to restock shelves.  Customer demand requires all kinds of business to build up inventory.

Because of this activity, one of the most widely used metals – Aluminum – is going to experience a surge in demand.

But I’m not the only one who thinks so.

Are you familiar with Alcoa (AA)?

If you plan to invest in Aluminum, I suggest you take a look at Alcoa and what they say about the industry.  Alcoa is the world’s largest producer of Aluminum and Aluminum products.  When they speak, you should listen.

I went through Alcoa’s third quarter earnings presentation.

Right there on page 21 was the information I was looking for.  Alcoa expects Aluminum consumption in the second half of 2009 to increase by 11% over the first half of the year!

The world’s largest producer is seeing demand increase across the board… Aluminum is after all one of the most widely used metals.  Aluminum ranks second behind only Steel.

Demand Is Growing

Aluminum is a lightweight metal.  It’s resistant to corrosion and incredibly strong. Aluminum’s used not only in your Pepsi can but also in cars, airplanes, and even electrical wiring.

According to the London Metal Exchange, Aluminum is widely used in various industries.  The following are the largest consumers:

Transportation… 26%
Packaging… 22%
Construction… 22%

And, electrical and machinery account for another 8% each.

As these industries start recovering, Aluminum demand is bound to jump even higher.

Over-production shouldn’t be a big issue.  Just last month, China announced a moratorium on new Aluminum smelters for the next three years!  This should keep a lid on supply.

Right now you can buy all the Aluminum you want at 2005 prices.  But that won’t last much longer.

Inventory Overhang

The storage rate started moving higher in early 2009 as the recession hit full stride. Industry estimates show there’s about 67 days worth of consumption in storage (inventory).  This is about double long term average inventory levels.

It makes sense.  As the recession dragged on, demand fell.  So inventory levels climbed.  Many investors think high inventory levels will hold down aluminum prices.

They are partially right…

The high levels of inventory are what everyone is watching.  At the first sign of inventory falling, we’re bound to see prices surge higher.  We aren’t going to need actual levels to drop significantly… only a hint of inventory levels starting to drop.

One of the first areas we’ll see increasing demand for Aluminum will be production in the automotive and construction industries.  As activity picks up, we’ll see demand move even higher.  And inventory levels will drop even more quickly.  This will be a huge catalyst for Aluminum prices.

Like a snowball rolling downhill, more consumption of Aluminum will drive increased demand.  That’s when we’ll see Aluminum prices really jump.

Here’s how to trade this fundamental news…

ABOUT ALUMINUM

The best way to invest in Aluminum is with the iPath Dow Jones-UBS Aluminum Subindex Total Return ETN (JJU) which is traded on the NYSE ARCA exchange.

Aluminum prices are volatile and so is this ETN.  The volume in JJU is also pretty low. So, be sure to use limit orders when placing trades.  For more details on limit orders, see the Commodity ETF Alert Users Guide.

TECHNICALLY SPEAKING

It looks like JJU is consolidating just above the $27 level.  The 50-day moving average just turned higher.  And the 5-day is about to cross over the 20-day moving average to the upside.  Both are above the 50-day… which is a positive sign.

The ETN has spent the last four weeks trading above the $27 level which is acting as a strong level of support.  By getting in near this support level, we’re minimizing our downside risk.

 WHAT TO DO NOW:

The iPath Dow Jones-UBS Aluminum Subindex Total Return ETN (JJU) is trading at $27.50.
Buy JJU up to $29.25 per share.
Our Profit Target is $46.00.
Don’t forget your position sizing.

ENERGY COMMODITIES

The Energy complex jumped 3.7% this month.  Oil prices moving over $80 a barrel was a big driver.  Our Crude Oil (OIL) trade hit the price target of $27 allowing us to lock in gains of more than 44%!  Congratulations to everyone on a great trade.

I’m going to revisit Oil in the next few months to see if we want to reestablish a position.

Natural Gas (GAZ) declined from over $16 to just over $13.  I’m lowering our buy-up-to price on GAZ to $15.50.  Oversupply continues to weigh on the market.  If we get a cold winter and an economic rebound, gas inventory should fall… helping support the price.

GRAIN COMMODITIES

Grain prices were the second biggest gainer this month.  They climbed a hefty 4.3%. The three major grains, Corn, Wheat, and Soybeans all closed higher for the month of October.

What’s driving prices higher?  A late harvest.  Remember the rains that delayed planting early in the season?  Well, that delay has required farmers to leave crops in the field longer than usual.  The longer crops sit in the fields, the more exposed they are to disease and mold.  This can reduce yields.

Some farmers are also battling bad weather.  Weather delays harvests and increases the chance of poor yields.  News like this can cut into a farmer’s profits and drives grain prices higher.

INDUSTRIAL METALS

Our new trade this month is in Aluminum, see above for all the details.

Our Copper trade is marching higher again.  We set a new high point of $42.36 for the trade just a few days ago.  This gives us a sweet 45% gain!  Watch the prices closely, our target is $45… and we’re getting close.

PRECIOUS METALS

Gold is right in the spotlight!  Just two weeks ago, all the talk was about Gold closing over $1,000 an oz.  Now Gold’s over $1,100 an oz.  The news media is reaching a frenzy.

India buying 200 metric tons of Gold at market prices helped push prices higher.  But, I think the run-up is an early sign of inflation.  We have much, much farther to run.

As a result, I’m increasing our price target to $125.

Last month we put on a trade in Platinum.

The commodity has been bouncing around lately.  But just a few days ago, it traded over the $36 level.  Good news out of the automotive sector – like Ford – could push Platinum prices through the roof.  Inflation will also be a big driver.  Watch for PGM to move higher on any such news.

Just a quick note on some recent news… A few weeks ago, iPath suspended issuing new shares (notes) for PGM.  This news came out only a few days after we recommended buying the shares.

Here’s the deal… this is a structure issue.  Barclays needs to get approval to issue more shares.  Once they get approval, its back to business as usual.

Remember, we’re in this trade for a long term move based on fundamentals.  The fundamentals haven’t changed.  If you don’t own it already, consider buying PGM on pullbacks below $34.50.

Silver is hovering around our buy-up-to price.  Consider adding SLV on pullbacks below $17.

SOFTS

The Softs complex was the big winner this month.  Both Sugar and Cocoa are hovering near highs.  Cocoa is at a 30-year high!  Rice has also entered the fray.  Concerns harvests in the US and the Philippines might have low yields is driving prices up.

OJ prices continued holding at new highs.  Production estimates for the Florida crop were down 16% from a year ago.  Lower supply means higher prices.

LIVESTOCK

Hog prices are once again moving higher.  News that China may lift a ban on US Pork helped support the move.  China is the second largest market for US Pork!

The H1N1 (or swine flu) virus continues to impact pork producers… consumers remain fearful of consuming pork products despite health official statements that all is safe.

• This month we’re adding Aluminum (JJU) to the portfolio.  See above for all the details.
• Gold (IAU) continues to rocket higher – we’re moving our price target up to $125.
• We’re adjusting our buy-up-to price on Nat Gas (GAZ) to $15.50.
• Just a reminder, we noted in our Portfolio Update Oil hit our price target.  44% gains… Congratulations everyone!

Category: Commodity Trading