Tuesday, March 29, 2022

Morning Note: Musing on the Current Commodity Setup -- And -- The Ultimate Investment Question

Yesterday evening, after skimming through the latest from a few commodity bulls generous enough to post their thoughts on Twitter, I found myself contemplating the short-term setup on my keyboard. 

Here you go:

Having just read a number of fintwit posts where “gurus” are promising that today’s correction in commodity prices is a buying opportunity and to rest assured that gold will see 2,500 before we know it, and that anyone who can grab silver at under $50 is going to be richly rewarded far sooner than later, I find myself in the mood to muse.

What those seemingly passion-laced threads tell me is that these folks got seriously spooked today, and rather than objectively considering what the catalyst(s) may have been and whether a serious correction is afoot, and, thus, hedging accordingly, they cling to their respective theses and convince themselves, by attempting to convince others, that their views are 100% sound and that there’s utterly nothing that can get in their way.

Well, I’m very bullish commodities long-term, however, I’m somewhat bearish short-term. And that’s on everything from gold to grains.

Now, that doesn’t mean we sell right here and hunker down and wait for the next great buying opportunity. Why? Because, frankly, I may be dead wrong. I mean, who knows? The logic in our long-term thesis may indeed be so sound as to have dip buyers rushing in right here, as the Twitter pundits promise will happen.

But, thing is, the stuff we added back in September 2020 is up 50 to 100%, which is fine, but, without question, covid lockdowns and Russia/Ukraine explains a not-small amount of the recent gains. And while supply constraints across many commodities are structural in nature, if nothing else, the (to some degree) easing of the pandemic and Russia-induced bottlenecks will have (is having) futures traders heading toward the proverbial exits faster than you can say soybean.

Now, said exodus could be very short-lived – as the twitter pundits promise – in which case all’s good for our commodities exposure. Or, it could set something seriously off to the downside, particularly in the face of a potentially slowing macro backdrop.

Therefore, anticipating some pain, last week we added what I'll call a tactical hedge (DBC [the most liquid broad-based commodity ETP] put options out to July), and then doubled our position this morning: Allocating, in total, just under 0.5% of our assets under management.

The position closed up 9% today, but, frankly, that’s meaningless. It’s actually there to quadruple should commodities take, say, a 25% hit over the next few months – a very doable scenario, btw. Which would mitigate a good chunk of the hit our commodity exposure would take under such a scenario.
Ideally, under such a scenario, should the then setup call for it, reinvesting the gains from the hedge right back into those beaten down commodities…

Well, indeed, we're seeing a further selloff in commodities to start the session this morning. There appears to be some real optimism (at least reflected in markets) around this week's peace talks. Let's pray that the markets are onto something! 

As for equities, they're rallying this morning, particularly across our foreign exposures. 

Now, not to pop anyone's balloon, but know that in purely market terms the present geopolitical setup serves as quite the distraction away from the reality that inflation is a real thing right here, and that the Fed has made it top priority -- and, suffice to say, that you can't have it both ways. 

I.e., a market that depended for years on what was a historically-accommodative central bank will likely (ultimately) struggle (perhaps mightily) as the focus -- and the Fed action -- shifts away from keeping asset prices buoyed.

Asian equities were mostly green overnight, with 12 of the 16 markets we track closing higher.

Europe's in serious rally mode this morning, with 17 of the 19 bourses we follow up notably as I type.

US stocks (save of course for all things energy and mining) are nicely higher to start the session: Dow up 278 points (0.8%), SP500 up 0.74%, SP500 Equal Weight up 1.04%, Nasdaq 100 up 1.11%, Nasdaq Comp up 1.25%, Russell 2000 up 1.76%.

The VIX sits at 19.25, down 1.94%.

Oil futures are down 4.52%, gold's down 0.65%, silver's down 2.27%, copper futures are up 0.02% and the ag complex (DBA) is down 1.87%.

The 10-year treasury is up (yield down) and the dollar is down 0.96%.

Among our 37 core positions (excluding cash and short-term bond ETF), 24 -- led by Disney, Eurozone equities, Nokia, South Korean equites and carbon credits -- are in the green so far this morning. The losers are being led lower by metals miners, MP (rare earth miner), energy stocks, base metals and ag futures.

Everyday we ask ourselves John Hussman's question:
"...on what basis do you believe that the expected return is adequate and proportionate to the risk you’re accepting?"

Then we do the work (address/explore the question), then we do it again, and again, and again as long as we're in the position.

Have a great day!

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