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DOUBLE
DOWN ON COMMODITIES?
by David Shvartsman
Finance Trends Matter
January 24, 2007
Goldmand Sachs and
Deutsche Bank are advising clients to double down on their commodities
bets this year, Bloomberg reports. From Bloomberg.com:
Anyone
who followed the advice of Goldman Sachs Group Inc. last year and
invested $10 million in the Goldman Sachs Commodity Index would have
lost 15 percent, or $1.5 million.
Like
so many of Wall Street's best and brightest, Goldman, the biggest
securities firm by market value, says it wasn't wrong, just early, and
to expect an 8.1 percent return in 2007.
``The
long-term secular story is very much intact,'' Jeff Currie, global head
of commodities research at New York-based Goldman, told customers in
London earlier this month. That's the same outlook provided 13 months
ago by Arun Assumall, the firm's London-based head of commodities sales.
Like
Goldman, Deutsche Bank AG isn't discouraging anyone from doubling down
in what increasingly looks like a bear market. Germany's largest bank in
September said oil will trade between $60 and $70 a barrel this year,
well above the $49.90 fetched last week. Barclays Capital, the
securities unit of the U.K.'s No. 3 bank, said four months ago crude
won't drop below $60.
As
losses mount in copper, oil and sugar, these firms say the 20 percent
plunge in commodities, as measured by the Reuters/Jefferies CRB Index,
since May offers a chance to buy before demand from China and India
causes a rebound. History shows otherwise. The CRB index dropped at
least 20 percent six times since 1970, and on average, fell a further
7.7 percent before bottoming.
First off, as far as
their rationale for investing goes, I hope you've got a better command
of return-related math if you're taking their advice. If Goldman is
calling for investors to stay put in the index for a multi-year holding
period, that's one thing. But the rationale for this call seems to be
more of a "wait till next year" justification.
As the article reports, "Goldman...says it isn't wrong, just
early...to expect an 8.1 percent return in 2007".
Well, if you're banking on a one year catch up performance, I've got
news for you. After suffering a 15 percent loss in the GSCI last year,
you'll need a gain of about 17.65 percent this year just to break even.
Banking on an 8.1 percent gain this year isn't going to make you whole.
Okay, maybe that's just the way they interperated the call for the
article, or I'm just taking the wrong impression from that report. But
it is a point to consider.
Moving on, it's interesting to see these guys touting the whole China
and India demand factor as rationale for getting in at this date. We
haven't seen the big slowdown in China yet that everyone's been
anticipating for so long. And the whole Asian demand story is what's
been partly responsible for powering the commodities higher since 2001.
They say this drop in the commodity indexes reflects a buying
opportunity before the next wave of Chinese and Indian demand takes
commodities higher. But you know what? I don't think it's going to be as
easy as all that. I think that after a one-two year correction in the
overall commodity indexes (CRB and GSCI to name two of the most widely
followed), the next leg up in the commodity bull market will be powered
by an altogether different story.
The demand from Asia will likely remain as the emerging economies
industrialize, produce more goods, and consume more resources, but I
think by that time this will be the accepted background foundation story
to the ongoing commodity bull market.
When the "secular bull" really heats up (if Bannister, Rogers,
et al. are correct in their long-term forecasts) I think you'll begin to
hear people voicing "new" explanations for the rise in
commodities and tangible asset classes. More people will have picked up
on the story of rising global liquidities, the shift from paper to
tangible assets, and the increased involvement of pensions and
investment funds in the commodities arena.
By that time you will also begin to see more involvement at the retail
level as well. Maybe someone you know will begin speculating on
commodity futures or you'll feel more comfortable adding commodity ETFs
and resource focused mutual funds in your portfolio.
Maybe Jim Rogers' book, Hot
Commodities, will have shipped its revised third edition. Or
maybe, as Clyde Harrison told me in 2003, you'll see Maria Bartiromo
reporting from the Chicago grain futures pits. We'll know better when
that time arrives.
In the meantime, I want to make note of the fact that we should look
behind the indexes and take a look at individual commodities and the
various commodity subgroups. We should probably become more selective
and look to the fundamentals and performance characteristics of
individual commodities and their related subgroups, whether they be
grains, softs, or precious metals.
You might want to zero in and be more selective by examining the bull
and bear case for each commodity group or each individual commodity, a
theme that was stressed in our July article, "The
Case for Commodities".
As far as the indexes go, each of the leading commodity indexes reflects
a certain weighting (or perhaps a "total return" makeup) that
might influence their performance. Take a little bit of time if you
haven't already (something I'm trying to learn to do) to check out the
various commodity indexes and familiarize yourself with the differences
between them. It could help you understand a bit more about the
commodity complex.
© 2007 David Shvartsman
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David
Shvartsman
Finance Trends Matter
Chicago, IL USA
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