Agriculture ETF May Be The Way To Profit in A Summertime Slumber
In the U.S. stock market, the current rally began on Tuesday, March 10. The S&P 500 SPDR Trust (SPY) climbed an amazing 6% off of the March lows that have faded from memory.
(S&P 500 closing at 676... and hitting intra-day, devilish lows of 666. Remember that!)
Surprisingly, many pundits seem to think that the remarkable upswing only met resistance here in the 3rd week of June. The truth, however, may be a bit more unsettling.
In fact, the S&P 500 stampeded like a bull for 8 consecutive weeks, hitting 919 on May 6. That marked an astonishing 36% rise off the closing low. Yet the next 6 weeks have left the popular S&P 500 benchmark essentially flat at 921.
8 weeks up... 6 weeks sideways. Granted, the S&P 500 has spent more time at the higher end of the 6-week range (879-955). Nevertheless, we're smack in the middle of that trading range.
Have things been any different for the emerging markets? Vanguard Emerging Market ETF (VWO) garnered an astonishing 52% from $19.75 to $30 in those first 8 weeks. Still, for the most part, VWO also traveled sideways over the last 6 weeks; while it has journeyed in a much wider range between $29 and $34 per share, it is only 4% higher ($31.2) than it was 6 weeks ago.
Developed Europe in the iShares S&P Europe 350 Fund (IEV) over the previous 6 weeks? The pattern is remarkably similar.
A bullish prognosticator would describe the last 6 weeks as a bull market breather. They'd suggest that minor corrections and periods of sideways movement are to be expected.
In contrast, a bearish forecaster would describe the first 8 weeks as a classic, bear market head-fake. They'd suggest that the oversold rally ended in early May, and that the recent deterioration in both domestic and foreign markets are only the start of bad things to come.
So whose crystal ball is accurate?
In reality, nobody has a crack-free, crystal ball. There are far too many variables at play. That said, there's another possibility that few commentators are talking about. I'm referring to the possibility of a summertime slumber.
For instance, there's more money sidelined in money markets than at any moment in history (except for a few months ago). Individual investors, money managers and fund managers are exceptionally eager to get back some of their losses by putting the money to work. Investment dollars will inevitably look to buy on dips at the lower end of trading ranges and/or at a 10%-15% discount off recent highs hit.
At the same time, there's enough economic uncertainty, risk aversion, hedge fund shorting and systemic concern to keep everyone on their toes. The markets may go up, down and around for much of the summer, only to wind up at about the same place they are today at the end of September.
In the near-term, then, the greenest shoots may not come from equity markets at all. In fact, one of the greenest ways to pursue any capital appreciation may be from the commodity ETF, PowerShares DB Agriculture (DBA).
PowerShares DB Agriculture (DBA) is an ETF made up of corn, wheat, sugar and soybean futures. The fund itself has underperformed other commodities, like oil and various metals.
However, DBA has definitive technical support with its price above a 50-day and 200-day moving average. Its 50-day trendline also moved above its 200-day trendline... which technical folks really love to see.
A simplistic assessment on why DBA is a strong investment goes something like this: People have to eat, don't they. Yet that's the same type of simplicity that led people to bid up California real estate (e.g., They're not creating any more coastline, etc.). It's also the same type of conformity that led others to stay long in the crude oil collapse (People still have to drive, don't they?).
What about true supply and demand with respect to agricultural commodities? Consider China. In spite of a global economic slowdown, their soybean imports rose 30% in Q1. China imported 30% more beans in the heart of the meltdown over a far calmer period in Q1 2008?
In truth, the demand comes from government policy. China is stockpiling corn, wheat and soybeans, allowing local Chinese ag prices to be kept at higher levels than international prices. Sounds eerily similar to the way the U.S. government has supported American farmers.
Of course, there's another way to look at China's stockpiling rather than seeing it as an abundance of supply. In fact, China has announced that they are building vast numbers of additional storage facilities for grains, which suggests that grain demand is quite vibrant.
Outside of China, soybean stockpiling is quite low. Prices could surge on just about any shock to the supply. Meanwhile, corn and wheat could deal with lower crop yields later this summer, and these products are always susceptible to dampness-related calamities.
Tom Lydon of ETF Trends explained that a particular wheat fungus (Ug99) could potentially wipe out 80% of worldwide wheat. Even a 5%-10% disruption would be a monumental disaster for the world's most popular crop.
Scientists have been feverishly working on a Ug99-resistant variety of wheat. Nevertheless, some believe that current crops are already in harm's way.
Could it really happen... or are fears overblown? They're probably overblown, but that doesn't mean price spikes won't help PowerShares DB Agriculture (DBA) in the near run.
(Note: It's been reported that Stern Rust wiped out nearly 10% of U.S. crops on 2 separate occasions in the 1950s, while destroying 5% of U.S. production in 1962.)
In January, I asked, Are Agriculture ETFs Independent from the Current Financial Crisis? Data over 1 year suggest that PowerShares DB Agriculture (DBA) has traveled a very similar path to the S&P 500 as well as the MSCI EAFE Index (EFA). (See the chart below.) The correlation between DBA and these benchmarks has been a remarkably high .94 and .96 respectively.
So why should we consider PowerShares DB Agriculture (DBA) if it represents theoretical diversification, but not practical diversification? Perhaps the theoretical will indeed become more practical over time.
Specifically, commodities priced in dollars hedge against a falling dollar... U.S. stocks would not. DBA fights food price inflation when some measures show agriculture commodity storage at historic lows. Plus, worldwide interest via commodity fund inflow appears to have greater momentum that inflows into company stock ETFs.
All the agflation folks need now is a major blow to a big time crop for DBA to soar. And yes, it could happen.
If you'd like to learn more about ETF investing... then tune into In the Money With Gary Gordon. You can listen to the show live or via podcast or on your iPod.
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Gary Gordon: firstname.lastname@example.org