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Thursday, February 13, 2014

More Real Stuff - Agriculture


Continue my research of commodity theme, aka Real Stuff.

Some observations:
- Investing in commodities, as a group, via index and corresponding etf may not be practical. Detailed review in this post (link). The biggest and most liquid etf is DBC, which is a pure gambling (rebalanced in November), and been stuck in 24-29 range for 3 years.
- I will be using $CCI (corresponding etf is GCC) and RJI as base line broad commodity index. RJI seems more liquid. Both are volatile like hell, but really don't move enough to make up for aggravation. Both seems to be painting some kind of sideways base on weekly chart, but I don't want to get involved with long term investment in these, because costs are very high.
- There is no sensible way to short commodity index via inverse etf's. Some inverse leveraged etf's (like SCO) are usable tradable instruments for short term only (days, not weeks). Decay and costs are very real and brutal. There is no practical way to sell short these commodity inverse leveraged etf's either (see update in this post link)
- Need to dig deeper into sub-themes, and possibly find some long-term trends. Commodities are not like stocks, they are not an asset class. Rather they are input costs, that can be forecasted and stored for future use. Here I go again with forecasting, but really - manufacturer need to plan ahead what to order from producer, who needs to let miner/grower know how much stuff they will need, because mining/growing takes time, and doesn't always work out. THEY need a forecast. Still, they are only human (hopefully) and do make mistakes. Error in forecasting creates rapid repricing, aka market turns, more often than trends

Right off the bat, I am familiar with Agricultural Commodities.

Following and trading grains via etf's since 2012, I wrote Food Riot post (link) with definite bullish bias, because "I think we will never pay low prices for food again". That assertion was correct, as our food shopping is more expensive than before, however trading on this opinion costed me some last year. To wit, all grain etf JJG is much lower now. My stops and position sizing served as excellent protection, my losses in grains are trivial, as I continuously trying to pick a bottom. Corn is not going to zero.


I entered JJG again on 2/4/2014 and wrote here (link):
Now there seems to be a legit double-bottom setting up. I marked it on a chart. 43.level has to hold, if there is an immediate back test. Measured move takes us to 100day ma.
I got 1/2 position on

If anybody heard any rumors, fundamentals, planting intention etc - PLEASE DON"T TELL ME!  I don't want to know
(People replied with funny pictures, and I made some general comments anyway) 

 I have half size BAL (cotton), half JJG, full size NIB (cocoa) and want more.
 PowerShares DB Agriculture Fund tracks DBIQ Diversified Agriculture Excess Return Index, rebalanced in November to base weights and then just rolls active contracts.
Allocation makes sense, except I think coffee is too much and cotton too little, but what do i know...?
Corn           12.50
Live Cattle  12.50
Soybeans    12.50
Sugar         12.50
Cocoa        11.11
Coffee        11.11
Lean Hogs        8.33
Kansas Wheat  6.25
Wheat              6.25
Feeder Cattle   4.17
Cotton              2.78

There is a very clear possibility of double bottom on DBA, with implications for extended rally in Ag Commodities and Lifestock.
RJA - another Mr Bow-Tie's monstrosity, with 21 components, covering not just the usual Ag's and Cows, but also lumber, rubber, rice, OJ, and even milk (0.2%). Largest allocation (over 10%) are Corn, Wheat, Cotton, Soy; followed by Coffee, Cattle and Cocoa. Makes sense to me.
Rogers Agriculture Index is 35% of RJI, and is second largest component of Rogers International Commodities Index, after Energy. RJA is also rebalanced at the start of every month back to initial weights.

Although, RJA doesn't have a well pronounced double-bottom (like DBA), its weekly chart also shows positive divergence on oscillators, best 3-weeks rally in many months. $8 level must hold any reaction, or there is no bottom
DAG is a note (etn) on corn, soy, sugar and wheat at 25% each
JJA is a note (etn), sector weights make no sense whatsoever, usual 0.75% fee
JJG - another iPath note - all grain etn
Soy   42%
Corn 35%
Wheat 22%
 Water - PIO, PHO

 DBB - PowerShares Base Metals is equal thirds aluminum, zinc and copper. Rebalanced in November and roll.
Frequently goes premium/discount to NAV by as much as 1%.


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