On The Rise And Fall Of Commodities

Posted by on

Commodities have been in a downward trend for many years now though they have recovered slightly this year. As China’s voracious appetite for all types of commodities decreased commodities declined sharply. Other countries were unable to drive the demand like China did.

According to a report from Schroder’s China’s demand for commodities created a super cycle in commodity prices. From the report:

Between December 1999 and June 2008, the Bloomberg Commodity Index (BCOM, previously known as the Dow Jones-UBS index) delivered total returns of around 15% a year with similar volatility to equities, during a period where equities barely broke even 2 (Figure 1).

Click to enlarge

commodities-vs-equities-return

Note: 2.BCOM was established in 1991 and is more diversified by commodity than the longer standing S&P GSCI index (GSCI, established 1970), which has an over 70% allocation to the energy sector. In this paper we have used BCOM to represent commodity returns where possible as it is more reflective of the broader commodity universe. However, when longer term analysis has been carried out we have used the GSCI as a result of its longer track record.

Source: Reappraising the case for commodities by Duncan Lamont, Schroder’s

Commodities are down 50% from their 2011 peak based on the Bloomberg Commodity Return Index. They are off by 60% based on another benchmark, the GSCI return index.

A few points to remember about commodity investing:

  • Commodities can be highly volatile relative to equities.
  • Investing in commodities either directly or thru derivative products like futures are not suitable for most retail investors.
  • Investors in oil have to understand and deal with unique situations such as Contango.
  • Though Wall Street has been pushing commodities as another asset class to retail investors, they are not. Other than a few exceptions like gold most other commodities are best avoided.

Here is another chart comparing the performance of commodities and equities:

Click to enlarge

commodity-vs-equity-return

Source:  Natural Resources – Uncovering Opportunity in a Secular Commodity Bear Market, T.Rowe Price

On The Real Oil Prices Over The Past 150 Years

Posted by on

Crude oil prices are on a roller-coaster ride this year.Brent Crude was down 1.76% and closed at $45.77 on Friday for November 2016 delivery. A year or two years it seemed prices would never fall under $100 per barrel and forecasters were even  predicting prices may reach $200. Now oil companies are desperately hoping prices to hit $60 and stay above that level.

According to an article by Shawn Driscoll at T.Rowe Price,  real oil prices are considered over $40/bbl (in 2014 dollars) are considered unusual when prices are looked at over the past century.

The real prices of oil over the past 150 years:

Click to enlarge

real-oil-pirce-over-150-years

Source: Natural Resources – Uncovering Opportunity in a Secular Commodity Bear Market, Shawn Driscoll at T.Rowe Price

The recent peak reached in 2014 exceeded the levels during the Iran-Iraq War in 1980.

Investment perspective:

Obviously low oil prices are not favorable to oil companies. However the major firms are big enough to weather the downturn. In fact, many have sufficient cushion to pay dividends year after year. Even if profits should further hit, they can finance dividend payout by issuing more debt since rates are lower. So long-term investors can consider adding stocks in the oil and related industries at current prices in a phased manner. Due to the current volatility in the market, it is better to stay away from small and medium companies especially oil and natural exploration firms and producers.

The supermajors of the oil industry are Europe-based BP plc (BP), Royal Dutch Shell plc(RDS-A, RDS-B), Total SA(TOT) and Eni(E) and US-based ExxonMobil (XOM), Chevron (CVX) and ConocoPhillips (COP).

Disclosure: No Positions

Emerging vs. Developed Market Total Returns Since 1987

Posted by on

Emerging markets have outperformed developed markets this year. As of  Sept 9, the MSCI Emerging Markets Index is up 14.5% while the MSCI World Index is up 2.7% according to an article by investment guru Mark Mobius. The MSCI World index is a proxy for developed markets.

The following chart shows the total return of Emerging vs. Developed Market since 1987:

Click to enlarge

emerging-vs-developed-markets-returns-since-1967

Source: Emerging-Market Resilience, Mark Mobius, Franklin Templeton Investments, Sept 15, 2016

In addition to the resilience of emerging markets this year, Mr.Mark  is bullish on the long-term investment case for these markets. Factors like rising purchasing power, favorable demographics, etc. should benefit developing countries.

Related ETFs:

  • iShares MSCI Emerging Markets ETF (EEM)
  • Vanguard FTSE Emerging Markets ETF (VWO)

Disclosure: No Positions

US Obesity Rates By State

Posted by on

Obesity is a major health epidemic in the US. Billions of dollars are wasted per year in treating all the health issues caused by obesity. However drug firms, hospitals and others profit from treating obesity and related illnesses.

The following chart shows obesity rates by state:

Click to enlarge

obesity-ratees-by-us-state

 

†Obese is defined as body mass index (BMI) ≥ 30.0; BMI was calculated from self-reported weight and height (weight [kg]/ height [m²). Respondents reporting weight < 50 pounds or ≥ 650 pounds; height < 3 feet or ≥ 8 feet; or BMI: <12 or ≥ 100 were excluded. Pregnant respondents were also excluded. Washington D.C. falls in the 20 -< 25 category.

Source: Schwab Sector Views: What’s Ailing Health Care? by Brad Sorenson, Charles Schwab