Tesla Only Get's 35% Charge?
Mother's Little Helper portfolio was UP today +$516.43 (+0.51%).
Overall GAIN YTD: +1,768.21 (+1.77%).
Our benchmark index, the S&P 500 is UP +1.31%
“Agriculture is our wisest pursuit,
because it will in the end contribute most to real wealth, good morals & happiness.”
– Thomas Jefferson
I made my buys for the year on December 28, 2017, see the new portfolio here (Click Here).
Today's gains The portfolio was up today a modest 0.51%, but that helped edge the year-to-date gain up to +1.77% which is still ahead of the S&P 500 at +1.33%. Treasury yields, gold, and crude oil prices advanced, while the U.S. dollar stayed about the same. The Federal Reserve released its Beige Book numbers, revealing a modest to moderate pace of economic expansion across all of its 12 Districts for March and early April.
Haters Are Gonna Hate, Hate, Hate... Oil has been one of the most hated investments since West Texas Intermediate (WTI) fell to about $26/barrel in February 2016 during the post economic crises redo that was the energy credit crisis. A number of big players in oil almost went bankrupt and the banks got drug down with them as we all learned that large loans had been made to oil companies on the premise that oil would keep trading at prices north of $100/barrel. That's like loaning money on a new car under the premise that the borrower keep the car new for the length of the loan.
"Formula for success: rise early, work hard, strike oil."
- J. Paul Getty
Your Tesla Can Only Have a 35% Charge
As investors we may need to get over our aversion to oil and do it quick. Frankly we need to get over our aversion to all commodities and see them for what they are, a great investment in real things.
I know, I hear you, "Clay we're weening ourselves off of oil, this is the age of electric everything". Okay, tell your Tesla it can only have a 35% charge, because 65% of U.S electricity production still comes from fossil fuels (oil, coal, natural gas). While we're making the transition an investment in commodities wouldn't hurt, in fact it may be the thing that saves a lot of portfolios that are over-weight in stocks. Don't get me wrong, I'm bullish on the stock market, but only if the risk is balanced against the return. This is a stock pickers market right now, which I predict will get illustrated by over sized gains from hedge funds over the next few years. You can be your own hedge fund and protect your portfolio with a hedge in commodities.
In February 2016 oil hit a low of $26.21, that was about 14% lower than the 2008 financial crisis low for oil. Today WTI Crude closed at $68.79/barrel and investors finally sat up and took notice. Looking at the XLE the Energy Select Sector ETF that tracks the largest energy companies as an index we can see that energy fell off the proverbial cliff at the end of January, traded up and down in a narrow sideways band until April and is now on a steady rise. You may want to believe that's a Trump Trade, Geo-political global unrest and all; I'm suggesting we don't all fall into a Chump Trade. Oil is rising for the same reason it always rises, supply and demand. Oil has been out of favor because of the financial risk we saw in 2016, but that's gone. As oil prices slowly rose, the stock prices of oil companies did not, leaving this sector a big value play for investors seeking good buys in an expensive market.
We are using more oil, and over the past decade we've seen a marked decline in capital expenditures for exploration, drilling and production facilities. Trump can open all the land and sea he wants to exploration, but there are precious few who will seek it out. To open a new well takes years. The same is true of mining and agriculture. Said simply supply is down and demand is increasing; prices must rise.
Copper, the metal that runs the world is the canary in the coal mine. Sometimes called "Dr.
Copper" because copper consumption foretells the condition of the global economy. Everything you use is in some way connected to copper. Electronics, plumbing, transportation, wiring in your house, etc. Between January 2016 and December of 2017 copper prices rose 72%, and China consumed 40-50% of the worlds ore production. This year copper prices are about 5% below the highs of last year and the options market is indicating more activity in defensive option strategies than in bullish ones. Said simply, China is slowing down and maybe at a faster pace then we have yet to recognize.
Cocoa beans, butter and grind have been a raging bull over the past year, after two years of bottom dwelling prices caused by over supply. Lack of rain in West Africa has significantly reduced crops amid a surge in demand, particularly in Europe. Prices are expected to keep rising as it will take years to increase supply assuming mother nature cooperates and investment in more planting takes place. My guess is cocoa growers will simply enjoy higher prices and put off investing in supply for a while.
Sugar prices have been falling while demand picked up; this is mainly due to artificial price supports and a market that won't tolerate meddling. Sugar is a subsidized commodity around the world, but the leading producers sell their sugar in the world market at un-subsidized prices. To remain liquid and keep the cash flowing they sell their sugar at below market rates. This will correct itself the same way we saw oil go through this same over supply conundrum. Sugar producers will eventually cut back on production, choking supply and forcing prices up.
Grains across the board, wheat, corn, barley and more have been on a slide and are now in over-sold territory by most analysts opinions. These are weather and calendar dependent commodities. Lack of rain in the mid-west has delayed planting of some grains which changes delivery dates and should raise prices. Barley received was selling for $6.45 in May 2013 only to slide to $4.58 this February.
The Big Picture
Commodity prices are cyclical and driven entirely by supply and demand. While demand from population expansion is ever increasing, supply is dictated by weather, man power, available land, government controls, price and more. With several years of rising interest rates ahead and significant supply constraints not being priced in, commodities look cheap right now. If the chart below were completed through today we would see that we're near the bottom of a trough and gearing up for the next big climb, which will likely rise to the new peak prices in 2035.
Viewed another way on a rolling 10-year price growth chart, we can see the regularity of the peaks, failed rally's and troughs. The peaks on average run 55 year cycles.
Where are we now?
How Do We Make Money with this Information?
Here's the kicker. That Wall Street Investment machine that we all like to scream at for stealing our money, braking our economy and robbing us blind with fees and investment products that we don't need, has almost entirely failed to provide a product that the average investor can buy to invest in commodities. The real things that make up everything we interact with is almost exempt from investment by the average investor. What I find most amazing is that the products that are available were created so recently that none have seen a full cycle. To invest in commodities you can buy futures, options contracts, ETF's, Trusts, ETN's or invest in companies that either produce or use commodities as a major component of their business. However investing in a company is not actually investing in the commodity because all the other factors of running a business come into play. Futures and options are pretty tricky for the average investor and may not even be available to you through your broker. That really leaves the exchange traded funds, notes and trusts. My favorite fund by allocation is the RJI, modeled after Jim Rogers Commodities Index, but this is an exchange traded note (ETN). Personally I'm not comfortable with exchange traded notes ETN's or trusts, there just too much risk and not enough liquidity to sell the investment quickly. That leaves ETF's. If the RJI comes available as an ETF I'll switch my investment immediately.
Powershares DB Commodity Tracking ETFDBC Today the biggest and most liquid ETF is the ). The fund has a market cap of $2.74 Billion and trades roughly 3 million shares a day. With a 0.86% expense ratio it's a little expensive, but the Beta indicates a risk factor of only 0.98, so nearly inline with the overall market which is 1.0. It's size and volume offers plenty of liquidity. From the prospectus, "The investment seeks to track changes, whether positive or negative, in the level of the DBIQ Optimum Yield Diversified Commodity Index Excess Return™. The fund pursues its investment objective by investing in a portfolio of exchange-traded futures on Light Sweet Crude Oil (WTI), Heating Oil, RBOB Gasoline, Natural Gas, Brent Crude, Gold, Silver, Aluminum, Zinc, Copper Grade A, Corn, Wheat, Soybeans, and Sugar. The index is composed of notional amounts of each of these commodities".
The DBC is up 2.23% YTD with a 1-year total return of 11.64%.
Disclosure: I am personally invested long in some or all of these funds that appear in the Mother's Little Helper portfolio or manage these investments for my Mother's portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the MLH portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. Since I may on occasion discuss Bitcoin and other cryto currencies I disclose here that I personally own investments in the cryto-currencies listed here: DBC, VTI, VWO, VEA, VIG, XLE, MUB, TBT, GLD, Bitcoin, LiteCoin
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.