Monday, March 03, 2008

Commodity bubble?

Tobias Levkovich, Citigroup's chief US strategist, told CNBC today that resource stocks looked "bubblicious." But in the equity market, sentiment had dipped down to "panic territory" following the sell-off, Levkovich.

The Financial Times also quotes Levkovich, although other analysts say commodities in which speculators have little or no influence, such as iron ore, coal and rice, have also seen significant price rises this year.

The WSJ online reports today that crude oil topped its inflation-adjusted high1 set nearly 28 years ago. "We're seeing momentum-type trading. We're seeing options-related buying," said one WSJ source.

The Economist said rising meat consumption worldwide has driven cereal prices higher. (Dec. 8, 2007). The magazine said its food-price index was the highest since it began in 1845.

My own take is that warnings of a commodity bubble are premature. (NOTE: I will be updating my model portfolio shortly to focus on Treasury inflation-protected bonds, cash, and ETFs such as IYM [materials] and IGE [oil].) The CRB Spot Index only took off in late 2002, about the time stocks did. A long term cycle in which commodities do well can certainly last longer than 6 years. Stocks had their run in the '80s and '90s. Commodities didn't. So, which is more likely to be in a bubble period?

In ETFs, GSG and DBC, two of the commodity-based ETFs available (both are weighted toward oil), only began outperforming the stock market since early Oct. '07. Stocks of oil and materials companies have outperformed since 2003, but they continue to outperform and shouldn't be dumped based on a timing bet. Gold and silver, meanwhile, languished from May 2006 through August of last year(after run-ups beginning in early 2002 for gold and late 2003 for silver).

That said, the resource ETFs should be bought on corrections, with the exception maybe of IGE (oils, materials) and IYM (chemicals, industrial materials, mining), which sold off nicely Friday, and only recovered a bit today. (I bought IYM today.) SLV (silver) and DBA (wheat, corn, soybeans, sugar) are for speculative money and are hugely overbought right now.