Tuesday, April 27, 2010
Hard Assets Investor just published an article of mine running down the new futures contracts that I had discussed previously (Cobalt, Molybdenum, and Distillers' Dried Grain), as well as the proposed Canadian Oil Futures contract. You can read the full article here.
Tuesday, April 20, 2010
Two weeks ago the Wall Street Journal ran an article with the headline: "Natural-Gas Data Overstated". Apparently, the Energy Department has for some while been screwing up its statistical projection for natural gas and significantly overestimating the country's gas supplies.
Basic economics tells us that when demand stays constant and supply diminishes, prices go up. And according to this report, supplies, in fact, have diminished, albeit somewhat artificially. And how did the market react? It didn't:
Other than that spike the day of the announcement (April 5) natural gas investors apparently couldn't care less about the US Government's overstated inventory figures.
This highlights the fact that in the US we have access to about as much natural gas as we could ever want. Granted, a lot of it is underground, but unless gas stocks were actually low (like, in danger of running out) knowing that our stocks are slightly less than previously thought doesn't actually affect the price. At some point, the functional supply of gas changes from a number of mmBTUs to the categorical figure "plenty". If we got to a point where we were consuming enough natural gas to see stocks diminishing the gas drillers could ramp up production so quickly that no blip would be seen.
So, nice try government, but the market knows better.
Tuesday, April 13, 2010
Yes, I realize the blog has been morphing into my simply posting links to articles I am writing for other blogs, but I assure you there's still original content to be had here.
Regardless, here's a new article I wrote for Hard Assets Investor, wherin I devise a multivariate statistical model for the Gold/Silver spread.
The basic idea is that, since gold and the US Dollar are highly correlated, and gold and silver are highly correlated, while silver and the dollar are NOT highly correlated, you can use silver coupled with the USD exchange rate in a multivariate model to observe statistical deviations from historical norms.
The takeaway? Even though past performance does not guarantee of future returns, according to this model at least, gold is trading well above its historical expectation for the current values of silver and the dollar. If you buy into the model, the play would be to short gold, buy silver, and buy a foreign currency with US Dollars.
Thursday, April 1, 2010
On Monday, Hard Assets Investor published another article of mine, the premise of this one is that it turns out Grains (Corn, Oats, Rice, Soybeans, Wheat) have fundamentally NO correlation with the broader stock market. This makes them an excellent candidate for investors seeking true diversification.
When I say "true" diversification, what I mean is that most investors' idea of diversification is owning lots of different types of stock, and maybe a few bonds. The problem is that stocks (and even bonds, depending on which ones you own) tend to have high co-correlations. That is, if the share price of Coca-Cola suddenly bottoms out, you can bet that a lot of other companies will as well. If interest rates go up at some point ever in the future (I know, ridiculous right?), all other factors being equal, the entire stock market will go down. Lot of good your owning stocks in different industries does you then.
The traditional view has long been that you should own some combination of stocks, bonds, and cash or money-market funds, weighted depending upon your risk tolerance and age. The problem is that with those three categories its nearly impossible to diversify within your risk tolerance. That is, stocks are riskier than bonds are riskier than cash.
That said, commodities provide just as much risk (and upside) as stocks while, as my research demonstrates, offering little to no correlation with the broader market, depending upon which commodities you invest in (i.e. not oil or gold).
You all know my issues with Commodities ETFs, but if you're purely looking for diversification, an ETF that holds a big basket of different grains might be the way to go. Personally though, if you have an account with a futures brokerage I always prefer owning the contracts directly.