The U.S. economy is the largest in the world and consumer spending accounts for approximately 2/3 of our economic activity. Therefore, a reviving US consumer will be a big help not just domestically but globally. Based on this, it appears that when the world economy gets pulled out of recession, it will likely be with the help of consumer spending.
Not so fast. The US is not in the midst of a consumer spending boom and the prospect for one does not seem to be on the horizon either. The consumer spending boom that I am referring to is going on in China. This year, it is expected that China will overtake the U.S. in sales of automobiles, refrigerators, washing machines, and desktop computers. The biggest consumer market in the world in a few years may no longer be the U.S.—it may be China.
The “new normal” that Bill Gross refers to is going to be a global investment marketplace, not one that is focused solely on the US. While it may not be comfortable to move toward a global investment policy, it might be the only way to earn a decent return.
Fortune editor Geoff Colvin has an interesting interview with Pimco’s Mohamed El-Erian. Among other things, Mr. Colvin asks him what investors will have to do differently to cope with the new global environment. Mr. El-Erian’s response is quite direct:
“The average investor has two issues today. First, the average investor is too U.S.-centric. There’s a reason for that; the behavioral finance people will tell you that we like the familiar, so we tend to invest in names that we know, that give us comfort.”
“The problem is that you don’t want to be too U.S.-centric in a globalizing world where the center of gravity is shifting. So the first thing for the average investor to recognize is that the asset allocation of tomorrow is much more global than the asset allocation of yesterday.”
“Second, most of us have been very lucky — we haven’t had to worry about inflation for a long time. We’re moving toward a much more fluid world in which, at some point, inflation will come back.” Mr. El-Erian suggests that individual investors need access to an inflation hedge.
Along this line, CNN Money is currently running a poll on their website, asking investors “Which type of investments will you focus on in 2010?”
The results thus far:
U. S. Stocks 35%
Emerging Markets 15%
Bonds 10%
Commodities 6%
Bank accounts 33%
At the risk of redundancy, I am repeating what was stated above, “the asset allocation of tomorrow is much more global than the asset allocation of yesterday.” The average investor, based on the results of the poll, has not yet grasped this fact. To capitalize on the growth of the world economy it is incumbent on us to invest in the emerging markets; China, Brazil & India, to name a few.
In summary, we need to watch for slower growth in the US, depend less on the US consumer’s spending as a driver of global growth and focus on the smaller economies which may take up the leadership baton.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Tuesday, December 22, 2009
Friday, December 11, 2009
One lump of coal, or two?
The holiday season is in full swing. People are out shopping, decorating, and preparing for the in-laws two week invasion. Susan & I use this opportunity to try and gain a little extra leverage over our kid’s behaviour. In years past, kids were threatened with a lump of coal in their stocking however in our house we have an ‘elf on the shelf’ for each kid. These elves travel to Santa every night to report on what they observed during the day. Soon the elves will likely be saving energy and tele-conferencing or texting Santa instead…
With Cap-and-Trade front and center in the news and the Climate Conference starting in Copenhagen this past Monday, one would expect coal to be a ‘unfavored asset’, at least until the 25th. Scientists, government officials, and non-government officials from 170 countries are presenting their cases and proposing a course of action on the topics of climate control and energy usage/restrictions. There is speculation on all sides of the issue as to what provisions, if any, will be agreed upon during this conference.
In a related development early last week, Australia, the developed world’s highest per capita emissions producer, rejected the proposed Cap-and-Trade bill. Stating that the bill would cost Australia; the 4th largest coal producing nation, 5 billion Australian dollars ($3.5B USD), 3000 jobs, and 10 coal mines. With the economic crisis still at the forefront of everyone’s mind, we will see what takes priority at the conference – economic recovery or global warming.
Adding to the drama was the recent scandal where by internet hacking revealed that several scientists either fudging or suppressed data to support their claims. Domestically, another related tidbit on this contentious subject was released Monday; with the EPA declaring that they have concluded that greenhouse gases are endangering people's health. Is this fact, political ploy or something in between? This declaration will effectively give the EPA authority to regulate co2 and other greenhouse gases in the US.
In short, the Cap-and-Trade battle goes on and may cause concern for anyone that has a hefty exposure to coal or the energy market.
Despite all this and regardless of if we were ‘naughty’ or ‘nice’ this may be a good year to receive coal, especially if it is in the form of coal stocks. This may sound ‘un-green’ from an environmental perspective, but from an investment standpoint, coal has yielded lots of ‘green’ returns this year and is a favored sub-sector within Energy.
Regardless of which side of the fence you reside from an environmental perspective, realize that technical analysis will help to steer us in an effective, unbiased and de-politicized manner regarding your investment portfolio. The bullish (positive) technical picture for coal remains intact at this point.
One way to invest in coal is through the ETF market. ETFs allow us to buy a ‘basket’ of stocks representing a specific sector. One such ‘basket’ is KOL (Market Vectors-Coal) representing an investment in 31 coal companies. This ETF scores 5.99 out of a possible 6 - almost a perfect score.
With Cap-and-Trade front and center in the news and the Climate Conference starting in Copenhagen this past Monday, one would expect coal to be a ‘unfavored asset’, at least until the 25th. Scientists, government officials, and non-government officials from 170 countries are presenting their cases and proposing a course of action on the topics of climate control and energy usage/restrictions. There is speculation on all sides of the issue as to what provisions, if any, will be agreed upon during this conference.
In a related development early last week, Australia, the developed world’s highest per capita emissions producer, rejected the proposed Cap-and-Trade bill. Stating that the bill would cost Australia; the 4th largest coal producing nation, 5 billion Australian dollars ($3.5B USD), 3000 jobs, and 10 coal mines. With the economic crisis still at the forefront of everyone’s mind, we will see what takes priority at the conference – economic recovery or global warming.
Adding to the drama was the recent scandal where by internet hacking revealed that several scientists either fudging or suppressed data to support their claims. Domestically, another related tidbit on this contentious subject was released Monday; with the EPA declaring that they have concluded that greenhouse gases are endangering people's health. Is this fact, political ploy or something in between? This declaration will effectively give the EPA authority to regulate co2 and other greenhouse gases in the US.
In short, the Cap-and-Trade battle goes on and may cause concern for anyone that has a hefty exposure to coal or the energy market.
Despite all this and regardless of if we were ‘naughty’ or ‘nice’ this may be a good year to receive coal, especially if it is in the form of coal stocks. This may sound ‘un-green’ from an environmental perspective, but from an investment standpoint, coal has yielded lots of ‘green’ returns this year and is a favored sub-sector within Energy.
Regardless of which side of the fence you reside from an environmental perspective, realize that technical analysis will help to steer us in an effective, unbiased and de-politicized manner regarding your investment portfolio. The bullish (positive) technical picture for coal remains intact at this point.
One way to invest in coal is through the ETF market. ETFs allow us to buy a ‘basket’ of stocks representing a specific sector. One such ‘basket’ is KOL (Market Vectors-Coal) representing an investment in 31 coal companies. This ETF scores 5.99 out of a possible 6 - almost a perfect score.
Wednesday, December 9, 2009
Strategic vs. Tactical Asset Allocation
The internet is truly an amazing tool! You have the ability to check on the fundamentals of any company just as quickly as I can. And, if looking for a strategic asset allocation, there are plenty of companies that will gladly provide an allocation without cost. But is it a worthwhile allocation?
Not in my opinion!
Let’s take a look at the chart below which shows what each domestic asset class returned over the past decade.
iShares MorningstarLarge Value: -15.42%
iShares MorningstarLarge Core: -16.94%
iShares MorningstarLarge Growth: -64.20%
iShares MorningstarMid Value: 47.38%
iShares MorningstarMid Core: 51.85%
iShares MorningstarMid Growth: -22.82%
iShares Morningstar Small Value: 76.08%
iShares Morningstar Small Core: 91.12%
iShares Morningstar Small Growth: -25.02%
returns for the period: 01/01/200 – 11/01/2009
The flip-side to a strategic allocation is a tactical allocation. At any point in time there are asset classes which are behaving better than others. By taking a tactical approach to the market, our allocation is going to change periodically. We examine six major asset classes, compare them to one another on a relative strength basis and determine which two or three should be emphasized. The asset classes considered are US Equity, International Equity, Commodities, Foreign Currency, Fixed Income & Cash. Two assets classes are typically emphasized, but Cash may be the sole recommendation if specific criteria are not met by any other asset class. Assuming US Equity is favored, we will compare the nine style boxes shown above to determine where the strength lies, similar analysis transpires to determine the international allocation, if any. The point is - that the allocation is changing based upon what the supply and demand forces within the market are telling us. We are using a logical, organized methodology to know where to be and when to be there.
Do not hesitate to email me if you have questions regarding this or any other strategy.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations
Not in my opinion!
Let’s take a look at the chart below which shows what each domestic asset class returned over the past decade.
iShares MorningstarLarge Value: -15.42%
iShares MorningstarLarge Core: -16.94%
iShares MorningstarLarge Growth: -64.20%
iShares MorningstarMid Value: 47.38%
iShares MorningstarMid Core: 51.85%
iShares MorningstarMid Growth: -22.82%
iShares Morningstar Small Value: 76.08%
iShares Morningstar Small Core: 91.12%
iShares Morningstar Small Growth: -25.02%
returns for the period: 01/01/200 – 11/01/2009
The flip-side to a strategic allocation is a tactical allocation. At any point in time there are asset classes which are behaving better than others. By taking a tactical approach to the market, our allocation is going to change periodically. We examine six major asset classes, compare them to one another on a relative strength basis and determine which two or three should be emphasized. The asset classes considered are US Equity, International Equity, Commodities, Foreign Currency, Fixed Income & Cash. Two assets classes are typically emphasized, but Cash may be the sole recommendation if specific criteria are not met by any other asset class. Assuming US Equity is favored, we will compare the nine style boxes shown above to determine where the strength lies, similar analysis transpires to determine the international allocation, if any. The point is - that the allocation is changing based upon what the supply and demand forces within the market are telling us. We are using a logical, organized methodology to know where to be and when to be there.
Do not hesitate to email me if you have questions regarding this or any other strategy.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations
Thursday, November 5, 2009
A Reversion to the Mean
Several weeks ago we saw our primary market risk indicator (among others) reverse down bringing the ‘defensive team’ onto the field; this meant that the risk in the market was elevated, and as I wrote earlier, we should be proceeding with caution. This did not mean that we needed to come to a screeching halt. It meant that we unload the dead weight in portfolios and trim positions which had appreciated nicely.
The past few weeks can best be described (thus far) as a reversion to the mean or put simply, an exhale for the equities market. In mid-October many investments were statistically overbought. So far this pullback, or correction, in the market has been very similar to that of June in a number of ways: it has coincided with a bounce in the US Dollar and it has (thus far) caused more (needed) pullbacks than it has outright collapses. Sure, there have been several earnings misses to the downside, but by and large many areas of the market are yet to show long-term weakness.
The international equity market continues to show positive signs from a long term relative strength perspective, so international equities, as an asset class, continue to be an emphasized asset class. The same holds true for the US, particularly small caps.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations
The past few weeks can best be described (thus far) as a reversion to the mean or put simply, an exhale for the equities market. In mid-October many investments were statistically overbought. So far this pullback, or correction, in the market has been very similar to that of June in a number of ways: it has coincided with a bounce in the US Dollar and it has (thus far) caused more (needed) pullbacks than it has outright collapses. Sure, there have been several earnings misses to the downside, but by and large many areas of the market are yet to show long-term weakness.
The international equity market continues to show positive signs from a long term relative strength perspective, so international equities, as an asset class, continue to be an emphasized asset class. The same holds true for the US, particularly small caps.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations
Friday, October 30, 2009
Proceed with Caution
We have enjoyed a strong run while running offense since July 20th. Actually, we have been on offense for all but one month since March 12th. Since July 20th we have seen the S&P 500 Equal Weight Index (RSP) gain 16.1% and the S&P 500 Index (SPX) up 11.8% while 30 out of 40 economic sectors gained more than 10% with only one sector (Savings & Loans) falling. While the market’s move has been nothing short of impressive, a breather - of some sort - is not wholly unexpected, nor undesirable.
After Wednesdays (10/28/09) activity, the pendulum in the market has switched from demand being in control to supply being in control. With this shift to wealth preservation there are several things we can do: scale back current positions, set stop-loss points, and wait for pullbacks to initiate new positions. Remaining positive for the market is the fact that equities (US & international) are still strongly favored over cash and the overall trend of the major market indices remains positive.
It's not too surprising that after such a strong rally we see some sort of consolidation and pullback here. We will follow what the indicators are telling us and will not let recent markets unduly influence our decision making process. 2008 was bad for equities, we know that, but that has absolutely no bearing on 2009 or 2010. Right now, we know that this shift from demand to supply suggests that the risk in the market has heightened and we will be proceeding with caution.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
After Wednesdays (10/28/09) activity, the pendulum in the market has switched from demand being in control to supply being in control. With this shift to wealth preservation there are several things we can do: scale back current positions, set stop-loss points, and wait for pullbacks to initiate new positions. Remaining positive for the market is the fact that equities (US & international) are still strongly favored over cash and the overall trend of the major market indices remains positive.
It's not too surprising that after such a strong rally we see some sort of consolidation and pullback here. We will follow what the indicators are telling us and will not let recent markets unduly influence our decision making process. 2008 was bad for equities, we know that, but that has absolutely no bearing on 2009 or 2010. Right now, we know that this shift from demand to supply suggests that the risk in the market has heightened and we will be proceeding with caution.
Securities and Investment Advisory services offered through NBC Securities, Inc., Member FINRA and SIPC. Investment products 1) are not FDIC insured, 2) not guaranteed by any bank and 3) may lose value including a possible loss of principal invested. NBC Securities does not provide legal or tax advice. Recipients should consult with their own legal or tax professional prior to making any decision with a legal or tax consequence.This is not an offer to sell or buy any securities products, nor should it be construed as investment advice or investment recommendations.
Thursday, October 22, 2009
WELCOME BACK TO 10,000! Well, sort of…
Headlines as the market closed on Wednesday October 14, 2009:
Dow Jones Marketwatch: “Dow Reclaims 10,000”
Wall Street Journal: “Dow Tops 10,000"
Reuters: “Dow hits 10,000 Mark on Earnings Optimism”
Unfortunately, or fortunately, it was the first time the Dow closed with five digits since last October. Big picture: the sobering reality for investors is that the Dow is right where it was 10 years ago; on October 15th, 1999 the Dow Industrials closed at 10,019.
We have had one heck of a run since March but according to published data, lots of investors have missed this up move; more on this below.
Markets fall when investor’s - rattled to the point of throwing in the proverbial towel - bail out (creating supply). At some point this ‘capitulation’ diminishes available supply and the market makes a bottom. (The flip side is that the ‘defensive’ cash becomes (potential) new demand for equities.) Consider this: a fully invested account represents no potential for net new demand to the market however, an account that is sitting in cash represents $$$ of potential demand for equities. In March of this year the equity markets reached such a tipping point; supply dried up and enough new demand re-entered the picture to produce a bottom and the subsequent rally. Several months later the media (sceptics the whole way up) are celebrating the Dow's return to 10,000.
According to published statistics, many investors have missed this rally. There are a lot of costs associated with this, if that is the case. Since March 9th, an investor in long-term US Government Bond Funds has lost approximately 7%, an investor in Money Market Funds has gained less than 1/10th of 1%, while the purchasing power of their Dollars declined 15% and the equity markets climbed more than 50%.
There are two facts that as investors we must realize; #1- bond funds attracted net deposits of $209.1 billion in the first eight months of 2009 while stock funds drew just $15.2 billion. Said another way, for every new dollar moving into equities, $14 were moving into bonds. What does this mean? Investors that were burned during the collapse of 2008 were busy flocking to the perceived safety of bonds right as the 2009 bottom was materializing. #2 - the continued decline of the US Dollar. The Dow has recaptured Dow 10,000 in terms of US Dollars. While this rally has taken the Dow back to even for the decade, ‘foreign’ investors have not yet been made whole for the decade. Due to the (continued/continuing) decline in the value of the US Dollar, the Dow would need an additional rally of 45% to get back to its October 1999 levels - in Euro currency, assuming the $ declines no further.
There is risk to investing in equities; domestic or international, but there is also risk in keeping assets in money market funds when rates are 0.25% and when the Dollar is trending lower. Investors have flocked to cash and bonds because they are perceived as ‘safe’.
I have advised clients on investments since 1983 and have learned that in this business it is the conventional wisdom that can be the most dangerous, and for this reason objective tools that are based upon supply and demand rather than fear and reticence can add tremendous value. That is what I use to guide your portfolio. My primary market indicator (the NYSE Bullish Percent - BPNYSE) has kept the offensive team on the field for all but a month since March 12th and remains on offense today. I am currently emphasizing two equity based asset classes; International Equities (emerging) and US Equities (small cap) along with some exposure to metals; industrial & precious - in the commodity area.
Dow Jones Marketwatch: “Dow Reclaims 10,000”
Wall Street Journal: “Dow Tops 10,000"
Reuters: “Dow hits 10,000 Mark on Earnings Optimism”
Unfortunately, or fortunately, it was the first time the Dow closed with five digits since last October. Big picture: the sobering reality for investors is that the Dow is right where it was 10 years ago; on October 15th, 1999 the Dow Industrials closed at 10,019.
We have had one heck of a run since March but according to published data, lots of investors have missed this up move; more on this below.
Markets fall when investor’s - rattled to the point of throwing in the proverbial towel - bail out (creating supply). At some point this ‘capitulation’ diminishes available supply and the market makes a bottom. (The flip side is that the ‘defensive’ cash becomes (potential) new demand for equities.) Consider this: a fully invested account represents no potential for net new demand to the market however, an account that is sitting in cash represents $$$ of potential demand for equities. In March of this year the equity markets reached such a tipping point; supply dried up and enough new demand re-entered the picture to produce a bottom and the subsequent rally. Several months later the media (sceptics the whole way up) are celebrating the Dow's return to 10,000.
According to published statistics, many investors have missed this rally. There are a lot of costs associated with this, if that is the case. Since March 9th, an investor in long-term US Government Bond Funds has lost approximately 7%, an investor in Money Market Funds has gained less than 1/10th of 1%, while the purchasing power of their Dollars declined 15% and the equity markets climbed more than 50%.
There are two facts that as investors we must realize; #1- bond funds attracted net deposits of $209.1 billion in the first eight months of 2009 while stock funds drew just $15.2 billion. Said another way, for every new dollar moving into equities, $14 were moving into bonds. What does this mean? Investors that were burned during the collapse of 2008 were busy flocking to the perceived safety of bonds right as the 2009 bottom was materializing. #2 - the continued decline of the US Dollar. The Dow has recaptured Dow 10,000 in terms of US Dollars. While this rally has taken the Dow back to even for the decade, ‘foreign’ investors have not yet been made whole for the decade. Due to the (continued/continuing) decline in the value of the US Dollar, the Dow would need an additional rally of 45% to get back to its October 1999 levels - in Euro currency, assuming the $ declines no further.
There is risk to investing in equities; domestic or international, but there is also risk in keeping assets in money market funds when rates are 0.25% and when the Dollar is trending lower. Investors have flocked to cash and bonds because they are perceived as ‘safe’.
I have advised clients on investments since 1983 and have learned that in this business it is the conventional wisdom that can be the most dangerous, and for this reason objective tools that are based upon supply and demand rather than fear and reticence can add tremendous value. That is what I use to guide your portfolio. My primary market indicator (the NYSE Bullish Percent - BPNYSE) has kept the offensive team on the field for all but a month since March 12th and remains on offense today. I am currently emphasizing two equity based asset classes; International Equities (emerging) and US Equities (small cap) along with some exposure to metals; industrial & precious - in the commodity area.
Wednesday, October 7, 2009
Consequences of a Falling Dollar
Not only have we experienced a terrific market rally since March, we have also experienced a falling US Dollar. A steady chorus of international voices making a strong case for a global reserve currency, helped to fuel the dollars decline. Unfortunately, one can also point to our domestic fiscal policy. The decline of the dollar has a number of consequences for cash assets held domestically; one being more expensive foreign goods (imports). The dollars decline has contributed to the bullish backdrop underlying many other asset classes - such as commodities and foreign securities. As it takes more dollars to buy the same amount of ‘stuff’, commodity consumers will often stock pile to avoid making future purchases with a weaker currency, while precious metals are often purchased as an inflation or purchasing power hedge.
One beneficiary of the falling dollar has been Gold, which has moved above $1,000/oz. to register new all-time highs; at least in US Dollar terms. Interestingly, in terms of the Euro, we find that Gold is still well below its highs from February of this year.
Gold, as an asset class, offers a strong outlook based upon its trend chart however, its outlook in terms of leadership within the commodity asset class and even the Precious Metals segment of the asset class, is much less attractive. The proxy for silver (DBS – PowerShares DB Silver Fund) gave a relative strength buy signal versus Gold earlier this year and continues to exhibit positive strength vs. gold.
Silver has outpaced Gold’s proxy (DGL – PowerShares DB Gold Fund) rather dramatically thus far in 2009: DBS +45% to DGL +14% and, for the reasons mentioned above Silver appears likely to continue doing so.
Where appropriate for accounts under my advisement, DBS is part of the commodity exposure - along with DBB (PowerShares DB Base Metals Fund). The commodity group as a whole typically benefits from a falling US Dollar however, some commodities will inevitably benefit more than others during any market cycle. Going back to 1990 the average annual differential between the best and worst performing commodity is 114%*. Tactical asset allocation allows me to ‘hand pick’ exposure to the stronger areas within commodities, providing us with the opportunity to do better than a non-tactical approach like ‘buy and hold’ the broad commodity asset class. For example, while the trend for the overall commodity asset class continued higher in September, the trend of Crude Oil was derailed in recent months; oil prices stalled in early August when a high was placed at $75 per barrel. This is a negative divergence from the other raw materials.
For now it appears that metals, as a sub-group within commodities, are best positioned to provide outperformance and, despite Gold’s recent highs, Silver is in a lead role for the time being.
*Dorsey Wright - October 7, 2009
One beneficiary of the falling dollar has been Gold, which has moved above $1,000/oz. to register new all-time highs; at least in US Dollar terms. Interestingly, in terms of the Euro, we find that Gold is still well below its highs from February of this year.
Gold, as an asset class, offers a strong outlook based upon its trend chart however, its outlook in terms of leadership within the commodity asset class and even the Precious Metals segment of the asset class, is much less attractive. The proxy for silver (DBS – PowerShares DB Silver Fund) gave a relative strength buy signal versus Gold earlier this year and continues to exhibit positive strength vs. gold.
Silver has outpaced Gold’s proxy (DGL – PowerShares DB Gold Fund) rather dramatically thus far in 2009: DBS +45% to DGL +14% and, for the reasons mentioned above Silver appears likely to continue doing so.
Where appropriate for accounts under my advisement, DBS is part of the commodity exposure - along with DBB (PowerShares DB Base Metals Fund). The commodity group as a whole typically benefits from a falling US Dollar however, some commodities will inevitably benefit more than others during any market cycle. Going back to 1990 the average annual differential between the best and worst performing commodity is 114%*. Tactical asset allocation allows me to ‘hand pick’ exposure to the stronger areas within commodities, providing us with the opportunity to do better than a non-tactical approach like ‘buy and hold’ the broad commodity asset class. For example, while the trend for the overall commodity asset class continued higher in September, the trend of Crude Oil was derailed in recent months; oil prices stalled in early August when a high was placed at $75 per barrel. This is a negative divergence from the other raw materials.
For now it appears that metals, as a sub-group within commodities, are best positioned to provide outperformance and, despite Gold’s recent highs, Silver is in a lead role for the time being.
*Dorsey Wright - October 7, 2009
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