Many investors simply look at the stock market as their only source of investing ideas. However there exist other options. One such option is managed futures and commodities.
With that said, this sector has presented, and will continue to present, great volatility, risks as well as rewards. All one has to do is go grocery shopping, or simply fill out the gas tank, and one can see prices of so many basic materials are increasing (trending). Just look at the price of milk or a loaf of bread. Inflation is defiantly on the horizon.
So how does one profit from this?
Commodity prices have tended to surge during periods when the stock and bond markets have experienced declines. Commodities both contribute to, and benefit from, inflation, particularly unanticipated inflation. Rising inflation hurts stocks by infringing on companies' profit margins and consumers' purchasing power. When inflation becomes apparent in the economic arena, rising interest rates can savagely impede bond returns by sapping the real value of interest and principal payments.
What else is interesting to value investors is that various commodities are significantly below their all-time price highs. For example, sugar is approximately 80% below its all-time high, silver 75% below its all-time high, and corn and cotton less than half their all-time price highs. So, as proverbial value investors, we need to have managed futures on our radar screen.
Considering the current situation one could consider investing in managed futures as a non-correlation with the financial markets. Commodities have done poorly during virtually all stock market booms. Glaring examples are the Roaring Twenties prior to the Great Depression, as well as the recent Bull Market in the mid 1990s. However during the Great Depression and the 1973-1974 bear market, commodities outperformed.
There are always bull markets and bear markets. Even in a grueling bear market in the stock market, one can make positive returns when divesting into other asset classes. One has to be available to participate, as well as have a plan. The plan is the most important aspect of any investment. There is tremendous leverage and volatility in the futures markets. That is why I would only suggest managed futures, but only with managers that negate leverage, are aware of the risks, and maintain a prudent stance.
Another way to participate would be to purchase a commodity index, but the indexes also expose one to great volatility. The news is full of recent stories of commodity-based hedge fund managers blowing up, such as Red Kite Metals (managing approx $1 billion) which lost 50% this year, after returning 188% last year. Amaranth Advisors LLC was in the news after it blew up and destroyed client’s assets.
Commodity bull markets occur due to years of disinterest. The longevity of commodity bull markets - such as 1906 to 1922, 1933 to 1953, and 1968 to 1982 - can lead one to speculate that we might be at the beginning of such a commodity bull market. Jim Rodgers, one of the original partners of George Soros, believes so and has staked his reputation on it. Bull markets in commodities have had, and will have in the future, severe corrections and volatility throughout. That's the nature of bull markets, and it could be said that these gyrations cause many investors to give up on their positions.
One example is that of gold: See its volatility during the 1980s, dropping from its record high of $850 an ounce, or the 50% correction it suffered in the mid-1970s, falling from nearly $200 to $100.
Another example is “The Rogers Index,” an index of commodities that imploded by approximately 25% in the months following 9/11, and then resumed its upward thrust shortly after. Obviously, a major terrorist incident, a bird-flu epidemic, a global financial crisis, or a hard landing in the Chinese economy, could trip up the commodities bull. One could question that any pullback would likely be temporary, and be a proverbial buy on the dip. As in the stock market, one needs a plan. There are always tremendous opportunities but there are also tremendous risks that need to be addressed.
Andrew Abraham
[email protected]
Http:/www.AbrahamBedick.com
Http://capitalinvestor1836.blogspot.com
With that said, this sector has presented, and will continue to present, great volatility, risks as well as rewards. All one has to do is go grocery shopping, or simply fill out the gas tank, and one can see prices of so many basic materials are increasing (trending). Just look at the price of milk or a loaf of bread. Inflation is defiantly on the horizon.
So how does one profit from this?
Commodity prices have tended to surge during periods when the stock and bond markets have experienced declines. Commodities both contribute to, and benefit from, inflation, particularly unanticipated inflation. Rising inflation hurts stocks by infringing on companies' profit margins and consumers' purchasing power. When inflation becomes apparent in the economic arena, rising interest rates can savagely impede bond returns by sapping the real value of interest and principal payments.
What else is interesting to value investors is that various commodities are significantly below their all-time price highs. For example, sugar is approximately 80% below its all-time high, silver 75% below its all-time high, and corn and cotton less than half their all-time price highs. So, as proverbial value investors, we need to have managed futures on our radar screen.
Considering the current situation one could consider investing in managed futures as a non-correlation with the financial markets. Commodities have done poorly during virtually all stock market booms. Glaring examples are the Roaring Twenties prior to the Great Depression, as well as the recent Bull Market in the mid 1990s. However during the Great Depression and the 1973-1974 bear market, commodities outperformed.
There are always bull markets and bear markets. Even in a grueling bear market in the stock market, one can make positive returns when divesting into other asset classes. One has to be available to participate, as well as have a plan. The plan is the most important aspect of any investment. There is tremendous leverage and volatility in the futures markets. That is why I would only suggest managed futures, but only with managers that negate leverage, are aware of the risks, and maintain a prudent stance.
Another way to participate would be to purchase a commodity index, but the indexes also expose one to great volatility. The news is full of recent stories of commodity-based hedge fund managers blowing up, such as Red Kite Metals (managing approx $1 billion) which lost 50% this year, after returning 188% last year. Amaranth Advisors LLC was in the news after it blew up and destroyed client’s assets.
Commodity bull markets occur due to years of disinterest. The longevity of commodity bull markets - such as 1906 to 1922, 1933 to 1953, and 1968 to 1982 - can lead one to speculate that we might be at the beginning of such a commodity bull market. Jim Rodgers, one of the original partners of George Soros, believes so and has staked his reputation on it. Bull markets in commodities have had, and will have in the future, severe corrections and volatility throughout. That's the nature of bull markets, and it could be said that these gyrations cause many investors to give up on their positions.
One example is that of gold: See its volatility during the 1980s, dropping from its record high of $850 an ounce, or the 50% correction it suffered in the mid-1970s, falling from nearly $200 to $100.
Another example is “The Rogers Index,” an index of commodities that imploded by approximately 25% in the months following 9/11, and then resumed its upward thrust shortly after. Obviously, a major terrorist incident, a bird-flu epidemic, a global financial crisis, or a hard landing in the Chinese economy, could trip up the commodities bull. One could question that any pullback would likely be temporary, and be a proverbial buy on the dip. As in the stock market, one needs a plan. There are always tremendous opportunities but there are also tremendous risks that need to be addressed.
Andrew Abraham
[email protected]
Http:/www.AbrahamBedick.com
Http://capitalinvestor1836.blogspot.com
