SET Monthly Issue June 2009
June 2009
COMMODITIES
Did investors sell in May and go away?
Take a look at this chart of the S&P 500. You’ll see a solid 5% gain in May. But it’s been a different story so far in June.
In fact, the S&P 500 has closed within a 15 point range everyday in June.
What it boils down to is investors are waiting on economic data to give them a reason to keep buying. And right now, ‘less bad’ data isn’t good enough to keep investors interested.
The 800 pound gorilla in the room is oil prices. Rising oil prices could derail economic recovery.
But it’s not all bad news. Commodity markets and commodity dependent stocks don’t always move in lock step with the broader market.
These commodity driven stocks are bucking the trend and still rising.
This month we’re adding two ETFs that’ll do well, even if the rest of the stock market struggles.
Farmers are a tough bunch.
I should know. I grew up on my family’s farm in central Nebraska. The farm has been run by generations of my family for over a century now.
Like most walks of life, there are good times and bad. I remember the hard work, stressing about commodity markets, worrying about the weather, and planning life around planting, irrigation, and harvest seasons.
But all of those worries paled in comparison to the semi-annual meeting at the bank.
We’d meet with the local banker to discuss our farm’s current state of affairs. As you can imagine, it wasn’t pleasant. The banker was usually an ex-farmer whose own farm had gone under. To have someone who didn’t cut it as a farmer, making decisions about what’s best for our farm, often seemed insane.
However, the meeting was a necessary evil. They financed our farming operation. All of the machinery, seed, fertilizer, chemicals, and fuel were financed until the harvest was sold. Then, the whole process started over again the next year.
The bank plays a critical role in our operation. They provide the capital for many of the 2+ million family farms like ours. Of course, they also work with the large scale family operations and commercial farms.
This year the banks are in a bind. They’re being squeezed by the credit crisis. In turn, they’re squeezing the farms.
Farms have less capital to run their operations. They’re faced with tough decisions. Ultimately, they’ll plant fewer crops. They’ll focus on the best producing land. In years like this, it’s important to get the highest yields possible.
Fewer acres in production mean a smaller harvest. Or to say it another way, less supply. When supply goes down, prices go up. We’ve already seen a run up in corn, soybean, and wheat prices this year. I expect they’re going to keep rising.
Ask any experienced farmer and they’ll tell you… when grain prices go up, the costs of seed, fertilizer, and chemicals have a funny way of jumping too.
Macro/Economic Trend: More mouths to feed
The US Census Bureau estimates 6.7 billion people live on our little planet. And we all have one thing in common. We’ve all gotta eat (and breath but I haven’t found a way to make money off that… yet).
It’s simple math really. There’s a limited amount of land suitable for agriculture. In order to meet increasing demand, the same amount of land must produce an ever increasing amount of food.
That, my friends, is productivity. Luckily for us, that’s the main focus of Ag Business. Their products drive increases in farm land productivity – also called yield.
Right now, demand from Asia is stressing the world grain supply. US corn stocks (current supply) have decreased to record lows. If production was halted today, we would run out of corn in about a month.
Its estimated demand will outpace supply again this year. We’ll see current stocks at dangerously low levels.
Increasing demand and limited supply is going to drive prices higher. Ag Business will keep developing higher yielding varieties of seed. And farmers will pay top dollar for the latest technology, seed hybrids, fertilizers, and pesticides to generate better yields… it’s the Ag Business cycle of life.
We’ve found an ETF to profit from this cycle. The Market Vectors Agribusiness Fund (MOO).
Fundamentals: A closer look at MOO
MOO holds 44 Ag Business stocks. These are companies making more than half of their income from agriculture.
It has a slightly above average expense ratio of 0.59%.
The top five holdings and percentage weight for MOO are –
| Company Name | Ticker | % Weight |
| Potash | POT | 8.63% |
| Syngenta | SYT | 7.81% |
| Mosaic | MOS | 7.32% |
| Monsanto | MON | 6.18% |
| Archer-Daniel-Midland | ADM | 5.85% |
The tug of war between supply and demand is king in commodities.
Right now, grain supplies are at record lows. The credit crunch and a wet planting season are cutting into the number of acres in production. We could see food supply concerns creep into public consciousness for the first time in ages.
And at the same time, demand is increasing. Asia can’t produce enough grain to feed its own people. The US is exporting more and more to these countries.
It’s not just food driving demand for grain. Bio-fuels like ethanol are taking a bigger piece of the pie each year as well.
These forces are painting a clear picture. Grain prices have to go up! As they climb higher, farmers will buy more materials to increase productivity. It looks like good times ahead for Ag Business.
Technicals: The charts lead the way
Take a look at MOOs chart. It speaks for itself. The strong upward trend is undeniable.
The 20- and 50-day moving average are both trending higher. The 20-day MA is acting as a support level as the ETF climbs higher.
The MACD and Relative Strength Index (RSI) both confirm the bullish price action.
It gets even better when you look at the recent up/down volume. It’s indicating MOO is under accumulation, which means investors are buying up shares of this ETF much faster than they are selling them.
Trade Alert
Buy: Market Vectors Agribusiness Fund (MOO) up to $38.75
Recent Price: $36.48
Price Target: $47.50
Stop Loss: $30
Remember: We’re looking to ride the trend higher. And this trend looks to be very strong. The ETFs price, 20-day MA, and 50-day MA have all crossed over the 200-day MA. MOO is setting fresh year-to-date highs almost every week. Overhead price resistance is minimal. We should be able to ride the 20-day MA to our price target.
INFRASTRUCTURE PLAY
In the April issue of Sector ETF Trader, we outlined the massive government infrastructure spending from around the world. We told you construction and engineering firms are first in line to benefit.
Now we’re moving onto the next phase.
Once projects are designed, they’ll require massive amounts of raw materials. Basic materials like steel, iron, and copper are going to be in high demand.
Macro/Economic Trend: Infrastructure, inflation, and China…
There’s a three headed monster driving the cost of basic materials higher.
Remember, infrastructure is a big component of governments’ economic stimulus packages. But they aren’t going to hit all at once. It takes time for projects of this size to start. The projects in China have been the first to get underway. The majority of the US projects will start over the next 18 months.
In fact, only $175 million of the $27 billion the US government’s allocated to road and bridge construction has been paid out. That’s less than 1% of the money ready to be spent! Once these projects get underway, it will fuel demand of raw materials for the next few years.
The raw materials they need are commodities like oil, steel, and copper.
To pay for the stimulus package, the US government’s printing money like it’s going out of style.
In fact, the US is printing money to pay for two wars, bank and auto industry bailouts, economic stimulus packages, and to keep interest rates artificially low. The new money flooding the system is having a profound effect on the markets. Prices are starting to rise and the dollar is weakening.
Fear of runaway inflation is pushing investors into commodities.
Historically, commodity prices increase in times of inflation. They’re an ideal hedge against inflation.
Investors around the world are noting the US debt binge. The federal government’s biggest creditor, China, is none too pleased.
China is concerned about a devaluation of the dollar. They’re the single largest foreign holder of US Treasuries. They hold about 24% of all foreign owned US debt. If the dollar continues to fall, the debt China owns will be devalued as well.
It’s no wonder China isn’t taking this lying down. They’re calling for the replacement of the dollar as the world reserve currency. However, it’s unlikely that will actually happen.
So, China is taking another approach. They’re stockpiling commodities. Why? The reason’s debatable.
They could be hedging their exposure to the US Dollar; they could see current commodity prices as a bargain; they might be stockpiling for future use.
I think it’s a combination of reasons. Either way, there’s no denying China’s buying commodities. As long as they continue to buy, commodities prices are going higher.
One ETF that should profit from rising raw material prices is the SPDR S&P Metals and Mining ETF (XME).
Fundamentals: A closer look at XME
XME holds 24 companies engaged in mining and production of basic materials.
It has a low expense ratio of 0.35%.
The top five holdings and percentage weight for XME are –
| Company Name | Ticker | % Weight |
| AK Steel | AKS | 6.84% |
| Massey Energy | MEE | 5.37% |
| Cliffs Natural Resources | CLF | 5.30% |
| Steel Dynamics | STLD | 5.16% |
| Schnitzer Steel | SCHN | 5.08% |
Technical Analysis: The charts lead the way.
XME’s set six consecutive higher highs and higher lows. That’s a strong trend. In my research, I always look for a trend confirmation. XME has set six of them… it’s a very strong upward trend.
The 20- and 50-day moving averages are both in a bullish upward slope. In fact, since crossing over the 20-day MA, it has been a spring board propelling XME higher.
The bullish trend is confirmed by multiple indicators. Buy signals are flashing on the MACD, stochastic, and relative strength index.
Trade Alert
Buy: SPDR S&P Metals and Mining ETF (XME) up to $43.50
Recent Price: $39.14
Price Target: $51
Stop Loss: $32
Remember: XME’s riding the trend higher. As long as China keeps buying, commodity prices will keep moving up. This ETF should continue to move higher along with commodity prices. Overhead price resistance is minimal. We should be able to ride the trend to our price target.
Consumer Discretionary (7.82%) Consumer confidence has been on the upswing lately. It triggered a big rally in the consumer discretionary stocks. Two issues that might derail the consumer recovery have appeared in the last month.
The first is higher prices at the gas pump. Gas prices impact everyone’s pocketbook. When we’re spending more money to fill up the tank, we have less to spend on everything else.
Along those same lines, interest rates are starting to rise. Raising the interest rate on American consumers’ $2.5 trillion personal debt has a big impact on disposable income.
Consumer Staples (5.14%)
Investor confidence continues to climb. And why not, market volatility is at the lowest level since September of last year. The VIX has fallen to 28 since peaking around 80 in October and November.
Investor optimism continues to drive money into economically sensitive stocks.
This isn’t good news for the defensive sectors like Consumer Staples.
Energy (11.48%)
Oil prices are going up and up and up. They’re reaching new year-to-date highs every few days. Now it’s closing in on $73 per barrel.
The driving force is a weak dollar and renewed demand. Last week the crude oil inventories fell by 4.4 million barrels. And just as I predicted in the trade alert last month, the IEA has starting revising their demand forecast higher. OPEC cutting supply hasn’t helped either.
I think oil prices are on their way to $80 per barrel.
Financials (8.33%)
Ten banks received the ‘ok’ from the government to start repaying $68 billion in TARP money. Don’t be fooled, banks aren’t out of the woods.
Mortgage loans made during the real estate bubble are still a ticking time bomb on banks’ balance sheets. Interest rate resets on prime and alt-A adjustable rate loans have the potential to trigger another wave of foreclosures.
The kicker is, interest rate resets on the majority of these loans don’t start until 2010. These borrowers will see their payments jump in the next year or so. It’s very likely they won’t be able to afford the new payment.
What’s really scary is the dollar value of loans in these categories. It’s more than double the amount of sub-prime loans. If interest rate resets trigger another round of foreclosures, it could be the death knell for some banks.
Healthcare (1.18%)
We finally got a bit of a rally in Healthcare this month. The first sign of life for this sector since President Obama announced plans for health care reforms.
But the rally doesn’t change anything… we’re steering clear of any new recommendations until the cloud of government health care reform clears.
Industrials (8.21%)
Industrial stocks have been soaring higher since mid-March. This cyclical sector is benefiting from China’s demand for raw materials.
Even though production numbers are ‘less bad’, manufacturing companies continue to shed workers. A lean workforce should help the bottom line for most companies. When we start to see real economic recovery, the lean workforce will help lock in solid profits.
Technology (8.95%)
Technology continues to lead the markets higher.
Our multimedia networking ETF (IGN) has been on roll. IGN’s largest holding,Research in Motion (RIMM), report earnings later this week. A solid number from RIMM could be the catalyst to push IGN to our price target.
I’ll keep you posted.
Materials (8.48%)
We sold our gold miners position this month, locking in a 35% gain. But that doesn’t mean we think this sector is done. This sector still has plenty of room to run.
China’s buying base materials left, right, and center. The companies producing materials like iron ore, copper, zinc, and coal should continue to move higher.
We’re recommending the SPDR S&P Metals and Mining ETF (XME) this month.
Utilities (8.64%)
The Utilities had a nice bounce this month. The sector is being carried higher by income investors tired of low rates of return on CDs and Treasuries.
Now they’re moving into dividend paying stocks.
Utilities offer some of the best yields of any sector. With stock market volatility easing in the last month, utilities are looking very attractive.
- Sold GDX on 6-2-09 at $44.75 for a 35% profit!
- This month we’re buying MOO and XME…
Category: SET Monthly Issues
