Friday, April 25, 2008

Time to short commodities?

Futures are now pricing in just a 25 bps cut next Tuesday and then a stop to the rate cuts by the Fed. That should be bullish for dollar and bearish for commodities (because commodites have been pushed up on the theory of the weak dollar).

I can't understand the supply-demand arguments to justify sharp movements in commodity prices on a daily basis. Suppose oil is in short supply. So why should it be priced only at $115 and not at $1150? I can understand that suddenly there have been port closures in Australia, so coal prices go up. But how come everything goes into short supply at the same time. I suspect the movements in commodities that we have seen in the last few months has a lot to do with the theory that because real interest rates are now -ve in the US, commodities should go up. But they can't go up ad infinitum, right?

Should I go long SMN? It is already up 10% in last few days, but has been absolutely hammered in the last few months. This ETF has shorted stocks of companies through derivatives and is leveraged 2x. Its biggest position is Monsanto, which is a play on agflation. All these companies have seen their stock go vertically up in the last 7 months since the Fed rate cuts started.

I guess what is extremely important for this to succeed in the short run is the nature of the commentary out of Fed next Wednesday. If they as much mention inflation, it will be a good bet. If they do not, it might become a problem - this is again leveraged 2x like SKF, so moves can be magnified. But with now everyone on the theory of agflation, it might be the time to go against it. It might not be a bad bet for the longer term if one has the stomach for it (I don't).

A technical point - how do dividends get adjusted for SMN? If I short a stock that pays dividends, I pay the dividend to the person from whom I borrow the stock to short. In SMN, who pays dividends? Or because of derivatives, that consideration doesn't arise?

1 comment:


Nice post on commidites.