Manager: Patrick Clark
Model: Market Neutral Growth
I will start this commentary by updating last month’s comments on the Yen. The CurrencyShares Japanese Yen ETF (NYSE: FXY) has moved steadily higher since last month. The Yen is strengthening, which is a very good indicator for Japan in my view. I am relieved to see the situation stabilize there, and am hopeful that Japan will recover.
The news has been almost as sensational this month as the previous. I do not wish to recap these news stories, but will focus on major trend changes in various markets. These trend changes may or may not be related to these news stories, but for practical purposes, it really doesn’t matter.
Over the past several months, we’ve seen an uptrend in most commodities and non-US currencies and a corresponding downtrend in the U.S. dollar. I would like to point out that weakness in the U.S. dollar is reflected in every commodities chart, since all charts can be understood as ratios with the U.S. dollar as the denominator. It gives the illusion that there is a strong uptrend in just about everything. Actually, there is a strong downtrend in the U.S. dollar, which skews all dollar-based charts.
The strength in commodities over the past several months has been a result of both commodity specific factors and U.S. dollar specific factors. These trends are a result of inflation. The strength in United States Oil Fund ETF (NYSE: USO) and PowerShares DB Commodity ETF (NYSE: DBC), as measured by levels in RSI, is similar to levels seen in 2008. The rise in commodity costs in 2008 was significant and caused starvation in poor countries around the world where food costs represent a high percentage of personal income.
The bullish trend in commodities back in 2008 was also accompanied by a steep downtrend in the U.S. dollar. This inverse relationship can be seen in the charts of PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP) and DBC in both periods.
Unlike the 2008 period, however, my portfolio is not currently pegged to commodity prices. I have been painfully aware of the loss in purchasing power of my portfolio over the past months, but with commodity prices extremely overbought, I have been waiting for a good opportunity to hedge my portfolio’s currency risk with commodities.
Over the past week (2-6 May 2011) the market has sold off commodities, providing what looks like a good opportunity for me to get in at a reasonable price. Over this past week the commodity ETFs on my watch list (COW, DBA, DBB, UGA, DBC, DBP, USO) have all declined.
DBC, as a diversified basket of commodities, is my ETF of choice for the purpose of hedging against inflation. In just one week, DBC has gone from an extremely overbought condition to a much lower risk entry point. I will watch this ETF over the coming weeks and enter when the selling pressure dies out.
My non-ETF equity positions continue to have a slight bullish bias. I am currently net long by 25% of my portfolio value.
The rise in US equity markets is attributable mainly to forces unrelated to the free market. Manipulation by the Fed has held off a fall in equity prices in exchange for the value of our currency. This action successfully masks the loss of wealth and purchasing power for everyone with income streams and assets linked to the dollar. There is nothing I can do to protect my income, but I aim to protect my assets.
