Welcome to the first weekend of 2014, dear reader. We hope the Christmas break has you refreshed and fired up for a big year ahead. The time for reflection is over. So it’s the task of today’s Reckoning to speculate on a profitable idea for 2014. Here’s a hint: it isn’t in the stock market.
Shares were the winning trade in 2013. Your regular editor Dan Denning ran the numbers in the Thursday DR to drive the point home. ‘The All Ordinaries up 14.8%, the FTSE up 14%, France’s CAC-40 up 18%, Germany’s Dax up 26%, and Japan’s Nikkei 225 up 56%,’ wrote Dan. ‘Closer to the centre of the world’s dollar-based financial system in New York, the healing powers of quantitative easing were even more evident. The Dow Jones Industrials index was up 27%. That was its best year in 18 years. The S&P 500 had its best year since 1997, rising by 30%. And as you’d expect, small stocks did even better. The Russell 2000 Index of small companies rose 39.5%, its best run since 2003.’
Shares are pretty hot right now. But we don’t want to buy when things are hot. So we turn to the advice of grizzled investing veteran Jim Rogers when hunting for profitable trades. His timeless tip, penned in his book Hot Commodities, ‘Look to the bear.’
By that of course he means bear market, where prices are depressed. You’ve seen the numbers for share markets. Now take a look at these for agricultural commodities in The Age on Friday: ‘Corn posted the biggest commodity loss last year, dropping 40 per cent. Wheat tumbled 22 per cent, coffee slid 23 per cent, sugar was down 16 percent, and soybeans declined 8.3 percent.’ The Standard & Poor’s GSCI Agriculture Index of eight crops had its biggest annual drop since 1981.
This is good news for shopping carts all over the world. With food prices low and the shale glut in the US keeping oil in check (for now), inflationary pressure is subdued. How long it will stay that way is the great question.
Ag commodities were in a huge bear market for twenty years before spiking in 2007, getting smacked down during the global financial crisis, then heading up in 2011 before the commodity bear market of the last two years knocked them down yet again.
The Age points out ‘gains in food costs around the world have slowed as record harvests from India to the US expanded supply’. But we note with interest that soybeans fell the least, a modest 8.3%. That is to say, the market practically went sideways with a decent harvest to bring in supply. What happens if the harvests turn poor?
This is one reason why soybeans are the commodity to watch in 2014 according to our colleague Phil Anderson. We’ve mentioned him before thanks to his bullish call on US and Australian real estate, but Phil is also an active trader in stocks and commodities. He applies the work of long dead trader and writer WD Gann to both markets. We were interested to see a presentation he did recently. He traded gold to the peak in 2011 and was out before it fell. He bought a house in London with the profits.
Here’s a long term chart of soybeans. You can see the big move was in 2007, and since then it’s been quite a ride.
The question then is how to get your timing right. Phil is working on a project to show you how to do just that, in both stocks and commodities. Stay tuned for more on that.
Of course, not all of us are traders, or want to be. The conservative approach to commodities is to grab a basket of them, based on a long term trend, and try and smooth out the swings individual markets are prone to thanks to the vagaries of the weather, politically unstable supply regions and news flow.
Dan Denning took this approach for his subscribers over at The Denning Report. One long term trend Dan is banking on is putting your money into ‘objects of permanent value’. That is to say, tangible goods in a world of competitive devaluations in the currency markets. Food fits the bill in a world of seven billion people. We know demand is strong. The key then is supply. Keep your eye on those harvests.