The Worst Month for Commodities Since Lehman

S&P Dow Jones Indices has a thing on commodity prices at their blog, Indexology, that is sure to raise some eyebrows. July 2015 is shaping up to be the seventh worst month for the GSCI index of 24 commodities in recorded history. The index is down 13.59% month-to-date, a feat it has only achieved in six prior months back to 1970 – 45 years ago.

Every single one of the 24 commodities is negative for the month except lean hogs, which is just barely positive by 18 basis points BUT only when taking into account the positive roll yield; otherwise that is negative too, by 14.5%. Throughout the history of the index, 23 commodities have been negative together in a month only once in September 2008 and all 24 were negative together only once in the following month of October 2008.  The single performer in September 2008 was gold, clearly different from today.

We don’t include commodities or “real assets” in our strategic asset allocation model portfolios although many advisors do, including the robo-advisors. This is not because we dislike them or disrespect their ability to add diversification. It’s mainly because of these three common-sense notions:

a) they are unnecessary in small amounts (a 3 percent commodity allocation sleeve? Who are you f***ing kidding?) and dangerous in large amounts. We’re not here to speculate on commodity prices. We’re here to keep rich people from becoming poor people. History suggests that, as with gold, you win sometimes and you lose sometimes but the whole gambit is unnecessary.

b) the commodity producers are publicly traded and represented in the equity opportunity set. In foreign markets, they are a bigger slice of the pie than in US markets. For example, the UK, Australian, Mexican, Brazilian and Canadian stock markets are lousy with materials companies and miners. If we’re getting industry exposure in our global equity portfolios, we don’t also need a constant-contract futures bet on top of it.

c) commodities as an investment are basically a weak dollar bet. There are plenty of other weak dollar bets embedded in our global portfolio as it is.

But back to the price action, which I find fascinating as a student of markets…

Here’s what will happen: Commodities will one day (maybe soon) get so oversold and universally despised that they will stage a massive comeback. Or maybe it will be a dead cat bounce on the way to lower lows. Some traders will absolutely clean up by being positioned perfectly. Most will get their asses handed to them, especially the pretenders that couldn’t tell a soy bean from a coffee bean and have no business being there.

Me, I’ll just watch and enjoy the show.

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