Friday, March 30, 2007

Commodity Inflection Point

As can be seen in the nearby graph (click to enlarge), commodities are nearing what appears to us to be the top of the recent range. The dark line represents the Powershares DB Commodity Index (DBC) while the brown line represents the US Oil Index (USO). Both indexes have declined moderately today despite several stronger-than-expected economic reports. Reuters reports that "personal income rose 0.6 percent in February, below the unrevised 1.0 percent gain for January but double the 0.3 percent increase forecast by analysts in a Reuters poll. February consumer spending also rose 0.6 percent, outpacing forecasts for a 0.3 percent gain after an unrevised 0.5 percent increase in January". In addition, "construction spending also defied forecasts for a decline as gains in nonresidential building overcame drops in home and federal construction, and a Chicago purchasing managers report showed a huge pick-up in Midwest manufacturing."

Reports like this would normally cause a spurt in commodity indexes and a drop in bond prices. The fact that they haven't leads us to conclude that the top of the range will stay intact and commodity prices will drift lower in the next few weeks as news reverts to some of the slowing economy reports. It can't help that Democrats are constantly in the press lately with a slew of anti-growth proposals.

Strategy Update: The Dynamic Commodity Strategy has increased 17.4% since the beginning of 2006 (see chart) versus the Rydex Commodity Index Fund (gray line) of minus -13.5% for a positive spread of 30.9%. It also has a positive spread of 12.0% over the Lehman Aggregate Bond Index for the same time period. The fund is moderately short at this time. More information.


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