Commodities & Related Industry Performance

After three straight weekly gains, it is not surprising stock markets suffered losses last week.  It still remains to be seen whether we have started a sustainable rally; how the S&P 500 moves relative to its 200 day moving average may shed light on the near term direction for U.S. stocks.  It has spent most of the year below it.

While many broad stock indexes are still down for the year, there are a few industries with gains.  Many of the current leading industries (mining, energy, machinery, transportation) have some exposure to the price of raw materials.  One of the current challenges for portfolio managers is the influence of commodity prices on many of these industries and the additional risk created if they are combined in a portfolio.  

One industry that has done well since the start of the year is precious and industrial metals.  For example, steel (SLX) is up 21%.  You can access many of these markets individually or several of them through one investment in the SPDR S&P Metals and Mining ETF (XME).  XME also includes a small amount of exposure to coal (KOL), which is also performing well in the current market.  If world demand from emerging countries for raw materials continues, these industries are likely to do well.  XME is an easy way to start a broad position in a portfolio with the potential to add DBB, DBP, GDX, or SLX for more specific exposure.  There are many other choices as well.  Make sure you understand whether your investment is an Exchange Traded Fund or Exchange Traded Note for the different risk factors associated.  Also, check with your accountant regarding tax exposure; there are specific tax characteristics to take into consideration.  There is also risk if the global economy slows, reducing demand for commodities, causing prices for metal and mining companies to decline.

With political instability in several oil producing nations on the rise, many people are wondering where the price of oil is headed.  Investors Business Daily just published an Oil and Gas Exploration and Production industry review that touched on the wide ranging views by companies and oil experts.  The article listed prices as low as $65 a barrel to as high as $200, with many smaller producers using $75 as their yardstick.  If you own a broad commodity index like DBC or DJP, you already have exposure to the price of crude oil, which is closely tied to the performance of Oil and Gas Exploration and Production companies.  For industry specific exposure take a look at XOP.  Owning both a broad commodity index and XOP may expose your portfolio to additional risk related to price sensitivity to crude oil.  While political instability can change quickly, many experts agree, remaining oil and gas reserves are becoming more difficult to find and develop.  Increasing demand in places like China and India, and some resource-bearing nations moving to take control of their assets, is shifting power.  In short, operating complexities have increased for the industry.  There is also risk a global recession could dampen demand and lead to excess supply.