Commodities Versus Stocks: A Decade Performance Review

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The French saying, 'the more things change, the more they remain the same' is an excellent description of the performance of the Dow Jones Industrial Average in the first decade of the twenty-first century. The Dow closed at 11,497.12 on December 31, 1999. It will close out 2009 at almost the same price. This lack of progress has been seen before between 1966 and 1982 when the Dow kept reaching the 1000 level, but couldn't break through it. While the Dow ultimately went sideways during the last decade, the S&P 500 was down approximately 23% and the tech heavy Nasdaq fell about 44%. So much for buy and hold. The small cap Russell 2000 was up 24%, but this was minimal compared to the money that could have been earned in commodities. Many emerging stock markets outperformed both the U.S. markets and commodities.

The CRB (Commodity Research Bureau) index, a broad basket of commodities, ended 1999 just above 200. It will close out 2009 around 490 for a decade gain of 141%. Copper, the leading industrial metal, was up 276%, substantially outperforming the overall sector. Oil traded at $26 a barrel at the end of the 1990s and closed out the 2000s around $79.00 for an approximate gain of 204% . Gold, the most inflation-sensitive commodity, was up approximately 279%. Silver rose around 220%.

It is easiest for investors to use ETFs and ETNs to get exposure to commodities, since these trade as stocks. There is no need to get involved directly with futures. DBC, GCC, GSG, DJP, and RJI offer exposure to a basket of various commodities. DBB offers a means to invest in industrial metals and JJC to invest in copper. Aggressive investors can buy BDD, a leveraged industrial metal ETF. Gold ETFs include GLD, IAU and SGOL and DGP, which offers an approximate 200% exposure to the movement in price of gold. For silver, SLV, DBS and leveraged ETF AGQ are good choices. Oil exposure can be gotten through OIL, DBO, USO, and USL.

While U.S. stocks were mostly flat to down in ten years of trading, a number of emerging stock markets had major rallies during that time. The Ukrainian PFTS Index was up around 900%. Two Russian indices, the RTS and MICEX, were up in the 700% range. The Lima General Index in Peru was up over 800%. While these may be seen as too risky by many investors, stocks on the more mainstream Hang Seng Index in Hong Kong were up over 500% on growth in China. Emerging markets definitely offered the stock investor much more opportunity for profit between 2000 and 2009 than did the American stock market.

It is not easy or even possible for the average investor to get exposure to many of these smaller countries however. Broad exposure to emerging markets can be obtained by buying EEM and VWO. EWH can be used to track the Hong Kong market. Investors should consider the big four emerging markets the BRIC countries are likely to continue to do well in the next decade - Brazil, China, India, and Russia. EWB, FXI, IFN, and RSX respectively can be used to invest in these markets. Commodity heavy markets such as Australia (EWA) and Canada (EWC) have the potential to do much better than the U.S. stock market in the next decade as well.

It should be kept in mind that markets are cyclical, so good performance in one decade doesn't necessarily mean a repeat performance in the next. Long-term trends in the market tend to last about 20 years though and the commodity rally has only lasted for half that time. So there is a good chance that commodities will outperform again in the decade ahead. The biggest gains are usually toward the end of a long move up. This doesn't mean that commodities will go up every year, there will certainly be periods where significant drops take place as happened in the second half of 2008. Only gold managed managed to still be up for the year back then. As of 2009, gold was the most consistently profitable asset during the first decade of the 2000s, having gone up nine years in a row. While buy and hold wouldn't have worked for U.S. stocks after 1999, it worked quite well for gold and a number of other commodity plays.

Disclosure: Long gold, silver.

NEXT: Blog Wrap Up for 2009

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Markets React to Helicopternomics and so does New York Investing

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The U.S. Federal Reserves 50 basis point rate cut on September 18, 2007 would prove to be a seminal event in U.S. economic history. As is the case for many actions that have potentially disastrous impacts, there was a swift and stupendously negative reaction after the Fed lowered rates. It was clear immediately to almost everyone except the Fed and its Wall Street supplicants that the rate cut decision had been the wrong one.

Starting that day, the trade-weighted dollar (the value of the dollar against the currencies of the Americas largest trading partners) already down 33% from its peak level during the Bush administration, started selling off and looked like it was setting itself up for a potential collapse. On the Monday following the Fed’s move, the U.S. dollar hit the first of a series of all time lows By the end of September, the value of dollar would be down against almost every currency on the planet, including the Philippine peso, the Brazilian real, the Turkish lira and the Botswanan pula. People everywhere were desperate to get rid of their dollars and even preferred to hold currencies from countries that had previously been so monetarily irresponsible that they had experienced hyperinflation.

In the future, people would see this episode as the beginning of the end of the U.S. dollar as the reserve currency for the world. Years of excessive government, consumer and business borrowing and irresponsible U.S. monetary policy were finally turning the dollar into a currency that people wanted to avoid rather than hold. Loss of reserve currency status would be definitive once the world oil producers stopped pricing their wares in dollars. While this was still some time in the future, the inevitability of this outcome had now become a certainty.

The fallout from the Fed's monetary easing was unfortunately not limited to its impact on the U.S. currency. The falling dollar acted as the spark that ignited a rally in the commodity markets. Since most commodities were priced in dollars, everything else being equal, their prices had to go up as the dollar fell. A large basket of commodities tracked by the CRB index rallied over 8% during the month of the Fed rate cut, the biggest such increase since the high-inflation 1970s. It was perhaps even more disturbing that the commodities most sensitive to inflation, gold and oil, had some of the strongest rallies. Only three days after the Fed’s cut, gold hit a 27-year high. Oil hit a series of all time highs breaking through $80 a barrel and then $90 a barrel only weeks later. Most investors were so euphoric at the Fed’s largess to Wall Street, that they failed to notice that the markets were not just saying there was serious inflation on the horizon, they were screaming it.

The seriousness of the damage the Fed was causing and was intending to cause to the U.S. economy motivated the New York Investing meetup to spread it's message beyond its membership. After the September Fed meeting, New York Investing did its first videos on the topics of inflation and the falling dollar (See, "Protecting Yourself From Inflation and the Credit Bubble", http://www.youtube.com/watch?v=2d8k75N0qpA). The first of these five videos were done with Alex Paul Morris from MoMoney.TV interviewing organizer Daryl Montgomery. Subsequently, the New York Investing meetup would do its own videos and publish them on You Tube and in a number of other venues.

Next: More Collateral Damage from the Fed's First Helicopter Drop

Daryl Montgomery
Organizer, New York Investing meetup

For more information about the New York Investing meetup, please go to: http://investing.meetup.com/21