Posts Tagged ‘DBA’

A Review of my EQ Based Global Macro Trading Ideas

December 22nd, 2009 Michael McDonough Comments off

Today I wanted to quickly highlight the performance of my equity based trading strategies around my global macro economic investment thesis.

Emerging markets: I continue to believe that emerging-market growth and equity performance — especially in countries with a strong consumer base — will continue to outpace developed nations in 2010. Therefore, you should still consider long positions in iShares Brazil (EWZ) and iShares FTSE/Xinhua China 25 (FXI).

Risks in Brazil include an eventual uptick in the central bank’s Selic rate, which could stymie the country’s growth. In China, early inflationary warnings could eventually lead to tightening actions by the government that could hamper growth. Still, I believe upside potential outweighs the risks over the short term. For more details on this trade idea, please see my piece published on Oct. 9 titled “Easy Money is a Big Driver.”

Steel: The continuing global economic recovery combined with relatively conservative steel demand estimates for 2010 should help propel steel prices in the year ahead. In addition, the potential consolidation of inefficient Chinese steel mills may lead to reduced output, placing excess demand in a favorable pricing environment on South Korea’s Posco (PKX ) and Japan’s JFE Holdings. Strong demand in other emerging markets should help to support Gerdau (GGB). Risks to these investments include a weaker-than-anticipated global recovery or an oversupply of steel weighing on prices. See my column from Oct 16, “Coal Seeing Recovery in Foreign Demand,” for more thoughts on this theme.

Japan: Not much has changed on my bearish view toward the yen since I published a piece called simply, “How to Play Japan” back on Nov. 13. In fact, I would argue that support for any further yen appreciation has dissolved, creating a good entry point for a short position via puts on ProShares Ultra Yen (YCL) or a straight long position in ProShares UltraShort Yen (YCS). This trade depends heavily on timing, and I anticipate that the yen should move back above 100 per U.S. dollar over the coming months.Japan’s woes have recently been noticed by Moody’s, where a senior vice president was recently quoted by Bloomberg as saying, “Things we are most concerned about are the lack of well-articulated long-term fiscal consolidation and a debt reduction plan.”

Rail: Warren Buffett’s purchase of Burlington Northern Santa Fe (BNI) provided a strong boost for railroads and provided Buffett with a bet not only on long-term U.S. recovery, but also on coal. I recommended CSX (CSX), Union Pacific (UNP) and Norfolk Southern (NSC) based on what I assumed to be Buffett’s investment thesis. These positions may not have the same short-term upside potential as some of my other ideas, but they should provide some longer-term value in your portfolio. My piece from Nov. 13, “Coal in Your Stocking: Hypocrisy, Senility or Common Sense?” has more information about this trading idea.

Agriculture: Ag products will see more demand as developing nations begin to eat more like developed countries. Ag stocks also provide investors with a good real-time hedge against inflation and thus far have lagged pricing increments seen in other commodities. I maintain my constructive long-term view on wheat, corn, sugar, soybean, cocoa and hogs. One way you might play these positions is through exchange-traded fund PowerShares DB Agriculture (DBA), which is unique in that it invests in actual commodities futures vs. agricultural companies. For more information on trades in the ag sector, please see my piece published on Nov. 20 called, “Talking Turkey on Agriculture Trends.”

China energy: Very little has changed since I first published my thesis on Chinese energy companies last week, “Three Ways to Play China Oil & Gas for 2010.” I still believe that PetroChina (PTR), Sinopec (SNP), and CNOOC (CEO) are all well positioned to take advantage of China’s growing energy and natural gas market in the year ahead.

Global Macro Trading IdeasSource: Bloomberg


Talking Turkey on Agriculture Trends

November 20th, 2009 Michael McDonough Comments off

An excerpt from today’s column on RealMoney…

“In tune with the Thanksgiving spirit–eating–I want to discuss a budding topic that’s garnering more attention lately from a growing number of my clients: food, or more specifically, agriculture. There are many ways to tackle this topic, but what I wanted to highlight today is the growing caloric intake of the developing world, especially China.

Developing-world diets have started a path of convergence with their developed-world counterparts, meaning that as disposable incomes within these countries have risen, consumers have begun to demand more complex proteins: meat. To help put this into perspective, if the present trend were to continue and if Chinese and Indian meat consumption were to converge with that of the U.S., global caloric intake could double by 2050.”

I go on to recommend the ETF DBA as a good play on this theme as well as a good hedge against inflation.  Please see the entire column here.


Food or Fuel for Thought?

March 14th, 2008 Michael McDonough 3 comments
Energy prices are showing absolutely no signs of abating; those peak oil theorists may be on to something (at least in the short-run). We just don’t see oil prices coming down significantly without a considerable reduction in demand; through improved fuel efficiency or a considerable economic slowdown. Now that we have settled that, we want to tackle a potentially larger problem verse high energy prices alone. That problem is higher energy prices combined with higher food prices. As people search for alternative energy sources, they have begun to tap heavily into the worlds’ food supply (i.e. corn). Ethanol, though 9,000 years old, has had a proliferation recently thanks to lofty oil prices. According to the Renewable Fuels Association just the US is producing around 375,000 barrels per day. This equates to almost 2 billion bushels of corn a year (around 25% of the domestic use), and it’s growing. Essentially, that means 2 billion fewer bushels of corn are going into the food supply for both humans and animals. Of course productivity improvements and new farm land could reduce the overall effect, but not nearly enough to compensate for the sectors rapid expansion.

US Ethanol Production has been increasing drastically

So what does this mean for food?

We are all aware that global food prices are rising sharply for a variety of reasons including weather and demand and supply shocks, but have energy prices had any affect?. Below we outline our view that the increasing in oil prices, have led to a substantial rise in ethanol production, and will have significant effect on food prices and eventually overall CPI. In order to have a consistent time series of agricultural prices we used the USDA prices received by farmers’ data. First off, let’s look at the relationship between WTI prices and ethanol production (chart below). As you can see below the two variables are highly correlated, this makes sense since the price of producing ethanol relative gas drops as oil prices move higher. However, the important question is what effect (if any) does the increased production of ethanol have on the food supply and prices?

High energy prices have been the driver behind the increased production

To answer this question we first analyzed corn price verse ethanol production (chart below). Again we see a strong correlation between the two, with the only anomaly being in 2005. This was caused by a good harvest and the effects of Hurricane Katrina. As we stated early the price of corn is influenced by a number of variables. Given the minimal use of ethanol prior to the beginning of this decade we do not believe ethanol production has had much, if any, affect on corn prices before now. In 1999 only 1.5bn gallons of ethanol were produced a year verse over 5bn today. That’s a lot more corn! Now that we now the production of ethanol can influence corn prices, what is the relationship of corn prices to the food and beverage CPI component and overall CPI?

Corn Prices have been influenced by ethanol production

Before we start this analysis lets mention some important direct uses of corn; food, corn syrup, animal feed, ethanol, etc… Meaning corn prices can influence everything from candy to milk. Now with this in mind, we would expect a significant rise in corn prices to eventually pass-through the food chain into every product that utilizes corn. In the chart below we compared corn prices to the food and beverage component of the US CPI on a y/y basis. Again the result was not surprising; the food and beverage component of the CPI has been increasing with corn prices. Given the wide spectrum of uses for corn it is hard to judge the total effective corn would have in the index (at least for this brief analysis), but we imagine it is significant.

Corn prices have helped to drive up the overall food and beverage CPI component


The massive increase in ethanol production brought on by elevated energy prices has had a significant effect on corn prices. This means that as long as energy prices remain elevated, and corn is used as the primary crop to produce ethanol, we can expect to see the prices continue on this path. Given corns multiple uses within the food industry, we can also expect to see the food and beverage component of the CPI increase as a result. Also as lower value crops are switched over to corn we may also see a rise in the price of other crops as supply comes down. One alternative on the horizon is using switchgrass instead of corn to produce ethanol. It is believed that switchgrass will be a more efficient producer of ethanol and also will not directly impact the food supple, since you can’t eat it. However, this is still in an experimental stage and will take time. The bottom line is, so long as energy prices continue to rise and ethanol production along with it, we can expect to continue seeing the food and beverage component of the CPI trending up.

Investment Idea:

If you believe that the price and value of agricultural goods will continue to rise from cross-over to energy products and higher world demand, we recommend purchasing agriculture based ETFs such as ‘MOO’ or ‘DBA’ as a good play on the sector. However, it is important to keep in mind that speculators may have artificially driven up prices in agro indexes, so it is possible that we could see the indices catch a bid in the short-term.

Price of DBA vs wheat, corn, & soybean (rebased to 100)