Pinnacle Activity Ticker
Vol. 263 - What Will Beat This Market? Agriculture Stocks
Not a member of Pinnacle Digest yet? Join now for free and receive our exclusive weekly publication in your email inbox. Click here to join.
The market took it firmly on the chin this week as the Fed momentarily closed the door on additional stimulus. Commodity based exchanges, and in particular the Canadian exchanges we have learned to thrive in, were decimated.
Below is the 5 day chart for the TSX
Below is the 5 day chart for the TSX-Venture
These were major moves in the TSX and the Venture. Panic selling set in on Wednesday and Thursday and the Venture lost more than 5% during the week. With that stated, never forget how quickly the commodity markets can come back when the US dollar declines. And the US dollar will resume its decline. To remind everyone of that, we've gathered a few quick stats regarding the debt super cycle which has and will continue to fuel the commodity bull market.
The Fed is Ready to Print
It was announced on Good Friday that a measly 120,000 jobs were added in the US for the month of March - the fewest in five months and lower than all forecasts. This had to make Bernanke cringe following his bullish comments last week on the economy.
At the end of the day, the US economy is dependant on low interest rates. If interest rates rise significantly, look out, the economy will most certainly collapse. This prolonged, low interest rate environment we find ourselves in is here to stay (at least for another 3 to 5 years) and will continue to bolster commodities.
Remember that without job growth, consumer spending, which accounts for 70% of the US economy, will be weak. The US economy is clearly out of whack and needs to offset the fragile consumer spending numbers through rising manufacturing and export numbers (a more sustainable path to a thriving economy). We've discussed this issue in past volumes.
Our team will be anxiously awaiting the US Trade Balance numbers set to release on April 12th of next week.
The Briefing Forecast is anticipating a March trade deficit of $53 Billion for the US. What might be most disturbing is that the market expects a $52 Billion trade deficit in the month of March. That means the US is running close to a $624 billion annual deficit when it comes to imports vs exports! Add that to the $1.5 trillion budget deficit Obama and his merry band of followers have been racking up and you have the fastest rising debt burden in the history of the world.
After running a $1.56 trillion deficit in 2011, 2012 is expected to come in at $1.32 trillion, but will likely be exceeded. The debt ceiling of $16.3 trillion is rapidly approaching and at this speed, it might be breached by election time in November. All of these factors will force the Fed to flood the economy with cheap money in order to help the US devalue its debt. Although these factors will undoubtedly unfold at some point, the market is rushing to cash - a knee jerk reaction.
As investors, we need to stop looking for quick trades and start looking at longer-term trends. Those investors who bailed on the market in a panic this week will learn the hard way. With that said, our team feels it necessary to discuss a defensive sector which has been outperforming gold and other commodity stocks of late.
Let's review Potash Corp of Saskatchewan (POT:TSX), one of the most famous and actively traded agriculture stocks in the country.
POT began the week at $45.91 and after hitting a high of $46.96, it closed the week at $44.88 - a fairly modest 2.24% correction amidst an overall week long commodity collapse.
Let's compare that to Barrick Gold, the world's largest gold producer, which began the week at 43.55 and after hitting a high of 44.13, closed the week at 40.51 (after almost dropping below $40 for the first time in two years). This represents a 7% decline. Many other gold companies dropped substantially more than Barrick; and these are blue chip world leading gold producers! The majority of junior gold companies lost double or even triple that during this past week.
One of the most widely held Agriculture ETN's is known as Barclay's iPath® Dow Jones-UBS Grains Subindex Total ReturnSM ETN (JJG).
JJG focuses solely on grains and has a current allocation of Corn (37%), Soybeans (38%) and Wheat (25%).
An ETN stands for an 'Exchange Traded Note' and acts almost identically to an ETF. It is different from an ETF in that its returns are based on the performance of the market index minus management expense fees.
Below is a 5 Day Chart of the JJG ETN
JJG began the week at $47.54 and after reaching as high as $48.25, it closed the week up 22 cents to $47.76. In late February, before the recent market downturn, this ETN was trading close to $44. It has managed to rise in value while nearly all other commodity plays have collapsed.
The real fundamentals behind food and grain demand cannot be shook by government policy or comments by the Federal Reserve. This sector operates largely outside the influence of central banks and market fluctuations. Food and grain demand is growing rapidly with the rising global population and the rising middle class around the world.
Let's look at the 1 Month Chart now of both the JJG ETN and the GLD ETF (largest gold ETF in the world).
1 Month GLD Chart
The GLD ETF has dropped from a February 29th high of $173.59 to an April 5th closing price of $157.87. A 9% one month decline.
1 Month JJG Chart
The JJG ETN has risen from $46.31 on February 29th to close on April 5th at $47.60 - a 2.7% one month gain. While a 2.7% gain is nothing to write home about, this increase came amidst an overall commodity market collapse over the past 5 weeks.
What does this resilience tell us?
The markets can go up, the markets can go down. There can be hurricanes, defaults in Spain and a hard landing in China, but at the end of the day, populations are exploding and people have to eat. Intense demand for food (across the globe) is creating severe disruptions and upward pressure on prices.
Our team is bullish on companies working at the heart of the expansive food crisis in our world. It goes without saying that companies with superior access to robust crops and higher yields will make a fortune as they attempt to supply the voracious demand in this sector. Our conclusion is that agriculture is indeed a defensive sector that will outperform if we move through increased volatile times. We will elaborate further with more compelling data on this sector and the opportunities within it throughout the month of April. The food trade is here to stay.
'The food system is buckling under intense pressure from climate change, ecological degradation, population growth, rising energy prices, rising demand for meat and dairy products and competition for land for biofuels, industry and urbanization.' -Oxfam report
All the best with your investments,
MUST READ ARTICLES ON THE SUBJECT FROM PINNACLE DIGEST & BLOOMBERG