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Price Asset Management
The Commodity Curve

May 12, 2015

Potential Catalyst Right in Front of Us?

Consensus thinking seems to be that there is no inflation; but is the consensus right?

When we went to listen to James Bullard, president and CEO of the Federal Reserve Bank of St. Louis several weeks ago here in Chicago, he indicated the key item that the Fed is looking for was a pickup in inflation prior to raising rates. He said the economy, in his opinion, was expanding and was not the issue.

I went up to him afterward to ask what they use as their indicator and how quickly the Fed might rise once it met their criteria. Although he would not disclose exactly what their criteria was, he did say if they observed the necessary inflation signal there would be 1) a collective sigh of relief since they have been trying to re-inflate (remember, “don’t fight the Fed”) and 2) there would be a rate increase in 30 to 60 days in his opinion. Four points on this subject:

  1. Fed Chair Yellen confirmed several weeks ago that rate raises are probable during last part of 2015
  2. Walmart, McDonalds and Target all raise wages
  3. The paragraph below from Argus Research is of interest in relation to Mr. Bullard's comments
  4. From a tactical perspective the best time to add commodity exposure may be when the Fed is increasing rates. [READ WHITE PAPER HERE]

Rise in Underlying Inflation

Headline CPI inflation may have been zero in the past year, but that doesn't mean inflationary pressures have disappeared -- and the Fed is, of course, watching closely. The Core CPI, also calculated by the BLS (Bureau of Labor Statistics) and excluding food and energy, rose at a 1.7% rate over the past year. Meanwhile, the Federal Reserve Bank of Cleveland calculates that the Median CPI rose 2.2% in the past year. In February, the FRB-Cleveland's Median CPI jumped 0.247%, which is an annualized rise of 3%. In fact, the annual inflation rate of the Median CPI has exceeded 2% (the Fed's "target") for 15 consecutive months. Housing costs are keeping Core CPI inflation low. The BLS estimates that the "home owners equivalent rent" (roughly a quarter of core inflation) has run around 2.6% for the past year. But their index of actual rents has accelerated from 2.8% to 3.4% in the past 12 months. As energy prices settle down, we may see inflation begin to pick up in the quarters ahead.

While we believe that commodities should always be considered a core holding overall, perhaps there is indeed a catalyst for higher commodity prices close at hand that no one seems to expect.

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Commodities Mutual Fund

Index Descriptions

RICI® (Rogers International Commodity Index®): Comprised of 37 commodity futures representing the energy, metals, and agriculture sectors. The components of the RICI® have been specifically chosen to give a balanced representation of consumption patterns throughout the world. The RICI® was first published on August 1, 1998.  CQG Inc. is the official global calculation agent for the Rogers International Commodity Index® (RICI®).

S&P 500 Total Return IndexThe S&P 500 is an index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe.

Bloomberg Commodity Index (BCOM): The BCOM is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The Index is comprised of 22 commodities representing the energy, metals, and agricultural sectors. Prior to July 1, 2014, the Index was known as the Dow Jones-UBS Commodity Index which was first published in July 1998.

Standard and Poors: Goldman Sachs Commodity Index (“S&P GSCI”) is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The Index currently has 24 commodities and was first published in 1991. All data provided direct from Bloomberg LP, Barclay Trading Group LTD Data Base or from the Index provider website.  Although we believe the sources to be reliable, Uhlmann Price and Price Asset Management cannot take responsibility for the accuracy of the data.

Disclaimer

The Index returns shown in this presentation do not represent the results of actual trading of investible products, assets or securities. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available only through investable instruments based on that index and there can be no assurance that investment products based on the index will provide returns that are similar to the actual index performance provide positive investment returns. All the indices referred to in this presentation above are not investable products and their returns do not reflect the fees and charges inherent in investing in a vehicle designed to replicate a particular index. Any Index performance provided is for illustrative purposes only.

Exposure to the Rogers International Commodity Index® is typically gained by investing in “alternative” investment products that are linked to the performance of the RICI®.  Alternative investment products may entail leveraging, commodity trading and other speculative investment practices which involve substantial risk of loss.  Alternative investment performance can be volatile.  Not all products are suitable for all investors and some products may only be available to certain qualified and sophisticated investors.

“Jim Rogers”, “James Beeland Rogers, Jr.”, and “Rogers” are trademarks and service marks of, and “Rogers International Commodity Index” and “RICI” are registered service marks of, Beeland Interests, Inc., which is owned and controlled by James Beeland Rogers, Jr., and are used subject to license. The personal names and likeness of Jim Rogers/James Beeland Rogers, Jr. are owned and licensed by James Beeland Rogers, Jr. Products based on or linked to the Rogers International Commodity Index® or any sub-index thereof are not sponsored, endorsed, sold or promoted by Beeland Interests, Inc. (“Beeland Interests”) or James Beeland Rogers, Jr. Neither Beeland Interests nor James Beeland Rogers, Jr. makes any representation or warranty, express or implied, nor accepts any responsibility, regarding the accuracy or completeness of this report, or the advisability of investing in securities or commodities generally, or in products based on or linked to the Rogers International Commodity Index® or any sub-index thereof or in futures particularly.

This report does not constitute an offer to sell, or a solicitation of an offer to buy or sell, any commodities interests, managed futures accounts or securities, and is intended for informational purposes only. Any offer for any investment product will be made solely by the appropriate disclosure document or offering memorandum. Price Asset Management, LLC. does not make any representations as to the accuracy or completeness of any data or information contained herein and such information should not be relied upon as such. Some data and information presented on this site may have been obtained from outside sources.

Investments in commodities, managed futures and other alternative investments involve a high degree of risk and performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Investments in commodities, managed futures and other alternative investments are often executed on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Past performance is not indicative of futures results.

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