- Commodity prices were weak when July began and they’ve plunged sharply over the past two weeks (before catching a small bounce over the past two days). The high commodity prices of 2010-2012 influenced massive capacity additions from oil to potash to iron ore to gold. Capacity takes years to add in these areas, so we’ve been seeing the new supply continue to come on line and prices continue to weaken. Michael Filloon wrote in Seeking Alpha about the improvements in fracking technology. Fewer wells are being fracked but we are still producing more oil and gas. The situation is going to get worse for most commodities before it gets better. The question is, at what point do you buy on the anticipation of future lower production and ultimately higher prices? The bottom will come in the stocks before the commodity cycle turns, but this month the sector has been filled with “falling knives”. Chart 1 below is an ETF that tracks the DB Commodity Index.
- High quality bonds nearly always have value as a stock portfolio stabilizer. In and of themselves they may not be attractive, but as an asset class they are uncorrelated to stocks. For that reason alone, they merit inclusion in nearly every portfolio. The fact that lower grade corporate and international bonds outperform high quality bonds over time is beside the point for most investors. Lower total portfolio volatility means happier clients even if some long term return is sacrificed. All of that said, I would not be a buyer here as rates have fallen from 2.48% to 2.27% (on the 10 year Treasury). If you don’t own some high quality bonds, buy after the stock market stabilizes and the 10 year is pushing 2.40% again. Two ETF’s to consider are the iShares Barclay’s 3-7 Year Treasury Bond (IEI) and the Vanguard Intermediate Term Government Bond (VGIT).
- The underlying technical picture for the U.S. stock market continues to deteriorate and the indices do not accurately reflect the weakness in the average stock. The 50 day moving average is moving closer to the 200 day moving average, and the advance-decline ratio is really weak. The strategy if this trend continues would be to make sure that the mutual funds and ETFs you own are the ones you would be able to stick with in a bear market. If you are ultimately going to sell something, you may as well do it now (into a rebound) rather than later (into weakness).
- I’m not a fan of using capitalization-weighted index for emerging markets. Internationally (and especially in emerging markets), the largest companies tend to have more governmental involvement. This tends to make them more bureaucratic and less entrepreneurial. Thanks to its large positions in such firms as Brazil’s troubled oil giant Petrobras, active emerging market managers have been able to best the passive index investment much of the time.
 July 27, 2015
 As of the close of July 29, 2015 the S&P 500 was up 3.58% and the equal-weighted S&P 500 was up 1.63%. Among smaller stocks the difference is much more pronounced: The Russell 2000 is up 2.77% but on an equal weight basis it is down 3.10%. A few big winners are skewing the indices.