Hackett Advisors in the News

Commodity Expert: It's Time To Sell

Posted 11/16/2010 06:52 PM ET

Shawn Hackett's call at the beginning of the month to sell commodities proved a bit premature. But the publisher of Hackett's Money Flow Report is looking more right each day.

Commodity ETFs and ETNs have fallen sharply from their recent peaks, led lower by Sugar.

Hackett, who is also president of Hackett Financial Advisors, a Florida-based commodity brokerage firm, made winning calls on buying coffee, grain and uranium this year.

His research shows over the past 200 years commodities cycles reach a major peak every 30 years that ends in a major crash. He says the latest apex will be no later than May of 2011, if it hasn't already happened.

Commodities across the board — including grains, gold, silver, corn, cotton, sugar, and soybeans — have risen too far too fast owing to "over ebullience of speculators" and need to come down to "a more reasonable price level," he said.

"Over the last 100 years there have been three major cyclical commodity peaks that occurred in 1920/1921 1950/1951 and 1980/1981 and the next cyclical peak is expected in 2010/2011," Hackett wrote in his Nov. 8 newsletter, catering to farmers and end users.

What's more, the Fed's quantitative easing, commonly referred to as printing more money, hasn't devalued the dollar or lowered interest rates as intended. A stronger greenback means fewer are needed to buy dollar-traded goods. The dollar has rallied 4.6% against other major currencies since bouncing off a one-year low earlier this month.

If history repeats itself, this year's trendiest commodity — cotton — will unravel faster than a cheap sweater.

Cotton Going Out Of Style

In its three prior bull runs since 1900, cotton vaulted fourfold each time. And since November 2008, cotton has increased fourfold. Investor sentiment gauges and overbought indicators have reached a 40-year extreme. On average, cotton corrected 50% from its peak.

iPath DJ-UBS Cotton (BAL) has fallen 15% from a record high of 77 reached last week. The white fluffy stuff has more than doubled since the start of the year. The rise followed lower global production the three prior seasons, higher-than-expected recovery in demand, export restrictions in India, weather problems in China and Pakistan, a weak dollar and market speculators.

U.S. cotton supplies of 2.2 million bales are the lowest since 1925, according to the U.S. Department of Agriculture, which says global supplies fall short of demand. A supply shortage in China has been the biggest force driving cotton prices to a never-seen-before $2 a pound. But in its November "World Agricultural Supply and Demand Estimates" report, the USDA forecast China will consume 47 million bales in 2010-11 — 6% less than last year — despite growing consumer demand. Limited supply worldwide and exorbitant prices will force mills to lower production and use polyester instead.

IPath DJ-UBS Sugar (SGG) has plunged 21% since peaking at 97 a share last week. It had rocketed nearly 150% in just six months from its May low. Sugar supplies are projected to rise by 218,000 short tons over last month due to higher imports, according to the USDA.

Hackett says sugar and cotton are ideal for shorting, in which traders make money from falling prices.

Silver — this year's shiniest metal — has corrected 13% from a 52-week high also reached last week. It nearly doubled from trough to peak between February and November.

What To Buy Now

The only undervalued commodities currently are cocoa, coffee, lumber, milk and rice, which Hackett advises to buy on dips.

Exposure to the first three can be had through iPath DJ-UBS Cocoa ETN (NIB), down 18% this year; iPath DJ-UBS Coffee ETN (JO), up 44%; iShares S&P Global Timber & Forestry Index (WOOD), up 12%; and Guggenheim/Beacon Global Timber Index (CUT), up 14%.

WOOD holds 24 companies engaged in real estate and producing paper, wood products, containers and packaging. It carries a 0.48% expense ratio. CUT has 27 stocks and charges 0.65% of assets a year for expenses.

There is no ETF or ETN tracking milk, but milk producers Feihe International (ADY) of China and Wimm-Bill-Dann Foods (WBD) of Russia can be used as proxies. Feihe is down 48% this year, while Wimm ticked up 4%.

Neither is there a rice ETF. Elements/Rogers International Commodity Agriculture (RJA), up 22% this year, holds some rice, but it only makes up 1.43% of the portfolio.


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