Isaac Newton might have been onto something with that whole "for
every action there is an equal and opposite reaction" thing in the
realm of mechanics, but his rule does not operate reliably in the
realm of trading and investment. I might add Newton, a true giant
in the history of physics and mathematics, got clocked in the South
Seas Bubble of the early 18th century. Izzy the Great lamented, "I
can calculate the motion of heavenly bodies but not the madness of
Many investors assume a Newtonian clockwork response in
commodity-linked equities. The assumption is rising prices for
commodities sold should push the price of producers' stocks higher
and vice versa for consumers' stocks and lower commodity prices.
Were it only the case; not only are the stocks affected
significantly by their beta to the market as a whole, management
issues, interest rates, and exchange rates, investors at the margin
tend to do a very good job of discounting short-term commodity
price volatility and focus instead on long-term smoothed trends.
Moreover, commodity feedstock costs often represent a smaller
portion of total costs than assumed. No one denies the importance
of jet fuel prices for airlines, but even these take a (cramped)
backseat to labor costs.
The recent experience of the S&P Packaged Foods group, whose
Kraft Foods Group
), inter alia, provides a case in point. I forecasted in July 2012
that drought-induced higher new-crop corn and soybean prices would
depress this group's performance relative to the
S&P 1500 Supercomposite
(INDEXSP:SP1500) . They did, briefly, by 6.63% between late June
and mid-September, before grain prices themselves stopped soaring.
Where are we today? New-crop corn prices have tumbled in 2013 as
farmers responded to last year's high prices by increasing
plantings. New-crop corn at Memphis, Tennessee, has declined 33%
since December 2012; new-crop soybeans at Osceola, Arkansas, have
declined 13.5% over the same period. The Packaged Foods group has
underperformed the broad market by 0.12% since then, and we are
seeing stories such as
(K), the breakfast cereal maker and an iconic company, reducing its
workforce by 7% to save costs.
The map of relative performance since January 1998 reveals
something else: The two periods where Packaged Foods' relative
performance increased rapidly were the two great bear markets of
2000-2002 and 2007-2009. Relative performance rose not as a
function of these stocks doing absolutely well but rather as a
function of other stocks in more discretionary and income-sensitive
industries doing poorly.
You have to eat, yes. However, this does not make a generally
defensive industry group a good all-weather investment. Finally, if
you want to trade corn or soybeans, trade them directly via the
futures market and not indirectly in the stock market.