A buy idea for the venturesome contrarian

Hogs.  That’s right. And you can own some of the other white meat in your portfolio.
We’ll get the investment vehicle out of the way first.  There is one exchange-traded fund that can get you exposure to pork–in this case, lean hogs.

Disclosure:  although I live in Wells County, it is North Wells County, and I don’t know much about livestock.  I assume the counterpart to lean hogs is fat hogs, and the counterpart to Live Cattle is Dead Cattle, but I’m just guessing on these.

Back to the vehicle.  Barclays offers the iPath Dow Jones-AIG Livestock Total Return Sub-Index ETN (sorta rolls off the lips doesn’t it?)  In contrast to an exchange traded fund, this is an exchange traded note.  The biggest difference is that the note structure allows for different investment types, including commodities.  Capital gains are taxed as such.  The ticker symbol is, fittingly, COW.  You can see a fact sheet of the fund by clicking here.  In addition to the reasons I’ll outline below, a big benefit of owning the fund is because of its diversifying characteristics.  In investments that is measured by correlation–think of it as co-relation.  The table below, which is excerpted from the afore referenced fact sheet, shows the correlation.  Correlation varies between -1 and +1, with the former indicating perfect inverse movement–zig versus zag; the latter, perfect positive correlation–zig versus zig.  Note the low correlation to U.S. (S & P 500 index) and foreign (EAFE) stocks.  For more on why to diversify with commodities click here.



S & P Goldman Sachs Commodity Index


S & P Goldman Sachs Livestock Index


S & P 500 Index


Barclays Capital U. S. [Bond] Aggregate


MSCI Europe Australasia Far East


Here are the reasons for considering this investment.

1.  Pessimism is high in the futures pits.

The Commodity Futures Trading Commission requires futures traders to classify themselves as one of the following:

  • Commercials – these are traders using the futures contract to hedge.  In soft commodities (e.g. grains), these are the producers and processors.  In financial futures (e.g. interest rate futures), these are the investment banks.  This group is the smart money.  It can be painful to trade against them.
  • Large Traders – typically these are hedge funds or other trend followers.  This group and the next group comprise the dumb money.  It pays to trade against this group.
  • Small Traders – these are the small trend followers.

Here’s a look at their net positions:  long positions net of short positions.  Click on a graph for a full-size version.

CommercialsThe blue area in each chart represents Bollinger Bands, or +/- 2 standard deviations around the average of the last 52 weeksLarge Traders positions.  Relative to the standard deviation bands, the Commercials are as long as they’ve been in several years, while the Dumb Money is as short as it has been in several years.Small Traders

2.  There is anecdotal evidence of pessimism.

This comes from a weekly commentary from Jeff Saut, Chief Investment Strategist at Raymond James.  I respect his opinions a lot, and he calls things like he sees them.  He cites, via an associate of his the following statistics:

“For the first time in 35 years, beef, pork, and poultry production is down year over year.  Demand is down as well, but it’s been down temporarily numerous occasions in the past, yet production NEVER [author's emphasis] went backwards . . . When equilibrium is reached, and prices start to recover, the producer will have to hold back animals that would normally be going to market to replenish the breeding herd, further reducing supply at the time demand is increasing.”

“Living in Iowa, I see the expansion and contraction cycles firsthand; and, I haven’t seen this type of despair in the hog industry fro 20 years, which by the way led to a multi-year expansion in prices.”

3.  In spite of the first death of a U.S. resident from swine flu, the fear is beginning to recede, or at least be reflected widely.

From the beginning of the swine flu panic, the issue has never been about pork.  That is, one doesn’t contract hog flu by eating pork chops.  Nevertheless, it has cast a pall over the industry.  Exhibit 1, the magazine cover phenomenon.  Popular magazines are notorious for producing covers at precisely the wrong time, and this week The Economist featured this cover.graig Exhibit 2, frequency of searches on Google relating to the word “pandemic.”  The graph (click to expand) shows the frequency of searches on Google over the last 90 days on the word “pandemic”.

Google search

4.  There’s also this hocus-pocus, voodoo item.

Tom DeMark has been studying markets since the 1970s.  He serves as an advisor to one of the greatest traders and hedge fund guys, Stevie Cohen of SAC Capital.  Much of his stuff I look at has to do with the study of exhaustion of buyers and sellers.  He has an indicator called TD Sequential, and when it registers a particular signal, as it is now, it indicates a low risk time to buy.  In the chart that follows I’ve circled those three signals, a 9, a 13, and another 9.DeMark 9-13-9

5.  Lastly, there’s the 800 pound gorilla of the globe, China.

In the U.S., one of the classic substitutions in economics is chicken and beef.  That is, when times get tough, Americans switch from the more-expensive beef to the less-expensive chicken to save money.  In China, as a country, the switch is not between beef and chicken, but between pork and chicken.  In that rapidly developing country, folks consider pork to be the attainable, upscale meat, and as they further develop, they’ll also develop a taste for beef.  Thus, the current affinity for pork will progress to beef, both of which will put upward pressure on pork and beef prices, which comprise COW.
There you have it, five+ solid reasons to consider an investment in COW.

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