Monday, February 3, 2014

Back to the 70's

Back at the end of October (see Here) we had mentioned that along with silver, coffee appeared stretched on the downside from a historical point-of-view. Our general thinking at the time was that despite the glut and supply forecasts that had maintained downside pressures on coffee throughout much of 2013, the summer low found in silver - our wily commodity proxy - gave credence to the perspective that the broader commodity space was starting to find some traction for a material reversal higher.
Fast forward to today and it appears that coffee did complete a pivotal low back in October and has enjoyed a ~ 30% move to the upside, while silver has double back down from its leading pivot higher and tested the lows from last summer. 

The long and short of things is we continue to like the long-term prospects of both volatile commodities and would expect the performance modulation exemplified since the summer low in silver to continue - but trend together higher over time. While we would not recommend starting a new position in coffee today after a 30% move, we would look for a significant retracement decline similar to silver's and coffee's other major upside pivots - to initiate a new position. 

The other takeaways for us from a big picture macro perspective, is that reflationary forces are beginning to overcome the considerable disinflationary trends that have exerted themselves in the markets over the last three years. While the bloom has not surprisingly come off the rose in the equity markets lately, the natural tendency for the commodity sector to lead broader reflationary spirits is a constructive development in our opinion and one that should temper greater bearish leanings.  

Having said that, we will be keeping a very close eye on the U.S. dollar index this week as we expect its time here in the 80's is coming to an end. It's back to the 70's (for the index) - just preferably without the polyester suits and stagflation.