Trends may persist, but never exist eternally. Both parts of that little piece of wisdom provide useful guidance for investors. Trends, clearly, are an investor's friends when the investor lives in harmony with that trend. However, always remember that the trend will end regardless of how solidly good the fundamentals might be, or how miserably bad the fundamentals might appear. On this latter point, have not received one email on the positive fundamentals for oil since it fell below $140.
Some trends are destined to be short-term in nature from the very beginning. Others may last for years. Seeking out short-term trends, for the majority of investors, is a waste of time. Those persisting in the pursuit of short-term trends need to remember what breakfast means to the pig. On the other hand, structural trends of a longer term nature are more similar to the relationship of the chicken with breakfast. Agri-Food is one of those longer term, structural trends that will allow investors to participate in more than one breakfast.
Our first chart this week is a comparison of the performance of the Agri-Food Price Index, a basket of major Agri-Food commodities, and the S&P 500. The superiority of the price performance of Agri-Food commodities over U.S. stocks is readily apparent. Despite the positive and negative turmoil created by the hedge fund pestilence, Agri-Food commodities have retained the high ground.
Second, the Agri-Food Price Index has walked through the down trend line drawn into the chart. That down trend is no longer controlling. The more dominant, longer term, structural trend is now the more powerful consideration. Bets against the structural trend will fall to the house. Bets with the structural trend are more likely to prosper.
Third, Agri-Food prices seem to have completed Wave II of an Elliot Wave structure. That should mean that Wave III is soon to unfold. That implies a further advance ultimately into a Wave V some time in the future. That view is supported by, and consistent with, the positive underlying fundamentals which suggest a wave structure of ten year or more in length.
As Gold investors are well aware, the Federal Reserve recently announced that it will mindlessly monetize the deficit of the U.S. government. As a consequence, the bear has returned to the market for U.S. dollars, and Gold has soared. Another beneficiary of that dollar crushing monetary policy will be Agri-Food commodities. Consumers living in national monies other than dollar will find Agri-Food commodities an economic bargain, and demand will strengthen.
Agri-Food investments have not been immune to the ravages of the bear market. This author does wish possession of some magic investment knowledge that will always prosper, without fail. A discovery that will only be revealed to a generous few. Alas that is not the case, the favored Agri-Food stocks went down too. That situation, though, appears to be changing.
The second chart this week portrays the performance of a basket of Agri-Food equities relative to the S&P 500. Prior to the bear market, the relative performance was excellent, but it too succumbed to savagery of the hedge fund liquidation. Over the time period shown, Agri-Food stocks hold a slight edge. More importantly, the Agri-Food stocks have also walked through the down trend line that had been in place. It no longer controls, as the fundamentals again seem dominant.
Agri-Food stocks are part of a structural change in the demand for food arising from economic change in China, India, and other sectors of the world. With more that half of the world now living in urban centers and more than half of the world living in developing nations, the demand for Agri-Foods is moving into a demand structure never before witnessed. Supply no longer is the dominant consideration. Any analysis of Agri-Food commodities built on the decades of supply dominance will miss out on that which is to come, demand dominance.
Commodities is not a homogenous group. Any analysis assuming such is in error. Agri-Foods are just one component of the commodity asset class. Agri-Food will also benefit from the Federal Reserve's intentional destruction of the dollar. Agri-Foods investments are also an offensive investment in that they will benefit from the unfolding prosperity of China, and later from India. Does your portfolio have an offensive element? The rest of the world will move past the economic carnage of the Obama-Bernanke-Geithner financial debacle. Will you also move on?
AGRI-FOOD THOUGHTS is from Ned W. Schmidt,CFA,CEBS, publisher of The Agri-Food Value View, a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-energy. To receive the most recent issue of this publication, use this link: http://home.att.net/~nwschmidt/Order_AgriValueRECENT.html.