There's a black cloud looming over the commodities market. However, behind that cloud, those of us who are situated on the short side (that is, buying put options and profiting when stocks are going down) can expect to find a rainbow with a pot of gold at the end.
I know, I know: Wheat is up 600% a bushel. Oil touched an inflation-adjusted, all-time high and seems as though it's setting up permanent residence above $100 a barrel. Gold prices were a straight tear up (although a recovery in the U.S. dollar has helped capped them).
I can hear you now: "There's no way to play the short side of the commodities sector, Shulman."
Longer term, there's every reason to believe that commodity prices will be high and perhaps go even higher. You might have heard a lot about growing infrastructure and demand in areas like "Chindia" (i.e., China and India) and other developing nations.
With this boom will come increased need for food, building materials and energy sources. As emerging countries become more industrial, it is only natural that more jobs will be generated, leading to a higher standard of living and even more commodity consumption.
That's the big-picture outlook. But with a slowing U.S. economy and its carryover into the global community, not to mention the fact that the big-money players (i.e., institutions, hedge funds) are piling into commodities and inflating the prices with their speculative buying, what does it mean for us in the short term and, more specifically, on the short side?
Even as the economy seems to be taking a rest, commodities are likely going to pull back before they keep going up, up and away. This bubble is building.
In some commodities, there's a classic parabolic bubble, which is a short-side investor's dream.
Perhaps gold can run to $1,600, as "Mad" man Jim Cramer thinks -- but will wheat remain near their high of $25?
Will a fertilizer and feed producer -- which is on my "short" list of companies that are going to get hit when the commodities bubble starts deflating -- manage to stay in the stratosphere? Will platinum keep shooting skyward?
Smart short-side investors need to identify the commodities that are driven by economic reality and look for places to establish short-side plays for the commodities or companies on a free ride with the run-up in prices. There are plenty, but there are also some rules to follow:
Rule 1: Don't get ahead of the bubble bursting. It's better to miss the beginning than get run over by being too early.
I know, I know: Wheat is up 600% a bushel. Oil touched an inflation-adjusted, all-time high and seems as though it's setting up permanent residence above $100 a barrel. Gold prices were a straight tear up (although a recovery in the U.S. dollar has helped capped them).
I can hear you now: "There's no way to play the short side of the commodities sector, Shulman."
Longer term, there's every reason to believe that commodity prices will be high and perhaps go even higher. You might have heard a lot about growing infrastructure and demand in areas like "Chindia" (i.e., China and India) and other developing nations.
With this boom will come increased need for food, building materials and energy sources. As emerging countries become more industrial, it is only natural that more jobs will be generated, leading to a higher standard of living and even more commodity consumption.
That's the big-picture outlook. But with a slowing U.S. economy and its carryover into the global community, not to mention the fact that the big-money players (i.e., institutions, hedge funds) are piling into commodities and inflating the prices with their speculative buying, what does it mean for us in the short term and, more specifically, on the short side?
Even as the economy seems to be taking a rest, commodities are likely going to pull back before they keep going up, up and away. This bubble is building.
In some commodities, there's a classic parabolic bubble, which is a short-side investor's dream.
Perhaps gold can run to $1,600, as "Mad" man Jim Cramer thinks -- but will wheat remain near their high of $25?
Will a fertilizer and feed producer -- which is on my "short" list of companies that are going to get hit when the commodities bubble starts deflating -- manage to stay in the stratosphere? Will platinum keep shooting skyward?
Smart short-side investors need to identify the commodities that are driven by economic reality and look for places to establish short-side plays for the commodities or companies on a free ride with the run-up in prices. There are plenty, but there are also some rules to follow:
Rule 1: Don't get ahead of the bubble bursting. It's better to miss the beginning than get run over by being too early.
Rule 2: Focus on those commodities most tied to economic reality.
Rule 3: Avoid commodities that are potentially driven by geopolitical events.
Rule 4: See rule No. 1.
So, how do you profit while commodities are poised for a pullback? There are two main areas I'm investigating right now.
The first is agricultural commodities. There's no way that wheat will stay at $25 (up from $4 last year), or that a company we're riding on will remain around $160 (up from $60 just one year ago!).
There are several exchange-traded funds (ETFs) and several overbought companies in this sector, so I am looking at them carefully right now. I also have a close eye on precious metals other than gold -- namely, platinum and silver. This segment can also be played by a mixture of ETFs and individual companies.
But for every opportunity, there is a sinkhole, and I can tell you what I will not be shorting.
Gold. Avoid playing the short side of gold at all costs. It is tied to the U.S. dollar and geopolitical issues -- and just possibly to the people who built bomb shelters in the '60s and their offspring who created hideaways in preparation for Y2K.
Oil. The fundamentals show that oil prices will rise because they are also tied to the dollar and geopolitical events. Stay far, far away.
In general, I'm keeping anything that is tied to the U.S. dollar -- or other factors beyond the segment that can change on a dime and decimate a play -- far from my "short" list.
But remember, you can play the short-side of individual stocks, sectors and, soon, commodities -- and you should.
So, how do you profit while commodities are poised for a pullback? There are two main areas I'm investigating right now.
The first is agricultural commodities. There's no way that wheat will stay at $25 (up from $4 last year), or that a company we're riding on will remain around $160 (up from $60 just one year ago!).
There are several exchange-traded funds (ETFs) and several overbought companies in this sector, so I am looking at them carefully right now. I also have a close eye on precious metals other than gold -- namely, platinum and silver. This segment can also be played by a mixture of ETFs and individual companies.
But for every opportunity, there is a sinkhole, and I can tell you what I will not be shorting.
Gold. Avoid playing the short side of gold at all costs. It is tied to the U.S. dollar and geopolitical issues -- and just possibly to the people who built bomb shelters in the '60s and their offspring who created hideaways in preparation for Y2K.
Oil. The fundamentals show that oil prices will rise because they are also tied to the dollar and geopolitical events. Stay far, far away.
In general, I'm keeping anything that is tied to the U.S. dollar -- or other factors beyond the segment that can change on a dime and decimate a play -- far from my "short" list.
But remember, you can play the short-side of individual stocks, sectors and, soon, commodities -- and you should.
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