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The Weight of Commodities>> McCall_comments

Matt McCall on Commodities, Energy
by: Hard Assets Investor October 17, 2008 |
about stocks: DJP / FAN / GLD / PBD / PWND / UNG / USO

By Murray Coleman

Matt McCall is president of Penn Financial Group. The firm is based in Ridgewood, N.J., and serves as an investment advisor for institutional and high net worth clients. In addition, McCall is editor of The ETF Bulletin, a weekly publication reaching about 1,000 paid subscribers.

HardAssetsInvestor.com (HAI): With prices of oil sinking, what are your views on commodities as a whole?

Matt McCall (McCall): I'm still very bullish on them long term. It still appears there's going to be a supply/demand issue for years out. We're looking at this as a buying opportunity for investors.

HAI: Do you have a sense of what the timing on all of this is?

McCall: I'm looking out at least three years for my clients. I think commodities prices will come back before that time frame, but certainly prices should be higher three years from now than they are today. It's important to remember that commodities markets are acting very irrationally.

When oil was trading at $150 a barrel, the market obviously wasn't basing its decisions on fundamentals. But now that it's trading under $70 on Thursday, oil is very attractive. The sell-off has just been too overdone at this point.

HAI: Any exchange-traded products or funds that you're suggesting to clients now?

McCall: As a whole for commodities, we like the iPath Dow Jones-AIG Commodity ETN (DJP). It gives you everything from Metals to Energy to Agriculture in one portfolio. In this type of commodities market, staying diversified is important. DJP is good for individual investors since it provides them with all of the major sectors. Then, if they want to over-weight, they can add other ETFs.

In particular, on our radar is natural gas. The way we like to play that is through United States Natural Gas (UNG). We're getting into an oversold situation in that market. And heading into winter, it's going to be easier to rely on natural gas since our main supplies are right here in the U.S. We also think that demand will get a boost from T. Boone Pickens and some other major oil players who are looking at natural gas as a way to alleviate this country's dependence on crude oil.

HAI: T. Boone Pickens is also supporting wind energy. Are you?

McCall: Absolutely. Wind has been something the government has been discussing for decades. But now, with oil at relatively high prices, wind is an alternative we have to consider more closely. There's no doubt it's going to be a major energy source in the future.

I wouldn't overweight it here, though. Ever since the wind ETFs started rolling out earlier this year, it hasn't been the right environment for making more equity purchases. But as the markets unwind, we'll definitely be looking at initiating positions in the sector. We're looking at First Trust Global Wind Energy (FAN) and PowerShares Global Wind Energy (PWND). Right now, we're in the stages of evaluating both and keeping them on our watch lists.

HAI: What about agriculture?

McCall: It was the hot investment in the second half of 2007. But we've seen a major sell-off in agriculture during the past six months. The leading ETFs providing exposure to that market are down around 50% since the beginning of this year. I think it's too volatile of a sector for the individual investor at this time.

For example, in a four-month period last year, the grains sector sold off by about 50%. That's just way too much volatility for the average investor.

HAI: Are you investing in gold?

McCall: Yes, we do own SPDR Gold Shares (GLD). We've held that for some time now. It serves as a diversification tool in our portfolios. Heading into Thursday, GLD was up 1% while the market was down close to 38%. So that pretty much makes a good argument to me about the diversification benefits of gold.

But individual investors should be cautious about trying to use gold as a trading vehicle. We prefer to hold it as a core position, around 5-10% of a total portfolio.

HAI: Are you playing alternative energy?

McCall: We own PowerShares Global Clean Energy (PBD) in some of our portfolios. The issue, again, is extreme volatility. But this is an investment we look at as a small part of an overall portfolio. We're keeping it less than 5% of your total portfolio. But we believe this is a type of ETF that should be a big winner over the long term.

HAI: Are you making a pure oil play at this time?

McCall: We own both oil ETFs and stocks. Right now, we don't own United States Oil (USO), which is the way we'd play it. If we get down to oil prices of $65-$68 per barrel, then we'll probably become buyers. From a technical perspective as well as a longer-term fundamental view, demand for oil should increase. And supply is stagnant at best from our evaluation, which starts with a top-down approach.

We take a macro approach to identify themes and then use technical analysis to identify individual investments, both to pick the investments and to determine the best time to get in and get out of each.

HAI: What's the overriding macro theme now with commodities?

McCall: Obviously the global economic slowdown has weighed heavily on hard asset markets. We've seen a huge pullback, but I believe that has been fully priced in to commodities. We're in a bottoming process right now. But volatility remains, at least for the coming weeks if not coming months.

So we're waiting for confirmation of a bottom. We've got to see some consolidation to confirm that the market can hold these lows and not fall further. It's hard to pick a bottom, though. For the individual investor, I think it's a good time now to start wading back into the market.