Strong Commodities and Weak Sectors
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Trading Features / Strategies from Simon Denham of Capital Spreads.
With the economies of the world sucking in ever greater quantities of critical commodities we are now experiencing the classic effects of the first lesson for economics students...Supply and Demand.
In normal Supply and Demand curves as the price of the product rises either the Supply rises or the Demand tapers off which reduces the price, and vice versa.
But unfortunately we currently have strong inflation in 'staple' commodities products. Prices in these will have to rise dramatically before consumers limit their use. For all the wailing about the price of fuel or bread I have yet to hear of anyone curtailing their consumption.
In places this producing odd results. Whereas a slight surplus means weak or stable prices, this very (and I mean very) slight deficit has created rampant price hikes.
The Supply/Demand equation fails to work. Supply is very difficult to increase and Demand is almost impossible to decrease.
The Sugar, Corn and Wheat Markets have all rallied some 15-20% in the last few weeks (!) and this was starting from a multi year high anyway. Most staple products have more than doubled in the last few years and there appears to be no end in sight.
At what price would you stop eating bread? Putting sugar in your coffee? In many households it would have to be a great deal higher than here.
With an ever increasing percentage of the population in the Far East reaching the point where they are not just consumers of locally produced goods but are also starting to demand the new Toyota in the drive or croissants for breakfast, we can see that the cheap availability of life’s necessities (which we have taken for granted for many years) are about to bite us on the bum.
So what is likely to be squeezed as more and more of our income gets taken up with core staples? It is quite simple to go through the Sectors in the FT and pick those that look vulnerable in the UK. Restaurants, Entertainment, Car sales, Clothes sales, Electronics Retailers, Travel and Consumer Goods Production the list goes on.
It was not much of a surprise to see that whilst the FTSE rallied some 100 points yesterday retailers and travel were (in the main) left sitting on the shelf.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'Strong Commodities and Weak Sectors' edited by SD, updated 28-Feb-08
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