May

30

I have made a few comments in the past suggesting the need to separate the commercial markets (commodities, fixed income, and FX) from equity markets when considering fixed systems. As an unrepentant fixed system guy, I would argue this is correct; there have not been many trends in commercial markets. Ten-year yield is about where it was in late 2003, as is the dollar. Commodities have moved up but when the carry is taken into account the move is modest. There is evidence of lack of movement in the volume levels of bond and FX options in particular.

This is, however, the ideal environment for Equity: stable rates and currency. As is the case with all diversifying asset classes, they are loved in research and hated in practice because they lose money when they are supposed to.

Steve Ellison writes:

There is a good reason why businesses try to minimize inventory using just-in-time processes. Holding inventory results in four types of costs, collectively known as inventory carrying costs:

  1. Cost of capital tied up in inventory
  2. Cost of storage space
  3. Risk of loss
  4. Risk of obsolescence or spoilage

In business, annual inventory-carrying cost rates are often estimated at 20% or more of the purchase price. For this reason, most business owners would consider buying and holding commodities a strategy for destroying business value, not enhancing it.

Over the weekend, I looked at the financial pages of the New York Times dated December 15, 1961. It was surprising how little the prices of some commodities have changed since then, even without considering inventory-carrying costs.

Annualized Price
              12/14/1961             5/29/2007             Change
DJIA           730.94000          13521.3400              6.7%
S&P 500       71.98000            1518.1100              7.0%
Silver             1.03250                13.2230              5.8%
Gold             35.14500              657.2000              6.7%
Wheat            2.39375                 4.9100               1.6%
Corn              1.41500                  3.6475              2.1%
Coffee            0.42625                  1.1035              2.1%
Copper           0.31000                  3.3200              5.4%
Crude oil        2.74000                63.1800              7.2%

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