Macro Tsimmis

intelligently hedged investment

BUY PowerShares DB Agriculture Fund (DBA)

Posted by intelledgement on Thu, 13 Mar 08

This is a pure defensive play, and we are later than we should be in making it.

We are not going to rehash the many reasons we believe the dollar to be in peril here yet again, but in retrospect it would have been smart to move into this ETF last September, when the Fed first lowered interest rates. That was the confirmation of our expectation that the government is willing to sacrifice the dollar to keep the merry-go-round cranking for as long as possible. However, we did not anticipate that the credit crunch would develop so quickly; we calculated that things would remain more stable through the U.S. election, and thus preferred to keep more funds in the emerging market ETFs. Once it became apparent that consumer spending already was slowing early this year, the Fed has accelerated the printing press as well as continuing to lower interest rates, and the dollar’s decline has accelerated.

We really decided to buy DBA two months ago, and have been waiting—hoping—for a pullback to the $30 range. Well…it ain’t happening, and it makes no sense to keep assets in dollars sitting on the sideline here, losing value nearly every day.

Commodities in general are hot right now, with the emerging market growth/demand story still going strong. The DBA ETF tracks the Deutsche Bank Liquid Commodity Index – Optimum Yield Agriculture Excess Return™ (Index)—a rules-based index composed of futures contracts on corn, wheat, soy beans and sugar. The agricultural sector in general has been strong of late, with more wealthy Chinese and Indian consumers looking to upgrade their diets combining with the pressure the irrational push for corn-based ethanol in the USA on corn prices in particular. This chart shows that since January 2007, the DBA has kept pace with gold and silver in outdistancing the market; only crude—which we mistakenly sold off two months ago—is significantly outperforming agriculture commodities in that time frame.

We do not necessarily expect agricultural commodities to continue to outperform at the same level; however we are sure we prefer having funds here than in dollars with the likely prospect of additional rate cuts and loose money forthcoming from the Fed.

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