MARKET BUZZ
He's Afraid of Commodity Heights
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The commodities price bubble is starting to look scary, in the eyes of Tobias Levkovich, chief of U.S. equity strategy at Citi Investment Research. In a warning about the huge run-up in prices, Levkovich expressed "deep concern" over what he described as "excessive enthusiasm" for commodities investments. He likened the rush into agricultural commodities to the dot-com craze of the late 1990s. "We remain very worried about these incredibly 'crowded trades' that could unwind quickly," he wrote last week.
He acknowledged that his earlier warning in March, in a report titled "The Case for Crumbling Commodities," was premature. Now, however, he said he believed the soaring commodity index, the CRB, was showing some cracks. The CRB is up about 30 percent in the past year. But an under-the-hood look reveals that components such as gold, milk, silver and cotton are slowing relative to the index's overall climb. This suggests that investors are wise to be selective in their commodities investments. "The broader commodity index price has been held up by corn, stainless steel, hogs, amongst other meats, and oil," Levkovich wrote. "Thus, one needs to be very careful about lumping together commodities within one mindset."
He also worries that a key theme underlying the commodities price surge, the soaring demand for the products from developing economies, may be peaking. This theme -- growth of the world's infrastructure -- accounts for about 30 percent of the value of the Standard & Poor's 500-stock index, Levkovich said, adding that that percentage "raises our anxiety levels." He pointed out that the energy sector in the late 1970s got up to 30 percent of the S&P before sharply declining. Information technology rose to 36 percent of the index in early 2000. Everybody knows what happened after that.
"In our opinion, this is a time to be very wary of the infrastructure theme," he wrote, "and it seems far more likely that the downside risk is quite significant."
-- Steven E. Levingston
