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The CRB Index: What Commodities Can Tell Investors About Stocks
by Dr. Scott Brown, Advisory Panelist
Wednesday, February 18, 2009: Issue #938
In 1933 and 1934, President Franklin D. Roosevelt was doing the same thing Obama is working to do today – reduce the corruption in our capital markets by increasing transparency and regulation.
Most investors know that the SEC and our key securities laws were enacted in those years…
Few know that in 1934, at the request of the U.S. Department of the Treasury, the Bureau of Labor Statistics began the computation of a daily commodity price index, using quotations for sensitive commodities.
The Commodities Research Bureau Index (the CRB Index) let’s you see what the commodity markets are doing, just like the S&P 500 does for stocks.
For many investors who focus on stocks, the thought of following a commodities index doesn’t intrigue. And it’s unfortunate…
The CRB Index – Very Different From the S&P 500
The CRB Index is very different from the S&P 500 Index. It gives us more than just the current market prices for a few commodities. It tells us about profitability. And for investors, that couldn’t be more important to keep an eye on it right now.
The S&P 500 measures the mood swings of the investors, whose daily opinion affects the price of the paper asset that is a share of stock.
Commodity markets and futures are very different:
- They represent raw goods purchased by thousands of intermediate manufacturers who convert these resources directly into consumer products, or indirectly as intermediate industrial products.
- This creates a very real relationship between the profitability of producers that consume commodities and the price that mines, wells and growers can charge intermediate manufacturers.
- As commodity prices rise, the production costs to manufacturers increase as well.
The CRB Index vs. The PPI Index
The CRB Index is very different from the Producer Price Index (PPI), which measures average changes in prices received by domestic producers for their output. The CRB gives a view of the cost side of the theory of the firm equation and the PPI gives the price side.
If the CRB Index goes up really fast but the PPI goes up slower, you know that corporate profits are being squeezed. And the opposite when the PPI is climbing and the CRB is dropping.
We aren’t there yet, but looking at the CRB chart in the crib sheet below you can see we’re headed in the right direction.
Reduced manufacturing profitability will cause large layoffs followed by the collapse of weaker competitors. Sound familiar? It’s why we’ve been seeing an explosion in unemployment.
In the past few years, skyrocketing – and volatile – commodity prices have collided with reduced consumer demand on a global scale. It’s created what’s become the harshest recession since the depression. And few economies around the globe have been left unscathed.
But this reduced demand has also been filtering down to the producers of source materials. It could be creating a perfect storm for a serious bear market in commodities.
While this may hurt producers, manufacturers may look at this as an opportunity to increase their profit margins, as they benefit from the strong side of the CRB/PPI equation. And for investors, keeping an eye on profits is never a bad thing.
It all starts with education,
Scott Brown
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Today’s Investment U Crib Sheet – Understanding the CRB Index
by Dr. Scott Brown, Advisory Panelist
The CRB Index tracks 22 raw industrials commodities: burlap, copper scrap, cotton, hides, lead scrap, print cloth, rosin, rubber, steel scrap, tallow, tin, wool tops and zinc. There’s also foodstuffs, including butter, cocoa beans, corn, cottonseed oil, hogs, lard, steers, sugar and wheat.
For three decades – from 1979 to 2006 – the index channeled between 200 and 300, before shooting up to an all-time high of about 475 in a single year. The index dropped off its all-time high in 2007 as a number of markets broke – the energy complex being the most notable.
The CRB Index is almost back to the top of the 30-year channel indicating that an end of the global recession is within sight.
An interesting aspect of the CRB Index in the 30 years that it channeled is that it had perfect support at about 205 – making that an interesting level to watch for entries into new commodity bull markets – as is the mid-point of the channel at 250.
These factors make for interesting times in the commodity markets.
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One Response to “The CRB Index: What Commodities Can Tell Investors About Stocks”
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Dr. Brown specializes in teaching stock investing because as he emphasizes "the stock market is where individuals and families have the best shot at succeeding financially!"
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September 7th, 2009 at 2:08 pm
So, What is your conclusion? recommendations for trade? It may be obvious to the writer what they see and feel. Not to me as a reader. “Going in the right direction”?
Where is trade, when, stocks or commodities?
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