Any investor who has not upped the ante on their commodity bets over the past eight months is losing -- and not by a small margin.
Since the Federal Reserve announced its controversial plan to buy Treasuries to inflate the economy last summer, the materials, energy and commodities sectors have responded dutifully and led the market's recovery. Corn, silver and oil are just a few of the commodities that have seen their prices surge. The question is can the consumer, and by extension the economy, withstand the rise in prices?
While the Fed appears to be maintaining calm thanks to tame core inflation readings, analysts like Andrew Wilkinson of Interactive Brokers see danger in the commodity crush.
"I don't think the consumer can get through it. I don't think businesses can get through it in the long run," he says.
As a senior market analyst, Wilkinson studies buying and trading trends in the futures and options markets. He says it's clear that consumers and companies can't take a prolonged hit from record and near-record commodity costs, but he points out that the stock market is currently not expecting a sizable selloff. He argues that as long as the CBOE Volatility Index (VIX) stays below 20, a market decline likely would be modest.
Even so, "we're at least due for a setback," he says. And he's not just talking about the U.S. consumer -- it's even worse in Europe, where taxes on gas are considerably higher.
Another trend he's watching is the subtle short-term flight to quality that has seen money going into sectors like consumer staples, which he says reflects the belief that "consumers are willing to buy a Coke, but not a car."
Wilkinson also says companies like Cheniere Energy (LNG) are popping on to his radar following some large bets being made on deep out-of-the-money call options, suggesting somebody thinks this oil and gas producer still has more to go.
For more details on his views on commodities and the markets, be sure to watch the accompanying video.
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- call options
- CBOE Volatility Index
- Andrew Wilkinson
- core inflation
- stock market