Doubling Up on Commodities — and Locking in 164% and 139% Gains

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Russia’s Mechel (MTL) was the star of the Global Bull Market Alert portfolio last week, soaring by 26.8%. Sell half of your options here to lock in your gains of 164%. The iShares MSCI Hong Kong Index (EWH) also jumped 10.8% over the last five trading days. Sell half your options here to lock in your 139% gains. Recall, you’ve already sold one half of your options in the iShares MSCI Taiwan Index (EWT) for 150% gains two weeks ago.

This week’s Global Bull Market Alert pick doubles up your bet on commodities through the PowerShares DB Commodity Double Long ETN (DYY). Here’s why I expect this broad-based commodity ETF to rise even if global stocks take a breather over the next few months.

First, despite the collapse in commodities prices last year, the rationale behind the “commodity supercycle” remains intact. After 35 years of under investment in production, global supply of commodities is in a sharp decline. The last lead smelter in the United States was built when President Obama was eight years old. There’s been no major oilfield discovery in the last 40 years and peak oil advocates suggest that there will be little if any oil left by 2020. “Soft commodities” like wheat and corn are in a secular uptrend as well. More immediately, a recent bottoming of global economic activity means that the rise in commodity prices is set to continue.

Second, commodities do well during times of inflation. Every central bank in the world is printing money at the same time, injecting the global financial system with massive liquidity. Inflation expectations are rising. With the worst part of the financial crisis having passed, central banks will soon need to withdraw money from the system. If they aren’t able to get it just right, inflation will soar, along with the price of “real assets” like commodities. The devaluation of the dollar also means that commodities prices will soar in U.S. dollar terms in particular.

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Finally, after commodities selling off sharply last year, commodities have now entered an uptrend. Crude oil prices have almost doubled from their December lows. Gold is now approaching $1,000. Corn and wheat are soaring. Broad-based commodities indices are on the verge of crossing their 200-day moving average for the first time since September.

So buy the PowerShares DB Commodity Double Long ETN (DYY) and place your stop at $5.10. This is a leveraged position that consists of  futures contracts on a wide range of commodities including (as of May 28) light crude oil (35.65%), heating oil (16.24%), corn (12.09%), wheat (13.31%), gold (13.65%) and aluminum (9.06%). If you want to play the options, I recommend the options on the unleveraged PowerShares DB Commodity Index Tracking (DBC), in particular, the October $23 calls (DOBJW).

Portfolio Update

With your Global Bull Market Alert portfolio bursting at the seams, I am tightening stops on many positions so that you get taken out of your weakest positions on any market correction.

The iShares MSCI BRIC Index ETF (BKF) jumped almost 8% over the week, as Brazil, Russia, India and China continue to soar. Raise your stop to $31.00. BKF remains a BUY.

The iShares MSCI Chile Investable Market Index (ECH) rose another 2.6% this last week, breaking through $44 for the first time since September. Raise your stop to $39.50. Backed by strong fundamentals, Chile remains a BUY.

The iShares MSCI Hong Kong Index (EWH) soared 10.8% last week. Sell half of your options for a 139% gain. Move your stop to $12.50. EWH is a BUY.

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The iShares MSCI Taiwan Index (EWT) added 4.2% last week. Tighten your stop to $9.80. With Asian stock markets the top performers of the year, EWT remains a BUY.

Both the SPDR Gold Shares ETF (GLD) and the PowerShares DB Gold Double Long ETN (DGP) rose another 2.17% and 4.25%, respectively, as concern about the U.S. deficit and inflation increased. Tighten your stop to $89 and $19.20 respectively. Both GLD and DGP remain a defensive BUY.

Your position in the iShares iBoxx $ High Yield Corporate Bond (HYG) is nearing the $78 level for the first time since early fall. Tighten your stop to $72.50. With this position yielding over 11%, HYG remains a BUY.

The iPath DJ AIG Copper TR Sub-Idx ETN (JJC) rose another 4.48% for the week, climbing back above the $30 level. Raise your stop to $26.25. “Dr. Copper” remains a BUY.

Russia’s Mechel (MTL) soared another 26.8% this week. Tighten your stop to $6.60. Sell half of your options here to lock in a whopping 164% gain. Mechel remains a BUY.

Your Rydex Inverse Government Long Bond Strategy Inverse (RYJUX) had a wild ride — rising to $15.86, before falling back to $15.25. Tighten your stop to $14.25. Your bet against U.S. Treasuries remains a BUY.

The Rydex Weakening Dollar 2x Strategy H (RYWBX) rose 1.72% as the dollar resumed its decline toward the end of the week.

Sincerely,

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Global stock markets took a breather last week as most of your Global Stock Investor equity positions consolidated their recent gains. However, Asian markets soared overnight after the strong performance of the U.S. stock market yesterday. The iShares MSCI Taiwan Index (EWT) rose about 3% last week, and added another 3% overnight. The Indian market also added almost 4%, which should benefit your new position in ICICI Bank Ltd. (IBN) in today's trading.

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