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2012-11-01 07:37:36
November 20 2009| Filed Under Economics, Futures, Options
The daily movements in the world's equity markets are influenced by a multitude
of factors, ranging from large institutional block trades and program trading
to earnings and economic reports. However, one factor that is frequently
overlooked is the influence of commodity prices. In fact, fluctuating commodity
prices can have a tremendous impact on the earnings of public companies and, by
extension, the markets. Read on to learn more about this relationship and why
it matters to investors.
Lumber Prices
The average person would probably never ponder the cost of lumber unless he or
she was in the process of building a house. However, the pricing of this
commodity is closely watched and can affect many companies, such as
homebuilders.
However, it's also important to note that many other types of companies pay
close attention to lumber prices as well. For example, companies that are
looking to expand and build out new locations, such as restaurants, retail
chains and even pharmaceutical companies looking to build new manufacturing
facilities would naturally be interested in the cost of lumber. After all, even
a small tick up in prices can materially affect the cost of a structure.
Random length lumber futures and options trade daily on the Chicago Mercantile
Exchange (CME) (Find out more about these on the CME Random Length Lumber
Futures & Options page.) Quotes and information may also be published in the
Wall Street Journal or Investor's Business Daily and is often noted on major
business channels, such as CNBC.
Oil Prices
Many consumers only think about oil prices in the context of how it directly
impacts their wallets. In other words, how much they will end up paying at the
pump as the result of price fluctuations. However, oil is one of the
cornerstones of the North American economy and its price is highly important to
companies of all stripes.
The price of oil can affect a variety of companies ranging from retailers to
manufacturers of plastics (oil byproducts are a big component in plastic). Just
think about how all of the products that are on the shelves at your local
Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are shipped.
By extension, this means that these companies either have to eat the rising
cost of fuel or try to pass some of it along to consumers in the form of higher
prices. Unfortunately however, if they aren't able to pass along the cost
increase, it can have an adverse impact on margins and net income, which can
put downward pressure on stock prices and hurt investor returns.
The price of crude can be tracked on the New York Mercantile Exchange (NYMEX).
(For more, see Oil And Gas Industry Primer.)
Cotton Prices
Cotton is used in a wide variety of products. For example, many types of
clothes contain large amounts of cotton; therefore, rising prices can have an
adverse impact on an apparel retailer's cost of goods sold and declining prices
can have a positive impact.
Of course those in the apparel industry aren't the only parties that can be
impacted by changing cotton prices. In fact, it's also a key component in
things like furniture, coffee filters and a variety of other materials that we
all have come to depend on.
As such, companies that sell these items have only a couple of choices when
dealing with rising cotton prices. They can raise the price of the product, and
/or eat the rising cost. Again either or both of these choices can have an
effect on income and by extension stock prices. (For related reading, see The
Sweet Life Of Soft Markets.)
Wheat
Wheat is the primary ingredient in many popular cereals and foods. While cereal
and other food producers may be able to pass along some of these costs, they
may have to absorb some as well. This can impact their margins and, by
extension, their profits.
Of course makers of such products aren't the only ones affected. Grocery and
convenience stores must purchase the items to keep shelves stocked. Also don't
forget about the impact on distributors and any middlemen. Fluctuating wheat
prices can have a far-reaching impact on a variety of companies and on
consumers. (For more, see Grow Your Finances In The Grain Markets.)
Corn
Corn in one form or another is used in a variety of products ranging from
cereals, building materials, alcohols and even tires.
It's also worth noting that the price of corn is impacted by the demand and
production of ethanol, which is an increasingly popular corn based fuel. As the
demand for alternative fuels ramps up, corn prices could go even higher. Food
manufacturers, retailers, consumers and, by extension, stock prices can be
affected by fluctuating corn prices. (For related reading, see The Biofuels
Debate Heats Up.)
Coffee
Rising or declining coffee prices can certainly have an impact on consumers
that enjoy drinking it in the morning. It can also have an affect on companies
that do a brisk breakfast business, such as diners and fast food chains like
McDonalds (NYSE:MCD) or Burger King (NYSE:BKC). Also, companies like Starbucks
(NYSE:SBUX), which derives the lion's share of its revenue from coffee or
coffee related products, can be dramatically impacted as well.
Gold
The price of gold can have an impact on jewelers as well as on retailers that
sell or receive a portion of their sales from jewelry related items. For
example, Macy's (NYSE:M) and many of the other well-known mall-based department
stores generate a significant amount of revenue from their jewelry departments.
Gold can also be used in medical products, glass making, aerospace and a
variety of other businesses. By extension, this means that fluctuations in gold
prices can make the markets move.
In addition, because gold is found and valued all over the world, it is
considered a universal currency. So, if the outlook for the U.S. equity markets
and/or the economy is dim, it's likely that the demand for gold will increase
as investors "flock to safety."
If it appears as though the economy is about to perk up, or that corporate
earnings are going to be on the rise, investors tend to abandon gold in favor
of equities. (For more, see Does it Still Pay To Invest In Gold?)
The Bottom Line
Although there are a variety of factors that can move markets, commodities can
have a major influence on businesses, stocks and portfolios. When you're
looking to invest in a particular sector or company, take a look at relevant
commodity prices and what this might mean for your investments going forward.
by Glenn Curtis
Glenn Curtis started his career as an equity analyst at Cantone Research, a New
Jersey-based regional brokerage firm. He has since worked as an equity analyst
and a financial writer at a number of print/web publications and brokerage
firms including Registered Representative Magazine, Advanced Trading Magazine,
Worldlyinvestor.com, RealMoney.com, TheStreet.com and Prudential Securities.
Curtis has also held Series 6,7,24 and 63 securities licenses.