We are closing our CCCP basket trade, first recommended on December 1, 2010, for a gain of 25% against our 28% target. Additionally, we are closing our long copper (first recommended October 4, 2010) and long platinum (first recommended July 15, 2009) trades for a 23% and 36% profit, respectively……
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Risk-reward no longer favours being long CCCP
Although we believe that on a 12-month horizon the CCCP basket still has upside potential, in the near term risk-reward no longer favours being long the basket and we are recommending closing the position for a 25% return versus a 28% target. While crude oil, cotton and copper prices have substantially exceeded our targets, platinum and soybean prices have lagged.
Near-term crude oil price risk is becoming more symmetric
Although potential contagion risk in the Middle East and North Africa (MENA) remains elevated and has pushed prices above $125/bbl, at these price levels the risks are becoming more symmetric, which shifts the risk/reward of being long oil. Not only are there now nascent signs of oil demand destruction in the United States (see April 5 Energy Weekly), but also record speculative length in the oil market, elections in Nigeria and a potential cease-fire in Libya that has begun to offset some of the upside risk owing to contagion, leaving price risk more neutral at current levels.
N-T upside in soybeans, but copper and platinum face headwinds
We still see significant upside in soybean prices, but believe that copper and platinum will face near-term headwinds as higher oil prices potentially translate into a negative demand shock for the metals and as these commodities are exposed to supply chain problems resulting from the earthquakes in Japan. This is particularly the case for platinum given its large exposure to global automobile production. Copper also remains vulnerable to slowing observed demand as high prices and tight credit motivate tight inventory management from key consumer China, which tempers the inventory draw we had expected and the risk of price spikes. As result, we are also closing our long copper and platinum trades, but even in these commodities the structural supply-side story remains intact, and we would look for new entry points to establish new longs.
The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Source: ETFWorld – Goldman Sachs Global Economics, Commodities and Strategy Research (April 11, 2011)