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Investment banks are showing signs they are increasingly bullish on commodities markets. Although Citigroup (NYSE: C ) sold its Phibro oil trading unit to Occidental Petroleum (NYSE: OXY ) last year -- due to controversy over compensation -- the bank is embarking on a hiring spree in its commodities division with the goal of raising headcount by 40% over the next three years. Last month, JPMorgan Chase (NYSE: JPM ) agreed to pay $1.7 billion to acquire a substantial part of RBS Sempra Commodities, including its oil unit and metal trading businesses.
A race for capacity
Both Citi and JPMorgan would undoubtedly like to close the gap with the leading banks in the sector, Goldman Sachs (NYSE: GS ) , Morgan Stanley (NYSE: MS ) , and Barclays Capital (the investment banking unit of Barclays (NYSE: BCS ) ). But the leaders are hardly twiddling their thumbs -- Goldman acquired metals warehousing firm Metro International last week in a deal thought to be worth $550 million.
As the stock rally appears to have exhausted itself -- the S&P 500 has stayed in a relatively narrow range this year and is approximately flat year-to-date -- investment banks may be looking increasingly to commodities as a source of profits. However, commodities may not offer substantial diversification if stocks experience a correction; thus, bulking up in the former area looks more like a multi-year bet than a near-term shift.
An alternative idea for investors
Looking for alternatives to stocks? Instead of thinking hard, investors might want to think "soft": Agricultural commodities may be worth looking at right now (the Powershares DB Agriculture ETF (NYSE: DBA ) is one way to gain exposure to this segment). "Ags" are less correlated with stocks than oil, for example, and less dependent on economic growth than their industrial peers.
U.S. stocks have gone nowhere so far this year, and there's little reason to hope for solid returns in 2010 -- Tim Hanson takes a look at the top markets right now.