With interest rates hovering near 0% for several years now, debt has been incredibly cheap and easy to obtain. The hope was that investors would pour that cash back into job-creating businesses. But many traders chose instead to buy commodities futures and short sell the dollar -- and it's pretty easy to see why.
Commodities contracts are purchased with a combination of traders' own capital and borrowed money -- CME Group, which owns Comex and Nymex, regulates the margin between them. So long as prices continue trending upwards, it's better to finance more and use less personal cash.
And with traders required to put only 6% of their own money down as recently as March, that's exactly what they did.
The problem is, all this borrowing pushes prices far above their fair market value, creating a commodities bubble -- and sooner or later, that bubble has to pop.
As gas prices started hitting the $4 mark nationwide, CME began increasing margin requirements, announcing an additional two this past Wednesday -- by May 9, traders will only be able to borrow 78%, down from 94% just a couple of months back.
With buyers now required to front a good deal more of their own cash, don't be surprised if the commodities market becomes a lot more volatile. Oil has already come down a whopping 8.5%, and silver took a 25% nosedive, while the dollar saw a sharp rebound.
As prices fall, traders may be scrambling to sell their contracts in order to pay back their loans.
So what sort of fallout can we expect? On one hand, the global economy could actually see a positive impact, as declining prices leave more cash in consumers' pockets to spend on other thing. But investors who bet on the commodities bubble are sure to suffer, as are economies dependent on their export business.
So, which companies stand to gain from the commodity crash?
To help you find ideas, we went back in time, and identified a list of about 400 companies that outperformed the S&P 500 during the most recent commodity bubble crash, which occurred between June 2008-February 2009.
We narrowed down the list of outperforming companies by only focusing on those companies that have seen significant insider buying over the last six months.
History suggests that these companies do well during times of commodity crashes, and insiders seem to think these companies hold significant potential -- do you agree? (To access free, interactive tools to analyze these ideas, click here.)
List sorted by the relative size of insider buying over the last six months. (Note: All price changes referenced occur between June 1, 2008-February 1, 2009).
1. Theravance (Nasdaq: THRX): Biotechnology Industry. Over the last six months, insiders have been net buyers of 5,189,200 shares, which represents about 10.32% of the company's float of 50.28M shares. During the previous commodity crash, the company's price changed from $13.53 to $13.18 (a price return of -2.59%, outperforming the S&P 500 index by 38.44%)
2. Auxilium Pharmaceuticals (Nasdaq: AUXL): Drug Related Products Industry. Over the last six months, insiders have been net buyers of 973,072 shares, which represents about 2.22% of the company's float of 43.83M shares. During the previous commodity crash, the company's price changed from $31.84 to $30.56 (a price return of -4.02%, outperforming the S&P 500 index by 37%)
3. ITT Educational Services (NYSE: ESI): Education & Training Services Industry. Over the last six months, insiders have been net buyers of 374,000 shares, which represents about 1.67% of the company's float of 22.35M shares. During the previous commodity crash, the company's price changed from $72.63 to $122.51 (a price return of 68.68%, outperforming the S&P 500 index by 109.7%)
4. Western Gas Partners (NYSE: WES): Oil & Gas Pipelines Industry. Over the last six months, insiders have been net buyers of 359,975 shares, which represents about 0.87% of the company's float of 41.38M shares. During the previous commodity crash, the company's price changed from $16.75 to $15.26 (a price return of -8.9%, outperforming the S&P 500 index by 32.13%)
5. RLI (NYSE: RLI): Property & Casualty Insurance Industry. Over the last six months, insiders have been net buyers of 96,751 shares, which represents about 0.56% of the company's float of 17.13M shares. During the previous commodity crash, the company's price changed from $51.14 to $56.49 (a price return of 10.46%, outperforming the S&P 500 index by 51.49%)
6. Questcor Pharmaceuticals (Nasdaq: QCOR): Biotechnology Industry. Over the last six months, insiders have been net buyers of 181,875 shares, which represents about 0.36% of the company's float of 50.96M shares. During the previous commodity crash, the company's price changed from $5.09 to $6.45 (a price return of 26.72%, outperforming the S&P 500 index by 67.74%)
7. First Financial Bankshares (Nasdaq: FFIN): Regional Bank. Over the last six months, insiders have been net buyers of 12,558 shares, which represents about 0.06% of the company's float of 19.68M shares. During the previous commodity crash, the company's price changed from $45.8 to $44.39 (a price return of -3.08%, outperforming the S&P 500 index by 37.95%)
8. Collective Brands (NYSE: PSS): Apparel Stores Industry. Over the last six months, insiders have been net buyers of 20,139 shares, which represents about 0.04% of the company's float of 56.29M shares. During the previous commodity crash, the company's price changed from $11.33 to $10.67 (a price return of -5.83%, outperforming the S&P 500 index by 35.2%)
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen does not own shares of any companies mentioned.
