Roger Nusbaum of Your Source Financial is one of the leading commentators in the financial press. In addition to writing his own blog, Random Roger, he is a regular contributor to SeekingAlpha.com, TheStreet.com, GreenFaucet, and is a regular interviewee for HardAssetsInvestor.com
HAI assistant editor Lara Crigger caught up with Roger recently to discuss where he's finding opportunity in the commodities market.
HardAssetsInvestor.com [HAI]: So are we in economic recovery mode yet?
Nusbaum: Certainly the recent rally has been huge. But it's been so fast and panicked that I'd be shocked if we didn't move down again at some point. I don't know if it would take out the S&P 500's low, but something big enough to scare the hell out of people again.
Because thus far, all this has been very normal bear market activity. If you look at past bear markets, there have been massive "feel-good" rallies. And as feel-good rallies go, this one wasn't even that big. So I try to caution my clients not to bank emotionally on this [recent bear market] being over.
The precedent is, the stock market usually leads the economy by six-to-nine months. So I think the economy may start to recover in a sustainable way at the end of '09, the beginning of 2010. It's not going to be boom times, but in terms of GDP growth going and staying positive, I think that's plausible.
HAI: Last time we spoke, you said you "wouldn't hesitate" to buy gold. Do you still feel that way?
Nusbaum: The short answer: yes. But the long answer comes back to the context in which I'd use it.
Gold is insurance against big bad events, a means of reducing exposure to the volatility that may follow when something bad happens. It's also gotten a recent boost from what appears to be our willingness to devalue our way to prosperity, with the printing of money that so many other people have been talking about.
So to that effect, I've also added DBA [PowerShares DB Agriculture Fund, NYSE Arca: DBA]. Both GLD and DBA have a 2% portfolio weight, so it's not a big bet. But I don't think you need big bets to capture the effect. Plus, there are also some compelling long-term supply-and-demand issues for agricultural commodities.
But clearly, the financial markets are not healthy right now. And for all the virtues of commodities, they are volatile. In an unhealthy world, I don't want to have a lot of volatility for my clients.
HAI: Do you think the de-stocking in industrials is over? Are you buying steel companies, copper, and so on?
Nusbaum: My materials exposure has been the same for awhile, although I've occasionally tweaked the weights. For example, the Brazilian company Companhia Vale do Rio Doce [NYSE: VALE], I've owned that name in varying position sizes since 2004. A couple of times I shaved some off, or I added a little bit. But it's a core holding.
While I don't think it's ideal to own individual stocks for my clients, when I do want the exposure, there's MXI [iShares S&P Global Materials Sector Index ETF, NYSE Arca: MXI], which I use as a proxy in a few instances.
In terms of copper, I wish that I had! I made a mistake in not adding some copper when I had the chance.
HAI: Beyond DBA, what about agricultural commodities?
Nusbaum: Monsanto's (NYSE: MON) been a core holding. It held up a little better on the way down than some potash names, but it hasn't done as well on the way up. Like I said for DBA, there seems to be a clear, obvious demand story long term, as more people need access to better food.
I don't own MOO [Market Vectors Agribusiness ETF, NYSE Arca: MOO] for anybody, but if clients didn't want to hold individual stocks, I wouldn't think twice about adding MOO as a proxy.
HAI: Let's talk a little about oil. Where do you think oil goes from here on out?
Nusbaum: It's pretty clear that $147 was too much on the upside. But I think oil needs to work itself higher, to a place where firms can make money pulling it out of the ground, or squeezing it out of oil sands, which leads me to think that the $75-85-a-barrel figure that OPEC kicked around makes sense.
We've had such a violent move up that I would think we'll go down some first, that the path between here and $80 would have to be volatile. If it moves in a straight line, it just can't sustain it; there's just not enough support under something like that.
What looked like a drop in demand, I'm convinced, was always going to be short-lived. As China and India use more oil, it's going to radically alter the supply-and-demand equation for oil, which I think is going to mean higher prices.
$150 or $200 a barrel? I think those kinds of heroic numbers are way off in the distance. But absolutely, something uncomfortable is reasonable. I'm not sure if that means $2.50 at the pump or $3.00, but I think we're a long way from $4 at the pump.
HAI: Given the current economic climate, how have you changed or adjusted your commodities allocation from six months ago?
Nusbaum: I haven't changed much. I was lucky in that most of the work I needed done I did rather early on. Looking forward, I imagine I might add a little to existing positions when things start to get healthier. For equities, one objective measure of that is when the S&P gets back above its 200-day moving average.
HAI: What benefits can commodities offer investors particularly in today's market?
Nusbaum: There's a lot we still don't know: what's going to happen with the financial sector, or the dollar, or with treasuries; what interest rates will do in reaction to all this; what kind of drag, if any, that creates on the economy. But generally speaking, commodities can offer a way to offset the potential of those threats. If inflation goes up, if the dollar goes down, or some combination of both occurs (which seems likely), commodities generally are going to swim against that trend.
As we've discussed, I've got opinions on everything. But if they all turn out to be wrong, I expect commodities will still work. They're going to zig against the zag of everything else.
