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Matt McCallBy Lara Crigger

The author of ‘The Next Great Bull Market' shares his thoughts on how investors can play the coming commodities boom.

  • Why he's still in UNG
  • Bull market benefits base metals, gold and oil
  • How (and why) investors should play lithium

Commodities are on a tear lately—and by all signs, they're only headed higher, says Matt McCall, author of the upcoming book, "The Next Great Bull Market" (Wiley, November 2009). And now, he adds, is the perfect time for investors to jump in.

Mr. McCall is the founder and president of Penn Financial Group, LLC, and co-author of 2009's "The Swing Trader's Bible: Strategies to Profit from Market Volatility." A vocal advocate of ETF investing, he's also a regular commentator on CNBC, Fox Business Network, Fox News Channel and Bloomberg.

Recently, HAI associate editor Lara Crigger sat down with Mr. McCall to discuss his thoughts on the bull market for commodities, including which sectors stand to benefit, why he likes UNG and lithium, and why he's not worried about tough talk from the government on regulation.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): When we last spoke back in March, you said you were laying low on commodities. As the recovery has strengthened, have you become more heavily invested?

Matt McCall, founder & president, Penn Financial Group (McCall): Yes, actually, commodities are the sector I'm most heavily invested in right now; my three largest holdings are gold, silver and natural gas. But I have been adding to everything from precious metals to energy to base metals.

Crigger: Natural gas? Even with inventories at record highs?

McCall: Yes. I believe we're going to have a much colder winter; a lot of forecasters have been calling for that. I believe we're going to see a spike in natural gas between now, the end of winter and the first quarter 2010. I've been buying on every bit of dip that we have.

I've been buying UNG [U.S. Natural Gas Fund], which isn't the greatest vehicle, but it's easy for us to play it without having a futures account. Most people I've talked to are staying way away from UNG—in fact, they're shorting it. But I think that natural gas is going to pop, and when it does, the difference between the ETF and the actual futures price will narrow. UNG could pop at $15-$16 (it's currently trading at $11) in the next four-to-six months. If that's the case, there will be a very large percentage gain.

Crigger: In your book, you predict a coming "long-term commodities bull market." What do you see driving this trend?

McCall: It's a combination of three key factors. The first is longer-term inflation, which I believe could actually turn into hyperinflation in the coming years. Here in the U.S., we just continue to print money, and that's eventually going to catch up with us, and inflation's going to be a concern. Look back at history, thousands of years: Any time an empire flooded the population with currency, inflation was always the end result eventually. I think that's going to be the case here, too. And obviously commodities do very well in an inflationary environment.

Second, the U.S dollar hit a 14-month low recently. I think that trend will continue, the way our government is going; they want to have a weaker U.S. dollar, as far as exports are concerned. I don't really believe in that, but I think that's the way we're going. And commodities also do well with a weaker U.S. dollar.

Third, I believe the global economy has turned. We were in a recession, but I think we're well on our way out of it. Countries such as Brazil are already out of the recession. That's going to create a greater demand for base metals and energy.

All three combined would give us an amazing bull market for the next five-to-10 years. Even two of the three would still get a bull market. So I think you're really set up with those three key factors, fundamentally speaking. Technically, we've been in an uptrend for several years now; I don't see that momentum stopping.

Crigger: Which commodities do you think will perform best in this bull market?

McCall: I really like base metals; they're one of my largest holdings. I invest through DBB [PowerShares DB Base Metals Fund], you know: copper, aluminum and zinc. The reason I like that is you're going to need copper for the build-out. China is still growing steadily, as well as India and other BRIC countries. So demand for copper will continue, and that's a great way to play it.

Another one is, obviously, gold. I'm pretty heavily invested in gold; GLD is my biggest holding, at this point. It's going to be more of an inflation play than a play on the global economy turning around. But it's also hedging. If I'm wrong, and the global economy falls apart, gold turns into a safe haven as well.

We also own GDX (Market Vectors Gold Miners ETF) and individual gold stocks as well. One of our largest holdings, as far as individual stocks, is Goldcorp. You want to have a little diversification. The term I use in my book is "conversification": You concentrate on commodities, but within it, you diversify, getting a little exposure to miners, the futures, and so on. You can get exposure to a little bit of everything through ETFs.

So that's two. Three, finally, there's going to be oil. We hit nearly $150 as the all-time high on crude, and I think we'll probably hit that again as demand picks up, and the global economy starts on all cylinders again.

Crigger: In this environment, which commoditiesif anywill lag?

McCall: It's going to be tough to say which ones will not do well. But one that's lagged recently has been the ags. Just in the past week or so, they've been coming back, but this year, they really haven't had the performance of something like energy. It's a wild card.

But just this week I've been thinking very heavily about putting some money back into the agriculture ETFs. There is a nice value here, and we had a drought in Australia, one of the worst droughts in the history of the country, sending wheat prices higher. So wheat, corn and soybeans could take off. If that's the situation, then we could be looking at DBA (PowerShares DB Agriculture Fund), which is sitting at a very nice value price over time.

I don't know that there are any commodities that I do not like, but some will lag others. I'd rather be diversified throughout all of them, have a little piece of all of them in my portfolio.

Crigger: Do you recommend any out-of-the-ordinary commodity plays that investors may not have already considered?

McCall: Something that I do own is plays for lithium. I don't know if people often consider lithium a commodity, but it really is. It's a long-term story, and eventually we're going to see a supply crunch when it comes to lithium.

The reason I love lithium goes back to lithium-ion batteries. As we move toward electric cars—and I really believe we'll move toward electric cars in the future—we're going to see greater demand for lithium. Yes, there's lithium in the laptop I'm using and the cell phone I'm talking on, but the amount needed for cars is much higher than for the smaller electronic components that we already use. Now, there's no guarantee that the lithium-ion battery will be the only battery for electric cars, but right now, it looks like a viable alternative.

So three companies at the forefront of the lithium angle: FMC Corp (NYSE: FMC), which is a major chemical company and the third-largest lithium supplier in the world; SQM (NYSE: SQM), which is based in Chile and also has exposure to agricultural chemicals, so you get exposure to both; and Rockwood Holdings (NYSE: ROC), the largest lithium supplier in the world. I own FMC and SQM for my clients, and I've been looking to buy more on any type of weakness.

Crigger: There's been a lot of talk in the government about increasing regulation over the commodities market. How would increased regulation impact the U.S. position in this commodities bull market?

McCall: What it would do is really hurt the ETFs, depending how ETFs react. But I'm not as concerned as a lot of people are when it comes to the potential regulation. At the end of the day, it makes a good sound bite for them to say, "We're going to regulate this and knock out the 'speculators.'"

But most people who actually are in the know about the commodity markets—or any markets, for that matter—know that speculators are needed to make the market; without speculators, there is no market. So I'm not too worried. It's just a lot of talk from the government; we've been promised a lot of changes that we're not seeing. If it does happen, we'll probably add more bureaucracy to the situation, but as long as you're on the up and up, I don't think it's going to affect the markets much at all.

Source: How to Play the Next Great Bull - Matt McCall