Steel, Coal and Agriculture Plays Turning Over

The hottest segments of the market over the last quarter have been commodity related names, specially coal stocks, steel stocks and agricultural names. Stocks like US Steel (X) had gone from under $100 just earlier this year to over $190 - until this week when all these hot stocks have turned over. Potash (POT), Mosaic (MOS), Walter Industries (WLT), Alpha Natural Resources (ANR), Cleveland Cliffs (CLF), CVRD (RIO) were all down 5%-15% just yesterday, and as much as 25% over the last week.

There are two main things happening - one is sector rotation, but then where are people putting their money? It's a good question, and I believe the answer is cash. There was no sector that was up yesterday. The other thing is redemptions - funds that have owned these stocks above sold them heavily to take profits.

I don't think the pull back is over and while I am not shorting any of these names, I believe you can probably buy them lower.

At some point later this summer, maybe sooner than later, the market will sell off much more sharply and I expect panic sellers to come in and dump everything. That is the point where one needs to load up. Until then, sell into rallies and start collecting cash.

Full Disclosure: I own POT, X and RIO but my position can change anytime without notice.

Comments

[raman kandola:]

AG sector is still the play. Every one is betting the flood, would increase the fertilizer intake for the crops.

2008 Jul 03 08:11 AM

[raman kandola:]

AG sector is still the play. Every one is betting the flood, would increase the fertilizer intake for the crops.

2008 Jul 03 08:11 AM

[blink0404:]

as the market continues to go down, material and agriculture, which used to be a safe haven, now looks like it may be subject to a downward trend. Here's a pretty good podcast that discusses what to during this down market and what's going on with coal, steel, bulk shipping, and agriculture.

the main idea is that individual investors dont have to act like institutional investors and this market and may be better holding cash than trying to beat the market.
www.greenfaucet.com/sh...

2008 Jul 03 12:18 PM

[MNSL:]

Good Article.

I think this is the time to sell our commodity stocks and commodities in in agriculture. energy and industrial materials.

2008 Jul 05 02:22 AM

[Blue collar...:]

There is no melt down of commodities or anything else in general except financials as a sector. Profit taking every once and a while is he name of the game. This is a particularly weird election year and thus more topsy turvy than ordinary with both major parties lacking a really good candidate. We have a totally respectable old war hero/Senator and a younger than young swarmy word artist who has more flips and flops than a sick Bass out of water.

2008 Jul 07 09:55 AM

[groty:]

Inlfation is out of control in many fast growing countries. Most of the world's central banks (except the FED) are responding by tightening. IN some cases, pretty aggressively. For example Brazil's central bank recently raised overnight lending rates to 12.25%. China has been raisig interest rates, increasing reserve requirements and allowing its currency to strengthen for several months to try to get a handle on inflation and still haven't been successful.

The point is, with central banks tightening, I think investors are starting to discount a synchronized global slowdown. All the high fliers mentioned are economically senstive, so they are getting wacked. If a sharp global slowdown does materialize, those stocks will be toxic even though they look "cheap" on '09 earnings estimates.

2008 Jul 07 06:41 PM

[Urbane Gori...:]

Raman ... Re your comment: "AG sector is still the play. Every one is betting the flood, would increase the fertilizer intake for the crops.".... Who is saying this?

I'm no farmer, but it would seem to me that there will not be any quick turn-around for the mid-west farmers this year. And in fact, I haven't heard anything about the issue yet. But think about it. Farm homes and barns are gone. Tractors, planting and harvesting equipment is gone. Roads and infrastructure is gone. Rails and barges that work the Mississippi are gone (Look at KEX and ACLI for intercoastal barges and CSX for rail problems.) The soil is sodden and needs to dry out. People (workers, owners and various support staff) have been displaced for the season. I just don't see a quick turn-around in farming in this area... I'm sure it will pick up next year. I haven't read anything about replanting yet, but have read about the remainder of the problems.

Having said that, I'm not sure that this small loss (in the scheme of things) will affect the rest of the world's usage.

It would seem to me a better play on this disaster would be infrastructure, modular home builders, local vehicle, equipment and banks - as all of the above need to be replaced and banking will need to furnish loans. (Just my take).

Thx jegan ;-)

2008 Jul 16 07:41 PM

[Agcapita:]

On the issue of rotation we need to take a longer view. The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research by Agcapita Farmland Investment Partnership (Calgary based agriculture private equity firm) shows investors must be prepared to rotate into asset classes with different characteristics.

During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland. Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms), cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return) and the S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)

I believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:
 Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
 Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
 Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981

2008 Sep 18 08:23 PM