Portfolio Investor: Clark on Commodities

By Murray Coleman

Joe Clark is a student of demographics and how that plays out in financial markets. As a result, the managing partner at Financial Enhancement Group takes a different sort of look at commodities and the world's need for more raw materials to sustain economic growth.

On Friday, IndexUniverse.com Managing Editor Murray Coleman took up the plight of the market as the Summer Olympics were about to start in Beijing.

IndexUniverse.com (IU): Do you see a big downturn in commodities demand as a result of the conclusion of China's buildup prior to the Olympics?

Joe Clark (Clark): A key point to keep in mind is that the recent drop in demand for commodities came after a rapid increase in the price of oil in the second quarter. The best picture in our mind to understand where we are right now is to imagine being in a 1970s car. You see a stop sign and throw on a brake. Inertia still pulls you forward and then it snaps you back. The question for the global economy is whether the car came to a rolling stop or did it come to a screeching halt.

IU: Which way are you leaning?

Clark: A rolling stop. I believe we're still in a demand cycle where there's a real need for raw materials, especially in emerging markets. And you should keep in mind that it's very typical for market leaders to take a breather during the third quarter. A big problem with oil going from $147 and change a barrel in the second quarter to $115.90 this morning is that people are beginning to expect more volatility - and in the same magnitude. In fact, some people are talking about $70-a-barrel oil prices. That's just not likely to happen.

IU: What do you see as likely then?

Clark: We think commodity prices will go up in the fourth quarter. You can watch PowerShares DB Agriculture (DBA) as a proxy for the actual commodity. It's designed to track the sugar, wheat, soy and corn futures. And you can actually own the fertilizer companies and equipment makers by purchasing the Market Vectors Agribusiness ETF (MOO). That ETF has dropped from $66 a share in June and now is down to $50.

IU: Is MOO a good bargain now?

Clark: We're not a buyer yet. We'll be ready to probably make a move in it around the end of the third quarter or early into the fourth quarter. We'd like to see MOO, along with DBA, find a base and stop falling. When you pull up the technical charts, both are continuing to fall. By contrast, Brazil is already finding some support. We know that through the iShares MSCI Brazil Index (EWZ). Technically, it seems to have found a base around $75 per share. MOO and DBA have not yet.

IU: Do you prefer right now investing in regional economies that are strong in natural resources?

Clark: That's why we own iShares S&P Latin America 40 Index (ILF). We originally purchased it purely due to the region's rich commodities basket. Since then, Brazil - which is about 65% of ILF - has received two debt investment upgrades in credit quality from rating agencies. So what we've seen happen is that now institutions and pension funds are able to invest much more readily in Brazil.

This is an ETF that was initially lifted by the commodities bubble. But there's now a genuine economic growth story in Latin America that's related to more than just commodities.

IU: Are you investing in China as an economy?

Clark: We sold everything we owned in China in November of 2007. China appeared to me to be going through the same thing that America did when it went through the Y2K nonevent. During that period in the late ‘90s, every board we visited was preparing their company for the Y2K crisis. Their capital budgets were increased in anticipation of a new millennium and a need for new computers. Of course, the crisis didn't play out to the extent most people were anticipating. So everyone in the U.S. basically shot a huge chunk of their reserves on a single event. So what do you do after it didn't turn out to be as big of an issue as they were expecting?

China is going through a similar situation, in our view. Everybody in a leadership role in China was looking directly at the Summer Olympics leading up to today - 8/08/08. I don't think you can say that they overbuilt. But they've bought a lot of extra goodies, so to speak, that can be used for the future. So China won't be going to the commodities grocery store at the same rate as they have in the past.

IU: Is that going to have a huge impact on commodities prices?

Clark: We've already seen it have a big impact. The fall in prices during the third quarter is a result of speculators changing their direction. The excuse they're giving for why commodities prices are falling today is what's being labeled as "demand destruction." And though the use of oil may have eased, the world certainly hasn't decreased the quantity of food it's consuming. So the pullback in DBA and MOO is related to speculators changing their overall opinion of fair pricing in the market. Prices should start to work themselves up in the fourth quarter once they reach a floor. Prices probably won't rise as rapidly as before, but the commodity cycle clearly isn't over yet.

Comments

[Scrat77777:]

We are seeing some very transformative changes in the economies of major countries towards infrastructure, competitive advantages, and resource development. China, India, Russia, and Brazil are in many ways very exciting emerging first world economies with growth rates that far surpass the U.S. Their stronger companies are becoming world powers.

2008 Aug 08 02:12 PM

[phdinsuntan...:]

in the mean time you loose money

2008 Aug 08 03:58 PM

[Boubou:]

Is the Schiff/Rogers/Weiss doomsday scenario over?
Right now I'm loaded down with Brics and Commodities, but they're beginning to look like finance.

2008 Aug 09 09:03 AM

[investor88:]

Joe Clark sold everything he owned in China in Nov 2007, what excellent timing. So given the logic Joe presented on the commodities cycle, we can do no worse than follow him in watching closely for entry points end of 3rd quarter or beginning of the 4th quarter.

2008 Aug 09 09:18 AM

[bold4gold:]

Regarding oil, his opinion makes sense to me in the long term. In the short term, with Russia NOW invading Georgia I wonder what sort of volitility we might expect this week. I sense a trading opportunity!

2008 Aug 09 12:46 PM

[NOWHEREMAN:]

Dear Bold, yours is the first post that has reflected the Russian Invasion, the Euro dropped like a rock due to this alone. How far the dollar rises has everything to with this rather than anything fundamental.

The financial miscarriages especially at AIG should have cratered the market, instead the dollar's rise masked it and created another shortcovering rally.

Reality will resume with European Angst over inflationary aspect of Dollar rise and Fed will have to think about the Deflationary Aspect of the Dollar rise.

Neither bodes well for the future in either sector.

2008 Aug 09 02:17 PM

[User 114593:]

Wall Street operates as a pack. Their "Rotation" out of energy and fertilizers stocks---and into financials is like the inmates taking over the assalym. Oil is the life blood of America and if China ever goes to three meals a day---there will be an immediate world food shortage. BOFA paid $4 billion for Countrywide--and it is now worth $100 million. So BOFA is now advertising on TV for their Wealth Management Division. Now if I was drunk---that's where I'd want to put my money. IMHO

2008 Aug 10 05:55 PM