The Commodity Comeback: Sooner Than You Think

Since the hedge funds dropped commodities in early July, you have seen a dramatic sell-off in oil, coal, and fertilizers. This despite the fact that these commodities have excellent fundamentals going forward, stellar earnings, and continued demand.

The recent "rally" on Wall Street, with the illusion that with lower oil everything is right with the world, came to a reality check Tuesday when JPMorgan (JPM) reported a loss of 1.5 billion. What the market fails to accept is that the financial crisis is still in the middle innings and as long as the credit crunch, credit card defaults, mortgage crisis, and lower consumer spending continues, this crisis will not go away simply because oil is down in price.

This crisis has been years in the making. The continued budget deficits, a war in Iraq, complete disregard for oil alternatives, and a weak dollar created a financial credit crisis not seen since the great depression. But Wall Street, acting in a world where expectations are counted in minutes and not in years continues to assume that the financial crisis is over or will be over by a positive stimulation such as lower oil prices. This is not only an illusion but a complete denial of what is yet to come.

So where do you invest? Opportunities are limited and the game today is played in a field that changes quickly. No sector is bullet-proof. Not even to those that boasted that Visa (V) is depression-proof and its price is not affected by a bear market.

The one thing I believe in is that commodities are a stellar play now and in the future. I believe in this so much that the recent pull-back in commodities does not scare me one bit. I truly believe that the forces that led to the boom in commodities earlier this year will continue into the future. Demand for oil, coal, fertilizers, and other commodities in a world fighting for depleting natural resources will only make the fundamentals of these commodities stronger for a few more years to come.

Yes, there is great volatility. Yes, there will always be pull-backs. But do any here really believe that the dollar is coming back strong to stay? Do any here believe that the price of oil will go down further and stay at low levels? Or that the demand for fertilizers will be lowered?

There will be a prolonged bubble in the commodities sector eventually. And when that comes it will be bloody and very painful. But all indicators point to the fact that in this game we are only in the second inning. Those that see the opportunities in commodities and act on the cycles will be richly rewarded.

Disclosure: Long

Comments

[bbzz24:]

short munis and state bonds with weak fundamentals: in the rust belt and in areas with huge home price depreciation. as tax receipts go down, states will begin to lay off workers and will have to cut spending. all construction companies and pizza chains will suffer from this.

2008 Aug 13 08:26 AM

[Dux:]

Thanks for the voice of sanity.
It's understandable that there would be such a big commodity sell off since there were such huge profits to be made. The current atmosphere of gloom & doom helps push the bottom lower too.
The commodity ride has a long way to go. My only regret is that I don't have more cash to scoop up the bargains.

2008 Aug 13 01:06 PM

[ajspark:]

what stocks offer the best value for the long term

2008 Aug 13 03:26 PM

[knightowl1953:]

I like AGU, POT, MEE

2008 Aug 13 05:29 PM

[look closer:]

Definitely some words of wisdom in this article. Some stocks just ripe for buying: MTL, GDX, KWK, GTE, VAALCO --- all have hit their lows and are now on the way up.

2008 Aug 13 10:00 PM

[sliman:]

The balance sheets of commodity stocks are loaded with cash and low debt ratios. What bank stock can you trust.

2008 Aug 14 05:40 AM

[Machiavelli999:]

What I don't understand are people who are predicting a deep and long recession AND are saying commodities will rebound. You can't have it both ways guys. I know it fits well into your 'doom & gloom' storyline, but you either have a deep recession and crashing commodity prices or no recession and a rebound in commodities.

Yes, fundamentally speaking commodities are a good play. As long as the world doesn't end, 100 years from now a bushel of wheat will almost certainly cost more then it does now, but we are talking about next 2 to 3 years here as our time horizon. And the commodity bubble has popped and won't be back to bubble levels for quite sometime.

2008 Aug 15 08:39 AM

[David White:]

The dollar's longer term recovery will likely be predicated on the US's ability to stem its oil importation trade deficit. T.Boone Pickens estimated that to be about $700 Billion in 2008. The US economy obviously cannot afford to have that large an outflow of monies from its economy. The US has to conserve. It has to use alternate energy sources. It has to produce more oil itself. If the US can do a good mix of these things in the relatively near future the US dollars rise could be sustainable. If it cannot, the dollar will rise. Then exports will lessen due to higher costs. Then the US dollar will fall again. Perhaps some other bad event could also happen to make the dollar fall again. I think we, the US, should try very hard to make significant near term headway in all three of the areas I mentioned above.

2008 Aug 15 09:31 AM

[David White:]

I should mention that I think there is likely to be long term upward pressure on most if not all commodities for the foreseeable future. The fastest growing economies will start to use more of all of them. This will put upward pressure on the prices of all of them. Fortunately for the US, we are relatively food rich. I hope that situation doesn't change.

2008 Aug 15 09:34 AM

[knightowl1953:]

Mach9 I do not believe we are going to have a deep worlwide depression. Economies like China and India should push oil higher. And as Oil goes so does the rest of commodities. Harsh winters, wars, Iran, and hurricanes can also lead to supply problems. I do not think the commodity bubble has hit. Believe me, we will know it when it comes. For myself, I see commodities now as a great buying opportunity. Buying great stocks with great fundamentals.

2008 Aug 15 12:13 PM

[MistaWhite:]

Bob Gary, your articles are terrible. Quit spamming....you post something like that on every article.

2008 Aug 15 12:32 PM

[Ricard:]

Machiavelli999:

Well said - I consider your comment the real voice of sanity amongst all the chatter.

An interesting article on the WSJ - seems nearly 50% of the trading for oil was done by "non-commercial" entities, i.e. hedge funds that do not hedge the price of jet fuel for their airplanes, for instance.

online.wsj.com/article...

I'd say that commodities are way overpriced - the China/India scenario's been around for a very long time, not just the past couple of years when commodities doubled, tripled, etc.

2008 Aug 15 05:49 PM

[Ricard:]

Machiavelli999:

Well said - I consider your comment the real voice of sanity amongst all the chatter.

An interesting article on the WSJ - seems nearly 50% of the trading for oil was done by "non-commercial" entities, i.e. hedge funds that do not hedge the price of jet fuel for their airplanes, for instance.

online.wsj.com/article...

I'd say that commodities are way overpriced - the China/India scenario's been around for a very long time, not just the past couple of years when commodities doubled, tripled, etc.

2008 Aug 15 05:49 PM

[Sober Realist:]

Has anybody looked at the population bubble lately:
www.ohiopeakoilaction....
www.paulchefurka.ca/Po...
I don't think commodites will really stop rising until the population bubble pops.

2008 Aug 16 01:27 PM

[DonaldRay:]

I think a reality check is in order NYMEX.COM

2008 Aug 16 05:03 PM