JBP

Six Situations to Monitor for the Remainder of 2008

This is from a newsletter I receive:

Today, the market had its worst daily decline since February 2007. The S&P 500 dropped 3.4 percent. This decline was not led by commodities, but financial stocks, as concerns about banks and investment banks prevailed. Shares of Lehman fell 45 percent in one day on renewed concerns about capital and as its talks with Korea Development Bank broke down.



The sell-off in commodities also continued. Declines such as the one we're experiencing can become irrational and can continue longer than the fundamentals should justify. This is a selling panic triggered by liquidity needs and, in part, by a stronger dollar. In the midst of it, we take comfort in the knowledge that the secular bull market in commodities remains in place, and that the downside risk from here is dwarfed by the upside potential in the coming months and years.



We will offer you two comments by industry leaders who are undeniably bullish long-term. First came from BHP Billiton's Chief Executive, Marius Kloppers (perhaps the smartest guy in the business). Yesterday he indicated that the slowing world economy will likely cause demand for raw materials to slide further in the short run. However, the downturn has done nothing to deter Kloppers from attempting to acquire Rio Tinto. The second comment is from Goldcorp's CEO Kevin McAuthur. Speaking at a conference yesterday, he described the current commodities market as a fire sale and attributed the decline in gold and related commodities to desperate hedge funds who are forced to shed assets to raise cash. McAuthur told participants that gold prices would soar to $1,500 in the next 18 months.



Stocks, meanwhile, are likely to remain mired in a trading range. Although we view stock selection as the most important part of investment process, we remain mindful of low valuations within most commodity stocks. While downside seems limited from here, the upside potential is significant.