Panic In Commodities

I’ve said it before and I’ll say it again.  The world does not stop growing in just a few weeks.  But, yet that’s the way the global growth stocks are being treated.  Commodities are falling and the stocks that go with them.  If it’s anything that builds the world out, it’s falling fast.  Have you seen XTO Energy (XTO) lately?  It’s gone from $73 to $43 in about 30 days.  That’s panic.  Steel, copper, coal, oil, agribusiness.  You name it, it’s down.  The money continues to fly out of here and into financials.

Let me get this straight.  The place we can see where the earnings and sales are coming from for 2-3 years out at a minimum are selling off fast and the money is going into an area (financials) where nobody can see out the next 2-3 days.

I’ll admit that some of the financials are attractive.  But, I stress the word some.  And, I surely don’t think they are a better investment than global growth.  I understand the global growth story is slowing.  I believe that’s good for the long run.  We don’t want the world to grow too fast.  You’ll get really bad inflation.  So, commodities selling off some is good for us all.

But, remember when everybody assumes the world isn’t growing anymore and takes their eye off the ball, that’s our opportunity.  That’s now.  Hedge funds are liquidating and it’s shaking out the weak hands.  It’s a snowball effect. 

Here’s the way we play it.  I’m short the overall materials with an ETF but long the areas I like the most like steel, deep water drillers, and agribusiness.  While those go down, my short materials ETF goes up.  It’s not a long-term move but it helps insulate the portfolio.  The goal is to sell the short for a gain in a few days or weeks when the panic subsides.  I’ll use those proceeds to buy more and add to areas I want like coal.  I still like the growth of the emerging markets and the stocks simply aren’t expensive.  This isn’t the tech bubble like 2000.  If you do your homework and look at the fundamentals, global growth should be bought, not sold. 

I look at my screen today and I see the leaders on the NYSE are all recession area stocks like PG, KO, WMT, and healthcare.  There is no question the market is pricing in a global slowdown that will last for a while.  I think these trades may make sense because I believe the economy will be weak for a while longer.  But, I’m not going to jump out of everything global growth and into Procter & Gamble (PG).  It’s ok to own some of these for a trade or for an investment if they’re good companies and they aren’t expensive.

Continue to look for trades.  Make good investments at good prices but just make sure you’re hedged.  I believe we’re still headed lower.

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1 Response to “Panic In Commodities”


  1. 1 Lee August 5, 2008 at 4:42 pm

    Karl,

    Excellent analysis!

    Thank you……….

    Keep us posted on how we should “play” the general market…….(I believe you are short the general market at this time aka SDS).

    I heard Dan Frishberg say that he thought that we could have a pretty good rally in the next 2-3 weeks but that you did not necessarily agree and think the market is still headed lower….

    I’ve also heard that some believe we are going to have a strong rally anywhere between the 4th of this year and 1st quarter of next year – any thoughts?

    Cheers!


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