commodities bull market?

  1. 9,081 Posts.
    As yet, still in its infancy???

    By Steve Sjuggerud

    "To accommodate the roughly 20 million people per year
    migrating to the cities, the Chinese, in effect, have to
    build a Houston, Texas, per month... "

    - Ed Yardeni of Prudential, 1/21/04

    John Neu's trash has made him incredibly rich. He sold 2
    million tons of it to China last year...

    Just beyond the Statue of Liberty, in Jersey City, he's
    collecting old toasters, bed springs, old cars, you name
    it. "Everything including the kitchen sink," he jokes. Well
    not everything, exactly... but everything that's metal.

    Neu, it turns out, was the major processor of mangled steel
    from the World Trade Center. It was 300,000 tons... which he
    shipped around the world. More than a third of Neu's scrap
    metal is sent to China... up from none five years ago.

    Initially, China didn't want America's scrap. But China's
    economy is growing so extraordinarily fast, it'll take it
    from where it can get it. China has made John Neu a happy
    man... when China joined the WTO at the end of 2001, a gross
    ton of scrap steel cost $57. The price more than doubled to
    $127 by the end of 2003. A few weeks ago it had soared to

    In the grand scheme of things, John Neu's 2 million tons of
    steel scrap is small potatoes. China's appetite for steel
    right now is insatiable. China needs steel. And it needs
    other commodities, too.

    Quite frankly, I think commodities will turn out to be a
    fantastic place to invest for the rest of this decade.
    Returns in commodities should easily beat stocks and bonds
    for the next five years. It happened in the 1970s, as the
    table below shows, and it'll happen again...

    Commodities Crush Stocks
    Annual % Gain, 1970-1980

    Asset Annual Gain
    Oil 34.7%
    Gold 31.6%
    U.S. coins 27.7%
    Silver 23.7%
    U.S. farmland 14%
    Housing 10.2%
    Inflation (CPI) 7.7%
    Stock prices 3.6%

    What I like even more about commodities is that nobody is
    interested in commodities... yet. Go to MSN's MoneyCentral,
    or Yahoo's Finance page, and try to get a quote on gold or
    oil, and you'll see what I mean. Nobody cares yet. Nobody
    has commodities as part of their portfolio asset allocation
    yet... and I love it! As Jim Rogers said in his book
    Adventure Capitalist, "when Merrill Lynch starts trading
    commodities again, it's time to get out."

    After bottoming in late 2001, commodity prices (as measured
    by the CRB Index) have soared by 40%. But don't feel like
    you've missed the move in commodity prices... long-term,
    commodities are the cheapest they've been in 100 years.

    Right now, you've got two camps of investors out there when
    it comes to commodities... those that don't want to buy
    because commodity prices have fallen for 24 years, and
    those who don't want to buy because commodity prices have
    risen 40% in the last two. Now where's the camp that's
    willing to buy? There really isn't one, yet.

    What happens when commodity prices fall this dramatically
    over such a period of time is predictable, says commodity
    trading advisor John Di Tomasso:

    "Mines are closed, exploration budgets are slashed, and new
    production is discouraged. In a free market economy
    production without profit cannot continue indefinitely. At
    some stage prices must rise... otherwise overall production
    of these raw materials will shrink, causing prices to
    ultimately rise, anyway - Adam Smith's 'invisible hand'
    restoring equilibrium to the marketplace."

    Demand has arrived, but there's not enough supply. It's a
    perfect recipe for higher commodity prices in the coming
    years, until the production can match the demand.

    And where has this demand come from? The answer, as John
    Neu discovered while hawking his trash, is simple: China.

    China is THE hot topic, again... just as it was 10 years
    ago. Same story, almost exactly. Investors are just
    throwing their money at China once again, and many of them
    have no idea what they're buying.

    To give you an idea, there are four Chinese "dot-coms"
    trading on the Nasdaq with over a billion dollars in market
    value each. Added up, these four companies have a market
    value of about $6 billion dollars, on combined total sales
    of $300 million. That means that these four companies as a
    group are trading for nearly 20 times SALES... not 20 times
    earnings... 20 times sales. As a point of reference, even
    wildly overvalued Microsoft trades at only 8 times sales.
    So these companies are almost three times as expensive as
    Microsoft. Does that make any sense? To me it doesn't.

    The latest big IPO of a Chinese company on the New York
    Stock Exchange was China Life. A Chinese insurance company.
    Talk about a dumb investment. The Chinese financial sector
    is known to be corrupt and dysfunctional. I laughed out
    loud when, three months after the IPO, China Life's parent
    company was caught in a $650 million accounting fraud.

    The worst part is, the U.S. investment banks can't tell you
    how dumb an investment China Life (or the upcoming Chinese
    banks) will likely be... because they're busy wooing them
    for investment banking business.

    I feel like I saw this movie in 1994, and I know how it
    ends. Five years from now, investors will probably want
    nothing to do with Chinese investments, once again. But
    that's February 2009... a long way from today. For now, the
    best course of action might be to follow George Soros's

    I'm taking a unique approach to China. I'm recognizing the
    trend "whose premise is false," as Soros said. And I'm
    going to ride that trend until it is discredited.

    For the moment, China is booming. And China's appetite for
    raw materials and commodities (such as steel, copper, and
    oil) appears insatiable. But I won't bite on the direct
    China plays like the ones above, many of which will
    eventually disappear.

    Instead, I'm playing the China story through commodities.
    When China's bust comes again (and that may not be until
    the second half of this decade), chances are that
    commodities won't be hurt badly. They'll participate
    handsomely in China on the way up, and be just fine on the
    way down, producing exceptional returns in the process.


    Steve Sjuggerud,
    for the Daily Reckoning"
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