commodities bull market?

As yet, still in its infancy???

"
END OF THE 100-YEAR BEAR MARKET
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
$150.

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
advice...

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.


Regards,

Steve Sjuggerud,
for the Daily Reckoning"