" 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.