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In recent weeks, we have seen the worst sell-off of commodities in the history of commodity trading. The magnitude and viciousness of the sell-offs made many traders wonder whether a slowing global economy could mean commodities are no longer bullish fundamentally.

These commodities sell-offs are precisely synchronized , which subject them to suspicion of market manipulation and government intervention. Grains, precious metals, base metals all move up together one hour, then all fall off a cliff the next hour.

As vicious and relentless as recent sell-offs have been, there has been absolutely no fundamental change in the multi-year commodities boom and dollar bearishness. It is all just inherent market volatility which naturally exists for any commodity in short supply.

The volatility is due to the presence of too many market participants chasing too narrow a market. The narrower the market, the tighter the supply. The greater the amount of people involved in a particular sector, the more extreme the volatility we will see in that market place. Gold is less volatile than silver because the silver market is much narrower than gold. Palladium has been more volatile than platinum or silver because the palladium market is even narrower.

It is a known fact that when supplies are abundant, prices tend to be very stable over a long period of time, and when supplies are tight, prices tend to shoot up rapidly, then drop viciously, only to bounce back and shoot up even more. Rhodium and cobalt prices are very good recent examples. As you might remember, I recommended cobalt as a better silver and pitched OM Group (OMG) as a cobalt play.

Why must tight supply be associated with extreme volatility and abundant supply lead to flat prices? Because when the supply is abundant, there will be abundant inventory at every segment of the supply chain, buffering any price shock and smoothing out any price fluctuation. Producers will be able to plan in advance and adjust production to meet the level of demand, based on price movement and their inventory levels.

But in a tight supply situation, inventories are depleted, which often leads to panic buying and hoarding by end users, and thus skyrocketing prices. Then the buyers think the price is too high and hold off on further purchases. Sellers suddenly find their buyers have disappeared, so they slash prices to attract new buyers, which actually drives all buyers further away as they wait for even better deals.

Speculators who were attracted by the tight supply further add fuel to the volatility by joining the bids on the rally side and participating in the panic selling as prices go down. Eventually prices fall to an extreme bottom, rewarding savvy investors who had patiently made purchases during all the selling near the bottom.

At this point, industrial users who have depleted their hoarded inventory figure the price has bottomed out. They start to buy, and suddenly find there is no supply because savvy investors have snapped up all the available supplies. And so, the panic buying begins again bringing on another round of strong rallies and vicious sell-offs.


cont'd


http://seekingalpha.com/article/95017-commodity-roundup-what...
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Rob,

Isn't this exactly the way I have been predicting for last 2 months in this very board? I talked about oil at $80 2 months back when it was $147. I am glad I sold off most of my commodities 2 months back and now I am getting back in but at a level less than earlier. I don't mind my cash position. I am using it to buy new GG picks and loading up on MPEL and AOB.

I don't disagree with your basic position that all non renewable commodities are going to keep rising with time as global infrastructure builds up. It is the timing of current prices that I have been questioning. Oil at $200? sure, but not today. My estimate of current oil demand/supply supports crude at <$60 today.

Anurag
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Lets see how it plays out. Your prediction short term might have been true. To me it is all just a guess. The price could have just as easily went to $200 also if during the upswing in oil prices lets say that the current hurricane in the USA happened or some other bad incident.

Short term predictions are a coin flip. You can brag...Yes I am correct and tomorrow Al Queda could blow out a major Saudi pipeline and your short term prediction could reverse quickly. In that case you will not see me gloat so fast because Oil prices from here shall be quite volatile and no one can predict the oil prices short term with certainty.

But don't listen to me...listen to Warren Buffett:

http://boards.fool.com/Message.asp?mid=26970167

or interview with Buffett bearing in mind that Warren looks at long tern trends and not just prices in the market:

8:53 AM

"Agricultural commodities have had a quite a run, although wouldn't want to predict exactly where they'll be in the future. Oil, on other hand, looks like it will go up as production is outpaced by consumption, since oil supply is essentially limited. Land can get more productive in growing things but I think oil is finite. Oil fields are "depleting at a pretty good rate."

8:55 AM

Is there a next generation play in energy? Buffett: We have a lot of wind farms and we're going to have more, but that is not big answer to the kind of energy demand that is going to come along. We have to do all we can on alternative energy but it won't be a cure-all."


I included Buffett because maybe my analysis might be faulty so I thought I would check what he had to say. It aligns perfectly with what I know after being a interested observer actually in the transportation, energy complex, and power generating industry for over 20 years. If my career took a different path I could be operating a nuclear reactor right now as some of my classmates have done.


Actually read the Full commodity Round up....which is the basic path oil prices are likely to take in the long term or Read this by IEA:

http://www.treehugger.com/files/2008/07/oil-demand-growth-to...

We are burning oil faster than it is being replaced and as long as that is the case Oil prices will be extremely volatile.


The replacement oil that people are talking out getting may not come online for a long time, if at all. Read about expected Tupi field production:

http://boards.fool.com/Message.asp?mid=26984643
http://boards.fool.com/Message.asp?mid=26984481

I will also make the comment that if oil does go below $60 for any sustained length of time, the world will regret it because much of the expected "new" oil projects that are expected to come online might not come online leading to a new period of under-investment and a even more violent price spike upward. Take a look at back of the envelop TUPI Oil project figures:


"Estimate of Payback Period under Certain Assumptions

Assuming an all in start up cost of between $50Bn and $100Bn - the Wood MacKenzie's estimate stated above - would mean a very wide ranging payback period of between 2 and 35 years, depending on the assumptions for production, oil price, and lifting costs. Note that lifting costs in the North Sea are estimated at under $15 per barrel of oil -- $20 is utilized for the cases below.

Scenario 1: Base Case:

500,000 bpd of total final production, oil price of $80, lifting costs of $20, total start up costs of $80Bn: Payback period: 7.3 years

Scenario 2: Low Case:

200,000 bpd of total final production, oil price of $60, lifting costs of $20, total start up costs of $100Bn: Payback period: 34.5 years

Scenario 3: High Case:

1,000,000 bpd of final production, oil price of $90, lifting costs of $20, total start up costs of $50Bn: Payback period: 2 years"



or read the homepage of this new issue:

http://newsletters.fool.com/25/issues/2008/09/11/october-int...

Yes, maybe both you and Bill were correct about not jumping on the commodity bandwagon as fast...It worked out that way. But I have seen a number of predictions by Bill go wrong for a sustained period of time but in the long term he might be correct such as MPEL, GIGM, PRS and others but you will not see me come on and tell Bill....Hey my instincts were right on MPEL. I did not buy MPEL until after the substantial pounding this stock took because I am excellent in predicting such things. I might have bought in MPEL at better prices than you or many others but does that mean that I know more than you or others on MPEL??? I think not....I am no expert in gaming. I just know it is big in Asia. I also look at anecdotal information when I make decisions on things and I just recently found illegal outdoor gambling spots in Singapore. It is amazing how many people get involved with that...I believe gambling in Singapore casinos will also be successful like Macau but I am off topic now.....I could gloat and think I am better in picking short term price movements than Bill but I don't because those predictions are a coin flip. Short term price predictions are more a GAMBLE than anything else.

Interesting that Bill chose yet another commodity pick this month also....just a observation that I am seeing more commodity plays than when I first joined across a wide range of TMF services. Maybe that is just coincidence.

All I can say is you won't see me gloat as people start to see some of the things I pointed to come true over the years. Over the long term I will more likely than not be correct. I also play the odds....long term odds

Which opinion would I rather take???....Someone that I do not know on a TMF board or some of the things that I know to be true that aligns fully with what investors much smarter than me such as Warren Buffett, T Boone Pickens, and Jim Rogers have been saying for years???

Rad article titled Jim Rogers Says Oil Price Rise to Continue for Decade:

http://www.bloomberg.com/apps/news?pid=20601087&sid=acri...




Rob S
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Rob

Please don't take my gloating in an incorrect sense. Let me be happy without guilt. :)

I have never said that what you have been saying on commodities is incorrect. You have provided a wealth of information to support your thesis and I respect that.

It is not about making a short term prediction and be proved right. I invested in real estate (india), oil, steel and copper in 2003-2005 and sold it from Jan to Jun this years. This was a good 3-5 year holding period after a 2 year build up period and I made a chunk of change here. In 2003, the commodity prices (oil and metals) looked very low and dividends enticing. That is why I entered. But this year, it was a sea of a difference. Try to look at from where I was standing. I was not under diversified to fear from a crash. We are talking of several X worth of gains here. I was not worried. But my original investment thesis had changed. Oil and metals were no longer undervalued. They were fully valued and beyond based on future supply fears and demand rise and not based on today's supply and demand dynamics. That is why I made the sell call and was very happy with Bill's IPHS sell call too.

Today, there are a lot of stocks that are far more undervalued than oil and steel and pay good dividends, as situation similar to the 2003 in commodities. I think those are better investments. Why not take advantage of that? With the recent crash in commodities, there are fresh entry points but still not as good as other sectors. I have been buying GSI and Bill's latest pick CGV. This is a good time to get into real estage and infrastructure. I have been buying JLL, Mitey and KPEL these days besides MPEL and AOB. I even purchased MDR, some tankers that Deej suggested a few weeks back (based on sudden fall in tanker traffic and low rates) and ATW (SA pick) as these are now trading at prices when oil was below $60. These are good entry points with a potential for even better ones if oil goes down to $60. I must have some dry powder for those days.

Current global economy is bad enough to not even major hurricanes impact oil prices. I don't think this is a good timing for Al Qaeda to go in for a oil pipeline strike. There is too much of supply compared to demand as of today. But, hey, one can take great advantage of the situation. Commodity prices are likely to reach irrational lows just like others sectors and that would be the time to make a killing. So I am making starter position in commodities with my fresh cash from sales at the peak and waiting for deeper dives in commodities if they come. If they don't, there are plenty of beaten down areas to dive into. Once high flying chinese stocks are certainly a good target.

The basic idea is buying the right stocks at the right time. This is different from classic market timing. I am looking at macro effects and basing judgement on valuation of the companies in relation to share prices and future potential. Most TMF picks are in this direction. That is why I like them. Hey, I have owned a lot of TMF loosers: FMD, CCRT, SCSS, ..... I even took a beating in my own bad timing in submprime market: NEW and IMB. Fortunately all such investments were at starter levels and I did not suffer and portfolio dents. My investment approach allows me to raise the winners in my portfolio (I call it a farm) over the rest. I can tell you about it if you are interested. Non TMF stocks form a speculative portion in my portfolio (~15%) where I practise my macro timing skills.

Anurag
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I am in almost all of the stocks that you stated. I am not in Mitey or Keppel, though.

I am in CSR, AOB,GSI, PBR, MPEL, GIGM, BAM, OMTR, EBIX, JLL,MVL, CRESY,CGAG in my retirement account. See not much commodities. I recently sold SSL because I don'think CTL or GTL will be as big as I once thought it was. That technology uses way too much water and they have not solved the problem of Carbon Dioxide sequestration. CTL or GTL may not be a reality for a long while to come. Oil supplies must be depleted a little more.

In my non retirement account I have CFSG, CSR, AOB, EBIX, RIG, CHK CBI, NUE, INFN, GIGM, WGOV, TLK, DHIL, and MVC. Thinking about buying NETC.

My favorite stocks are real estate plays....small cap China related stocks, Brazilian stocks, and Telecom. I am very much on the look out for energy stocks and commodity stocks. I believe the upside on commodities will be huge over the next several years.

I believe the prices on such things such as Lithium, Palladium, Oil, Iron, Titanium, and Copper will go farther than much people expect. Some of the charts on those things might be scary to look at in the future......almost like POT is now. It is hard to look at the chart of POT and invest in it..the rise has been incredible over the last several years. I looked at the story and I believe POT story could last another 3 to 5 years but I still can't bring myslf to invest in it but CGAG is a stock that has not been chased yet so that is why I am building a position there.

As for oil going real low....I hope not. It will stop invesment by many oil companies in future projects if it goes to the price you predict. The rubberband effect to over $175 will not be pretty...I don' want the price that high in the near term or medium term....because I might start to become to expensive to travel to Asia which I love.

$100 dollars for a barrel is a happy medium.....don't need prices too much below that. That price will encourage Oil companies to go full speed ahead with their projects and keep volatility lower.

Steel will also be big because of all the projects people are talking about building. Oil rigs, pipelines, ships, the whole energy infrastructure as a whole requires a massive amount of steel

As for Al Queda not striking...LOL....Let's just say my friends think I am crazy because I went to Bali about 6 months or so after the bombing there. They thought I was crazy but I knew it was perfectly safe. Afer a bombing like that happens security gets intensified and everyone is on the watch for terrorist activity. It is usually when everyone is talking about terrorism that the least amount of terrorist incidents happen. The safest time to go to Bali was in the year after the terrorist bombing. All the Australians and Europeans (the targets) had packed their bags and gone home. The goverment in Bali was intent on restoring their image and making it safe. It was the safest place in the world. The place is much less safe now in my opinion because everyone thinks it is ok to travel again making it once again a ripe target.

There has not been a terrorist incident in awhile...most people are complacent.....therefore I expect one. I have worked on ships going through that area of the world (Middle East). The terrorist threat there is more than gets reported in the everyday news. Al Queda loves to strike when it is unexpected....when people say now is not the right time so we can relax our guard....that time is the best. It is a guerilla war...the best time to strike is when everyone says it is nice and safe...playbook from the Viet Cong in the Tet Offensive:

http://en.wikipedia.org/wiki/Tet_Offensive
http://www.youtube.com/watch?v=KiW5FXs1n6M


We have not had a terrorist incident in awhile and no one is talking about another....therefore I expect one. For me now is the unsafest time to be traveling....Let's just say I am more aware.

I am currently in Singapore. I have some very interesting observations about the place that I will write about later. Singapore is very much a extremely safe stealth way to play both the rise of China and India. Most of the population of Singapore is first Chinese, second Indian and third Malay. Singapore businessmen have big connections into both China and India. They don't all the time win. Witness Singapore Airlines failed bid for China Eastern Airlines:

http://en.wikinews.org/wiki/Singapore_Airlines_bid_for_China...

But Singaporean companies will have their share of wins in the coming years in both China and India as well as the rest of ASEAN. Now is a excellent time to begin invesments ino SGF...The Singapore Fund. There are many excellent companies in that fund including CapitaLand, City DEV, Keppel, some major Singaporean banks (which are some of the best), and lots of top notch logistics companies. Sinaporeans are noted for being ahead of the curve which is among the many reasons they do better than Malaysia which is larger and has far more resources.



Rob S
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Whoops...I forgot my biggest position in my retiremen account....HDB
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Thanks for sharing your portfolio details. All are excellent selections.
My own portfolio is too large too list (~250 global stocks and counting..). That is why I only listed what I am buying currently.

My basic approach (I try to follow somewhat of a Shelby Davis approach) is to have <15% of my portfolio in speculative stuff, currently it is at <5% after the sale of commodities. 20% in high yield stocks. More than 80% of my portfolio is based on TMF pics from 4 newsletters (GG, SA, HG and II). I never fall in love with a stock but try to raise the potential winners disproportionaly high in the portfolio. The goal is to have a dozen stock occupy >50% of the portfolio in next 10-20 years. The rest will serve as the background. Let us see how it all turns out. It is an experiment that has so far served me well.
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"As for Al Queda not striking..."


http://www.bloomberg.com/apps/news?pid=20601087&sid=aF83...


combine that news with the following mindset:

http://english.aljazeera.net/news/middleeast/2008/09/2008913...
http://www.ynetnews.com/articles/0,7340,L-3597638,00.html
http://www.turknewspaper.com/haber.php?haber_id=174

and I say the situation is ripe to go from Demand Destruction to Supply Destruction. From the little I know about the Middle East, I expect very bad news to come out of this area of the world as it concerns oil supplies during the next five to ten years.

Obviously, you can't invest solely on this type of speculation but this is a risk that is only reflected when there are major headlines coming out of the area. The problem is that when and if the major supply disruptions occur out of this area of the world, there might not be any advanced warning.....sort of like a terrorist attack....



Rob S
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