Mish has listed some good reasons for why there is no cause for inflation fears. If a global slowdown is awaiting us in the future, this of course would mean that commodities and materials would continue their fall in prices.
However, at the moment, its difficult to see what appears to be great opportunities in the energy-related sectors. One stock that I’ve been eying is closed-end fund Tortoise North American Energy Corporation (TYN).
Recently, TYN has been trading at a steep discount to its NAV. For the past couple of weeks TYN has traded at 15-20% discount. I’m fairly certain the large increase of the discount to NAV is due to the large commodities correction: people simply wanted out of TYN. Also, TYN’s price has visited an all-time low and it has a very good distribution rate of 8.14%.
I believe TYN would be a good target for an activist like Bulldog Investors or Western Investment for the simple reason that TYN has traded at a steep discount since its inception in 2005. If an activist investor were to become interested in closing this large discount, I think hedging would be relatively easy.
All commodities have experienced a large, much-needed correction. Oil, energy, metals, food; all the basic materials. The dollar has made a large move up. However, I’m not certain that we are at the beginning of a strengthening dollar just yet. I still believe America has a large inflation problem. Though there seems to be more evidence of global growth slowing down, which would bring down the price of commodities and materials down even more, I think now is a good time to take advantage of the dollar and commodities correction.
Here’s a chart of the Euro versus the US dollar:
There may or may not be further downside for the Euro. I’m guessing the dollar will weaken again over the next six months.
Here’s a chart of the gold ETF:
Gold usually increases along with inflation and oil. If we’ve got an rising inflation and oil, gold will go up.
Here’s a chart of the price of platinum:
I particularly like the prospects for platinum. I recently purchased some Jan. 2010 calls on Stillwater Mining (SWC), the only US producer of platinum and palladium. With many good reasons to expect a continuation of a commodities bull market, and this recent large correction, I felt the time was right to make such a purchase.
I’ve known for 4-5 months that famed value investor Seth Klarman has been invested in two paper-related companies: International Paper (IP) and Domtar (UFS). It seems that lumber and paper-related companies have been particularly out of favor. However, International had a great day, gaining nearly 14% after announcing net earnings gains of 20%. In fact, Bloomberg reported, “International Paper Soars Most in 28 Years on Profit.”
Another interesting tidbit is that with IP’s recent acquisition of a business asset from Weyerhauser, IP will soon be the world’s largest maker of containerboard and corrugated boxes. Sounds like a decent-sized moat to me.
Turning away from paper and towards lumber, the market blog from the Canadian Globe and Mail asks whether lumber be the next oil? The Canadian blog gives particular attention to Canfor Corp., Canada’s largest (or second-largest by market value) lumber producer.
Canfor’s stock has fallen over 40% in the last 12 months, yet Canfor’s CEO Jimmy Pattison has been purchasing shares and has increased his stake in the company to nearly 30%. The fact that Pattison is aligning his interests with the company is a great sign. Pattison also seems to have a history as an activist investor. Two other catalysts for a recovery of Canfor’s stock is a falling Canadian dollar or a recovery of the U.S. housing market.
Things still look pretty bad for Canfor, and most likely other lumber companies as well. A recovery can be imagined, but is not in clear view. But aren’t the bad times the best times for a value investor?
Corn prices reach an all time high, so why not tax those greedy farmers? If we want a windfall profits tax on oil companies then why not the same for these greedy farmers who are enjoying high prices for their commodities? However, farmers and agriculture, for whatever reason, have a special place reserved for them in the hearts of politicians.
There is no way anyone would tax a farmer. As the Tax Foundation points out, farmers receive huge subsidies every year.
So why do politicians treat farmers and oilmen differently? I think it has something to do with the stereotype that farmers are poor and oilmen are conniving and rich. Most of the simple-minded politicians respond to certain words and concepts in simple, predictable ways:
Housing: Good
Oil: Bad
Small business: Good
Corporations: Bad
Farmers: Good
Foreign: Bad
Jobs: Good
Middle Class: Good (because everyone is in it)
Rich: Bad
Purchasing a put on Southern Copper Corp (PCU) was my only trade for Tuesday March 11, 2008. The limit price for my put could have been better as I should have waited for the market close for a better deal, but oh well, this deal was still fairly good considering the stock was up by a lot.
This trade is based on two factors. First, my belief that all sorts of commodities are severely overbought, copper in particular. Second, I believe that this stock in particular is at an extremely strong point of resistance; I feel it is now at a formidable barrier of two different retracements and is hugging a very long-term trend line.
People are getting a little nervous about the parabolic movement of commodities:
“Every single commodity is currently trading in extreme overbought territory except for orange juice,” said Bespoke Investment Group, on its blog. “At some point, these commodities will see declines, and the more parabolic they get, the harder they will fall.”
…
Bart Melek, an economist at BMO Nesbitt burns, sounded a similar note of caution. Yes, the price of oil is rising partly because of tensions between Venezuela and Colombia and an unexpected decline in U.S. crude inventories. But there is speculation going on as well, as investors seek out hedges against the weak U.S. dollar and rising inflation – and speculation is a fickle driver.
I too am somewhat worried, but I also see good potential for profiting. For example, just take a look at this chart of JRCC:
This baby went from $3 to almost $20 inside of 7 months or so. Now that it’s pretty much filled its gap and meeting up with resistance, and also I think that people are worrying less about demand for coal, AND the downturn of the U.S. economy, I think one can profit nicely by shorting JRCC with a good protective stop just in case.
It appears uranium may be on the rise again. There certainly will be great demand for the stuff in the future, but will a global slowdown depress the price of this valuable commodity?
Ernst & Young has released a report that addresses the cyclical nature of commodities, the abilities of analysts to forecast commodities prices, and what these two factors mean for the future of this sector.
Ernst & Young says metals analysts’ prediction of metal prices “have consistently and significantly lagged behind the actual spot market,” and that mining and metals equities have been undervalued. They also say, “It is our view that current metal prices are actually a return to sustainable price levels following an extended period of artificially depressed prices, rather than the conventional wisdom that the industry is near the top of a cycle.”
It will be interesting to see how this plays out if a recession takes place in the U.S. Will a recession in the U.S. affect the growth of BRIC countries and thereby the demand of raw materials?
Hat tip to Sufiy for the link.
