Sunday, October 19, 2008


I have been making a larger wish list over the weekend as I am becoming more convinced that all of the interventions are going to unclog the credit markets. When credit improves, confidence will improve and we will get back to fundamentals such as EARNINGS. Now I don't doubt that we are going to see weaker revenue numbers because we are in a recession, but don't forget that we may see better than expected margins because of the falling commodities prices. The commodities fall has taken a back seat in the mainstream media to the ECONOMIC CRISIS. I know why---that story doesn't sell as much fear and air time as does the falling commodities. These falling prices will serve as a "tax relief" to both consumers and corporations. I was much more concerned about the changing consumer habits with the daily threat of increasing gasoline prices. The consumer forgets quickly and soon that fear will be gone and many will be back to spending every penny of each paycheck.

Will we ever see some companies at these low levels again. U.S. Steel at 4X earnings? Yes I know the argument is that earnings will fall, but see the first paragraph. In the steel industry sales will fall, but margins will improve as input costs per unit are lower. I am putting X on my watch list. Along the same lines, how can a good firm like VLO still be at these low levels given the fact that their margins most certainly will improve? When oil was going higher every day, the crack spreads (the margin for refining) were getting squeezed and we heard a lot about it in the mainstream mayhem. Anybody heard about a lack of pressure on the crack spreads with the rapidly declining price of oil? I haven't, but just because the mainstream guys aren't telling you about it doesn't mean that it isn't happening.

I think we are going to see the fear premimum unwind out of gold in the next couple of months, making gold a good long term play. That said, I can't fathom why FCX is still at low levels. Gold as an investment will be much better when the panic buyers are out of it some sense of normalcy is restored. I like gold over the long haul.

The commodities plays have been overdone to the downside. It is a generational issue. Recent generations are going to live longer and are much more spoiled to the "good life" than were our ancestors. We are going to continue to spend money and worry about saving later. Oh and those emerging countries China and India are raising generation that will be the same way. The global slowdown will be less than 2 years and then we will be rocking and rolling at a faster pace than ever before. You can expect to get back in the commodity bull mode sooner rather than later. People are going to eat, and they are going to have houses. It is that simple.

All that said, we may see some short term volatility. Hang on.