Tight credit, shrinking consumer buying and the falling real estate prices have commodity investors wondering, when will it turn around?

To find an answer to that question, we look at another indicator to help determine the future of commodity prices. It’s not one most investors think of in trying to predict which way commodities will go.

But if you look at its current moves, you’ll probably draw the same conclusion that we did: commodities will be ugly for a while.

The indicator I’m referring to is Fitch Ratings – the company that provides so-called credit opinions on companies, markets.

Over the past week or so, Fitch Ratings lowered the sovereign credit rating worthiness for several emerging market economies that had flourished during the commodities boom.

Many of these countries rode up the prices of oil, natural gas and precious metals – in turn re-investing their gains in economic growth and infrastructure to boost trade.

In addition to commodity pullbacks, Fitch Ratings also looked at the health of the countries’ national banking systems to determine if the governments were doing enough to ensure their survival.

Still, in many of the Fitch Ratings downgrades, the one message that kept cropping up was that these companies are suffering from dropping commodity prices.

Mexico, Russia and South Africa – countries rich in commodities – were revised down to “negative” from “stable,”

Chile and Malaysia were lowered to “stable” from “positive.” Brazil was reaffirmed at “stable.”

The downgrades are certainly indicators of past and current problems. But the downgrades also give rise to speculation about any near-term rebounds getting pushed out to a distant horizon.

After all, the commodities boom fed off global prosperity. India, Russia, Southeast Asia were all rolling in dough during peak commodity prices.

It was the overall scope of commodity consumption that gave rise to the term “Commodity Supercycle.” And that consumption was fed in large part by liberal credit.

The problem, however, is that there’s simply no more credit to feed the beast – despite trillions in government bailouts.

As a result, it could still be too early to get back into commodities with the expectations that prices will rise again any time soon.

While China’s $586-billion massive infrastructure build-out will certainly consume plenty of steel, cement and oil, the country remains in a deflationary cycle.

China is literally attempting to dig its way out of this deflationary cycle with new construction projects. Other statistics coming out of China argue that the $586 billion package may not be enough on its own – and that China is more reliant on the global economy than construction projects for true economic growth.

Housing prices continue to decline, manufacturing is shrinking and the trade surplus is on the rise.

Building new roads, railways and airports won’t really affect the trade surplus, raise manufacturing output and make the cost of living much cheaper than it is today.

So if you believe that China’s stimulus plan could drive up commodities worldwide you may be in for a rude awakening.

Commodity prices will only go back up after governments find a way to inject new cash into their respective economies.

He says it is essential to guard against today’s downside risks with trailing stops, inverse ETFs, and put options.

And every investor should have a plan to re-engage with the markets when this financial storm passes.

This from Money Morning:

As the worst financial crisis in recorded market history rocks Wall Street, millions of investors on Main Street keep asking a single question.

When will this end?

The market volatility is unprecedented: Where professional traders once ranked a day as “wild” if we witnessed a 300-point swing, in recent months we’ve seen 600- and 700-point swings on a regular basis. On Oct. 9, a Thursday, we rode out a record-setting swing of 1,000 points.

That wild backdrop is bad enough. At the same time, however, the major market indices are heading lower – at times with a speed and ferocity never before seen. But the real killer is that there is seemingly nowhere to hide.

This is what Wall Street’s Armani Army doesn’t tell you about traditional diversification: It doesn’t work when everything goes down at once. (The one exception is the specialized inverse investment vehicles that we’ve repeatedly counseled you to employ precisely to prevent this kind of total freefall. Two examples that we’ve mentioned numerous times were the Rydex Inverse S&P 500 Strategy Fund (MUTF:RYURX) and the ultra-aggressive “2X” ProShares UltraShort Financials (AMEX:SKF) exchange-traded funds).

Most noticeably, of course, was last Friday’s trading, which began after an overnight bloodbath in the markets overseas. A notice from the CME Group Inc. (CME) that stock index futures contracts were “limit down” – meaning they’d achieved their maximum allowable downward move for U.S. stocks even started trading for the day – didn’t help much.

While much of this is commonly explained away as a panic reaction to the news, the reality is that it’s primarily a financial panic that’s driving this market action lately. And, just in case you recall my comments a few weeks ago about not having seen the hair on fire selling I thought lay ahead, this is exactly what I was referring to.

This time around, ironically, it’s not panic from normally flighty retail investors that’s causing the markets to go haywire. Instead, it’s the big boys that are apparently panicking.

My experience suggests that one or more hedge funds have imploded. Whether by margin call or redemption proceedings is a moot point. We won’t know for sure until much later next week when the newspapers finally catch up, but the massive swings we saw in currencies, gold and other commodities are certainly consistent with an unprecedented liquidation – and a forced one at that. Perhaps even more than one.

Long the domain of hedge funds and their uber rich clientele, many hedge funds were over-weighted in these categories in recent months in an attempt to chase performance. Overweighting, in case you’re not familiar with the term, means they’ve made excess investments in those areas. And chasing performance means they’re trying to create higher returns by making disproportionately larger bets than they would otherwise. Part of this could be from simply trying to generate larger performance fees, but it could just as easily be attributed to anxious managers placing ever-larger bets in an attempt to make up losses (most hedge funds are under water this year).

Where this gets fund managers in trouble is when they make these over-weighted bets by using leverage. You’ve probably heard this term a lot lately. In case you don’t understand what it really means, let me digress for a moment to explain it. Leveraging up (or simply “levering” to those in the industry) means using borrowed money to control a huge pile of assets that you wouldn’t otherwise be able to control.

In recent years, for instance, it wasn’t unusual for a hedge fund to lever up 30 to 1, meaning for every $1 dollar they invested they borrowed $29. As a result, a fund with $100 million under management could control $300 million or more of investable assets. I’ve heard of some funds running 50 to 1, while currency traders routinely run 100 to 1.

While using other people’s money dramatically enhances the potential for higher returns, it really enhances the potential for massive losses. Where this gets them into trouble is that a fund running 30 to 1 only has to lose 3% of the $30 worth of equity to get wiped out, as in kaput.

Somewhere along the way, as bad turns to worse and performance deteriorates, a hedge fund’s creditors will place a margin call, meaning they want the hedge fund to pony up more collateral or return the money it was loaned. Or, investors will place redemption requests meaning they want out. Either way, this forces the operator of a hedge fund to raise money any way it can.

If a given hedge fund does not have enough cash to meet the margin calls or redemption requests, they have to raise cash by selling assets. And they typically start with the most liquid stuff like gold, currencies and commodities. At first, the sales progression will be orderly, but as I suspect was the case last Friday (and on many big down days recently where chaos ruled), it will rapidly deteriorate into a fire sale where the hedge funds involved dump everything they can at any price just to get out.

And that’s where their problems affect you and me.

As scores of highly leveraged hedge funds dump billions of dollars worth of holdings at once, they effectively “flood” the markets with whatever the asset is that they are trying to sell. In doing so, they push the values down for the rest of us.

For an example, imagine a house in your neighborhood selling for 50% of its appraised value. Upon completion of the sale, all “comparables” in the area, including your own home, will likely take a hit as a result. So it’s in everybody’s interest to keep prices as high as possible.

But nobody can do that when there are more homes than buyers – even in the best neighborhoods.
So when is it going to stop?

We don’t know. No one does. Hedge funds are notoriously secretive in their reporting, so even though there are estimates as to how much they own and (by implication) how much they owe, it’s hard to gain perspective on how much leverage is actually being used. Nor do we really know who holds what asset – especially as it relates to potential liquidations.

Over the weekend, rumors were flying that U.S. Federal Reserve examiners are hounding Citadel Investment Group LLC regarding “counterparty risk” and its exposure to debt. Citadel, naturally, vehemently denies this, but lately where there’s smoke, there’s certainly been the potential for fire.

[...] The bottom line is this: What should we do for now?

That’s actually the easy part even though it may not feel like it.

1. If you’re retired, take a good hard look at how much money you really need for the next five to 10 years. Talk to your financial advisor and, if needed, take some risk off the table. Move what you need into cash, or such safety-first choices like the American Century Capital Preservation Fund (MUTF:CPFXX). Do not own anything you would not want to have in your portfolio if the stock markets were to be shut down for a short time.

2. If you’re not retired – but are close – and have properly diversified your money to something akin to the 50-40-10 structure we advocate (50% base-builders, 40% global growth and income, 10% speculative), hang in there. And remember, this is exactly why we diversified our holdings in the first place – to get through the rough spots. It’s just that this is perhaps the roughest most of us have ever seen.

3. Stick to your plan. Hopefully that includes the disciplined use of trailing stops to capture gains and minimize losses, as well as specialized inverse holdings that profit with each further decline. And don’t forget options to hedge existing risks.

4. Above all else, make sure you have a plan – as we do – for re-engaging the markets when the coast is all clear. It may be awhile before we reach that point, but it’s important to maintain your upside potential in a down market. When the train leaves the station, the one place you don’t want to be is left behind on the platform. Studies like those from Standard & Poor’s show that investors can typically make up 80% or more of bear market losses within the first year of a recovery, once that recovery actually arrives.

Source: Four Ways to Sidestep the Damage Wall Street’s Big Money Movers are Inflicting on Main Street

There are great wealth-creating opportunities in today’s miserable markets, says Andrew Snyder. Take oil, for example. The black goo is on a slippery slope towards $50 a barrel, and no OPEC production cuts are going to stop this in the short term. Andrew says the UltraShort Oil and Gas ProShares ETF (AMEX:DUG) is the best way to profit from the oil industry’s downturn.

More from Today’s Financial News:

Our good friends at OPEC are up to their same old tricks. Oil prices are dropping so the cartel is meeting later this week to discuss a cut to pumping quotas. It is a last-ditch effort to try to keep crude prices from plummeting all the way to $40.

The cartel is expected to reduce production output by as much as two million barrels per day, which would be considered a major cut. There are even rumors that Russia may reduce its output as well. Remember, there are scores of countries that are now dependent on huge sums of “oil” money to fuel their economy.

If we see prices go much further below today’s levels, we are going to see several countries buckling to their knees. The same nations that gouged us for the past few years are in desperate need of help. I cannot wait to see them shed some tears.

Let ‘em fall

Really, all that OPEC is trying to do this week is change investor sentiment. We all know the organization’s price-fixing scheme has been utterly unsuccessful in the past. Greed, corruption, and a powerful producer force outside of OPEC continue to allow the free market to price a barrel of crude.

But if OPEC can sway investor sentiment, make us think demand is not dropping all that much, and make the world believe oil prices truly deserve to be high, then its mission later this week will be a success.

Fortunately, OPEC does not have the slightest chance of keeping oil prices artificially high. Sure, this week prices may not make the drops we saw over the past few weeks. But the decline will continue. We will see valuations drop all the way down to the $40 range.

I know the world has evolved into a market that demands instant gratification, but oil prices will not plummet $30 overnight. It will take some time. But over the next few months and quarters as we see more examples of a worldwide economic recession, crude demand will slip, supply will increase, and prices will drop.

Last week, I recommended that readers take a short position on oil. That way, as prices fall they can profit. The best way to take advantage of the fall is through an exchange-traded fund (ETF) like the UltraShort Oil and Gas ProShares (AMEX:DUG).

The fund is designed to move inversely to crude prices at a 2-to-1 ratio. In other words, for every percentage point crude prices fall, this ETF will increase in value by two percent. It is a great way to take advantage of the oil industry’s downturn.

Another great aspect of ETFs like this one is the ability to buy and sell options based on it. For savvy options investors, there are all sorts of profit and hedging opportunities.

If you are a Hot Stock Confidential subscriber, do not be surprised if you hear about one of these highly profitable plays in the next two days. Last week, we made 85% gains in just a day on Altria (NYSE:MO). We might just reap some more gains from the oil industry.

Oil prices are going even lower. Take advantage of the situation and put some profits back in your portfolio.

These are some highly volatile times for the energy industry and the market as a whole. Pay attention to what is going on, and you have a shot at some great, wealth-creating investments.

Source: OPEC cuts create fantastic buying opportunity

This from The Daily Reckoning’s Desidooru Saloon blog:

Remember when speculators were getting blamed for high oil prices?  Remember how I thought it was bogus?  Now oil is down more than 50% from its summer highs.  And this time, I think it’s safe to say speculators have a hand in it.

It looks as if the last time I wrote about the greedy-speculator meme was July 7.  Those were the days, huh?  Those of us sympathetic to the Peak Oil crowd were beside ourselves:  Yes, oil had likely run up too far too fast, but it was frustrating as hell to see “speculators” take the rap while long-term supply-and-demand issues got swept under the rug.

Now, a little over three months later, where do we stand?  We stand somewhere, no one knows exactly where, in the process of a Great Deleveraging: “All the hedge-fund fast money that poured into commodities is pouring out now as the redemption orders pile up fast and furious,” I wrote last week.

A story in today’s Wall Street Journal fleshes out this theme:

‘Hedge funds, responsible for a large amount of the speculation in crude oil, have had to play defense in the credit crisis lately by unwinding trades that use a lot of borrowed money, such as oil futures bets. Hedge funds are also being hit by heavy redemptions as risk-averse investors cash out. This forces funds to sell at inopportune times, adding to the spiral…

Jeffrey Currie, Goldman’s head of commodity research, said it was the credit crunch and its impact on the U.S. economy — more even than soaring prices this summer — that have so sharply eaten into demand. Gasoline purchases have fallen more so far this month than they did in July, when prices were at records.

“The credit issues have had a severe impact on economic activity and especially on the oil industry,” he said. “If this was all just about pump prices, the cratering would have been much more severe in July than in October. But it’s been the other way around.”‘

And yet, all you hear from the pundit class — and indeed most of this WSJ article is shot through with the same garbage — is that the falling oil-price story is primarily one of falling demand.  An “Americentric” perspective lures lazy thinkers into believing lower fuel consumption in the United States can be extrapolated worldwide.  Not so:  Second-quarter car sales were indeed down 7% in developed countries… but up 20% in Brazil, Russia, India, and China.

PS. Outstanding Investments editor Byron King has updated his short- and medium-term oil forecast:  A potential dip down into the $50s, and eventually up to $200… all in the next 36 months.  His reasoning here.

Source: Blame the speculators (No, really)

Energy investor T. Boone Pickens says “natural gas is the fuel of the future.” He also says water will become an increasingly scarce commodity with major implications for the agricultural sector.

Chris Mayer agrees with Pickens. He says once the financial crisis ends natural gas and water stocks will attract big bucks.

This from the Rude Awakening:

T. Boone Pickens’ new memoir, The First Billion is the Hardest, is better than I thought it would be. Based on reviews I’ve read, I thought it would spend a lot of time on Pickens’ plan to reduce U.S. oil dependency. I always find such discussions a bore. But that part of the book was only 10 of 250 pages.

Mostly, it’s memoir material, with some peeks into the future as T. Boone sees it evolving. The most interesting parts, to me, were some nuggets from his career, his views on natural gas and his large investment in water.

Pickens is 80 years old now, and he’s accomplished an awful lot in his career. He started Mesa Petroleum with $2,500. Five years later, he took it public, and Mesa earned $435,000 in profits on revenues of $1.5 million. Not a bad start at all. After only eight years as a public company, Mesa generated $92 million in sales and $15 million in profits. It helped make him a rich man.

Along the way in the book, Pickens offers various “Booneisms” such as: “Chief executives who themselves own few shares of their companies have no more feeling for the average stockholder than they do for baboons in Africa.” (That’s one reason why the “O” — owner-operators — in CODE is important.) Or this: “As my father used to say, ‘There are three reasons we can’t do it. First, we don’t have the money, and the other two reasons don’t make a damn.’”

He complains about the bureaucratic nature of Big Oil and its track record for dumb deals. “I’ve said that giving the good old boys of Big Oil excess cash flow,” Pickens writes, “is like handing a rabbit a head of lettuce for safekeeping.”

Pickens points to Mobil buying Montgomery Ward as part of its plans to diversify. What a bust! In 1984, Fortune focused on the seven worst mergers of the decade. Four of them involved oil companies. I think big oil companies have gotten smarter since – or maybe just less dumb.

Gains of 9,095%!

He also talks about his career in deal making, finding deep values in the oil patch and making millions taking them over. He eventually gets out of the oil business and starts BP Capital in June 1997. What follows is an incredible ride. By May 1998, the fund lost $24 million and had only $13 million left. By January 1999, it was down to $2.7 million — down 90%.

It was practically out of business. No one would’ve blamed Pickens for changing things or giving up. Some investors left him, but most stuck with him. It paid off big for those who stuck to their guns.

In 2000, he rung up one of the best years anybody has ever had anywhere – up $252 million, a 9,095% gain! I love Pickens’ grit and determination in all this, sticking it out and coming back.

Plus, Pickens offers peeks into the future. A couple of topics piqued my interest: natural gas and water.

The Fuel of the Future

“Natural gas is the fuel of the future,” Pickens writes. I agree with him. Natural gas is our second largest resource, behind only coal, and it burns a lot cleaner than coal does. Pickens’ big vision for natural gas is as a transportation fuel. The logic is pretty simple. “[Natural gas] is the highest-priced fuel in the United States when used for power generation, but it’s cheaper than gasoline or diesel when used for transportation.”

Pickens is talking his book, as they say. He owns Clean Energy, which runs fueling stations for natural gas and builds more every year. Even so, he makes a good case. I was not aware, for example, that there are already 8 million natural gas vehicles on the road worldwide already. He also points out that 25% of all transit buses burn natural gas – a use that’s growing 25% annually.

I had a hard time imaging who would want to own a natural gas vehicle when fueling stations are so sparse. It’s kind of like being one of the first people to buy a telephone. But I recently read a review of the only natural gas-powered car in America at the moment: the Honda Civic GX.

It was a positive review.

Though the range is limited to only 200-220 miles, the car comes with a GPS locator to find the nearest fueling station for you. Refilling also costs about half of what it would cost you for gasoline, though the car itself sells for a third more than a gasoline-powered Civic.

Tax credits help offset that somewhat, and the EPA estimates the payback is about 21/2 years. Meaning after that, you’re even with the conventional gasoline vehicle. There are also home fueling systems that go for about $5,000 and let you tap into your gas lines at home (assuming you have gas). You get tax credits for that too.

Anyway, this is the way these things get started. Pricey in the beginning, but as technology improves and more people adopt, the price will go down. I think there is a good future in natural gas-powered vehicles.

There Is Profit in Scarcity

In addition to his stance on natural gas, Pickens writes that he is a large owner of permitted groundwater in the U.S. His investment here follows the same key principle he’s used throughout his career: There is profit in scarcity.

Pickens owns land in Roberts County, Texas, a place so rich in water, he jokes it’s the only place he couldn’t drill a dry hole. It’s not difficult to pump 1,000 gallons per minute. This land lies above the Ogallala Aquifer, one of the largest in the U.S., covering over 174,000 square miles across eight states.

Pickens plans to sell water to parched regions in Texas, like Dallas or San Antonio, where water supply is becoming an issue. “We can deliver water faster and more cheaply than any other option on the table,” he writes. “It’s not a matter of if, but when, and I’m betting it’s soon.”

I’m thinking along the same lines as Pickens on water, too. This all ties back to the agriculture theme, as well. In fact, The Economist recently ran a story called “Running Dry: The World Has a Water Shortage, Not a Food Shortage.”

It’s a simple idea.

As world populations and incomes rise, expect to see meat consumption also rise. Meat takes more grain and water to produce – exponentially more.

In a post-finance world, where the mortgage gravy train is dead in its tracks, these are the kinds of ideas — essentials like grain and water — that will attract new money.

Source: The First Billion Is the Hardest

This pushed up the price of Canada’s Potash Corp (NYSE:POT). It hit a peak of $240 in July. Since then, the share price has collapsed by almost two-thirds. It is now trading below $100.

These kinds of corrections are creating great bargain in the stock market today. But Andrew Snyder says Potash Corp’s liquidity problems could see it tumble even further in the short term.

This from Today’s Financial News:

The downturn in the stock market is impacting nearly everybody, but some companies are really taking it on the chin. Many businesses are getting hammered by valuation cuts of 60% or more.

If I had to pick just one company that exemplifies the global economic pinch we are enduring, it would be the Canadian powerhouse, Potash Corp. of Saskatchewan (NYSE:POT). The firm, which produces various fertilizers and feed products, is a mirror of everything that was great about the global economy and what is now violently sour.

Over the past five years, Potash shareholders saw their positions rise by more than 1,500%. The stock was on an unbelievable run. Thanks to a booming economy, product demand was through the roof.

Ethanol was fairly fresh to the market, prices for corn were hitting all-time highs, and farmers could not get their crops planted and out of their fields fast enough. They needed lots of fertilizer.

Now, the company’s future does not look nearly as bright. The ethanol fad has come to an end and farmers are realizing they have way too much corn on their hands. Demand for Potash’s products has plummeted. And so has its share price.

Shares that were trading for highs of over $240 in June are now going for less than $100. It is a drop of over 50% in just a few months. Some investors see this as just the start of an even larger plunge. Others think this is a great opportunity to get shares at a discount.

I agree with the bears on this one. There are various fundamental reasons for the company to be considerably overvalued, but the glaring error bulls are making is not gauging the company’s current liquidity. In other words, they are looking at today’s balance sheet and not anticipating what it will look like tomorrow.

The check is in the mail

In a market roiled by credit and debt problems, it is absolutely vital to understand a company’s ability to pay its short-term bills. After all, if it cannot make payroll this week, next week is going to be an even larger problem.

A company’s current asset ratio is a good measure of short-term bill-paying ability. It is a measure of the amount of cash available versus the amount of bills to be paid.

To calculate current ratios, simply divide current assets (those available in the next fiscal period) by current liabilities. If the result is above 1, a company can pay its bills without taking on more debt. Below 1, there are problems ahead.

Potash’s current ratio as of last quarter is 0.88.  It has roughly $2.4 billion in bills, but only $2.1 billion to pay it with. In this credit market, a shortfall of $300 million is a figure worth being concerned about.

In a normal credit market, analysts would glance at that figure, discount a few cents off share price and move on. But when $300 million can be extremely hard to come by, it is a huge red flag to potential investors.

Stay away from Potash until this credit crunch loosens. By then, share price could be much cheaper and you will get in at fantastic levels. Invest now, and you could be in for a turbulent ride as the company figures out how to make up its short-term liquidity needs.

In a month or two, Potash will be a great buy. Until then, there are much better investments out there.

Companies make drastic decisions when times are tough. You do not want to be part of the problem if you do not have to be.

Source: Potash Corp. (POT): Liquidity Trouble Ahead?

This from Smart Profits Report

Unless you’ve been living under a rock these past few weeks (and many investors probably do want to crawl under one), you’ll know all about the incredible market action – both in the U.S. and around the world. Many countries and almost all sectors have suffered, as the ripple effect from the battered American stock market spreads across the globe.

That includes investments that typically have little correlation to stocks. Like commodities…

Commodities Crushed

Every area of the commodities arena has taken a hit, some of which have absorbed multiple blows.

When the stock market falls, we usually see some sort of upward bump in physical assets, as investors flock to so-called “safe havens.” It’s part of the “rolling” process out of one market (in this case, stocks) and into another commodities.

But not this time. The only commodities that have seen any kind of climb lately are gold and silver – the most traditional safe havens. But both metals also suffered nasty selloffs in the weeks prior to this latest round of stock market turmoil.

Metals Outshine

Scan your eyes across the commodities sector and you’ll see that silver and gold are currently the only commodities not getting whacked. At least as badly as everything else anyway.

Gold has held up pretty well, still trading above the lows it made back on September 11. In times of turmoil, gold is usually the asset of choice. But when everyone is selling across the board, even stable assets like gold can stay suppressed.

As for silver, although it’s performed weaker than gold, it’s still trading above its September lows, too. If the stock market starts to turn around and the U.S. dollar moves lower, we should see the metals pop up even more.

Oil Suffering From Financial Fallout

As always, the energy market tends to dominate the commodity sector. When I last wrote to you two weeks ago, crude oil futures had rallied almost $20 a barrel – from near $90 to the recent high of $110.

But not surprisingly, the story has changed again, and oil has dropped all the way back down, even trading as low as $87.56 a barrel on Monday for the front-month futures contract.

Talk about volatility! That’s a $20,000 move in equity on the way up and the same amount going right back down. Hope you like Tums! There’s no doubt we’ll continue to see this massive volatility.

With that in mind, if you’re brave enough to play this market right now, stick with limited-risk option strategies.

Natural Gas Takes Its Cue From Oil

Natural gas looked like it had been building a base of support after its long slide downward since July 2008.

But like its fellow commodities, the market hasn’t been able to stand up against a wave of selling. As you can see on the chart, the front-month futures contract is now below $7 per mmbtu – a level it hasn’t seen since the beginning of the year.

We’re seeing this type of activity in a lot of markets now, where the gains for the year get totally wiped in just a few short weeks in some markets. As with crude oil, natural gas will be part of the volatility and likely to continue to see large moves.

I’ve seen more volatility in recent weeks than I have in my entire 17 years of trading. It’s a rough ride that makes the trading environment very difficult. But try to keep a cool head and avoid panicking until the dust clears. It’ll pay off in the end.

Source: Stock Market Massacre Trickles Down To Commodities… But These Two Are Holding Up Well

Slowing growth and inflation problems means the short-term outlook for commodities is not pretty. But over the long term, scarcity of resources is strongly bullish for commodities prices.

This is a great chance to add commodities stocks to you your portfolio and hold for long-term profits.

This from Chris in Penny Sleuth:

Jeremy Grantham heads up GMO, a respected money manager. Grantham has been largely spot on in the big-picture sense of staying bearish on stocks for the last eight years or so. He is bullish long-term on commodities. In his latest quarterly letter, Grantham makes some good points about the future of commodities and emerging markets.

His conclusion first: “In the short term, slowing world economic growth combines with credit, currency and inflation problems to dominate the outlook and offer poor prospects for emerging markets and commodities. Longer term, the reverse is true, and they look like the assets to own.”

It is mostly the long term (looking out a couple of years) that interests me, although I obviously don’t aim to step into any immediate problems if I can help it.

Longer-term backing for commodities demand comes from two sources, Grantham says:

The first is that if enough people enter economic take-off at approximately the same time, as 2.3 billion Chinese and Indians have now done, then the pressure on resources might happen to increase marginal costs slightly faster than technology could offset them.

This has already happened. It’s why the price of oil, for example, is so much higher than historical averages. All that demand hits very quickly, but it takes time to bring new supply to market. In the interim, higher prices result.

This seems well-known already. Most investors realize that behind the commodities boom stands surging demand from countries such as China — former ‘runts’ now muscling in on the global dinner table.

The second reason is more interesting. Grantham believes that the global growth spurt has come at the expense of eating away at some hard-to-replace resources:

“Underground water resources that currently sustain some of our most productive land but, like a metronome, tick off a reduction of several feet each year; rain-fed waters that, although renewable, are finite and already so overused that previously valuable lakes retreat to sometimes disastrous local effects and river volumes, once seemingly limitless, are now fought over; subsoil, which took thousands of years to form, is depleted through casual use (in the Midwest, for every bushel of wheat produced, it is said that a bushel of subsoil is lost. Our farmers are in the mining business! Yes, the soil is incredibly deep, but it is still finite); high-grade mineral ores are fully developed, the very best are long gone and all are irreplaceable; previously fertile land has often been overgrazed and turned into desert.”

At Mayer’s Special Situations, we’ve been on the water beat since this publication began in summer 2006. We’ve also watched the agricultural boom unfold, and we’ve picked up nice profits along the way. We are, in fact, still invested in these ideas.

Along with these ideas, oil, natural gas and base metals all have become more difficult and expensive to produce. Recently, we’ve had to sit through a pretty tough correction on the commodity names. Stocks in these sectors have sold off in a big way this summer, as I’ve noted. Based purely on fundamentals, though, these stocks haven’t looked this cheap in years.

But short term, such drawdowns are common on the way to eventual higher prices. Grantham, too, says as much:

“The prices of commodities are likely to crack short term, but this will be just a tease. In the next decades, the prices of all future raw materials will be priced as just what they are: irreplaceable. Oil, for example, will never again be priced on the marginal cost of pumping a marginal barrel from some giant Saudi oil field, as has been the practice for most of the last 100 years of oil production. Real cost is always replacement cost, and oil, a precious feedstock for chemicals and fertilizers, simply cannot be replaced.”

I don’t take as hard a plumb line as old Grantham does. I believe there is, even now, lots of room for innovation and replacement. Oil, for example, is replaceable in a broad sense. We can get energy from a broad array of sources. But it’s not an easy or painless transition.

Slowing economic growth is the bigger issue. That’s problematic for most commodities, short term. The market, though, is probably punishing the commodity companies too severely. That creates some interesting opportunities.

You can more easily pick up stocks trading for discounts to readily ascertainable net asset values now than anytime in the last five years, in my view.

It doesn’t mean making money in commodities is a lock or that it will be easy. Lots can go wrong with individual companies, and the drawdowns will probably be more than most investors can stomach. But longer term, looking out a few years, I think an investor will be happy with the portfolio assembled in the doubtful summer days of 2008.

Source: Vancouver’s Laboring Drunks

There are “fears that the package may cost too much, drive up inflation, swell the already bloated U.S. deficit and hurt the ailing economy,” reports AP.

Eric Fry says his investment strategy is based on a simple formula: “Sell the dollar, sell the dollar and sell the dollar.” And as the buck gets whacked, so will American stocks and bonds. On the other hand, foreign assets and commodities should soar…

This from The Rude Awakening:

During the last couple of years, I have been very afraid of the stock market, and in particular I have been afraid of the financial sector. So in many, many editions of the Rude Awakening, we’ve been telling our readers just to hide as well as they can.  Mostly we have been telling them to hide out in commodities like gold and oil, and also to hide out in investments that are denominated in any currency other than the US dollar.  For the most part, these have been very good hiding places. But lately, these hiding places are starting to feel a bit like tombs. The commodity markets have been horrible.

Stocks and commodities usually move in opposite directions. But during the recent stock market selloff of late August and early September, commodities provided almost no protection whatsoever. In fact, they performed even worse than stocks.

Therefore, many of us resource investors are feeling more chagrin than satisfaction. We sidestepped the financial sector 18-wheeler, only to step in front of the commodity sector bus. But at least we’re still flinching on the pavement…unlike our bank-stock-investing counterparts. We should remember that Merrill Lynch (NYSE:MER) stock has delivered a total return of MINUS 45% during the last 10 years! Commodity prices have nearly doubled over the same timeframe. So all of us commodity investor who gravitate toward self-flagellation might want swing the whip a little more gently. These are very unusual times in the financial markets.

Even though commodity prices have retreated substantially from their all-time highs, they will rebound eventually…and then continue on to new all-time highs. (Perhaps the big bounce in gold and oil during the last couple of trading sessions is the start of something bigger). So at the risk of repeating myself, I will repeat myself anyway: I like commodities, at least for the long haul, if not also for the short haul. I like commodities because supplies are limited and demand is not. I also like commodities because they lack CEOs and executive management teams. I like commodities because greed and stupidity cannot destroy their value.

Please understand that my opinions are just that, mere opinions.  I’m not issuing any prophecies here, just a couple of guesses. And even my guesses aren’t really guesses at all; they are reactions to fear.  I am afraid that the US Federal Reserve and the U.S. Treasury have overextended themselves.  They have committed hundreds of billions of dollars to rescuing Bear Stearns, Fannie Mae (NYSE:FNM), Freddie Mac (NYSE:FRE) and AIG etc.  That’s bad enough.

What’s worse is that these governmental agencies have exposed themselves to more than $1 trillion of potential liabilities.  No one knows how large the ultimate invoice will be to clean up the American financial system.  But we investors can assume that much of the money to satisfy that invoice will roll off of printing presses.  We can assume, in other words, that the Treasury will greatly inflate the money supply in order to prevent an even more extreme credit crisis.  This process will almost certainly erode the dollar’s value.

And so we ask ourselves, “What wins when the dollar loses?” Gold, the currency of the ages, comes to mind immediately.  But we would also expect most other commodities to perform extremely well in a weak-dollar environment.  And obviously, investments that are denominated in a foreign currency should perform relatively well when the dollar weakens, at least from the perspective of an American investor.

Also, we should expect the Treasury’s multi-billion-dollar bailout packages to increase the supply of Treasury bonds. I’m not so sure these bonds will meet with eager investment demand. For one thing, whenever supply swamps demand, prices fall.  That’s economics 101.  For another thing, the traditional buyers of Treasury bonds might become much less eager to loan money to a government that is buried under a massive mound of unknown and growing liabilities. So I’m afraid the road in front of us will be very difficult for investors in American stocks and bonds.

Investors who wish to bet on falling Treasury bond prices could buy an ETF like the UltraShort Lehman 20+ Year Treasury ProShares. (AMEX: TBT; Price $68.37) This unique ETF wins when Treasury bond prices fall. Specifically, this ETF produces an investment result that corresponds to 200% of the inverse of the daily performance of the Lehman Brothers 20+ Year Treasury Index.

I think we’ve reached an important inflexion point in the American financial markets. The extinction of Bear Stearns, Lehman Bros., Fannie Mae and Freddie Mac – along with the near-death experiences of AIG, Merrill Lynch, Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) – tell us that a very important change has occurred in the financial markets. The extreme greed and institutionalized speculation that has nourished the Wall Street brokerage firms for so many years has finally been exposed as the fraud it has always been.

American-style investment banking is not a “business model,” it is a Ponzi scheme – a fraud – in which all the money flows to the people at the top, while everyone else who plays the game absorbs the losses. This massive institutionalized fraud is now over.

But investors must understand that this fraud created enormous leverage in the financial system.  And this enormous leverage created enormous liquidity which caused stock prices all around the world to soar… and therefore, caused lots of investors to feel rich and happy.  But now that all of this leverage is collapsing, the liquidity it created is draining from the financial system and causing share prices to fall sharply.  The U.S. Treasury and the Federal Reserve are trying very hard to counteract these trends by absorbing hundreds of billions of dollars worth of bad mortgages, and also pumping fresh credit into the banking system.

The Treasury and the Federal hope that these actions will restore buoyancy to the potential markets.  But we doubt it.  Instead, we suspect that these actions will only add buoyancy to the US inflation rate and, therefore, to commodity prices.

Most of the bad guys who created this mess are gone…although not yet in prison where they belong. And most of the American regulatory agencies are eager to change the rules of the game. These two developments are very helpful. But the process of repairing and reforming the American financial system could be painful. The U.S. Treasury will absolutely, positively increase the money supply to rescue the financial system…Which means investors must try to protect themselves against an almost certain inflation.

So what’s an investor to do?

Sell American stocks, bonds and currencies; buy foreign stocks, bonds and currencies. And, of course, buy commodities.

Source: To France with Love