An article yesterday by Evan Smith and Brian Hicks, co-managers of the U.S. Global Investors Global Resources Fund titled ‘Coming Inflation Is Good for Commodities’ although it isn’t possible to predict its timing the trillions of dollars being injected into the global financial system make it inevitable, and that this “prospect of inflation will likely be one of the key drivers for the energy and commodities sectors over the medium term”. The article goes on to say that “the economic slowdown has reduced demand for oil and natural gas, but the supply-and-demand fundamentals are tightening rather than loosening. This is because supply has been declining at a greater rate than demand” in circumstances where “it is much cheaper and easier to cut supply than to bring that same supply back on line”. The authors then comment that “China has been buying commodities at a record pace in an effort to secure future strategic supply. Many have speculated that the Chinese are opting to invest in commodities and other hard assets rather than continuing to invest their massive currency reserves in low-yielding U.S. Treasuries. If you read several of my recent posts on this blog you will quickly find that I am one of those who so speculate.

The views expressed in this article make sense to me, so long as one assumes there will be recovery in the near term before the current recession deepens, perhaps to ‘depression levels’ of 20% unemployment in the U.S. I am certainly not predicting a depression, and hope it doesn’t happen. That said, I continue to watch for early U.S. job loss forecasts and U.S. consumer confidence indicators for the month of April, as I consider these to be a critically important bell-weather short-term indicators of whether there is any possibility of the beginnings of U.S. economic recovery any time soon.

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An article today titled ‘Preparing for the Dollar’s Next Down Cycle’ begins with the author saying “One thing I learned early on in my investing and trading career was that I can’t trust analysts or the news media! I learned that not only are these guys not as knowledgeable as they should be, but that they also don’t alert everyone to the fact that things are changing until well after the fact”. The author attributes this to “analysts and the financial news media (being) horrible investors”, and because “analysts work for firms that are biased”. The author then says that he relies on commodities “like gold, copper, oil, steel, lumber, and even a commodities index…the CRB index (which holds a basket of commonly used goods)” as an indicator for buying stocks and currencies. The author’s rationale for focusing on commodities as an economic and market indicator is that he believes “when an economy is turning around, companies will need to use these raw commodities to make their products in order to expand their corporate earnings”, and that “when an economy comes out of a deflationary (or even disinflationary) period back into a typical inflationary period, you will see it first in the rise of commodity prices”. The author then says he thinks the “The Worst is Over, yet (there are) Still Some Bumps Left” since oil, copper, gold, lumber, etc. have all started to perk up and have broken their downtrends.

While I think the author has it ‘generally right’ with respect to analysts and the news media, I that he goes ‘far to far’ by making such broad statements. I think there are many thoughtful media writers and quite a number of good and careful analysts. That analysts may have inherent conflict of interest issues depending on who employ them is something that needs to be weighed when considering their advice. I also think the author’s analysis is very shallow with respect to what he sees as a ‘fact’ that many commodities have now ‘broken their downtrends’. Thus, while I think the author of the referenced article may be directionally and conceptually correct with respect to commodities and commodity prices as indicators of economic and stock market prospects, I think he is a little, and perhaps more than a little, early in his conclusion that ‘The Worst is Over’. A principal reason I have spent a substantive part of my time in the past two years developing the StockResearchPortal.com is because I believe intelligent investors will be more careful and doing more of their own investment research going forward, because I believe in the long term future of precious metals as a safe haven, and because I believe investments in carefully researched commodity stocks will do well going forward.

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In an earlier post I talked about what I see as the likelihood of China employing some of its massive (U.S.$2 trillion) U.S. debt holdings to acquire resource and other assets outside of China that it considers strategic. A recent Reuters article says that “Chinese state-owned aluminum group Chinalco will invest $19.5 billion in miner Rio Tinto in a deal that will secure resource supplies for China and help cut Rio’s debts, but also raise regulatory scrutiny (from the Australian Government – which is reported as immediately tightening foreign ownership laws by treating convertible debt as if it were equity)”, and that “As part of the biggest overseas investment by a Chinese company, Chinalco will spend $12.3 billion on stakes of up to 50 percent in nine of Rio’s mining assets. It will also buy $7.2 billion of bonds convertible into shares of the world’s largest aluminum maker, second-largest iron ore miner and a top-five copper producer”. The article goes on to say that “Chinalco, the parent of listed Aluminum Corp of China Ltd (Chalco), will potentially double its stake in Australia and London-listed Rio to 18 percent”. One fund manager is reported as saying: “(Rio’s) had to sell away part of the farm and particularly the iron ore assets, which are the jewel”. The transaction apparently requires shareholder, government and regulatory approval.

In a second article it was reported that Alcoa has sold its Rio Tinto stake to Chinalco for $1 billion, and that it will cooperate with Chinalco in new ventures. If I am reading the article correctly Chinalco is paying Alcoa over three times the current market price.

My Comments: I anticipate commenting on many similar stories on this blog in the coming months. In my consulting career I have advised on several ‘related party transactions’ where shareholder disputes have arisen. As a generality, to which admittedly there may be exceptions, it seems to me that the more dismal the economic times the less alternative transactions and flexibility there likely is available to shareholders and regulators. If I am right in this, it seems to me to follow that an aggressive strategic purchaser almost certainly will succeed more often in the current economic environment than it otherwise would – both on more favourable pricing terms and with less shareholder and regulatory resistance – stay tuned and watch China. You might consider reading my February 1 post titled ‘The Chinese Century’ by clicking here.

Read the first article referenced in this post by clicking here, and and the second by clicking here.

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Bespoke Investment Group LLC (click here) claims offer some of the most original content and intuitive thinking on the Street.  Trading range charts for ten major commodities showing two standard deviations above and below their respective 50-day moving averages are shown in charts you can find by clicking here.  There is a brief commentary on trends in these commodity prices as well.

The views expressed in this Post are those of the author. They are offered to readers for information and general guidance only. They are neither intended to, nor should be taken to, constitute economic or investment advice. No check of data underlying articles or comments referenced herein has been made, and no responsibility is taken for them.  See Legal Disclaimer.

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