Where Do I Put My Money?
Wednesday, June 25, 2008 | Teeka TiwariRating:
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- How do you know when the market is oversold or overbought?
- Are makers of SUVs and large trucks good long term shorts?
- Will there be drilling off the U.S. coasts and, if so, are there any good ways to play that with stocks?
I spent much of last week in Washington D.C. and was privileged to meet several congressmen as well as the Vice President and the President of the United States. (Big thanks to ETF Master Trader member Ron S. for making that happen!) Wherever I went, and whomever I spoke with, the topic was the same:
“How do we lower oil prices?”
Is there a political solution to soaring energy prices?
The short answer is no. Opening up domestic drilling will help, but it will be 8-10 years from the first shovel hitting the dirt to the first barrel of oil coming out of the ground.
The seeds of the current oil bull market were sown during the over production of oil in the eighties, leading to collapsing oil prices which then lead to under investment in finding new oil sources.
There is no quick fix to current energy prices.
So what does this mean for us?
Typical commodity bull markets last between 15 – 20 years, indicating that oil will not come to the end if its run until around 2013 at the earliest, and may even last as long as 2018.
While this may seem unthinkable, did you ever think in a million years that you would live to see $140 oil?
There is no question that oil will take pauses along the way. If you remember in 2005, oil went to $80 then languished at $55 for almost a year before breaking out again. We’ll probably see similar action.
Good old fashioned 1970’s inflation has come back.
This situation has been worsened because, in the current environment, the federal reserve has to keep rates low in an effort to pump liquidity back into the virtually insolvent US banking and brokerage business. The lower US rates go, the weaker the US Dollar becomes. All major commodities are priced in US dollars, no matter where you live. So as the dollar gets weaker, commodity prices rise to compensate for the dollar's weakness.
The central bankers fear inflation because inflation ravages a nation’s paper wealth. It destroys buying power and, next to bank runs, it’s every central banker’s biggest nightmare.
As soon as the Federal Reserve feels that the banks are secure, they will jack rates higher with a vengeance. Higher interest rates are the only tool with any teeth that the Fed has to slow inflation. Higher rates will push up the dollar and bring down commodity prices. BUT it will also seriously slow the domestic economy, curtailing demand and thereby tempering inflation. Additionally, it can only slow - not prevent - the massive commodity bull market currently under way.
Stock Market and Commodity Bull market go in alternating 20 year cycles. So for 20 years we’ll see stock prices boom and commodities under perform. Then we’ll see 20 years of terrific commodity performance and 20 years of poor stock market performance.
Currently both the DOW and the S&P 500 are below their year 2000 highs. Any guess as to who has the ball right now?
Stocks or Commodities?
The reason why stock prices under perform during a commodity boom is that the price of raw materials rises faster than a company can raise its prices. This leads to profit margin compression which leads to slower earnings growth.
Always remember: the stock market is a slave to earnings growth. If the earnings growth isn’t there, then the market cannot rally.
This prompts us to ask several questions.
What caused all this?
How do we profit from this?
What Industries will be the winners?
Why is this different from previous commodity booms? (Especially the 1970’s)
Every other commodity boom has been made of American, Western European consumer and industrial demand. The booms were limited by the population pool of those nations. Like a sponge that can only soak up so much water, previous booms were curtailed by the population size of those countries industrialized enough to use commodities in any significant way.
This time around, however, it's not just America & Europe at the party.
We now have Brazil, Russia, China and India. We have 300 million more consumers in this commodity cycle than we had in the last one back in the 1970’s. Specifically, we have the industrialization of China & India which is why this movement has legs. It will last longer than any other commodity boom in history.
For the first time ever, 300 million new consumers are being added to the global economy. This has never happened before. Primarily it's India and China’s middle class causing the rising tide that is lifting all commodity boats.
It is their spending habits that will shape the next round of economic growth during this new century. Many industries will be impacted.
As investors, we want to ask ourselves: where is the world’s wealth flowing?
Agriculture Equipment – Farm equipment
Agriculture/Farming – Fertilizers, Seeds
Crop Prices - more meat consumption, sugar, corn, wheat
Heavy Construction Equipment – building out infrastructure, cities, roads, hospitals
Oil Service – Rigs, drill ships, welders, ship builders, huge backlogs of business
Precious Metals – Chinese and Indian Demand: its how they show wealth, inflation hedge
Industrial Metals – Aluminum, Copper, Zinc
Nuclear Energy – All alternative energy, wind, solar, geothermal
Biotech/Nanotech/Healthcare – Baby Boomers
These are the key investment themes for the next 10 years. Just how software, networking, internet, banking and drug companies were the leading sectors of the 1980's and 1990's. We are only about halfway through this run; just remember you only buy into these sectors on WEAKNESS, never on strength. They are very volatile groups and you must put that volatility to work for you.
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“Let the Game Come to You.”
Teeka Tiwari
Chief Investment Officer
Point & Profit
