Very simply, It ALL comes back to commodities; we will know that the financial markets will stabilize when… oil prices rise again.

The economic data that the media tend to focus on are often lagging indicators. Unemployment, GDP, corporate earnings and retail sales tell us what has already happened… not what is going to happen.

The stock and credit markets most times have discounted and factored in the dire information that we are getting every day. Markets are forward looking, and higher crude oil prices are a sign that the worst is over and a recovery is under way.

A temporary no-lose situation has taken place with the oversupply of oil in the spot market. Inventories are significantly built up and storage has become nearly impossible to find. In fact, tankers are now being used just to store millions of gallons of crude — and they aren’t set to move an inch.

Nowhere for the oil to go has presented a unique situation in which traders can guarantee a profit by storing now and selling in future months. But as you know, there is no such thing as free money, and this to me is just another sign of an extreme that market forces will correct.

Technically, we are at the third attempt to push through the $50 per barrel level.

Jan. 20 marked new multiyear lows, but many indicators showed divergence and renewed strength to the upside. Since then, crude has rallied over 10% in a week as the stock market oscillated around the Dow at 8,000. Higher oil prices are the sign that consumers and the markets can handle it.

Commodity Investing in 2009…

Some commodities have actually done very — very well — in the past couple of months. Cocoa has reached the highest levels since 1985 with the decline of the pound sterling currency in which it is denominated.

The British pound made new 23-year lows against the dollar last month with the damage in the United Kingdom financial system. According to the Financial Times , a full-scale nationalization of the banking industry is “very close.” When the pound is weak, worldwide traders have more buying power for the commodity when they convert their currency to purchase cocoa.

The central banks around the world have had a contest to see which could cut rates to zero the fastest (Japan doesn’t count; it has been a mess for over a decade). The goal in times of global slowdown is to devalue your currency to aid exports and jump-start the economy with cheaper relative prices and more money to spend in the system.

The dollar is not strong!! It’s just not as weak as some other currencies of economies that are also in serious trouble. The currency fun and profits are about to begin.

Back to Commodities…

I was looking up a recipe and uncovered some interesting facts about meals from the Great Depression. Just to let you know, cooking is research for this job. “A chicken in every pot” was not just a political slogan, but what every city dweller aspired to before factory farming methods made it so cheap.

According to the U.S. Dept. of Agriculture, the average American ate 10 pounds of chicken per year, compared with over 60 pounds today. Chicken is just corn inside another package, and high grain prices have a huge impact on profitability for producers. What caught my attention was the recipe for mock chicken legs. It was cheaper to make fake chicken out of veal before giant corporate plants met consumer needs.

Enough about history; it’s time to address the present. Super Bowl Sunday had its own set of problems. A shortage of chicken wings doubled prices in some areas. It is widely disputed, but the Anchor Bar of Buffalo, N.Y., is credited with starting the delicacy in the 1960s to use the wasted wing parts that couldn’t be given away.

It’s not that there is a chicken shortage. There are plenty of breasts and legs to go around, but wing demand has reached new heights. The cause is the bankruptcy of poultry giant Pilgrim’s Pride and the entrance of KFC and Pizza Hut mass marketing the tasty boney treats.

I like to be optimistic, but I want to let my concerned friends know that this may be only the beginning of the problem. As the dollar goes down, commodities rise, pushing up corn and oil prices once again. And the savvy investor stands to benefit from this move.

Regards,
Alan Knuckman

February 5, 2009

The Economic Stimulus Plan, Commodity Investing, and Oil Prices in 2009 was originally featured in the Penny Sleuth.

It’s sometimes uncanny how history repeats. Historian Frederick Lewis Allen writes about the New Deal of the 1930s in his book The Big Change: “It rewrote a good many of the rules of the economic game as played in America.” The steps the government took resemble what’s happening now an awful lot.

“The New Deal,” Allen continues, “continued to prop up ailing corporations through Hoover’s RFC; made arrangements to prevent near-bankrupt firms from going broke; aided farm owners and homeowners in meeting their mortgage payments; underwrote the financing of new housing enterprises; insured bank deposits…” And on and on.

It also went into the business of stimulating the economy directly by “building dams, bridges, parkways and playgrounds on a grand scale.”

If FDR walked the Earth again, Obama’s stimulus would look familiar…

Over the past few weeks, we’ve gotten more details of Obama’s stimulus plan, which comes with a price tag of at least $820 billion (and climbing). Some of the projects of interest to us include:

• Renovate 10,000 schools
• Build more than 3,000 miles of new or modernized transmission lines and install 40 million “smart meters” in homes
• Weatherize at least two million homes and 75% of office buildings
• Launch 1,300 wastewater projects, 380 drinking water projects and 1,000 rural water and sewer system projects
• Repair and modernize thousands of miles of roadways.

“Shovel ready” is the hot new phrase in Washington these days. It means a project is all set to go as soon as the money arrives. The list of projects for Obama’s plan are shovel ready — so they say. As soon as Congress approves the deal, the money goes right to work, like a needle sticking into a vein.

The water pipe business, in particular, ought to benefit from the slew of water projects in Obama’s stimulus plan. Whether the companies build, repair or install pipes, they’re in a great position to cash in on the growing list of projects coming out of Washington these days.

Sincerely,
Chris Mayer

February 3, 2009

Stimulus Stocks and Infrastructure Plays in 2009 was originally featured in the Penny Sleuth.

I’m talking about Franklin Delano Roosevelt in 1933. But the same thing could apply to the 44th president of the U.S. in 2009. Barack Obama plans to spend $700 billion over the next two years as part of a new plan to give a jolt to a flagging economy. It’s a kind of “new” New Deal.

His stimulus package is big – it’s more than what the U.S. has spent on Iraq in the last six years. It also rivals the Paulson bailout plan. And Obama’s stimulus plan just gets bigger and bigger. During the presidential campaign, it was $175 billion. Heck, by the time he takes office, we could be talking about numbers that begin with a “T.”

Where is all that money headed? It’s basically new money for public works projects to repair the nation’s crumbling infrastructure. It’s a lot of money for highways, bridges and water infrastructure projects. It will also include a fresh infusion of cash to promote alternative energy and green technology.

China has its own $586 billion new deal, too. When the world’s two largest economies plan to spend that much dough, you’ll want to know where it’s going. The short answer is infrastructure. As investors, we have a window to cash in on a sort of government-guaranteed prosperity. You don’t have to like it, but you can profit from it.

Most of it will go toward highways, railroads and airports. Already, China’s infrastructure spending has grown at a pace of 20% annually for the last 30 years. The impact on China’s economy has been transformational. For example, new highways now connect small far-flung rural towns to much larger booming cities. As a result, the economic activity between the two areas is in full bloom.

This transformation in China reminds me of the effect canals had on trade in the U.S. during the 1820s and ’30s. The Erie Canal alone cut transportation costs by 90%, according to Tomorrow’s Gold by Marc Faber. It linked the Great Lakes grain markets to New York. Canals more closely knit the interior part of the country with the Eastern seaboard, resulting in explosive growth in trade.

How to pay for these plans is a question neither country seems all that concerned with at the moment.

There is this belief that you must stave off economic contraction at any cost. Meanwhile, the U.S. government’s fiscal position is atrocious, with a deficit closing in on $1 trillion and the federal debt approaching $10 trillion. China is in much better financial condition. But China’s stimulus plan is still a big bet. It’s about 14% of the Chinese economy. As The Wall Street Journal reports: “The central government likely will have to significantly boost its own debt sales to fund the stimulus.”

Both big expansion plans will probably end badly eventually. America’s infatuation with canals that began in the 1820s led to a canal boom that ended in tears by 1836. Canal stocks collapsed, over 1,500 banks failed, nine-tenths of Eastern factories closed and a depression began that would last to 1842. Ultimately, these plans likely lead to wasteful spending and overinvestment. In finance, as in an Argentine steakhouse, everything gets overdone.

For now, investors have a window to capture huge gains from the global infrastructure spend. As I write, the U.K. just announced a $30 billion stimulus plan – with huge chunks of money for infrastructure. Argentina quickly followed with its own big plan. The news agency AFP calls it “a massive public spending plan to pump more than $21 billion into Argentina’s infrastructure.”

This is the dominant theme – think of it as a kind of contagion. Soon every government with a slowing economy from Capetown to Moscow, from Brasilia to Bangkok, could follow suit. All of which spells a possible golden age for those that make asphalt, water pipes, wind towers and the like. It should be a nice ride for investors who get in now, especially as prices for these stocks have become so cheap.

Until next time,
Chris Mayer

January 2, 2009

Investing in the Global Infrastructure Boom was originally featured in the Penny Sleuth.