Commodities haven’t been this cheap since 1999…
Regular readers know commodities are hurting. The price of oil has fallen 51% over the past 12 months. Sugar, coffee, and oat prices are each down more than 30%.
China is a big reason why. China consumes 55% of the world’s commodities. But its economy is growing at its slowest pace in 25 years.
Many commodity producers are in “survival mode.” Miners and oil companies are laying off thousands of workers. The Wall Street Journal reports that energy and commodity companies expect to cut capital spending by 14% this year.
• Blackrock thinks the worst might be over for some commodities…
BlackRock (BLK) is the world’s biggest asset manager. It sees more opportunity than risk in commodities right now.
According to Financial Times, Blackrock thinks miners could be near a bottom.
BlackRock also notes the “classic signs” that suggest the mining sector is reaching a cyclical bottom: Return on capital in the sector has fallen to historic lows, costs and capital expenditure have come down and many mined commodities’ prices sit well below marginal costs.
We’ve recently pointed out many signs of distress that suggest commodities are near a bottom…
- Glencore is “fighting for its life.” Glencore is one of the world’s largest mining companies. It recently announced big spending cuts. It’s even suspended its next two dividend payments.
- Junior mining companies are moving into other businesses. One Canadian iron ore miner started selling eggs recently. A Brazilian mining company is entering the haircare and cosmetics business.
- Commodities are cheap compared to stocks. The chart below shows the ratio of the Bloomberg Commodity Index (BCOM), which tracks 22 different commodities, to the S&P 500. As you can see, it’s at its lowest level in at least two decades. This means commodities are cheaper, relative to stocks, than at any time in the past 20 years.
To be clear, we’re not saying all commodity prices have bottomed. Some commodity prices could continue to go lower. But we do think it’s likely commodities as a group are close to a bottom.
• Switching gears, Uber is hurting taxicab companies…
Uber is a technology company that’s changing the way people use cars. It’s one of the most “disruptive” companies on the planet.
Tech investors call a new technology “disruptive” when it’s a threat to established businesses. Uber is a huge threat to traditional yellow cabs.
Uber lets you call for a car by pressing a button on your phone. Within minutes, a driver picks you up and takes you where you want to go. It’s quicker, cheaper, cleaner, and more efficient than most taxis.
Bloomberg Business explains how Uber has taken a big chunk of the New York taxi market since it launched there in 2011:
Since the arrival of the car-by-app service, valued at about $50 billion, taxi ridership is down, daily receipts have declined, and drivers are idling—or going to work for Uber.
Barron’s reports that the number of taxi rides in New York fell 8% between 2012 and 2014.
• Uber has crushed the value of taxi medallions…
A taxi medallion is a license to operate a cab. The government of New York City has issued about 13,000 taxi medallions. There are about 8.5 million people in New York City.
Because the government strictly limits the supply, medallions are extremely valuable. In 2013, the average price of a medallion was $1.3 million.
However, because more and more people are riding with Uber, the value of a medallion has nearly dropped in half. The average price of a medallion today is just $700,000, according to Financial Times.
• One publicly traded taxi company is in trouble…
Medallion Financial Corp (TAXI) lends money to the taxicab industry and other small businesses. Barron’s reports that about 51% of the company’s loans are for cab medallions. And 70% of those loans are made in New York.
Medallion went public in 1996…but it might not stay public much longer.
Financial Times reports that TAXI’s CEO is thinking about taking the company private.
The damage wrought by San Francisco-based Uber has been so great that Medallion is now considering taking itself private, he said, adding that he had been approached by a number of private equity firms and investment banks in recent months.
TAXI was worth nearly $400 million when medallion values peaked in late 2013. Today, it is worth $178 million. Its stock price has fallen 56% since November 2013.
• Uber is part of a huge trend in technology…
We call it the “Uberization of the Economy.” Chris Wood, editor of Extraordinary Technology, explains:
The “Uberization of the economy” describes a simple idea: technology is making it easier and easier for people to share things.
Before Uber, a car owner wouldn’t drive around giving rides to strangers. The owner of a car was the only person who benefitted from that car.
But Uber allows almost any driver to connect with any passenger. Now almost anyone can use their spare time to “rent out” their car (and their time) to drive people around.
The driver wins because he makes some extra money. The passenger wins because he gets a ride for cheap. He doesn’t have to own a car to get the benefits of a car. He’s “sharing” the car with someone else.
Uber is just one example of this huge idea. Another private company, Airbnb, connects the owners of houses and apartments with people who want to rent them. The renter gets a nice place to stay, often only for a few days. And the owner makes some rental income. It’s a win-win.
Of course, Uber and Airbnb didn’t invent the concept of sharing. They simply make sharing cars and apartments much easier…because their technology connects people more efficiently than ever before.
I’m following this trend very closely. It’s already huge, and it’s only going to get bigger.
Chris went on to explain that although they’re not public, both Uber and Airbnb are already huge companies…
At a conference in May, Airbnb CEO Brian Chesky said that Airbnb was approaching one million guests per night.
Meanwhile, Uber is currently valued at about $50 billion. General Motors, one of the largest automakers in the US, is worth $47 billion.
What are your thoughts on Uber and the Uberization of the economy? Drop us a line at email@example.com and let us know.
Chart of the Day
We explained earlier that commodity prices have fallen hard. Today’s chart shows the eleven worst-performing commodities in the last year.
As you can see, eleven commodities have fallen 20% or more. And seven commodities – oil, gasoline, coffee, oats, natural gas, lumber, and sugar – have fallen at least 30% in the last year.
Delray Beach, Florida
September 22, 2015
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