NATURAL RESOURCES

The commodity bubble is about to burst! There is no thing as a commodity bubble! These are the two opposing views I hear from analysts these days. Which is right? A lot depends on how you define commodities as an asset class. If it contains only the hard raw material, you could say the “bubble” label is justified when it comes to some base metals, especially copper. But most analysts include stocks of commodity producers and exchange traded funds in their definition, and there I see no evidence of a bubble. On the contrary, most top-quality stocks of energy producers or miners trade at exceptionally low multiples, which in turn are based on reasonable commodity price assumptions. Also, the level of institutional investment in commodity based stocks is modest. For historical perspective, consider that in 1979, at their peak, natural resource producers made up roughly 25% of the S&P500; early this decade, at the cyclical bottom, the figure was about 5%; now it’s 11%. So what’s ailing commodity based investments? In a nutshell, the possibility that we may see a concurrent and meaningful slowdown of both America’s and China’s economy. To be sure, such an event could deflate raw materials prices and delay the resumption of their long-term upward trend. But the emphasis here is on delay, as opposed to discontinue. I firmly believe that we’ve only completed the first phase of a bull market in natural resources that will last another decade or longer. My advice: if your holdings of top-quality energy and mining stocks are below 20% of your total equity exposure, accumulate them on weakness.

ENERGY

What about the huge oil discovery in the Gulf of Mexico? A number of Perspectives readers have asked me to comment. My view is simple: a discovery that could nearly double current US oil reserves will be of immense benefit. But despite that, the overall context of US dependence on foreign oil will not change. US reserves amount to roughly 20 billion, the new discovery may yield 15 billion barrels, and annual US consumption stands at 7 billion barrels. Looking at the logistics of production, it will take at least three years before any of the new oil gets to consumers. And given that the discovery is situated in a notorious hurricane path, that target may be delayed. Finally, as one reader asks: what companies will benefit from this boon? The three firms that make up the discovery team are Chevron (NYSE:CVX), Statoil (NYSE:STO) and Devon Energy (NYSE:DVN). I like the latter company the best. Also worth considering are drilling and servicing companies, of which I think Transocean (NYSE:RIG) and Hercules Offshore (NASD:HERO) are the most obvious choices. Transocean is the world’s largest deep-water driller; Hercules is the largest liftboat operator in the Gulf of Mexico. With the energy sector quite depressed, this may not be a bad time to position yourself.


Peter Cavelti’s background as a financial analyst and author spans 35 years and four continents. His grasp of global issues is extraordinary and his comments and books have been published internationally. He was president of Canada’s Guardian Trust and subsequently owned his own firm, which managed some of the best-performing natural resource mutual funds. Peter firmly believes that only an integrated understanding of geopolitical, demographic and economic events can lead to successful investing, and that is what his web service Perspectives is about. If you feel keeping on top of relevant global events takes too much time, Perspectives is for you. Whether it’s investment advice or political analysis, Peter offers his insights in concise and easy-to-read form. Best of all, Perspectives is free. Visit www.cavelti.com and sign up today!