smart-money-report.com Blog

Andrew Mickey reflects on a Bloomberg interview with long-time commodity bull Jim Rogers. In it Rogers says he believes that western economies are in for an “inflationary nightmare.” And he thinks gold is still in a bull market and will remain in one for years to come.

But Rogers thinks he will make the most money in agriculture. I think Mickey summarizes the agriculture story with a simple fact:

In 1961 there were only 3 billion people in the world. There was plenty of food to grow around. There were about 40 arable acres for every man, woman, and child in the world. That was more than enough to feed everyone.

In the five decades since, the situation has completely changed. Today, the world has about 6.6 billion people. That doubling of population has pushed the amount of arable land down to less than 25 acres of farmland per person. That’s a 37% decline in arable farmland per person…and falling.

Because of forced liquidation agriculture prices are way down. Corn is around $4 a bushel after being close to $8 just a few months ago. Soybeans are $9 after rising to $16. Wheat is about $5.50, down from $9.

And the smart money realizes these prices are low. The Commitments of Traders report is telling us that commercial traders of grains are the most bullish they’ve been in a long time.

If you want a great example of how valuable assets have been liquidated at any price just to raise cash, look no further than Boone Pickens.

He went to cash not because he thought his positions should be sold, but simply because he couldn’t afford to take any more losses in his hedge funds — forced selling. That kind of selling has been dominating these markets. And it is that kind of selling that presents tremendous opportunities.

Todd Sullivan observes that coal stock prices are not reflecting what is really going on in the coal business.

Just another example of what can happen when everything is sold for no other reason than to raise cash.

Ted Butler points out that this week’s silver Commitments of Traders report was particularly bullish. In fact, commercial traders (the “smart money”) have their most bullish position since April of 2003.

Also, lower silver prices have resulted in lower production. That makes sense. But here’s the kicker. Because of the “sell everything” attitude as a result of the financial crisis, prices have apparently collapsed at the same time inventory levels are low.

That means that the coming rebound in silver prices could happen a lot faster and a lot more dramatically that what we’ve seen in the past.

Silver opened below $9 today. I couldn’t pass that up. I bought it and plan on buying more.

Boris Sobolev looks at the 80 year history of severe  mining stock downturns.

I think the important point is that in terms of how fast it happened the correction we’re seeing now is the worst in history. It would be reasonable to expect the fastest rebound in history:

Yes, it would be foolish to say that it cannot get worse from here. But both math and history are on our side. It is now very probable that a sharp multi-week rebound of at least 50% to 100% is near.

XAU reached an intra-day low of 63.52 on Friday. A 50% rebound would take it to 95.28, which is just where it was a week ago! A 100% move would only take it to where it was at the beginning of October.

Boris is right. These companies are trading like they’re going out of business. And I don’t think they are.

Doug Kass can only find three times in his entire career when Warren Buffett has publicly made a boldly bullish market call like he did last week: 1974, August of 1979, and October of 2008.

The man must mean it.

“Regardless of how much further it might (or might not) drop, the stock market now abounds with so many bargains it’s hard to avoid stepping on them. Out of 9,194 stocks tracked by Standard & Poor’s Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year – or at levels less than half the long-term average valuation of the stock market as a whole. Nearly one in 10, or 876 stocks, trade below the value of their per-share holdings of cash – an even greater proportion than Graham found in 1932.”
- Jeffrey Saut (via The Kirk Report)

So I’m reading Jim Jubak’s article, “Be ready for the commodity comeback.” And I agree with most of it. But there is one thing he wrote that I’m not sure about.

He makes the point that the prices of the base metals have fallen below the cost of production for most producers, except for copper…

Fourth, separate the stocks in the mining and energy sectors into two groups by the price risk in their underlying commodities. So, for example, since copper is still trading above the average cost of production, it is relatively risky. The metal has further to fall before its price starts to eliminate mine capacity…

And he says that since copper is, in his opinion, still not cheap enough he would stay away from copper stocks. I’ve seen that point made several times lately. Just a couple of days ago hedge fund pioneer, Julian Robertson, made the same point. In fact, he’s short copper.

But I’m looking at copper a little differently. I’m looking at the Commitment of Traders report for copper and  I see that the smart money (commercial traders) have the most bullish position in copper futures that they’ve had in at least a year and a half. Surely they know that the price of copper is still above the cost of production.

Also, the stocks of some copper producers are dirt cheap and seem to be discounting much lower copper prices. Take Southern Copper (PCU), for example. At $12 a share it’s trading at about 5 times earnings. A return on equity of over 50%. A return on assets of over 30%. A return on invested capital of between 50 and 75 percent. An earnings yield of 30%. That’s value.

So, obviously I don’t know for sure, but we may wake up a year from now and see that copper prices are higher, not lower. That, evidentally, will suprise some people.

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”
– Warren Buffett

I’m posting again after a long hiatus.

I sometimes think that too much attention is given to Warren Buffett. Unless you’re him you’re just not going to be able to invest like him. Unless you have $5 billion or so in loose change, try getting the deal he got on Goldman Sachs (GS).

But the man does share valuable investment wisdom with us from time to time. And the opinion piece he wrote in this morning’s New York Times (Buy American. I am.) is a great example.

He thinks prices of U.S. stocks are so attractive that he may soon be 100% invested in U.S. equities. In fact, he says that if you’re holding cash you may feel comfortable right now, but you’re…well… you’re crazy (my words, not his). Why? Because government policies are inflationary and your cash is almost certain to decline in real terms.

So take it for what it’s worth. But I think the Oracle of Omaha is on to something.