Material World [WSJ]
May 18, 2005; Page C1
Anybody who has put money in the shares of basic-materials companies lately has been basically burned.
It's been a fast turn of fortune for a sector whose shares had, up until March, been marching higher. Over the past two months, the Dow Jones U.S. Basic Materials Index has fallen 12%, bringing it back to where it stood at the end of 2003. Last week was especially tough: Dow Chemical's stock fell 8%, Alcoa's fell 9%, and U.S. Steel's fell 15%.
Crude-material prices haven't fallen by as much as the shares of the companies that produce them, but they've fallen starkly nonetheless. The Commodity Research Bureau's index of commodity prices is down 8% over the past two months.
William Sterling of New York investment-advisory firm Trilogy Advisors says the commodities slump is due to more-restrictive monetary policy in the U.S. and China -- the two most important countries when it comes to demand for basic materials. In the U.S., the Fed's year of rate increases has begun to limit the amount of money flowing into the economy, taking much of the fuel out of commodities prices. China's effort to rein in inflation has been less overt, but its effect is there to be seen in slowing loan and money-supply growth figures.
With hindsight, the time to buy commodities and basic-materials stocks was two years ago, when Federal Reserve policy makers were so worried about the danger of deflation that they were openly discussing what extraordinary measures might be taken to prevent it.
"With everybody worried about inflation, it seems like you're at the other end of the spectrum in terms of the attractiveness of commodity themes," says Mr. Sterling.
But Brown Brothers Harriman portfolio strategist Richard Koss says the most recent price drops may have been about more than economic fundamentals. Investors keen to make a quick buck had been flocking to the commodities arena, he points out. Some appear to have focused on basic-materials shares in particular, because they can offer higher returns than commodities alone can.
Last week, as rumors of hedge funds in trouble swirled through the markets, investors across the board suddenly found their appetite for risk wasn't what it used to be. Commodities bets were among the first to go by the wayside. |
