Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: stockman_scott who wrote (72903)	2/26/2005 5:50:51 PM
From: Wharf Rat	Respond to of 89467

Changing Of The Guard Mark M. Rostenko The Sovereign Strategist It's been an interesting week so far and one that may very well herald a major turning point in the U.S. financial climate. Stocks got battered after failing to penetrate the cyclical bull market high, copper surged to a new 14-year high, gold had its largest one-day advance in some time. And flying well below the mainstream radar, the CRB Index of commodity prices broke out to a new bull market high, its highest in decades. Fascinatingly enough, while the prices of just about everything continued to surge into the stratosphere, the dingbat mainstream financial press worked overtime to assure everyone that prices aren't actually rising. The "tame" CPI report "edged up a TINY 0.1%" we're told. Energy costs "went down significantly" (someone ought to tell $51 crude oil which apparently doesn't read the CPI data). According to official reports, it was merely a "small increase" and inflation "remained very much under control." Tame tame tame! Not to worry, Alan "I didn't know it was a bubble" Greenspan assures us that inflation is "anchored", whatever that means. Bear in mind this is the fellow who assured us that $40 crude oil was "transient." I'll say, given its swift transition into the $50s! Unfortunately for the spin doctors, reality spins a far different tale. While the Wall Street/Pennsylvania Avenue machine works tirelessly to keep our attention fixated upon the "healthy" stock market and housing bubbles, the stealth bull market in commodity prices continues. And that doesn't bode particularly well for mainstream financial vehicles. There is an established inverse-cyclicality to the prices of hard assets and paper assets. In general, one is vastly outperforming the other and over the long haul, you don't do well in both at the same time. According to Barry Bannister of Legg Mason Wood Walker, that cycle spans about 18 years, which is pretty much in line with my estimation of a 20-year cycle which I discussed in TSS during the very early stages of the current commodity bull. When paper assets are flying higher, commodities tend to fare poorly and vice versa. In the 1970s many commodities surged to all-time highs, surpassing their previous records by huge margins while stocks languished. Two years after grand-daddy commodity gold topped out in 1980, stocks began an 18-year bull run that ended in 2000. With stocks topping out after 18 years and commodities in an emerging bull market, what are the odds that stocks will be the "next big thing" in coming years? In technical terms, pretty freakin' slim. Unless of course this cyclical pattern was merely a 130-year fluke. And I sincerely doubt that. You don't have to believe in cycles to have faith in the bloody obvious. In order to sustain a long-term bull market you need long-term bullish fundamentals. Ask yourself: are conditions more or less favorable for stocks today than they were between 1982 and 2000? Well, let's see. We have rising inflation. A housing bubble that must and will burst in time. We're waging a costly war in Iraq and getting ready to wage another in Iran. The trade and budget deficits stand at all-time record highs, consumer and national debt are higher than ever and savings are near an all-time low. Meanwhile, commodities are on fire, many of which still have plenty of room to go before breaching their lifetime highs. The fundamentals are undeniably and powerfully in place: China is consuming metals and oil like Rosie O'Donnell sucking up chocolate cakes after a gut-wrenching two hour fast. More importantly, supplies of many commodities have dwindled over the years as everyone shifted their focus to the easy-money paper asset boom of the 1990s. Major U.S. steel mills went bankrupt and shut down over the past couple of decades. When's the last time you heard about a major gold find or a major new mine coming on line? Many U.S. oil companies are pumping the same old wells, not having discovered too many new major oil fields in quite some time. Demand for commodities is surging in the East while supply is not increasing at anywhere near that rate. Hence the substantially higher prices for many commodities. As Marc Faber has noted, the financial world usually sees one major longer-term theme during any given era, a theme that can make patient investors very wealthy. In the 70s it was commodities. In the 80s it was Japan. In the 90s it was U.S. tech stocks. It doesn't take any tremendously remarkable insight to figure that stocks aren't likely to repeat their 90s performance anytime soon and that commodities are very likely the new, dominantly profitable financial theme of the early 21st century. That's not to say that the stock market is necessarily dead, although the big divergence between the Nasdaq Composite and the S&P 500 & Dow combined with what this week is beginning to look a lot like a double-top, may in fact herald the end of the cyclical bull market. Top or not top, the odds are overwhelmingly good that the upside for this long-in-the-tooth stock bull is limited while commodities likely still have a long way to run. How can the average investor participate without taking outright positions in the futures market? Unfortunately Wall Street doesn't offer many vehicles for the little guy as it's hard for them to make money with real stuff. They can't whip up IPOs for real assets out of thin air and unload them on the gullible masses, so commodities tend to be the domain of the wealthy. What about commodity-based stocks like food and energy companies and the mutual funds that invest in them? Not the best bet as their performance tends to correlate much more with the overall stock market than commodities. In other words, they rise and fall with the stock market more so than with commodity prices, which pretty much defeats the purpose. (Although to be sure, oil stocks are enjoying a healthy bull move in the wake of crude oil's gains.) In addition, many funds are over-weighted in energy stocks and limited in their exposure to the much larger universe of other commodities. But for the "non-accredited investor", several commodity-based mutual funds are available, including PCRAX which we highlighted in TSS some time ago. These funds don't offer the leverage and outsized returns of genuine commodity funds, but they don't tend to suffer the gut-busting drawdowns either. For the little guy looking for a simpler way to play, gold and gold stocks will likely deliver the most bang for the buck. While gold is subject to its own vagaries and vicissitudes, you're not likely to see a commodity bull market without gold's participation. For the long haul, it's as good a bet today as it was more than four years ago when we first began recommending gold and gold stocks. Relative to the 18-year cycle, the party has only just begun... Mark M. Rostenko Editor The Sovereign Strategist gold-eagle.com