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The Commodity Investor Q&A

With Matt Badiali, editor, S&A Resource Report
Wednesday, October 22, 2008

Q: Do you think OPEC will cut oil production? And if so, will that raise the oil price again? – H.J.
 
A: Yes, I think OPEC will try to cut production. However, I don't think OPEC countries have the willpower to make the cuts it would take to spike oil prices up again.
 
Several OPEC nations are facing a squeeze no matter what. Nigeria and Venezuela, which make up 14% of OPEC's production, are in a particularly bad spot. These countries grew incredibly fat and lax on high oil prices. And I suspect they didn't save that cash for a rainy day. I'd bet they spent it all, every centavo...
 
Venezuela donated oil and cash to all of its allies in South and Central America. In Nicaragua, President Daniel Ortega joined with Venezuelan President Hugo Chavez to build a series of power plants run on Venezuelan fuel oil. Those programs are going to pinch now.
 
So these countries have seen the price of their major export cut in half since July. Now OPEC's going to ask them to cut production.
 
Inevitably, OPEC countries will fall back on their tried and true method of raising funds: cheating on their quotas. That'll undercut the reduced production and keep oil prices low.
 
Q: Do you have a favorite commodity investment right now or are you running scared? – T.D.
 
A: I'm not focused on any one commodity. Instead, I'm looking for the survivors that will lead the way from here.
 
I've been thinking a lot about the Panic of 1873...
 
It started with a housing bubble, similar in cause and effect to the current one. The turning point was the failure of Philadelphia blue-chip bank Jay Cooke, similar to our Bear Stearns sale for $2 a share.
 
Once the bank fell, the credit market locked up and nobody was lending money. Companies failed by the thousands. Unemployment soared to 25% in New York City.
 
But some businesses flourished.
 
Companies that could finance themselves from their cash flows reaped huge rewards. John D. Rockefeller, who founded Standard Oil (the parent of nearly all the major U.S. oil companies), bought out his competition at fire-sale prices. Andrew Carnegie, who built U.S. Steel and became history's second-richest man behind Rockefeller, did the same thing.
 
These men converted their companies into empires. The years following the Panic of 1873 became the Gilded Age of Industry.
 
That's why I'm looking for the absolute best blue-chip companies in the commodities sectors. Those are the companies I want to own.
 
I'm not buying yet, but the world's best commodities businesses are getting so cheap, we'll see hundreds of percent returns over the next five years.
 
Good investing,
 
Matt




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Market Notes
Biotech rally resumes... Questcor Pharma, Emergent BioSolutions, and ImClone hit new highs.
 
Time for a European vacation... greenback hits a new high against the euro.
 
Gold stocks carve out bottom... Gold Fields, NovaGold, and New Gold hit new lows.
 
Earnings today... AT&T, ConocoPhillips, McDonald's, Merck, Boeing, Wachovia, GlaxoSmithKline.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%