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Stock Ideas Investors Daily Edge Don’t Believe in This Bull
Stock Ideas Investors Daily Edge Don’t Believe in This Bull 
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Cash in on the next market boom Growing World-Wide Healthcare Spending Per Capita Wish you could invest in a recession-proof industry that you knew would just keep going up, and up, and up? Well, you don’t have to venture very far to find it. |
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| Don’t Believe in This Bull |
| Tuesday, 26 February 2008 | ||||||||
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The collapse of one bubble often sows the seeds of the next. -- The Sages at Citigroup Dear Reader, Last week oil prices hit a record high of $101.32 a barrel.Wheat, corn, and soybean prices all approached near-record highs. Tea prices took flight, thanks to the unrest in Kenya. Coal prices soared, caused in part by the harsh winter in China. A 65-percent spike in iron ore prices was agreed to between Brazilian miner Companhia Vale do Rio Doce SA and major buyers. Power shortages in South Africa helped drive up the price of platinum and gold. If seeing is believing, then no one can question the strength of the commodity boom. But they should question what is fueling it. It’s certainly not U.S. growth. Just last week, the Economist Intelligence Unit cut its U.S. GDP growth forecast to 0.8 percent for this year. So it must be global growth, right? Goldman Sachs predicts that continued growth in booming spots such as China and India will underpin global demand. I doubt if the rest of Wall Street disagrees. It’s settled then. Why don’t you go out and buy some shares in SPDRs S&P Metals and Mining (AMEX:XME). The ETF holds 24 U.S. companies that make aluminum, coal, platinum, palladium, silver, steel, and other metals. Over the last 12 months, it returned 30 percent. The S&P 500 would have lost you eight percent in the same period. Then again, maybe you should think it over. I believe that Asia and other parts of the world aren’t so disconnected to what’s going on here as the co-called Wall Street experts would have you believe. Japan would love to hitch a ride on this global growth. Last Friday it lowered its economic assessment for the first time in a year. Factory orders are suffering from slowing U.S. consumption. Japan's government also warned that chances of a further slowdown in Japan's export-driven economy are increasing. I guess they’re having trouble pinpointing where this global growth is. What’s more, it’s not just Japan whose economy is coming under attack. The export-dependent economies of Southeast Asia should also start feeling the pinch. Korea, Taiwan, Singapore, and Hong Kong are bound to suffer slower growth, unless they too can figure out where this global growth is coming from. Swiss bank UBS also predicts that the economies of central and eastern Europe and Latin America are likely to grow more slowly. Compared to China and India, though, these are bit players. If those two countries can continue to hug the fast lane, even while the economies of other countries pull over for a pit stop, then just maybe global growth is more than a figment of Wall Street’s fanciful imagination. It’s a nice thought. But I’m not buying it. China’s inflation is running at 7.1 percent this year. That scares the heck out of the Chinese government. The World Bank puts Chinese economic growth this year at 9.6 percent – almost two percentage points lower than growth in 2007. The boom in commodity prices doesn’t exactly do China any favors, either. They are heavy importers of iron ore, coal, oil, and the like. China’s own China International Capital Co. has cut economic growth forecasts by up to a half a percentage point from previous estimates and China’s exports from 11.8 percent to 10 percent. As for India, its economy is due to slow down for the first time since 2005. It is expected to grow by 8.7 percent, its slowest rate in three years.
Now China’s projected 9.6-percent clip and India’s 8.7-percent clip still sounds pretty good, don’t they? But slower growth is slower growth. Unless these projections are completely off base (and, if anything, they’re probably on the high side), then India and China will be importing and using fewer commodities this year than last year. The answer to the question – “what is fueling the commodity boom?” – is not global growth. Well, if it’s not global growth and it’s not U.S. growth, then what is it? Here’s a hint: The recent global decline in stocks has wiped about $7.2 trillion from equity markets this year. Where has a good chunk of that $7.2 trillion gone? Citigroup – where our quote that begins this article comes from – believes that the recent rise in the oil price “is driven principally by a sharp uptick in fund flows.” You think? Commodities prices across the board have become bloated from speculative money that doesn’t have anywhere else to go. The commodity bull is really a commodity bubble living on borrowed time. Global demand propping up commodity prices? I wouldn’t fall for that bull if I were you. Good investing, Andrew Gordon P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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