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One Commodity You Need to Play

Today's Financial News - Posted September 5, 2008

After a huge upswing, commodities have returned to their beginning-of-the-year prices. Is it time to jump back in? Horacio Marquez talks about the commodities sell-off and reveals one commodity you will want to play and when.

by Krista Das

Baltimore — (TFN): After a sharp rise this year, it seems that most of the major commodities have returned to their prices at the beginning of the year. So is the bull market for commodities over?

To examine the commodities market more closely, Horacio Marquez, editor of Money Map Report and one of the most respected global strategists, joins us today.

Horacio welcome to Market Insights.

We’ve seen huge jumps in commodities over the past year. For example, gross earnings for Potash Corporation, the world’s largest fertilizer company, have tripled. What is behind these tremendous gains?

Horacio Marquez: Well the reason is global growth, synchronic global growth. Basically we have seen a period of sustained, above average global growth that lasted quite a few years and that growth basically created scarcity in all of these commodities.

Now in the face of these commodity price increases that in some cases, like oil and the prices of grains and the prices of fertilizer have been dramatic.

Basically most of the countries around the world, starting by Europe and then emerging markets, have resorted to tightening monetary policies in order to slow down their economies a bit to have basically some abatement in the prices of those commodities.

Right now what we’re seeing is that gradual slow down of the global economy and we have seen some profit taking in the prices of those commodities driven by the rise of the U.S. dollar lately and at the same time, the fact that in the U.S. next year the capital gains taxes are going up and that motivates people to take their capital gains this year so that they can re-establish a much higher entry point if they want to keep investing in commodities.

Krista Das: What else is contributing to the sell off in commodities?

Horacio Marquez: Well, basically again it’s the commodity prices are a direct reflection of the growth in the economies and these economies are slowing down. In the U.S. we have seen the negative wealth effect of house prices that literally affect everything because consumers which drive about two-thirds of the U.S. economy feel a lot less wealthy, have less capability to borrow and basically with that they curb consumption.

On the supply side, banks have been affected by severe losses in their mortgage products and some other products, especially structured products. Because of those severe losses they also have to resort to lower levels of lending which have contributed to the credit crunch and the slow down of the U.S. economy.

But that situation is coming to an end and we expect that commodity prices have to find some stability at around these levels.

****View the video here…

Krista Das: So what do you think is going to turn this around and bring commodities such as Potash back up?

Horacio Marquez: Well basically the long-term story of emerging market industrialization and growth is still very clear today. That trend is going to continue unabated for the next ten, 15, 20 years as China urbanizes, as the population in China moves from the countryside to the city, their incomes go up, their consumption of meat for example will escalate dramatically and that will mean that corn prices will remain very well bid for the next 20 years.

As at the same time, the amount of arable land has decreased by about 50 percent in the last few years. The only way to increase your production for the existing arable land is basically to incur in higher consumption of fertilizers.

Now in emerging economies such as China and India, the use of fertilizers is per amount of arable land is still about 50 percent of what it is in developed countries. So there is tons of room to grow in terms of the demand for fertilizers. Fertilizers are in very, very short supply. In addition the costs of starting a mine to bring supply into the market are very, very high.

Krista Das: So getting back to Potash what’s the action to take? Buy, sell or hold?

Horacio Marquez: Well recently I put a sell on Potash because of the specific situation that Potash is facing. At the time there was a potential for a strike in three of its mines. That situation has already transpired and there is a strike that’s affecting Potash production. About five percent of Potash production is affected by this strike. That basically is going to affect prices on the way up and it’s going to be very supportive of prices and help actually a lot of Potash competitors in this situation.

At the same time, because of the fact that there are very, very significant gains in long-term holders of Potash stock that need to basically take their profits this year or take a significant part of their profits this year in order to re-establish much higher tax basis for their investment. Because of that danger I put on a sell on Potash that has already played quite dramatically.

So my strategy in Potash is start to scale into Potash in stages maybe starting here to the end of the year. In terms of the levels of Potash, Potash is already sitting on the 200 day moving average and it might even go below it for a little bit of time, but I don’t expect Potash to go much below it because of the situation with prices and the tremendous positive of the long-term supply and demand conditions.

Krista Das: Great information, Horacio. Thanks for talking commodities today.

If you would like to discover Horacio’s best plays, check out his investment research service, Money Map Report VIP Trader by clicking on the screen or go directly to TodaysFinancialNews.com. That’s all for this week. Until next time, here’s to great profits from Smart Investing.

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