Principles of the Stock Market : Soft Commodities

Chinese Strategy Looks Good

Richard Schwartz — Tue, 17 Feb 2009 14:38:00 GMT

GLOBAL VIEW. What Is China’s Strategy? Without having to worry about their banks, because China never got involved buying securitized, US subprime mortgages and other debt backed instruments, China’s now at a great advantage. Sure China is slumping fast economically like everyone else, their manufacturing industry shrinking rapidly, but China still has much greater leeway than other countries in lots of ways. First, luckily, because China has no developed bond market and is just starting to open up their financial markets, China missed the debt feast most other banks enjoyed. And are now regurgitating. So now it turns out, that’s a big, big plus. Also China still has its ‘Command Capitalism’ in place, meaning that when government decides on a path, boom, the country can start right off on it. No arguing back and forth like in big democracies like the United States and India. Next, China’s leaders are well educated, many with useful engineering backgrounds and have proven themselves. Finally, China is in a great spot financially. So what is China doing strategically, meaning their plans of long term significance?

Strategically, I’ve written previously how China is moving quickly to help their farms and farmers every which way because the farms were the first part of the Chinese economy to move to quasi free marketplace operations. After this move proved very successful, China then tried the same in manufacturing. Which, obviously, turned out to be a great and grand success. But now that Chinese manufacturing is downsizing rapidly, China has to keep the millions of Chinese workers forced back to the farms happy. Thus I see this government boost as making Chinese agriculture one of the few good buys around today as their farms consolidate, become larger and thus more efficient and productive, and have thus previously recommended Chinese agriculture strongly and offered up a list of stocks to consider buying.

Stockpiling Minerals & Mineral Producing Companies Too. Another, a second, strategic or long range move China has implemented is to stock up on raw minerals while their prices are down and also to take equity positions where allowed by other governments in mining companies themselves. The reason being that when China starts really growing again they are going to need adequate raw materials. China found this out quickly as it became the world’s manufacturing colossus. Even today with their new infrastructure program already in force, China needs cement, iron ore, steel, etc. So consider some recent Chinese moves:

· State-owned Zhongjin, China’s 3^rd largest zinc producer, bought a 50.1% stake in Australian zinc miner Perilya Ltd.

· State-owned Jinchuan Group, Asia’s largest nickel producer, bought 18% of Albidon Ltd, a Perth, Australia based nickel producer and has a deal to take 100% of the nickel from Albidon mines in Zambia.

· China’s 3^rd largest steelmaker bought a 50% interest in Australia’s Centrex Metals Ltd.

· Chinese interests bought a 40% stake in Australia’s Mount Gibson Iron.

· China’s 2^nd largest steelmaker upped its stake in Australian Gindalbie Metals from 12% to 36%.

· Aluminum Corp of China (ACH) has just increased it’s stake in Rio Tinto Plc.

· China’s Tongling Nonferrous Metals Group just bought 13% of Canada Zinc Metals.

· China Mining Resources said it would up its stake in Canada’s Quadra Mining from 4% to 19.9%.

Schwartz View: My point being watch what China’s doing. You might want to even sign up for FREE www.moneymorning.com as this service tracks closely what’s happening in China, the news clips above coming from a recent article. Again, while other countries play defense, having no real answer to their economic slumps besides cutting interest rates and implementing various stimulus plans, China is on offense, planning for where they want to be when this economic slump is over. So, again, if you want to put your toe back in the water on general market weakness, I would do so in China. You should have a ready resource right in front of you to do so, as along with the list of Chinese ag stocks I ran here, I also detailed by category & sub category the USX China Index and published it here for you on February 5^th.

* As soon as I wrote that along with China’s domestic-investor only stock markets, the Shanghai and Shenzhen Stock Exchange Composite Indexes going up this year, the USX China Index (symbol HXC) and the iShares FTSE/Xinhua China 25 Index Fund (symbol FXI), an ETF, were following suit and rising, that link ended. Schwartz View: Ok, I was surprised they were moving together anyway. Going forward, still scale in to China, just take it a little slower.

Is This Your Portfolio?

Richard Schwartz — Fri, 27 Jun 2008 15:14:00 GMT

WHERE YOU SHOULD STAND TODAY. The Ideal Portfolio (another Schwartz View).

Yep, let me offer up one man’s view of what the ideal portfolio should be today and why:

· Very minimal exposure to the stock market! This major, modern day margin call on institutional investors is causing havoc. I’ve likened this margin call to the one which wiped out many individual investors quickly back after the 1929 stock market crash, only this time around its institutional investors getting slaughtered and thus the process of meeting their margin calls is being stretched out. All are deleveraging their portfolios big time and since the securitized investments killing them are so opaque and illiquid, it’s a terrible, long, drawn out process.

· Where you do have exposure, have some in the Energy Service sector. Business is going to remain strong and money is going to funnel into this sector as long as oil stays up there, even if oil tanks 50%. The world is in now in a new competitive battle to secure our energy futures. Thus companies which help countries like Brazil find and produce oil should do well.

· Where you can, hedge your long stock exposure. One does this by having some inverse mutual funds and/or ETFs (exchange traded funds). Happily today, investors have access to this modern day invention of being able to go short (bet on declines) with inverse investments. You just buy a fund or ETF which goes up as the market goes down. I would recommend having small inverse positions, especially in financials. This allows you to ride through a day like yesterday knowing that a part of your portfolio is rising while your long positions are falling. The next day you check your portfolio’s value and see how you did. That’s what I do each morning. Say the stock market fell -3.00%, like yesterday, & your account lost just -0.20% like my ProFunds managed account did you might figure your hedge is just right. Just tinker with the hedge until you get it right.

· Hold NO BONDS. I’ve been recommending this for some time now. Yes, we may get a deflationary collapse at the end of this 25 year “too much of everything” Kondratieff disinflationary economic backdrop we’ve been in since former Fed chairman Paul Volker broke the back of runaway inflation in the early 1980s. But the world is now experiencing our first return to higher inflation jolt. Thus we’ve started a new bear market in bonds. I can’t help but remember when I first became a stockbroker with Merrill Lynch back in the late 1970s, the client who say she would never, ever buy a bond again, after losing money on bonds going back two or three decades. Well, we’ve had a 25 year bull market in bonds and its over or close. Thus, my recommendation is no bonds. (Except some very short term laddered US Treasuries for income.)

· Hold a little Gold. Yes, some will keep warning of a deflationary collapse ahead, when the economy really tanks and thus say gold will collapse as well. But gold is in a long term uptrend, a bull market, and no one knows quite how it will react in various market and economic scenarios. Buy SPDR Gold Trust (symbol GLD) as opposed to the miners themselves, thus eliminating one unneeded uncertainty. FYI, I’ve seen gold rise and gold sector funds fall, so watch yourselves.

· Hold a little foreign currencies. Again, in today’s modern day investment world, the individual investor can easily bet on foreign currencies … by buying their ETFs or tracking stocks. I’ve been recommending & still am, buying Swiss francs & Japanese yen, symbols FXF and FXY. Both are Big Picture superstar guru Jim Rogers’ picks and are in long term bull markets and dipping now so it’s a good spot to buy in on weakness. Today let me add the Chinese renminbi, symbol CNY, to the buy list since there is a exchange-traded note in existence. Not a fast mover but it’s also in a long term bull market and probably is now one of the most reliable bull markets going.

· Hold a little agricultural commodity position. The middle class global world has grown tremendously, yay!, and thus the general commodity bull market has now spread out to foodstuffs. A larger global middle class, means more and better food is needed, especially increased protein. Food commodities are up so only buy on pullbacks here if you don’t own any now. My picks have been and remain symbols RJA and DBA. Again buy the commodities themselves as much as possible and not the companies which produce such although ETFs like MOO have been doing well to this point. Today, let me add iPath Livestock ETN (symbol COW) to the buy list if I haven’t already, a livestock play. Looks like with corn prices so high, cattle is being killed off (thus one can still get steak and hamburger at $1.99 a pound) because it costs too much to feed ‘em. But that will change too and red meat prices will skyrocket.

· Finally, hold small positions in lots of alternative, clean green energy stocks. I see new fortunes being made by those riding the wave of the US and globe getting off oil. The best way I’ve found to buy these is to keep the shopping list of alternate, clean green stocks I’ve compiled and posted for you back on June 6^th in this space handy. (If you don’t have it email me and I’ll send you a copy.) Buy a bunch of these stocks on weakness. I bought one for myself yesterday.

Disclaimer! I hold or plan on holding many of the ideas recommended above.

Oil Holding Stock Market Up! Oil Is Key.

Richard Schwartz — Wed, 21 May 2008 14:26:00 GMT

OIL NOW AT $130! What will be the resolution of today’s high oil prices?

The best, first approach in analyzing anything is to look back at any historical parallels we can find. The two oil crises of the 1970’s pop immediately to mind. Thus I just printed out a few online histories, including what Wikipedia, the free Internet encyclopedia, have to say about the 1973 oil crisis. (the Internet is great!) I’ll read these histories today and report back to you. For now, as I lived through the 1970s and have studies the stock market and economic history of the time, let me relate what I know:

The oil crisis of October 1973 came about after OAPEC (Organization of Arab Petroleum Exporting Countries; OPEC plus Egypt and Syria), because of the Yom Kippur War, used oil as a weapon against the west. Schwartz View: The stock market had already topped out back on January 11^th, 1973, some nine months before the oil crisis erupted. Hm, the stock market topping out BEFORE the oil crisis really started? Sound familiar? Sound like today to you too?
The October 1973 oil embargo was the cause of sharply higher oil prices but crude prices had started to rise previously. Schwartz View: Again, similar to today. Crude has soared with no actual crisis, no cutoff of oil by oil producers. But what if something similar occurs next?
Oil stocks were the leaders in the stock market in 1973, the first year of the last severe Papa Bear bear market we suffered through. Schwartz View: As I’ve been writing for a number of Tuesdays now, and which is pretty obvious without doing much research, oil and oil service stocks are now, by far, the leaders in the stock market. We’re now up to about half or 50% of the whole 100 stocks on the IBD 100 list of leading stocks being energy or energy related. And that number could be even higher if I include other companies and industries doing well primarily because of high priced oil, like mining machinery. Bottom line, strength has narrowed down considerably, basically being confined to oil and those sectors which benefit from high oil, like transports. And those sectors which are NOT directly affected by higher oil/materials prices, like technology.
“Higher prices resolve higher prices.” This old economic truism hasn’t proved true; YET! But if the laws of economics haven’t been repealed, and they haven’t, it will prove true over time. Schwartz View: Today, sure, the tipping point is higher than in the 1970s, businesses are much less dependent on oil now than back then. But there will come a tipping point.

SCHWARTZ SUMMING UP: Today is reminding me more and more of 1973-1974. Maybe 2008 playing out like 1973 and 2009 playing out like 1974. My sense is that the overall stock market will hold up, hold on, UNTIL oil starts dropping. And that when oil does goes down, it won’t be the panacea that the hosts on CNBC speculate it will be. Because high oil prices are what’s holding UP so many stocks, those in the energy service industry, stocks in coal and solar. And holding up the transports, Russia, the largest energy exporter and their new zillionaires, the Middle East and many emerging or developing countries like Brazil. When oil goes down, so do the other materials stocks, the natural resource stocks and all the rest which depend on oil. They are up because oil is indicating the world economy is still growing. The reason for the strength in the market today. BUT when oil goes down, it won’t mean relief for the other sectors of the economy, as one would logically think. That’s because we’ll be too far gone. Just meaning consumers and businesses alike will have been like a “lemon squeezed dry,” or already in such bad financial shape, the downward economic spiral will have already begun. Please think about or reread the UPDATE ON THE STOCK MARKET section above, which implies that high oil is, even now and under the surface, rippling outward and squeezing corporate profit margins. Sure, history doesn’t repeat itself exactly. But human nature itself and its reactions to events change very slowly. I see parallels from the oil crisis of 1973 and the big bear market that followed with today. Thus I plan to study the stock market and economy surrounding 1973-9174 period and get back to you with more.

For now all we need to know is the key going forward is OIL. And since the price of oil is rising so fast now, that’s an indication of a peak getting closer and closer. Be aware and be cautious!

Look Back & Learn: Lesson One; Stay With Trends! It's Super Profitable!

Richard Schwartz — Thu, 15 May 2008 14:27:00 GMT

LOOKING BACK: One major day-trading tenet is to look back at each trade & learn from both your successes & mistakes. This rule should apply to investing, speculating, everything. So let me do so today.

THE SOFT AGRICULTURAL THEME. Yesterday I cleaned out my files and found when I first began writing about “AG” stocks. It was exactly two years ago now, in May 2006. Below are some excerpts:

* * *

Written May 17^th, 2006

THE CASE FOR OVERWEIGHTING AGRICULTURE AND FOOD STOCKS

I would posit that the commodity bull may now start being led by the agricultural commodities like wheat, corn, sugar, soybeans and other agricultural related commodities.

My Rationale. The rationale here is that as the world gets a little richer, err, let me change that to read as the world develops a larger middle class, in China, India, Brazil, Eastern Europe, Russia and more, this new middle class buys food. I heard a commodity analyst on CNBC say that when a person moves into the middle class (when food and shelter becomes standard fare), when a person makes $10 a day versus $1 a day, the first thing he does is to increase the quality and quantity of his food intake. Makes sense to me. With the global middle class truly expanding greatly and rapidly during this growth spurt (by the limited definition of middle class) because of globalization, demand should rise for agricultural commodities like corn, wheat, barley, etc. And it would fit well with Morgan Stanley’s Steven Roach’s recent writings as well. In the same article whereby economist Roach argues that the run up in industrial metals is way overdone, a bubble as I mention above, he quotes China’s latest five year plan which decreases its focus on commodity-intensive exports and encourages its focus on consumer-led growth. I would say that means billions of Chinese will be buying more and better food soon, wouldn’t you? And elsewhere the same.

Written May 18, 2006:

MORE ON MY NEW AGRICULTURAL COMMODITY THESIS

I began this new thesis on Monday when I first suggested overweighting agricultural related stocks, or “AG” stocks as I think they are called in the business. Then yesterday I offered up the basic rationale behind this new overweight allocation recommendation. Let me repeat and expand upon my reasoning again this morning because the investment rationale is the bedrock principle. If this economic principle is economically sound and correct in its timing, we should make money overall. If not, well, then not!

Commodity Bull Market: Phase 2. On the other hand China’s new plan is to encourage a different growth strategy which encourages consumer-led growth. That means more consumer spending to me. And that means the new Chinese middle class will first start spending more on food, expanding their diets. Remember any country that is (1) growing wealthier and (2) has billions of people has to spend its new found wealth on something. And China says they are going to encouraging more consumer spending.

And its not just China which has gotten wealthier by the world economy expanding and coming closer to together because of more free trade. (In spite of the war on terror.) Latin America has really been helped out as well. Remember Brazilian banks are now finding its profitable to make consumer loans to their citizens! (I wrote about that.) That’s another indication of a new middle class forming. (Again don’t think of developing country’s middle class as the same thing as in America. Middle class meaning people have the means to finally not worry about a roof to sleep under and where the next meal is coming from.)

And its not just China and Brazil growing wealthier and thus developing a new middle class. . Think India, Eastern Europe, Russia, and more.

Schwartz Conclusion. My sense thus is there is a wind at the back, a tide coming in, if you will for foodstuffs and thus anything agricultural related. Farms, grain companies, companies producing or shipping agricultural commodities, fertilizer companies, commodity traders, etc., etc. etc. and on and on.

Written May 19, 2006:

Continuing on with my new theme I proposed on Monday, that agricultural commodities are going to take the lead from industrial commodities (the base metals) in phase 2 of this long commodity bull market, let me make a couple more comments and then start offering up the “shopping list” I promised you.

Brazil makes ethanol out of sugar, the US makes ethanol out of corn, biodiesel is made out of byproducts. Analysts are saying when people make $10 a day instead of $1 the first thing they buy is better food. But the extrapolation from ethanol to agricultural commodities in general is not mainstream quite yet, thus we have a “first mover” advantage. And by looking at the charts of corn and wheat and other foodstuffs I can confirm we’re early on into the ag commodities bull market. Corn just started perking up last December, wheat in early May, cocoa is still trading sideways.

Thus we’re in a way earlier stage in foodstuffs than industrial metals but still it’s the same commodity bull market. Over time we’ll probably see more new ETFs, this time in agricultural commodities, come into play but we mustn’t wait around for that. Look what happened to silver just now when that ETF came out! ETFs usually come out just in time to suck the public in at some type of top, someone’s got to buy when holders want to take profits, right? Bottom line I believe the next big thing is going to be anything to do with agricultural stocks. So I’ve begun a shopping list below. But please remember, don’t just jump in without checking where each stock stands! As an example, the stocks having anything to do with ethanol, yes they are in the ag group, have just ran way up and may hurt you badly unless you’re very careful.

AGRICULTURAL COMMODITY SHOPPING LIST: The very beginning!

Price Price %

5/18/06 5/14/08 Gains

ADM Archer-Daniels-Midland 39.80 43.07 +8% Processes agricultural commodities

MON Monsanto Company 83.25 122.63 +195% Tech-based agricultural products

POT Potash Corp. 93.20 198.80 +539% Produces potash, phosphate and nitrogen

MOS The Mosaic Company 16.40 125.16 +663% Produces crop nutrients to ag communities

AGU Agrium Inc. 25.91 86.68 +234% Produces fertilizers and related products

UAP UAP Holdings 20.35 ???? ???? Distributes crop protection, seeds, etc.

CF CF Industries 16.97 136.27 +716% Manufacturers, distributes fertilizers

TNH Terra Nitrogen 19.45 142.77 +634% Produces nitrogen, fertilizer, seeds

Schwartz Update: I filled in yesterday’s closing prices above and the % gains. Note: Some stocks have had stocks splits and or spin offs so the numbers may not seem right.

Written May 24th, 2006:

THE INVESTMENT CONCEPT: INFLATION FINDS ITS WAY INTO FOOD NEXT.

Remember my new investment concept or thesis here is that commodity inflation is going to find its way over into the agriculture and foods sector next. The speculation and demand for industrial metals, while still probably robust going forward depending on economic growth, has blown its top. Thus after this first, big commodity bull market correction is over, and it could run some time, in a 25-year bull market a correction could last from three months to three years says Jimmy Rodgers, famed investor who first called this commodity bull market, I expect commodity leadership to come from, to shift over to, the soft commodities, namely the food and agricultural stocks and almost any related ag stocks like farm equipment companies, etc.

Schwartz Lesson & a New SCHWARTZ RULE:

“When you find a solid, working theme, stay with it!”

This is a rule put forth in both of Jack Schwager’s books if I recall correctly, in both The Market Wizards and The New Market Wizards. One wizard trader in particular was an expert on staying with a trend, like a “dog with a bone.” And I must say I’ve seen first hand staying with trends work very well over the last few years. Maybe after writing today’s piece and seeing for myself the incredible results out of my fertilizer recommendations, I’ll learn to not be so flighty and thus stay with multiyear trends much longer in the future, like the REITs trend I identified early on in its big multiyear move up which ran from the beginning of 2000 to the beginning of 2007, like today’s ongoing commodities bull market and the still running and hot alternative, clean green, wind, solar trend. Yep, when we unearth a new trend with strong underlying economic fundamentals (macro economic trends which don’t change for years) we gotta milk it for all its worth. “Are you listening Schwartz?” You better be!

Odds Still Favor Deep Recession

Richard Schwartz — Mon, 12 May 2008 13:59:00 GMT

THE BIG PICTURE & THE ECONOMY Today’s Big Picture view comes down to whether the US economy is going into a severe, long lasting recession or not. My belief remains that we are, that’s where today’s slow-motion economic slowdown...(read more)

March 17th, 2008: Fateful Day Turned Markets

Richard Schwartz — Tue, 29 Apr 2008 13:50:00 GMT

UPDATE ON THE STOCK MARKET . Tuesday, April 29th, 2008: 6:30 a.m. The stock market has some uncertainty – there’s that awful word again – about tomorrow’s Federal Reserve 2:15 p.m. interest rate policy announcement. For the first time in a very long time...(read more)

Real & Paper Economies Have to Meet in the Middle; Right?

Richard Schwartz — Wed, 16 Apr 2008 13:32:00 GMT

THE REAL ECONOMY VS. THE PAPER ECONOMY The Real Economy . Oil at a record, rice too. Gold hitting $1000 an ounce, silver way up. Corn prices boosted by ethanol demand. Food riots in Haiti, Guatemala, Argentina and more. 24 countries dropping food import...(read more)

Forget Scapegoating! Look Forward

Richard Schwartz — Wed, 09 Apr 2008 14:40:00 GMT

SCAPEGOAT BLAMING . Boy, am I’m getting tired of the carping! Day after day, article after article. All these writers seem to think there’s something to gain in blaming former Federal Reserve Chairman Alan Greenspan for the US housing bubble, the credit...(read more)

Time Frame Strategies

Richard Schwartz — Wed, 12 Mar 2008 18:29:00 GMT

PORTFOLIO STRATEGY: Monday, March10th, 2008 One Schwartz Rule that I’ve developed from my INVALUABLE day-trading experience of a couple years back is to SELL EARLY! , which led to the corollary rule to BUY EARLY! which has now morphed into the all purpose...(read more)

THE COMMODITY “BUBBLE” PARSED

Richard Schwartz — Thu, 06 Mar 2008 15:56:00 GMT

THE COMMODITY “BUBBLE” PARSED Yep, BUBBLE is the new buzz word on Wall Street. Makes sense as CNBC has to keep people interested somehow as stocks lose ground and investors lose money. The show, after all, has to keep their ratings up, has to get all...(read more)

Monday Weekly Letter: Full Sample

Richard Schwartz — Mon, 03 Mar 2008 14:20:00 GMT

PRINCIPLES OF THE STOCK MARKET A learning, teaching, always evolving stock market letter and advisory service Seventeenth Consecutive Year of Publication ; Letter #1; Sept 18, 1990 Mon day, March 3 rd , 2008: Three people yesterday told me they were sick...(read more)

Global Inflation

Richard Schwartz — Thu, 21 Feb 2008 15:09:00 GMT

Global Inflation a Problem . We’ve got a growing problem with US and global inflation, no matter what our Federal Reserve Bank says. Although our Fed ignores them, or says they will go down soon, food and energy costs are rising and global, right? Thus...(read more)

On the Economy: 12/20/2007

Richard Schwartz — Thu, 20 Dec 2007 14:34:00 GMT

ECONOMIC VIEW . Three points to think on today: Lucy heard the term on “ stagflation ” on CNBC early Tuesday morning and asked me what it was. I replied that stagflation was when inflation was rising and problematic … and … the economy was almost at stall...(read more)