Commodities will come back

Although still reeling from the small but mindless loss in the commodity company Noble, I have strong beliefs that Commodity stocks will bounce back, once the major economies start to emerge from the current recession. And since stock prices always preempt the real economy by 6-9 months, and economies are not expected to recover until at least end 2009, the best times to look at Commodities stocks could be anytime in 1H 2009. So, I am keeping watch very closely. Remember the Big 4: Noble, Wilmar, Olam and SembMar.

I found an article on MSN, by Jim Jubak(18 Oct 2008) reinforcing my beliefs:

First, recognize that the long-term commodity boom driven by the rise of the world's developing economies (and the difficulty in increasing supplies of everything from oil to zinc) is intact and that you want to own the next stage in the boom just as you wanted to own the last stage.

Second, admit that investors face a big timing problem. Stocks in mining and energy companies have plunged with the financial crisis, and fears of a recession aren't going to do them any favors. Prices will recover from current deeply depressed levels as soon as the market's general panic subsides, but the big gains will come when the global economy shows signs of picking up speed again. You want to catch that moment in 2009 or 2010. But these stocks could well be dead money in much of 2009.

Third, decide if you have the patience to be a true value investor. (If you don't, try to catch this sector when the charts for these stocks show signs of life in 2009.(note I am more inclined top timing the market). But this sector can move very, very fast, since a relatively modest 10% change in the price of the commodity produces a 17% increase in earnings, according to calculations by Deutsche Bank.) These stocks are extremely cheap right now. Deutsche Bank calculates that current share prices for mining companies, for example, reflect on average just 60% of the value of their resources in the ground.

Fourth, separate the stocks in the mining and energy sectors into two groups by the price risk in their underlying commodities. So, for example, since copper is still trading above the average cost of production, it is relatively risky. The metal has further to fall before its price starts to eliminate mine capacity. Zinc, on the other hand, has already tumbled to levels so low that producers are shutting mines as fast as they can. Oil comes with an intermediate level of risk, I'd argue. We know that the Organization of Petroleum Exporting Countries is going to move to cut production to support oil prices at $80 a barrel. But we don't know how effective OPEC will be.

Fifth, and finally, look at how deeply the market has discounted the prospects of any individual company. Take, for example, Thompson Creek Metals, a Jubak's Pick. The stock of this molybdenum miner had fallen from $24.45 a share May 19 to $6 a share Oct. 14.