Buy Sell and Tell Investments

The following sectors are areas I want to own or be long:

Commodities: It seems each government is in a global competition to see who can weaken their currency the most and thus give themselves a perceived competitive advantage. In such an environment, it makes sense to own commodities (whether it is precious metals, base metals or energy) which will continue to increase in price and act as an inflation hedge. Since commodities are priced in US dollars, as the US government continues to stimulate the economy by injecting more liquidity (i.e. money) into the system, the US dollar will continue to weaken and thus cause commodities to strengthen. I find it odd that the US can weaken it’s currency and cause commodity prices to soar, yet the Cdn dollar continues to trade basically unchanged. I would have expected the Cdn dollar to strengthen against the USD, but so far in 2008, that has not been the case. As long as this relationship holds, it makes sense to own Cdn equities with commodity exposure as their commodity reserves continue to increase in value but the stable foreign exchange hasn’t caused a reduction in earnings or asset valuations.

Oil, gas and energy: I’m bullish on the whole energy sector as the demand for energy should continue to grow faster than the world can develop the resources. I believe that all the mined energy sources (oil, gas, coal and uranium) will eventually reach peak production and then decline forcing up prices. In the case of conventional oil, we’ve probably already reached peak oil production and it is only the unconventional sources that will maintain current production levels before they too decline. The problem with unconventional oil (such as oil sands and deep offshore wells) is that it is getting more and more expensive to produce. This is similar to what happened to conventional oil where all the big and easily accessible oil fields have now been found. You have to go farther afield to find smaller and smaller reserves. Demand may have peaked in the developed countries, but it is still rapidly increasing in the developing nations such as China, India, Russia and Brazil. In addition, the OPEC nations themselves and the many of the oil producers (e.g. Venezuela) subsidize oil prices within their countries resulting in rapid demand for oil even with record oil prices. The citizens of the subsidized oil, don’t feel the pain of record oil prices like we in the developed nations do.

The fact that the mined energy sources are non-renewable makes them different from other commodities because eventually we will deplete them. Metal commodities whether precious or base metals aren’t depleted and can be recycled, renewing the supply. Farmed commodities can be re-grown every year replenishing the supplies. But with mined energy, once the resource is consumed, it is gone. I’m always on the lookout for energy companies with long reserve lives.

Fertilizer: I’m bullish on fertilizer companies for some of the same reasons I’m bullish on energy stocks (i.e. the reserves are running out), so prices should continue to rise if demand remains unchanged. Technically this probably isn’t true as potash and phosphorous fertilizers are elements which should be recyclable though the time required might be long. Demand will probably continue to increase as the global population continues to increase. In addition, many of the developing nations with the largest populations (e.g. China and India) are getting wealthier resulting in a dietary shift that includes more animal protein. Producing animal protein such as beef is a number of times more cost intensive. I’ve seen figures showing it takes 8 pounds of grain feed to produce 1 pound of beef. In the past these people would have eaten mostly grains with little relatively small amounts of animal protein. Now these people are consuming a larger percentage of animal protein which consumes a larger percentage of the grains.

In addition, there’s a number of nations that are pursing biofuels (e.g. ethanol) as a way to combat rising oil prices and oil dependence. Many of the crops are now being diverted from food production to biofuels causing food shortages which have driven up the price of the food to record prices. High food prices are resulting in more crops being planted and more. Even if the crops were being planted in ideal locations this would lead to an increase in demand for fertilizers. I suspect that much of the new crop land will be less than ideal, thereby requiring more fertilizer to produce reasonable results. Eventually even the best soil has its nutrients depleted and will require constant fertilizing.

There’s been a number of news articles recently where there is more concern about food inflation with governments imposing export tariffs, eliminating import tariffs and imposing price controls. I’ve seen some headline news about rice farmers in Asia sleeping in their fields so thieves would steal their rice.

Base Metals: I’m bullish on base metals as a result of the emerging wealth in the developing nations. As these nations continue to accumulate wealth, there’s going to be increasing demand for housing. So even though housing is slumping in the US, overall global demand should keep increasing. I follow copper mostly which is used in the pipes and wiring of the houses. Copper is easier for me to track (compared to other base metals) since the company I work for is involved in many of the copper mines in South America. Also, many of the copper stocks I follow are at relatively low P/E ratios and have long reserves. As long as there are articles about copper thieves stripping houses and businesses of their wiring and plumbing, I’m going to be bullish on the metal. Copper must be pricey if someone is willing to go through all the hard effort to steal the copper out of a house or risk electrocution by stealing from a utility.

Precious metals: I’m bullish on precious metals, but not to the extent that I am for base metals. I mostly follow gold, as the company I work for supplies much of the mining equipment. Gold is a good store of value especially when the governments of the world are trying to devalue their currencies. Since gold has been seen as a traditional store of value, there will always be demand for it whether it is in the form of bullion or jewellery.