The Cure For High Prices Is High Prices

A quick, cursory glance at almost any commodity chart will lead the viewer to only one conclusion: watch out! Agricultural products, precious metals, industrial metals, rare earth minerals, energy, etc. have all experienced a steep ramp up over the past 6 months.

That increase in price has been explained by a weak dollar, upcoming inflation, emerging market growth, a rebounding economy, permitting difficulties, and the growth of commodity influenced ETFs. Given the foregoing, demand has been significant and prices have risen. Investors have taken notice, but so have producers.

Timing anything is notoriously difficult. This cycle will be no different than trying to figure out when tech stocks would peak or the last deadbeat would receive his triple subprime home equity loan. You can sense it's coming, but when?

My guess is that we're about 2 years away from the cure kicking in. The process has already begun as high prices has encouraged large numbers of new mining projects in various stages of permitting/buildout and we are beginning to see a significant number of untilled acres being planted. The cure for high prices is high prices.

To avoid the impact of increased supply, world economies need to get going and keep going. Any stutter along my 2 year guestimate and investor/speculator confidence could weaken, causing prices to start a readjustment process. ETF money isn't the same as industrial demand and if that segment of demand starts to move elsewhere, the new supply will look overwhelming!

Like the greater fool that I often am, I'm sticking with my allocation of commodity related companies and ETFs. The likes of Bunge, Cloud Peak, and Devon are likely to remain in my portfolio even after my 2 year threshold. But, the ETFs, GLD, SLV , and EWZ, are likely to be sold as months elapse and we get nearer to increased supply and weaker demand.

The recent sell off in many commodities will likely be reversed and owners will be rewarded by further moves upward, but sometime over the next couple of years, high prices will drum up supply and prices will correct. It always happens.

A Purchase Today Of CLD Will Result In A 5% Gain Shortly

I already own a full position of Cloud Peak, CLD, so I haven't added to my holdings in today's sell off. CLD is off about a dollar, 5%ish, due to an announced secondary offering by the company of most of the stock owned by the major shareholder, BHP Billiton. Cloud won't receive any of the proceeds, but it does distribute its ownership and will no longer be controlled by BHP.

Once the dust of the secondary settles, I believe the price will readjust back to Friday's level and continue upward. Cloud is a low cost producer of coal for power plants and sells for 10X forward earnings and a modest cashflow multiple. Today's price decline, anticipating a lower offering price to move the large secondary, gives a new buyer a 5 % head start.

How Does The Blogosphere Function Without Me?

It's been about 45 days since I last had something worthwhile to write. While that has left Crusty's readers in the lurch, my in-person buddies have remained subject to the same verbal drivel that they have become accustomed to. But, again, time has flown and I've been busy, busy, busy. Time to write.

Almost all stocks have risen with the market's recent advance. I'm only bleeding on a few short positions and my ownership of Smart Balance. A few covered calls have been taken away and several others are hovering around the strike price, but that's OK.

Crusty is feeling happy as the market and my net worth has rebounded.

But, that feeling of elation is starting to feel a bit tentative. There is quite a consensus regarding QE2, a weaker dollar, and the attraction of commodities and equities during a period of money printing. While I suspect there isn't a ten percent correction coming between now and year end, who really knows? A Democrat victory, a European melt down, or deteriorating numbers from the emerging markets, and a host of other possibilities, could cause serious problems. Celebrate, but remain wary.

Some recent purchases are INSU, the sewer replacement company, SHAW, the engineering nuclear giant, and CLD, a BHP Biliton North American coal spin-off. All have turned in good earnings performances of late, look solid going forward, and have been creamed by the market.

Time to walk the dog. It's finally turned cold in Nebraska and I can't delay any longer as she is staring at me with some extreme urgency. So no more stock talk, out the door I go.