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.

Bunge Has Gone From Worthy To Compelling

It's difficult to buy equities in a lousy market, but if you truly believe, and have discipline, that you will hold the securities for many years then it becomes easier. Remember I said easier, not easy, as you will kick yourself with each market swoon. But, you ought to make money. Since I think we'll stay in a difficult market for a long time, it's obviously better not to bet the farm at one time as the market will continue to give you opportunities at lower entry points, so scale into a company like Bunge.

Not too many years ago, during the great fertilizer mania, BG was selling for about $140. Today you get to buy it at about $49. That's still higher than was available at the bottom, but still an excellent entry price. Espescially since Bunge is significantly changed since that time. It has ramped up it's sugar and ethanol production in Brazil through an acquisition and, just days ago, closed the sale of its ferilizer mining operation, keeping retail.

BG will net $3.5B from the sale and use at least $1.5B to reduce debt. If they decide to use it all, they could almost be debt free. Before the sale, today's price was about 85% of book and I'm guessing that when we see the quarterly numbers, book value per share will be higher than last quarters's $55 per share. It never hurts to buy at less than book. On the earnings front, they project 2010 earnings of between $5.30-$5.70, say $5.50. At a share price of $49 you are acquiring an ag leader for less than 9 X earnings. And you get a large exposure to Brazil.

Bunge pays a dividend and has a good coverage ratio, is an excellent grain merchandiser, has some leading brands overseas, now has an ethanol component, possesses a good balance sheet, and is the best ag name to own. Much more attractive than ADM or Corn Products, a company that BG could take another run at with their new cash horde.

Buy a little here and more later and eventually you'll be happy. You can't get beat up too badly in the interim like you can, and will, on those 15-20X P/E companies.

If You Are Attracted To Brazil, Buy EWZ

I happen to like Brazil and find many similiarities to an earlier time in the USA. Immense natural resources, export and internal consumption opportunities, population growth, and an expanding middle class. The government is stable, debt manageable, and the future bright. President Lula doesn't appear to be a total socialist.

EWZ is an ETF that tracks the Brazilian stock market. It had an amazing 2009. It has fallen like a rock the past several weeks as speculators have fled riskier assets, i.e. commodities and emerging markets.

If one's investment time horizon is longer than a couple of days, EWZ has merit. At present pricing, it has a distribution yield of about 4%. It is an income play as well as an emerging market bet. The 4ish percent distribution evolves from the portfolio composition. About 60% of the portfolio is invested in preferred stocks. These yielders not only throw off dividends, but are higher up the priority ladder should Brazilian companies start to falter.

The stock price may decrease further from here, but you get 4 percent to wait for Brazil to prosper. And prosper it will. There's too much oil, agriculture, steel, and consuming citizens to avoid growth. Yesterday was the best day in quite awhile to buy Brazil, today wouldn't be bad either. Expect it to go down, be happy if it doesn't, enjoy the distribution, and reap the benefits down the road. In the mean time sit back and enjoy the precision flag twirling half-time show on Brazilian soccer.