Pricey Liquids

"That’ll be $64," grunted the barman at Smith & Wollensky’s
last night, after placing a Budweiser and two glasses of
wine on the bar.

"Really?" your editor replied, as he reached very slowly
for his wallet "Only $64?"

Fortunately, a generous companion promptly tossed four 20s
toward the barman, thereby obviating the need for your
editor to satisfy the bill. UN-fortunately, because we all
continued drinking our pricey libations, your editor found
himself tossing SIX 20s on the bar to close out the tab.

One Budweiser and two ordinary glasses of wine should not
cost $64…not even in Manhattan. But they did. And to hear
most "experts" tell the tale, crude oil shouldn’t cost $56
a barrel…but it does. Maybe these two phenomena are

Aren’t $64 cocktails as much a picture of dollar weakness
as $56 crude oil?

The commodity bull market and the dollar bear market are
one and the same. As the nearby chart clearly shows, the
recent price histories of the CRB Index and the euro are as
entwined as young lovers. They are rising together because
the dollar is falling against both of them.

Or to express this phenomenon from another perspective: The
price of crude oil in dollars may have reached a new record
high, but the price of crude in euros remains well below
its record high.

The message is clear: the dollar bear market both powers
and enhances the commodity bull market. Rising commodity
prices are not ONLY a function of physical supply/demand
dynamics in each of the individual commodity markets; they
are also a function of limitless dollars encountering
finite natural resources. Both of these trends are well
established and durable. In which case, the commodity bull
market is likely to "have legs."

That being the case, investors may be better served to "buy
the dips" in the commodity markets than to sell the
intermediate-term peaks. As seductive as it may be to
"catch" a short-term trade, it is far more remunerative to
"catch" a long-term move.

During the decade of the 1990s – a decade that "belonged"
to the U.S. stock market – "buying the dips" proved to be a
winning strategy. Although this embarrassingly simple
approach seemed almost moronic at the time – to SOME people
– it excelled nonetheless.

16 times during the 1990s, the Nasdaq Composite Index fell
10% or more. Each and every one of those sell-offs proved
to have been a "buying opportunity," as the Nasdaq racked
up a 443% gain over the 10-year span. Even Berkshire
Hathaway, the iconic stock of the value-investing crowd,
subjected stockholders to harrowing volatility throughout
the 1990s. 18 times between the start of 1990 and 2000
Berkshire Hathaway shares dropped 10% or more. With the
benefit of hindsight, investors should have purchased BRK/A
each and every time the stock fell more than 10%. Warren
Buffett’s baby produced a prodigious 718% gain during the

If, therefore, the first decade of the new millennium
"belongs" to commodities, investors would be well served to
pursue a similar strategy with resource shares. The bull
market in commodities, we submit, is not the handiwork of
"hedge fund speculators." It is the love child of a U.S.
Treasury that produces too many dollars and a global
population that consumes ever-growing quantities of

Is there any reason to believe that this love child has
reached maturity, much less old age?

Despite the powerful three-year bull market in commodities
that has vaulted the CRB Index to 24-year highs, commodity-
related investments command very little respect from
professional investors.

"It’s hard to find any commodity analyst who believes that
any of today’s commodity prices are supported by
fundamental supply/demand trends," one skeptical voice
opined yesterday on CNBC.

Maybe so; or maybe the commodity markets "know" more about
authentic underlying trends than the human analysts who
follow these markets. In short, the commodity bull market
seems to be very real…and still very young.

The crude oil market, for example, does whatever it wants,
no matter what oil analysts or OPEC ministers or Federal
Reserve chairmen say about it. Yesterday, the oil price
jumped an astounding $1.41 to a new record high of $56.46 a

"OPEC is irrelevant," harrumphs Kenneth Deffeyes, professor
emeritus of petroleum geology at Princeton University.

We tend to agree with the professor’s observation. OPEC
becomes increasingly irrelevant as it bumps up against its
own production limits. Already, OPEC has been operating at
full capacity for the production of light, sweet crude,
which is the benchmark crude oil contract. Any increase in
production, if it actually materializes, will be heavy sour
crude, which won’t do much to alleviate the supply of
light, sweet. Whether light or heavy, we suspect that all
of OPEC’s supply faces the inevitabilities of declining
production. The spirit to boost production may be willing,
but the oil fields are weak.

Non-OPEC countries provide little cause for cheer. This
year’s oil production growth rate in Russia – the world’s
second-largest oil exporter – will be the lowest since

Meanwhile, world oil demand will likely rise to a record
84.3 million barrels a day this year, or almost 2 million
barrels a day more than last year, according to the IEA.
Most other commodity markets possess similarly bullish
demand characteristics.

There are only so many barstools at Smith & Wollensky’s. If
you want to occupy one of them, there’s a price to pay.
There are only so many barrels of oil in Saudi Arabia. If
you want to own one of them, there’s a price to pay. In
either case, be sure to pack your wallet with plenty of
Andrew Jacksons.


Did You Notice…?
By Eric J. Fry

"What’s good for America is good for General Motors and
vice versa," former GM president Charles Wilson used to say
during happier times in Detroit.

Yesterday we observed that what is bad for GM is bad for
America. The Dow tumbled 112 points and the dollar dropped
about 1%, as the giant automaker-cum-mortgage-lender
announced a shocking earnings shortfall…shocking, that
is, to those who do not religiously read the Rude

If you will indulge us a brief moment to pat ourselves on
the back – the opportunity arrives so rarely – we have been
cautioning investors for a very long time to avoid this
big, bad stock. So far, our apprehension has proven well
founded. But yesterday’s steep drop in GM stock and bond
prices prompts the question: Are they a buy?

In a word, No!

And the Markets…



This week

















10-year Treasury





30-year Treasury





Russell 2000


























JPY 104.18

JPY 104.53



Dollar (USD/EUR)





Dollar (USD/GBP)