A Commodities Outlook for 2009

It was almost sad to see 2008 come to an end. Talk about moving markets… As investors with discipline, there was something for everybody.

The first half of the year saw ALL-TIME HIGHS in gold, crude, wheat, unleaded gas, copper, corn and soybeans. But as they say, what goes up must come down, and the force with which commodities fell from the sky was rather amazing.

At any rate, I believe there are great things in store again for 2009 — the entire world concentrating on global economic problems and messing with natural market forces could create a lot of unintended consequences. And commodity traders should be able to take advantage.

The dollar has recently strengthened with negative numbers out of Europe, but the economic stimulus package details dwarf any short-term data. Remember, money will be spent like never before in American history.

The strategy is to rebuild infrastructure and create 25,000-50,000 jobs for every billion dollars spent by the government. The connection couldn’t be more obvious. Construction of bridges, dams and roads and improvement of decaying schools and other government buildings get back to the basics of supply and demand.

It all comes back to commodities, with depressed steel and copper leading the way.

Hidden Inflation

Sometimes, we get inflation that you don’t see. It just sneaks up on you when you aren’t looking and just trying to start you day with the usual bowl of oat wheat sugar flakes cereal and, “Hey, either my hands have grown larger or this box is thinner than just a few weeks ago!”

This downsizing of packages is one way for food manufacturers to avoid raising prices. At first, it was to offset higher fuel and commodity prices, but now it has turned into profit growth — with 10 less potato/potatoe chips in my bag.

The indented bottom of a Skippy peanut butter jar got more indented, turning an 18-ounce jar into a 16.3-ounce one. Ice cream containers shrank by one-quarter of a quart. And for breakfast, a jug of Tropicana orange juice got 7 ounces lighter, while that box of Froot Loops lost more than 2 ounces.

According to recent analysis by Nielsen Co., about 30% of all packaged goods have lost content over the past year. This at a time when U.S. grocery bills are rising — up 7.5% in October versus a year ago — at the fastest rate in 18 years.

More indirectly, with more stimulus, consumers will eventually have more money to fiesta, in this case, and spend as the year goes on — all the time feeding inflation.

Commodities Past and Present

Consumer spending has been impacted by the extremes of the stock market and commodities, as well. The wealth effect created by escalating home prices from 2000-2007 drove demand, and consequently all costs and goods, higher. That trend reversed in 2008 and the 40% stock sell-off has constricted almost all buying for most of us. The challenge is to not let the overriding psychology affect your market sentiment – or your trading mentality.

You can’t see the beautiful stars if your head is down.

The tie between a stock recovery and commodities demonstrates a rebuilding of economic confidence. By the time most investors get comfortable enough to get back at it, a large move will have already been made.

As stocks hold and build stability, commodities will continue to find more equilibrium, possibly much higher, with people having little choice but to eat, heat and drive every single day.

How will we know that the government stimulus is working to stabilize the markets?

I was on Chicago radio a couple days ago and answered that very same question.  I’m normally at no loss for words, as anyone who has seen or heard me speak will testify to, but the answer didn’t hit me until the caller was gone.

Very simply, It ALL comes back to commodities; we will know that the financial markets will stabilize when… oil prices rise again.

The economic data that the media tend to focus on are often lagging indicators. Unemployment, GDP, corporate earnings and retail sales tell us what has already happened… not what is going to happen.

The stock and credit markets most times have discounted and factored in the dire information that we are getting every day. Markets are forward looking, and higher crude oil prices are a sign that the worst is over and a recovery is under way.

Let’s not get too positive or too negative — both ways cloud sound judgment. Investors seem paralyzed by the events of the last six months, but they need to roll with the punches, instead of getting knocked out. Don’t call it a comeback; call it an opportunity for those with the proper fight training.

There will be plenty of opportunities this year with commodities.  After all, it all comes back to commodities.

Alan Knuckman

February 2, 2009

The Daily Reckoning