Jeeez!

[Gone4Good]

And with respect to crude oil-- and even more so natural gas within easy reach of US markets-- it may well be different this time. Ever see $14/MCF natural gas before? It will undoubtedly come off that level, but the fact that it is there at all is something that has to be addressed.

He-he, he-he, he. Mary Meeker said the same thing about NASDAQ 5,000. More so than with internet stocks, high commodity prices generally sow the seeds of their own (demand) destruction - which is typically how they are "addressed."

For the record, I'm all in favor of adding some commodities to my portfolio for diversification purposes. I fully intend to do so once a nice sharp correction breaks all the fast money chimps.

 

[greg]

Pretty interesting how many more people seem to like the idea of commodity diversification now vs. three years ago.

I like the idea of added diversification but commodity prices go in a pretty predictable cycle:

1) Prices are low - producers under invest reducing supply while users push up demand which leads to higher prices
2) Higher prices - producers reinvest to increase production while users cut back or find alternatives leading to lower prices
3) Rinse, Repeat.

Which phase of the commodity price lifecycle do you think we're in now?



PS. Famous last words "It's different this time"

I have to agree with HaHa on this one. I don't remember the exact statistics, but about three-four years ago while researching China a bit, I found out that the Chinese used about one barrel of oil/person/year in their country. Let's see, one barrel times a billion equals ALOT. Now, in 2005, they use close to two barrels/person/year. That's alot more. In this country, I think use is at about 25 barrels/person/year. No wonder the glut disappeared so quickly.

I don't see a big change or deceleration in the above rate increase unless there is a worldwide recession in the near future or a huge oil find or a dramatic implementation of alternative sources of energy in the next five years.

And everything is far more complicated now. Here we are the most advanced and richest country in the world 8), and we have a pinch-out at the refineries. We also had to suspend our shipping act to get enough vessels delivering refined products. All these second and third world countries have revolutions every few years, oftentimes over who gets to control the oil.

Plus, just about every country and especially ours (and except perhaps those in the EU) is printing money hand over fist, which, by definition, is inflation. You end up with one big mess--sooner or later. If we had a less interconnected world like in the good old days when popcicles were a nickel, the messes could probably be contained a bit better. Now, one or two hurricanes and boom! The people in Indonesia are paying double for gasoline and fuel oil. Who woulda thought.

I guess that's why all those financial planners and bankers 8) make the big bucks. They know exactly what's going on. I don't. My guess is one should have a reasonably diversified portfolio unless one is making a big bet on the future. Lots of short-term AAA bonds if one is worried that something's gotta bust soon.

--Greg

 

[Dry Socks]

I'm certainly no expert in this area, but I have read a bunch of the Indexes for the masses books. Seems to make sense.

Does anybody really think gas prices are going back to $1.50 a gallon ? No way

What's wrong with putting a little bit, say 5%, of a long term portfolio in something like PCRDX ?

 

[haha]

What's wrong with putting a little bit, say 5%, of a long term portfolio in something like PCRDX ?

The main thing wrong with it is that 5% is likely too timid. Say your stocks go down 30%, and your PCRDX doubles. Starting with a $1million portfolio, you would then have (2*$50,000)+(0.7*950,000)= $765,000. Better than with no PCRDX, but not exactly wonderful either.

Ha

 

[Dry Socks]

Thanks Ha, you might be right, but it's a pretty volatile area.
What % would you recommend for a long term portfolio ?

I was thinking something like
30% foreign (EAFA, Emerging, plus a little overweight in Japan/Asia)
40% US (spread between large, mid, small)
10% weird things like PCRDX, Gold ETF, ...
20% bonds

EDIT - sorry, EAFE

 

[brewer12345]

Thanks Ha, you might be right, but it's a pretty volatile area. 
What % would you recommend for a long term portfolio ?

I was thinking something like
30% foreign  (EAFA, Emerging, plus a little overweight in Japan/Asia)
40% US (spread between large, mid, small)
10% weird things like PCRDX, Gold ETF,  ...
20% bonds

EDIT - sorry, EAFE

Right now, I am 15% EAFE, 10% PCRDX, 15% Domestic bonds and cash, 10% unhedged foreign bonds, and 50% domestic equities, plus a short position and a couple of long put positions. I do not like what I see in the economy right now, so I will likely put on another short or two and possibly add some more long puts. I will also be taking the cash/domestic bond position down. I don't see any attractive equities or junk bonds, so I will likely be upping the unhedged foreign bond and/or the commodities positions.

I agree with Ha that Natural gas won't stay at 14 for long, but I am worried that it will go up rather than down. $20 anyone? We will eventually see $1.50 gasoline, no doubt, but I am a lot more worried about the effects of $3 heating oil on the economy.

 

[haha]

Thanks Ha, you might be right, but it's a pretty volatile area. 
What % would you recommend for a long term portfolio ?

Dry Socks, I am no expert. What you say sounds pretty good to me though.

Ha

 

[Gone4Good]

I agree with Ha that Natural gas won't stay at 14 for long, but I am worried that it will go up rather than down.  $20 anyone?    We will eventually see $1.50 gasoline, no doubt, but I am a lot more worried about the effects of $3 heating oil on the economy.

January heating bills are going to take some peoples wheels off.  $14 natural gas is 130% higher than last year.      With the home refinance ATM window closing it will be interesting to see how people cope.  This is what we call "demand destruction" and it is why commodity prices don't go up forever - not like internet stocks, anyway 

Natural gas, for one, has come completely unhinged from any semblance of "fundamental" value.  US natural gas storage is normal by historic standards - which means normal for a $2.50 gas environment.  The previous argument that a geo-political risk premium in the oil market was supporting natural gas as a substitution fuel has fallen apart with gas now priced above oil on a BTU equivalent basis.  I'm sure some "analyst" stands ready to fill the breach with a theory as to why prices are reasonable, and indeed, heading higher.  Isn't it always such?

I'm actually a little surprised by the lemming herd mentality of so many on this board who are so willing to jump into an asset class that is at historically extreme valuations. 

The main thing wrong with it is that 5% is likely too timid. Say your stocks go down 30%, and your PCRDX doubles.

Doubles?  So oil goes to $140 and gas to $28!?!  Maybe.  But at some point the world economy breaks - which is bad for stocks AND commodities. 

Best of luck to everyone on this.  I'll be content to watch from the sidelines and stand ready to step in if, and when, commodities return to more normal levels.  I'll be happy at that time to buy anyone's PCRDX shares at a nice discount.

 

[haha]

I am not predicting that it doubles, or making any other prediction. I am just pointing out the mathematical fact that a 5% position in anything except something with real possibilities of flying is not going to do a hell of a lot.

And BTW, not many people have ever made money by buying energy investments from me- and quite a few who sold them to me have left a lot of money on the table.

Haha