Minding My Own Business

The following is a guest post by Charles Rotblut of Zacks Investment Research.  Charles raises some interesting discussion on trading in the commodities markets and offers his opinion on the potential longevity of the current financial crisis.

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I’m surprised by the indiscriminate selling in commodities and commodity-related stocks.

Were there bubbles? Yes, but demand remains high and product shortages continue to exist.

For example, erratic deliveries of steel have caused an acquaintance of mine to put his employees on flexible work schedules. According to him, steel mills are not sticking to regular production schedules of the type of metal used for the packaging products that his company manufactures.

Not surprisingly, his customers are unhappy. But, because they lack a cost-effective alternative, they have no choice but to accept the higher prices and irregular production schedules.

Then there is fertilizer. Employees of fertilizer company Potash (POT) are on strike at a time when there continues to be a shortage of potash - a key ingredient for fertilizer. The company told Standard & Poor’s that the strike should only affect non-agricultural customers. That may not sound like a big deal, until one considers that there is no room for supply disruptions across the entire industry.

Still, shares of CF Industries (CF) and other fertilizer stocks are getting knocked around because of the overall weakness in commodity stocks. For demand destruction to occur, one would have to assume that people are going to stop eating, ethanol is no longer going to be subsidized or a replacement for fertilizer has been found. I just don’t see this happening.

Another example is natural gas. Natural gas prices have plunged by nearly 50% since early July. Yet, worldwide energy usage is growing. Plus, the Farmer’s Almanac is predicting a “numbing” winter.
Perhaps traders think that the NOAA’s forecast for above normal temperatures will be the correct one. My best guess is that those of us living in the northern states will be bundling up and complaining about our heating bills.

Of course, it is important to realize that even with the pullback, just about all commodities are still expensive. Here in the Chicago area, gas stations charge around $4 for a gallon of unleaded. Lake County, where I live, is coping with a dramatic increase in the price of road salt. Local officials say that this problem affecting many municipalities across the country.

Given the slowing economies of the Western World, some weakness in the commodity prices is logical, but we are a long way from the perceived demand destruction that seems be influencing some traders. This is why I am looking for the opportunity to add more commodity stocks to the Zack’s Focus List.

The Financial Crisis
On Wednesday, I discussed the ongoing financial crisis in my Industry Rank column. In the second half of a podcast published on Thursday, I further discussed the banking industry’s problems with Chuck Jaffe of Marketwatch.

In summary, I believe the financial crisis, and the housing slump, will continue into next year. Here are some reasons why:

• The FDIC’s insurance fund’s reserve ratio dropped so low, 1.01%, that it is being forced to develop a plan for replenishing the safety net for depositors.
• Banks will likely have to pay higher fees to the FDIC, at the same time they are coping with tighter net interest margins.
• Nearly 1 million petitions for bankruptcy have been filed during the past 12 months; personal bankruptcies are up 28%.
• Net charge-off rates for Capital One (COF), and probably many other credit issuers, have been rising for several quarters.

Staying on the subject of banks, I want to mention the creativity shown by National City (NCC).
NCC is offering customers $200 to close their home-equity lines of credit. The bank is also waiving the $350 early termination fee. It is an interesting attempt to avoid further charge-offs, but my guess is that it won’t have any positive impact. Those who have the cash to pay off their home equity loans are not likely to default. And those who are at a risk of default probably don’t have the cash to pay off their loans.
The more likely scenario is that NCC is trying to engage in a game of hot potato, by which its borrowers move their home equity lines to another lender. For someone who is cash strapped, $200 helps, but not enough to keep them from falling behind on their payments.

The Markets
Volume picked up this week, as was expected.
Rather than focusing on weakening inflationary pressures, traders instead viewed the falling commodity prices as another sign that the economy is having problems.

The Fed’s observation that “economic activity has been slow” didn’t help matters. Selling intensified on Thursday in response to lousy retail sales numbers and fears about Friday’s employment numbers.
Last week, I called for choppy markets and this is what we are seeing.

My expectation is that the economic news won’t be very good, on balance, for a while. But, also I think we are closer to a recovery than many other developed nations. It’s a good market for long-term investors.
Remember, those who try to time the markets are often the ones who take large losses and miss out on the big gains. Conversely, the most successful investors never stop researching stocks.

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Charles Rotblut is the Vice President of Web Content for Zacks Investment Research and the Senior Market Analyst for Zacks.com. He oversees the editorial staff, manages the market-beating Focus List, Timely Buys and Top 10 portfolios, and plays an instrumental role in the development of new products. For more information, visit http://www.zacks.com.

Learn to manage money at Minding My Own Business.

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