Shares In Commodities Are Falling - Is It Time To Get Out?

It’s Thursday, so we’re answering your investment questions. If you have a query, send it to the team at askfleetstreet@fspinvest.co.uk

Here’s today’s selection:

Q: I sold shares when they started falling and bought into commodities, since when all of them have fallen heavily. Do I sit tight in the face of falling world prices and hope? Or jump out and throw away a great deal of money? — AW

A: There’s no right and wrong answer to this question. Or, rather, there is — but without the benefit of hindsight we can’t know for sure what it will turn out to be. All we can do is make an informed decision. I collared Garry White, our commodities man, for his opinion.

"There’ll always be cycles within cycles. But I’m happy with the long term story for commodities."

Garry gave his reasons for this belief — which he still holds — in a piece he wrote last month. You can read Garry's article on commodity cycles here.

And tomorrow, Garry takes a closer look at gold and oil, and asks whether or not the bubble has burst for these two mega commodities.

There’s also the dollar angle to consider. The big commodities are priced in dollars. If the dollar strengthens, commodities prices fall (other things equal). If it weakens, they tend to rise.

The commodity price falls have coincided with a period of renewed appetite for the dollar. That’s not the whole story, of course. But it is a big part of it. In my answer to the next question, I present my outlook for the dollar...

Q: Both the pound and the dollar have terrible backgrounds and reasons to trade lower. Given that there is such a large interest rate differential, and that rates can hardly go lower in the US and have room to move in the UK, where do you think the exchange rate will go first? $1.70 or $2.10? — SC

A: It's impossible to know with certainty which way a currency will go next. The currency markets are notoriously volatile — they will rarely do what seems to make sense. Besides we’re not short term traders; we’re investing for the long haul.

But we can take a step back, and take a view on the outlook for the medium to long term.

The US Fed still has a full two percentage points to play with. It may seem unlikely that the Fed would cut rates much when they're already so low... but Bernanke has shown himself to be more than willing to take drastic action.

Will rates go as low as Japan's did? It's a possibility, and we can't discount it.

There seems to be a bit of a race going on between us, the Americans and the eurozone to see who'll start their recession first. Some of the data coming out of the US lately has been less scary than many expected. But there's always a nasty surprise lurking... it just depends where it comes from.

Kenneth Rogoff, former chief economist at the IMF, was reported this week as saying that the financial crisis is, perhaps, at its half way point. As financial woes continue to translate into real economy woes, we can expect bad news from all the big western economies.

Both £1=$1.70 and £1=$2.10 are real possibilities. Which happens first depends on who puts out what data first, and how the markets interpret it. Despite its recent run of form, I’m bearish on the dollar. (I’m bearish on the pound too, but that’s another story. Whether the pound hits $2.10 before it hits $1.70 is a matter of speculation, something I try to avoid. Suffice to say I’m not keen on either currency, and have recommended hedging against both).

On our website I’ve reproduced an article I wrote to Fleet Street Letter readers last week. It explains my stance, and reveals the number one reason why I don’t like the dollar.

Have local authorities gone completely mad?

A curious story floating around this morning. Apparently councils want the power to offer mortgages to those who can’t get a loan.

A noble aim, perhaps. One borne of an admirable desire to help those in need. But let’s apply some business logic here. Those who can’t get loans tend not to be the best credit risks. Indeed, there’s a term for such customers. They’re known as ‘subprime’.

Ring any bells? Maybe I’m jumping the gun, but this has ‘disaster’ written all over it. And let’s not forget, local authorities are not private enterprises. If this went wrong, it’s not shareholders who’ll take the hit. It’s us — the people who pay council tax.

The Treasury don’t like it, so hopefully this’ll go no further...

Until tomorrow

Ben Traynor

Editor

Selected articles:

Manraaj Singh on The Railroad to Africa’s Riches.

Garry White on the most valuable commodity in the world.

The Daily Reckoning — What will become of Fannie and Freddie?

What’s going to happen to the mortgage twins — Fannie and Freddie? Yesterday, investors got nervous. They wanted to know. Would the feds officially nationalize them? No one believes the two will disappear. But no one knows on what terms they will be saved either. Both stocks sold off yesterday — with Fannie taking a 27% whack... and Freddie getting hit for a 22% loss.

The feds let it be known that they stood behind the two back in 1968 — when they were set up in their present form. They were no longer on the government’s financial books, but every lender knew they wouldn’t be allowed to go broke. So far, Treasury Secretary Hank Paulson has counted on that implicit guarantee — along with a long line of credit — to keep the two going. But now that investors are selling off the stock, he may have to come up with some real cash to put on the equity side too.

You can read The Daily Reckoning in full here. P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.

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Shares In Commodities Are Falling - Is It Time To Get Out?

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