The new mantra creating a deflating speculative bubble is taking a new twist.  Even before Ospraie blew out its fund (and now after) there have been more rumors about commodity-related funds or commodity-stock related fund blow-ups.  In fact, today is no different and much of that is being tied to selling as new credit issues are bringing about more and more de-leveraging. All you have to do is look at some of the top commodity stocks (below) to see how this is not just sector rotation. Or you can just look at the yield on the 10-Year T-Note at 3.65% today.  In mid-August this was 4% and if these levels hold here this will mark the lowest yield since mid-April.  Today feels like one of those days after a weak week where nothing works.  Only two of our old "defensive stocks for a crummy market" are trading up today.

The price action that was being seen in June in commodities like oil,coal, and gas were just the tip of things in a bubble.  For the firsttime in many of our professional careers the fertilizer business wascool and was rocking.  When potash and chicken poop are cool, well youknow what it smells like.

So which major sector stocks have been swimming back in the bad-smelling fertilizer? 

• Integrated Oil… Exxon Mobil Corp. (NYSE: XOM) is within a hairof the 52-week lows which were put in during August and are now down20% from their 52-week highs and down almost $5.00 in just the lastweek. 
• Diversified metal & mining… BHP Billiton Ltd. (NYSE: BHP)has lost more than 37% from their 52-week highs and down over $10.00from the $70+ levels of just last week.
• Gold… Barrick Gold Corporation (NYSE: ABX) is down almost 45%from its 52-week highs and shares are down about 13% from last week. 
• Coal… Peabody Energy Corp. (NYSE: BTU) shares are down over 40% from their highs and down more than 20% over the last week.
• Potash/fertilizer… Potash Corp. of Saskatchewan, Inc. (NYSE:POT) shares are down nearly 40% from highs and down about 17% just overthe last week.

And there is more bad news.  Technology companies aren’t proving to bethe haven investors were hoping and financial stocks failed to continuetheir rally.  The latest big rally groups were homebuilders and retailstocks as traders were trying to discount the current environment andlook six months or nine months out.  Wal-Mart Stores Inc. (NYSE: WMT)is still within 1% of its 52-week and multi-year highs as it is winningfrom the trade-down economy.

This is what de-leveraging and bubbles popping looks like.  Would it befair to call the commodity bubble of 2007 to 2008 the same as the techbubble of 1999 to 2000?  No, it would not.  But it does look verysimilar while it is happening.  These are at least real companies withreal histories, real products, and real needs that have to be met.  Butagain, the similarities are there.

When you have speculators on Capitol Hill telling Congressionalhearings that they play no part in asset prices it becomes a bit likegetting advice from the Alzheimer’s ward patients at the nursing home.If not, it’s no different than asking a fox if he’s seen any threats tothe chickens.  Unfortunately the Volatility Index ("VIX") is up over 2points today alone at 23.79, and that will have over 25 or get tonearly 30 before the overall level gets too oversold.

But there is good news.  When you get to this point with theseobservation the old adage of "you have to buy when you feel horribleabout things" sure comes to mind.  But there is another adage too tokeep in mind…. What do you call it when bottom fishing doesn’t workout? Bottom sniffing.

At least there is no recession.  The government keeps telling you thatwith those economic numbers not technically falling into an officialrecession.  The other good news is that the drop in raw commodities is takingthe winds out of the inflation sails.  The bad news is that energy andcommodities became a pretty big component of the markets, or at leastlarge enough to take away the benefits from the market overall.

Jon C. Ogg
September 4, 2008

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