Commodity Crash Ails Markets

Self-education is, I firmly believe, the only kind of education there is.
― Isaac Asimov

Anyone who stops learning is old, whether at twenty or eighty. Anyone who keeps learning stays young.
― Henry Ford

When you are young, it is common to be involved in activity which is extreme (eating, drinking, use your imagination). Your body deals with the excess the day after, or hours after, depending on what the situation may be. The consequences can be difficult on the body, brain, or both. Been here, done that, thank you. I am sure you probably have experienced something similar. Anyway, the same way your body needs time to mend from excess, businesses and economies do as well. The circumstance of extreme overcapacity and the lingering hangover is what the global economy is grappling with. The difference is the binge in a China-led global expansion took place over ten years or so, which makes the downside a bit difficult.

Case in point number one would be Anglo American (L:AAL), the large conglomerate with exposure to nearly every kind of commodity one could think, and also the owner of diamond monopoly DeBeers, it's crown jewel. A few months ago, the leadership at Anglo told markets they needed to downside to the tune of fifty thousand employees. Not so fast. The cherry on top came this week with even larger write downs and the job cuts will total 85,000 across the globe. Example number two and three are Kinder Morgan (N:KMI) and Freeport-McMoran Copper & Gold Inc (N:FCX). Kinder is the largest pipeline company in North America, and they chopped the dividend after months of saying it was money good. Freeport is a large miner of commodities, bought an oil group at the top of the market, and this week the leadership declared there will be no more dividend for the near future. Large commodity trader Glencore (L:GLEN) also decided to sell assets to pay down debt from global expansion. With every global commodity under severe pricing pressure, these kinds of events are ramping up quite quickly, which means you need to get used to the unpleasantness. What a nice holiday present.

Nowhere can the pain be more prominent than in the oil patch. With oil nearing the 35$ per barrel level, the ramifications all across energy companies are imminent. Carl Icahn warned about the bubble in high yield debt, and sure enough, two bond funds decided to shut down because of lack of liquidity among these credits. One is from highly regarded family Third Avenue Value Fund (Marty Whitman). As the year closes, tax loss selling and leverage is certainly a part of the equation. Things probably will not change much over the last three weeks as there are plenty of losses to be taken. Still, losing 4% on the indexes for the week and 10% in oil is a bit much. So what do you do if you have exposure to capital markets?

Clearly, each situation is different, but if you want to own oil, or want more oil exposure, selling losers and buying them back in 31 days is a good strategy. If you want no part of energy, selling it for tax losses or to be tax efficient to offset gains is another solid tactic. If you have cash, using the next six months or year to dollar cost average into the assets you want also makes sense. With respect to high yield and other global commodities, picking bottoms is difficult, but agriculture and fertilizers are intriguing to me as well.

In other developments in the market, Green Mountain Coffee Roasters was acquired at a big premium by a private equity group. Dow Chemical Company (N:DOW) and Dupont Fabros Technology Inc (N:DFT) decided to create a global chemical giant in a merger of equals. Closer to home, Harry Reid is battling fellow Democrat Elizabeth Warren on the rights of minority creditors in prospective legislation which could dramatically affect thousands of employees of Caesars Gaming. Mr. Reid knows where the bread is buttered and wants to try spare as many jobs as possible from the debt laden gambling concern. Mr. Reid has big juice, but it may not be enough.

In my little world, Yahoo (O:YHOO) decided to scrap it's plan for the Alibaba (N:BABA) spinoff and instead will spinoff the core search and advertising businesses. A while back I wrote about how Marissa Meyer should have lunch with John Malone and discuss the situation. Yahoo hired McKinsey, who Malone worked for many years ago, to get another opinion on what to do. For the money she paid McKinsey, Malone would have come up with a much better solution than what they decided on. Still, the bottom line is the core has to improve, and releasing it to the public markets will give it value. Something is better than nothing, or in this case, less than nothing.

On the macroeconomic front, if you are a member of the Federal Reserve Open Market Committee, the persistent chopping in the price of every product in the commodity complex makes the idea of 'normal' inflation questionable, at the very least. If the premise of raising interest rates is based on targeting inflation and unemployment, and only the latter is trending towards typical, also a stretch, you might say raising interest rates, even 25 basis points, is not a brilliant policy decision. The quandary is the committee has essentially told markets for months, lift off is here. So, after three days of market sell offs, we will see what happens on Wednesday. Your move Janet.

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.