We got this thing all wrong. We don't seem to understand good when it bites us on the nose. I am talking about the pell-mell rush to judgment we undergo every day when we forget how positive the vast commodity decline is for our country -- something that's been overlooked again today.
First, let's set the stage. For most of my investing professional life we have had to endure commodity inflation. It's one of the most insidious destructive forces in the market. When you get bottlenecks because of supply tightening and rapidly rising prices because of demand accelerating, you have a treacherous market. When it's the reverse, as it is now, that's a benign market.
Yet so many people tend to think otherwise.
First, how do I know this? In 1987 we experienced a bout of commodity increases that were breathtaking. Major producers of all sorts of goods were raising prices repeatedly, sometimes each week. I recall monitoring the prices of the two most commoditized products of all -- uncoated free sheet paper, the kind you stick into your printer, and container board, the stuff your Amazon (AMZN) packages come in -- and marveling at how you might get a price increase every single month, sometimes intra-month.
I often got them from my late Pop, who sold Stone Container and International Paper linerboard and he was aghast at how expensive it was getting and how quickly the price increases were coming through. Same with chemicals. I used to monitor polyvinyl chloride, polyethylene and titanium oxide and the price list couldn't be updated fast enough. I even used to get orient strand board prices back then, the material that competes with plywood, just to stay current with the lumber market, which, of course, I also followed.
It was absolutely fabulous for a handful of chemical and paper companies. I scored big hits with Georgia Pacific, Georgia Gulf, Vista Chemical, Reynolds Metals and Phelps Dodge and AMAX, all now swallowed up or obliterated. They were real barn burners, at least according to this incredibly boring man.
But the whole endless, vociferous, ferocious commodity complex rally was just ghastly for profits for the users, where you could cut numbers with impunity for the big packaged goods concerns that bought this stuff.
Oh and what happened in 1987 after these endless price increases piled one on top of the other? How about a stock market crash, that's what. It wasn't the cause, but it was a proximate one and I never forgot how much you have to fear them. I hate commodity increases. They are a disaster for stocks because raw costs impact gross margins and gross margins that go lower lead to lower stock prices.
So, do me a favor and stop sweating the consequences of the opposite, the commodity cuts. They are as good as the increases are bad. Sure, that means you need to be scared of Cliffs Natural (CLF), where a hedge fund bought far more than it can ever chew. It means you have to steer clear of Freeport-McMoRan (FCX) and Peabody (BTU) coal.
But sell the market on this? Please, please don't be that dumb.
