Tuesday, August 12, 2008

Commodity crack-up..

Commodities are cracking - finally. If it becomes a deeper slump over the next 24 months, there are going to be lots of issues with industrial companies and banks that are heavily exposed to steel, cement and other commodity companies. The swing factor for a lot of these commodities is China, and I have no clue about what is happening there.

In the immediate term, commodity stocks might fall a lot and start pricing in a very pessimistic scenario. One of the key learnings of the last 9 months is - nothing goes down forever. So there might be a quick trade here. But there is a global slowdown/recession, it is spreading, and high commodity prices dont fit in well with a theory of global slowdown. I think inflation is going to turn into deflation over 24 months. So need to be careful with commodities.

Sold out Aban at a loss of 30% - there are much better oil drillers available cheaply now with lower leverage, higher exposure to deepwater drilling, and better corporate governance. This stock didn't rally when oil was moving up in May June because Indian markets fell, and hasn't rallied since when Indian markets have gone up in July-August, because well oil has been falling. Now when Indian markets fall again, and their fall this time will have nothing to do with oil, this stock can crack up further. For a highly leveraged company, its stock price is paramount to its survival.

Why will India markets fall again? They have been rallying since RBI apparently surprised the markets with more tigheting than the markets bargained for - because oil is falling. Interest rates and inflation are high and they are not coming down for the next 5 months, and all you need is 5 months to turn the cycle decisively. Earnings estimates are way out of whack for all Indian companies.

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