 Yesterday morning, the U.S. Labor Department announced that wholesale price inflation jumped 0.7% in October, far more than the ZERO percent change Wall Street was expecting.
Now, in about a half hour or so, they’re going to give us their estimate for last month’s consumer prices. I stress the word “estimate†because it’s one of the most sloppily conceived — and hotly debated — numbers the government statisticians put out. They assume that the effective cost of faster computers is less than lower-priced computers that may not be as powerful. That makes no sense to me. They assume the cost of housing is stable simply because rents have not been going up while home prices surged. That makes even less sense. And now, to add insult to injury, it’s widely assumed that so-called “non-core†inflation — gasoline and food — doesn’t matter. Really? The people who subscribe to this theory must be among the most physically fit in the world. To exclude gasoline and food, they must walk to work and eat a very lean diet. If energy and food had been going up for just a month or two, it might make sense to shove them aside temporarily to get a clearer view. But that’s not the case. They’ve been going up for almost three years straight.
Just in the last couple of days, it has busted out of its recent trading range and made a new beeline toward higher levels. This, too, has been going on for three years. So how long are the “core inflation†proponents going to keep making the argument that these rises are “just temporary?†It’s a Joke. But I’m Not Going to Laugh, This is no game. It’s very serious. It can impact major decisions that are going to be made in Washington and virtually every choice you and I make for our own finances. Yesterday, Ben Bernanke pledged he won’t let politics sway his decisions at the Fed when he takes over as Chairman next February. But if the primary decision-making tools he uses — like the Consumer Price Index to be announced this morning — are themselves distorted by politics, what’s the difference? And if you think distortion of data is bad, what about the idea of just deep-sixing the data that doesn’t support the political agenda? No one in Washington would dare do that, right? Wrong! The Fed has announced on its website that it will cease publishing one of the broadest measures of money supply — M3. M3 happens to be one of those measurements that’s growing at a super-fast clip, evidence that the Fed is failing to control the primary fuel of the inflation engine — money. And it also happens to be the one that’s been selected for termination?! I pray this is just a coincidence. In any case, their motto seems to be: “If the news is bad, distort the message. And if it’s still bad, shoot the messenger.†My advice: Make sure you distance yourself from investments that can be hurt by rising inflation and rising interest rates … and gravitate to those that will benefit. Sean Brodrick, whom we welcome back to our corner of Florida after a short absence, gives you one great example …
Right now, you’re in the early innings of Phase II of the commodities supercycle — a period of accelerated growth, accelerated price rises and grand slam profit opportunities. Let me explain: Generally, commodities go through a standard cycle of (a) growing scarcity, (b) rising prices, (c) oversupply, and then (d) falling prices. But once every fifty years or so, commodity prices explode out of the normal pattern, driven first by real demand, then by investment demand and finally by speculative demand. In the last 150 years, that’s only happened three times. And now it looks like it’s happening again. From what I can tell, the past few years were just Phase I of this commodities supercycle. And now, it looks like we’re starting Phase II, when many of the big homeruns will be hit. The biggest slugger of them all: Canada — the country where cub-sized companies are finding giant-sized deposits of gold, uranium, coal, oil and more, greatly outperforming their Yankee competitors. Indeed, Canadian small-caps have been running rings around the S&P 500.
Meanwhile, the Toronto Exchange’s Venture Composite Index rocketed 116%, triple-outperforming the S&P — and more! What’s driving this superlative outperformance? In addition to the extra leverage small caps naturally give you in a rising market, the Canadian small caps are also powered by the commodity boom. Commodities account for 35% of Canada’s exports and an even larger share of the best-performing stocks in this index, a key factor helping it to zoom higher at over three times the pace of the S&P 500. Canada’s strategic positioning to serve customers in the U.S., Asia and Europe … top-notch transportation system … deepwater ports … modern technology … all work in its favor. Canada’s relatively firm currency, stable government, and modern banking system also make a huge difference — both as an environment for running first-class business operations and as a magnet for prime-time investment capital. The biggest source: The United States. Indeed … American Giants Are Beginning Kinder Morgan has ponied up $5.6 billion to buy Vancouver-based Terasen … Occidental Petroleum paid $3.9 billion for Vintage Petroleum … Canadian zinc-nickel kingpin Falconbridge, which just merged with Noranda, is being bought by Inco … And Barrick Gold is snapping up fellow gold miner Placer Dome. Reason: Canadian companies have been undervalued for many years, especially when commodity prices were deflated and Vancouver-registered stocks were scorned. Now, they’re finally coming back on the radar screen of American giants, and a rush of US capital into Canada is under way. But so far, the focus has been on large caps. Small caps are next in line. The Large Potential Impact of Even when the takeover target is a larger company, the sudden, extra buying push can make its shares a nice jump: KMI’s bid for Terasen sent its price up 14.6%…the bid for PetroKazakhstan sent its shares jumping 18.4% … and Barrick Gold’s bid for Placer Dome sent its shares soaring 23.5%. So when the target is small-cap companies whose shares can double or triple even without a buy-out, you can just imagine what the results might be. And it’s not just the U.S. that’s hunting for bargains on commodity-rich Canadian soil. Chinese, South Korean and even Russian investors are joining the chase, and an international bidding war for Canada’s resources is in the making. As Larry explained to you last week, China now consumes at least 150% more steel than the United States. China also ranks as the single largest consumer in the world of iron ore, copper, thermal coal, steel, coal, and alumina … and the second largest consumer of aluminum and nickel. And that’s just based on China’s past growth. Don’t forget that what really drives commodity prices — and the value of Canada’s commodity-based companies — is China’s future growth, still speeding along at 9% per year. Since that’s almost three times faster than growth in the United States, China is likely to be at least that much more aggressive than the U.S. in bidding for everything it must have to feed its growth engine — copper, aluminum, nickel, coal, oil, gas and virtually all the natural resources that abound in Canada. The growth in China’s commodity consumption is stunning — and it’s not slowing down. In a recent report, Credit Lyonnais explains it this way:
The report’s title: “China Eats the World.†The subtitle I’d suggest: “Canada Is the Main Course.†Sonic Boom in Canadian Metals I am especially excited about the opportunities in metals — gold, iron, nickel, where the commodity supercycle could be among the largest and the most sustainable. Sure, we’ll see corrections along the way — but these corrections will be buying opportunities. Instead of calling it merely a boom in metals, I believe we may soon see a Sonic Boom. New mines are scarce and sparse; many of the major metal deposits mined today were found 30 or 40 years ago. And never forget: Once you remove a resource from a mine, it doesn’t grow back! So heck yeah, I’m bullish on metals, especially copper, aluminum, zinc and rarer metals like tungsten. Here’s How to Stake a Claim to Here are some alternatives to consider: Alternative #1. If you can’t afford any risk whatsoever and must protect every penny of your principal, any stocks, including Canadian natural resource stocks, are probably not for you. Stick with Treasury bills or one of the T-bill-only money funds Martin has recommended. Alternative #2. If your goal is primarily to boost your yield, we recommend you focus Alternative #3. Use mutual funds and ETFs. For example, USG’s Global Resource Fund (PSPFX) gets a five-star Morningstar rating and a four-star S&P rating. Its total expense ratio is 1.3%. It’s returned 35.8% this year and has a five-year average return of 31%. Not too shabby. As of the last reckoning — September 30 — the fund had over 41% of its portfolio in Canada, with nearly 47% in the U.S., and the rest in the UK, Brazil and China. That’s a substantial concentration in Canada, plus good diversification for balance. The fund’s shares have ramped up nicely over the past three years — from less than $4 per share in late 2002 to nearly $16 last month. Now, with the recent market correction, it has dipped back down to just under $14, and I think that could be a nice bargain at that level. Another simple alternative is simply to buy the MSCI Canada iShares (EWC), an exchange-traded fund that gives you a broad stake in Canadian companies. The primary drawback right now: EWC puts about one-fifth of your money in Canadian financial stocks which could come under pressure as interest rates rise. But the allocation to energy and raw materials companies is greater. Alternative #4. If you have money you can afford to risk, I believe the single best way to hit home runs is to stay close to home base. That’s where you’ll find the small-but-powerful Canadian natural resource explorers and producers that are on the cutting edge of this boom. These are the kinds of stocks that triple-outperformed the S&P over the past three years. They are similar to the companies we named on Monday that surged 406%, 444%, 558% and even 1,192%, also over the past three years. And these are the ones I believe will be next in line to become buy-out targets. For more details, see our latest report. Best wishes, Sean Brodrick About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. © 2005 by Weiss Research, Inc. All rights reserved. |
More Inflation! Commodities Supercycle!
And it’s not just energy. While energy prices have taken a short breather, copper’s price surge, already very rapid, has now kicked in to an even higher gear. 
The Commodities Supercycle 
Over the past three years, the S&P 500 is up 33%. 
on Canadian royalty trusts like Enerplus (ERF). But you don’t have to rush to buy it. There may be an even better buying opportunity coming up soon.Previous post: Schizophrenic Market
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