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Crash Opportunities: Part I

by: Paul J. Lamont September 04, 2008 | about stocks: DBC / DIA / GSG / QQQQ / RJA / SPY / TLT / UDN / UUP / XLF    
Paul J. Lamont

Paul J. Lamont

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As we mentioned two months ago, a speculative commodity bust would fit with the onset of a deflationary collapse. During the month of July, commodities began this correction with the largest monthly decline in 28 years. They are still falling.

Similarly, Lombard Street Research’s measure of M3 fell in July the most on record (since 1959). The chart of the percentage change in money growth is below.

The banking system is currently broken. Without credit, asset prices fall and money is hoarded. The risk is of a Great Deleveraging of the economy. We still recommend U.S. Treasury Bills for the preservation of one’s portfolio.

That being said, in the first part of this series, we would like to mention other investments (even some commodities) that could appreciate during this deflationary period. In the second report, we reveal what investments could present a better buy at the bottom in 2010-2011.

Cattle and Hogs

We also believe livestock could rise during the next few years.

The main costs in raising hogs and cattle; gasoline, corn feed, and labor are all falling. Due to recent financial innovation, there are ways to invest in these price trends without owning a farm or purchasing commodity futures.

However the option available to U.S. investors, exchange traded notes (ETNs) offered by Barclays and UBS, have a major flaw. They are subject to credit risk, as they are little more than bets with the bank.

So while you may be correct in the price rise, if the bank goes down or defaults, you will not receive your winnings. In 2005, Jim Rogers’ commodity funds at Refco (“wrongful” handling or not) were also similarly unavailable for redemption. In the current environment, these atypical risks become more probable.

In our view, investing in companies that sell pork or beef is also unadvisable. The inability to pass a higher price along to the consumer could become an important problem. A companies’ debt woes could also be fatal. Instead, we prefer to take possession.

Inverse Stock Index Funds

Speculative investors may also want to consider inverse stock index funds. These funds rise in value as the market goes down. We offer a Bear Market Strategies Account in which the bulk of your funds are protected with U.S. Treasury Bills, the remainder positioned in speculative inverse index funds. This can possibly hedge business owners from a recession or attempt to provide a little better return for investors who are still saving for retirement. The suitability of this account depends on your risk tolerance. It is not for everyone. In an environment where institutions are failing, counterparty risk is also a major concern.  

Disclosure: At the time of publication, Paul Lamont holds positions in UVPIX and RYUCX.           

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This article has 3 comments:

  •  
    Sep 04 04:59 AM
    I profiled several wholesale food distributors(like SYY) and dining establishments (like BOBE) and they all were unable to hike the price past the ceiling already in place. If they raise prices further to pass on costs, they're going to lose revenue and if they don't raise, then they're going to lose revenue anyway. Catch-22
    Reply
  •  
    Sep 04 07:51 AM
    There will be a rise in beef but not for the reasons you cite. It is because of an early cull a few months ago in response to high corn/feed prices, their inventories are now extremely low and will put upward pressure on beef prices this fall. In fact, given the pullback in feed prices, the 4th quarter may be a banner period for the beef producers if costs trend lower.
    Reply
  •  
    Sep 04 11:50 AM
    Like all bull markets, there are many 'reasons' for a rise. The high-cost-cull also supports our argument for higher prices.
    Reply
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