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Commodities — the case for the bull and the case for the bear

Is the super bull market for commodities over or not, asks this advisory? Either way, it has four growing stocks that it likes.

Seeing both sides of an argument can be taken several ways — incredibly broad-minded or just plain wishy-washy. But it can also be good for your financial health.

If you can see a question from all sides, you may be able to make some useful and profitable decisions. And few questions are bigger than the future of Canada’s commodities. Mr. Louis Paquette can actually see more than two sides to this puzzle.

Writing in Emerging Growth Stocks, Mr. Paquette is able to state the case for both a bear and a bull market in commodities. But those cases come with one important modification: you also have to take things commodity by commodity.

In addition, the editor has several stocks to recommend. Two are in commodities, but several more are in a field he favours, one that we might call the anti-commodity sector, alternative energy.

First, bull vs. bear.

The pause that refreshes

The short-term correction that began in mid-March, says Mr. Paquette, was the “pause that refreshes.” The short term trend lines in commodities were broken. But within two weeks most commodities had found support again. The Commodity Research Bureau (CRB) Index zipped up to test its recent highs.

But in this chart-driven world, no long term trends were established. “So on a purely technical basis,” says the editor, “there are no grounds for saying the bull market in commodities is over.” A short term setback was inevitable, he adds, because market sentiment was way too bullish.

“I conveniently omitted discussion of the fundamentals,” says Mr. Paquette, “since these are not nearly as clear cut. I can site you an extremely bearish or bullish fundamental case for commodities long term.”

The short and sweet case

“The bear case is short and sweet,” sums up Mr. Paquette. “Commodities are cyclical.” With a credit contraction and recession brewing in the U.S., there are bound to be repercussions in the global economy, which must affect commodity prices.

“I’d sure hate to look back a year or two from now, wishing we had recognized those obvious signs, taking our profits and said good-bye to this great 7-year run,” adds the editor.

“The multifaceted bullish case is just as compelling,” he says. For one thing, commodity bull markets need to run for two decades at a time — which would give this bull market 13 more years to go!

Also, it’s hard to imagine anything but a weak U.S. dollar in the foreseeable future, due to the toxic financial situation south of the border and America’s “massive underfunded future liabilities.” Historically, a weak greenback is good for commodities, since most are priced in U.S. dollars.

Beyond that, you have to take each commodity by itself.

Ouch!

Mr. Paquette begins with gold, and not very optimistically. A leading consultant in the industry, Gold Fields Mineral Services “estimates that supply will overwhelm demand for gold fabrication next year, sending prices down to $600 an ounce — Ouch!”

Agriculture is on fire. Fundamentals remain bullish for the so-called agri-businesses (remember when it was just called farming?). Grain inventories are low relative to production. Poor weather conditions have tightened supplies as well. The Big Three of fertilizer companies — Potash Corp of Saskatchewan (TSX-POT), Agrium Inc. (TSX/NYSE-AGU) and Mosaic Corp. (NYSE-MOS) — have signed a contract with China that tripled the price of potash from the previous one signed 14 months ago.

Only one thing can stop the agriculture tractor in its tracks, in the editor’s opinion: the repeal of ethanol. This may seem ridiculous, admits M. Paquette, with so much invested in biofuels, but watch out.

The rise of food prices is creating shortages around the world, which means “food for fuel doesn’t work,” Mr. Paquette observes. “It’s amazing how a global crisis can sharpen the senses.” If ethanol loses its momentum, grains and fertilizer stocks will lose theirs, too.

Not least, there is that great monster, oil. It is right back to making new highs (like $118!) and the possibility of further conflict in the Middle East “no doubt is catching the attention of the crude market as well.”

The bottom line: “ I would suggest the evidence weighs in favour of the super bull remaining intact. Still, I wouldn’t count on the trajectory remaining as it has the past seven years — and I think we need to be very selective and pick our spots more carefully than ever.”

Auctioneers and irritating neighbours

Mr. Paquette has two emerging commodity stocks he likes. One is Hodgins Auctioneers (TSX/V-HA), located in Melfort, the heart of Saskatchewan farm country. One of Canada’s leading agricultural auctioneers, Hodgins specializes in equipment and real estate.

The company just enjoyed its best nine-month reporting period ever (31 per cent revenue growth) and trades at a low multiples (five times trailing EPS). Investors like the auctioneering industry these days. Trading at $0.32 when this report was published, Hodgins opened today at $0.37, and the editor has a target of $0.70.

Hathor Exploration (TSX/V-HAT) recently announced “the best results in recent memory for any uranium explorer,” says Mr. Paquette. But a boundary dispute with Fission Energy pushed the share price down. Nonetheless, the editor is keeping this stock on a buy “despite the irritating neighbour,” because it is the “best uranium prospect out there.” It opened at $2.22, down seven cents from the time this report was issued.

Mr. Paquette follows the alternative energy market closely, and is discovering that wind power has more steam than solar power, at least in the stock market. He likes two wind power firms.

Western Wind Energy (TSX/V-WND) finally ended a long battle with a hostile shareholder, Pacific Hydro of Australia, and the stock price took off. It has settled in at $2.26. “I think we can continue to trade this one on strength and hold or buy in weakness as the company has a lot happening in both the wind and solar areas,” says the editor.

Another wind winner is Keewatin Windpower (OTC-KWPW), which trades in New York, is headquartered in Vancouver and is taking over SkyHarvest Windpower, a private firm in Saskatchewan. “Wind seems to have the best return on equity and less resistance from outside groups,” says Mr. Paquette. The stock is trading at $1.60.

It would be nice to have a tidy yes or no answer regarding the future of commodities, but a little honest ambiguity certainly doesn’t hurt. And people who claim to have all the answers probably aren’t asking the right questions.