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Commodity Bubble? Has It Burst?

All over CNBC today, the talking heads are proclaiming the commodity bubble has burst.

First, you’d have to believe that commodities were in a bubble – I don’t. Bubbles are situations not supported by fundamentals. Commodities have strong fundamental reasons why they have gone up so much – principally strong demand and strong earnings at the commodity-related companies. Other bubbles (Tech, Housing, Tulips) had poor fundamentals – tech had no earnings, housing was predicated on imprudent lending practices, tulips were just stupidity).

By the end of the third quarter, commodity names will be higher and financial names will be lower. A pretty bold statement, but supported by evidence – demand is still strong for oil, metals and ag, leading to strong earnings and increasing earnings estimates at the companies that produce these things. Financials will still be dealing with problem loans, write downs, and bankruptcies.

What we see now is a rotation out of the commodity names and into other names. Its happened before and it was a great buying opportunity. We will continue to buy shares in strong companies with growing earnings as their prices fall, knowing that this is the set-up for some major gains in coming months.

Mark