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More Commentary on Commodities, Part 2

Below is an article written by Jim Cramer. Many people follow Jim on his TV show, so I thought I’d share with you his comments and strategy on the current commodity correction. Interestingly enough, his strategy is very similar to our own.

As oil approached the top, we sold a lot of our commodity exposure, selling partial positions to lock in gains. Here is the list:

Anandarko Petroleum: 15% of position
Apache: 20% of position
BHP Biliton: 10% of position
Canadian Natural Resources: 10% of position
Compania Sidurgica: 50% of position
Core Labs: 15% of position
Diamond Offshore: 15% of position
FMC Technologies: 15% of position
Frontier Oil: entire position
Halliburton: 20% of position
Imperial Oil: entire position
Lundin Mining: entire position
Marathon Oil: 20% of position
National Oilwell: 20% of position
Oceaneering Int’l: 20% of position
Southern Copper: 10% of position
Tenaris: 10% of position
Ultra Petroleum: 10% of position
Valero: entire position
XTO Energy: 15% of position

After the companies had fallen 15% to 20%, we started buying – some beaten down commodity (ag, natural gas, and steel), some beaten down industrial, and some biotech: Cabot Oil & Gas, Cleveland Cliffs, Mosaic, Eaton, EOG Resources, El Paso, Covance, Genentech, Imclone, Goodrich, Nucor, Gilead, Occidental Petroleum, Parker Hannifin, Petro Bras, Sandridge, Southwestern Energy, Syngenta, Xenoport.

Assessing this, the sales were all good moves – we booked profits and diversified away from energy to a big degree with those profits. The purchases of biotech were extremely good moves – two of the companies have already been acquired and we booked 20%+ profits on those investments in a few weeks.

The purchases of the industrial names and the other commodity names were clearly early – but we are continuing to build these positions at lower prices so that when the recovery comes we will have holdings in areas with strong/growing earnings, which historically have led the market coming out of a recession/bear market.

That’s what we have been doing during this correction.

Below, you can read about what Jim Cramer has been doing.


Facing the Teeth of the Commodity Collapse
By Jim Cramer

8/5/2008 9:15 AM EDT

This is a commodity collapse of historic proportions that touches on every single area that had pricing power just a few weeks ago. As someone who has been a commodity bull for four years and liked the oils and minerals, it is shaking to watch the unwinding of what I suspect will be as much as 60% of the rise.

I was certain when oil got to $148 and was turned back and natural gas flirted with $9 that it could go to $8, but I did not see that the stocks would correct far more than that. I trimmed back, for instance, for my Action Alerts PLUS charitable trust, but no matter how hard I have tried to trim — given the attempt to have a longer-term perspective — it has not been enough. Such is the case with momentum. You can give it all back so fast it is incredible…

I know that once again it seems that the short side is the right side today. I am trying to rebuild the positions I trimmed back into strength during the commodity boom that ended about six weeks ago, but I am using wide scales to do so, and I will likely get hit (I can’t short). So a company like National Oilwell Varco (NOV) , with a firm book of orders and great visibility to 2011, I have to expect can go down another $5 fairly easily on a $2 dip in oil.

What is the right price for these stocks? It does not seem to matter that they are reflecting prices for the commodities that on a percentage basis are far lower than the commodities themselves — now after yesterday $7 for nat gas. Last time Exxon was at this price, oil was at $70!

Obviously if we see these prices again, a sizable portion of this market will be substantially higher, so it is a blessing for everything else… To me, the declines are so severe that they have gone from high-growth to value overnight. I can’t sell stocks at 6 or 7 times 2009 earnings even if the earnings get dinged a great deal — again, remember that the stocks reflect a tremendous decline in commodities that might seem…unrealistic.

It is tough to sit there and take it. But I will not give up on the part of my diversified portfolio that is related to these stocks. In fact, if I didn’t own any of these I would be hard-pressed not to buy them today. But the sellers, the short-sellers, the ETF-sellers seem to be doing to these stocks what they did to the financials during the weeks leading up to July 15.

I do not believe the collapse will repeal all the move. Take Cabot Oil & Gas (COG) , which is growing like a growth stock, not a commodity stock, because it is adding acres. It was at $72 last month. It is at $39 today. I believe it is right to buy more at $35, half of where it was a month ago. To sell it seems, well, wildly emotional. Yet that’s what’s happening as the people who own these stocks express panic to get out of them each day.

Again, it is a collapse of historic proportions, with a severity I have never seen … other than in the financials two months ago. Rotating bear markets, with the last of the leadership taken out and shot. I am receiving an intense amount of hate mail for liking these stocks. I really don’t know what to say about it. I liked them for four years. Without them, performance was nearly impossible; I scaled out of them to the best of my ability as I was taught to do 20 years ago and have chosen to rebuild them on weakness. Just my style, which is right now killing me. As it did when I bought Morgan Stanley (MS) at $31 last month.

I anticipate a bounce — not one that can take us back to even, of course, but one that is worth playing if only to sell what is picked up in free fall today on the inevitable bounce before some semblance of equilibrium sets in courtesy of the end of the panic-selling and some realization that oil is not going to $67, as Exxon (XOM) indicates, and nat gas is not going through $7, as Cabot indicates.

That said, I feel really lonely about it. And I’m glad for the diversification I have into other non-commodity areas, even though they can obviously not save me from the severe declines ahead.