Today’s Wall Street Journal has an article titled Commodity Prices Surge, as Investors Seek A Haven.  Several points of view from this article echo comments we made in our Economic Update last Friday titled Commodities, Oil and the Reflation Trade

A fundamental case can certainly be made for a long term, secular bull market in commodities driven by the rise of industrializing nations like China.  In fact, we’ve profited handsomely from many such investments over the last few years.  However, there is also a price at which only VERY long term investors can profit from a fundamental theme on a going forward basis.  The NASDAQ 5000 class of investors got the fundamental call on technology correct.  Technology has dramatically altered our domestic economy in the last seven years, enabling the exchange of ideas and products on a global scale at far lower costs than was previously thought possible.  And yet, in spite of their prescience, this class of investors still sits on sizable losses, with visions of NASDAQ 5000 still in the rearview mirror.  

There was some news in the media yesterday about a large public institution’s decision to increase the commodity exposure of their portfolio to 3% by 2010, an apparent sixteen fold increase from their current levels.  While this is a massive increase in dollar terms for a fund of its size, it also strikes us as largely symbolic and perhaps a hedge of sorts given the relatively small percentage end goal.  With the proliferation of low cost, exchange traded funds, investors of all sizes and shapes can similarly gain quick exposure to entire baskets of the market’s hottest areas, not just overnight, but for same day delivery. 

Having more choices is, of course, a good thing.  It’s what capitalism is all about.  A better question might be, is it right for you?  When many, many investors take even small positions in the very same thing, it can quickly add up to some massive fund flows and resulting price bubbles bordering on speculation, even when not so intended. 

Are we at a high enough price in commodities at which only the longest term investors can profit on a going forward basis?  Unfortunately, no one knows that answer.  I remember a number of technology bears who were mercilessly trampled by a running of the technology bulls in the late 90’s.  Being short too early can permanently sideline an investor with injuries before the game even gets started.  At the same time, if the current building projects in places like Dubai are an indication of conspicuous consumption, we may be getting closer.  (Check out some of these actual pictures and plans by clicking the link.)

So what can an investor do?  To sound perfectly trite, we’d advocate a thorough portfolio checkup.  Investors should clearly understand the risk exposures in their overall portfolio and what pain they might experience if a hot area freezes overnight, as they often do in an era of same day delivery.  If you own mutual funds, try to understand what they actually hold so you can more clearly understand your portfolio’s exposure.  If the downside would get in the way of your long term goals, you may be overexposed.  And remember, there isn’t a single right answer for everyone.  (Although I’m sure our gifted politicians are working on it!)  

Remember, pigs get fat, but hogs get slaughtered.  As a graduate of NASDAQ 5000, I learned this the hard way.