Wiping Away
A Decade of Pain
By Duru
April 11,
2005
In March, I
FINALLY got excited enough about commodities to start dabbling in them. Turns out that I was just
in time to join mass opinion. In March, rising commodity prices were
making regular headlines that made top-billing in screaming bold letters. If you did not know about the rising inflation pressures that had even the Fed
frowning, then you simply were not paying attention to financials markets
at all. I have long been bullish on oil
(although not putting my money where mind is enough), gold, and other mining
stocks, but in March I finally dabbled a bit more….steel, Brazilian resource
plays, heck, even uranium! After steel
quickly made a top, I had to retract my claws and munch some humble pie. With the excitement placed back in its cage,
I took a more sober assessment of the overall situation. I will use Oregon Steel (OS) as an
illustrative example of the do-or-die situation I see out there. I like this company and think they have a
good business, but the stock is not performing well of late. (Click here for my standard disclaimer).
First, this
daily chart shows how OS completed a neat double-top in March:
This weekly
chart that stretches back into 2002 shows just how late my interest in OS was
in the run for this current bull cycle.
Finally, this 9-day chart shows that OS has been an
extremely poor long-term investment. The
stock essentially spent 10 years of pain, the entire 90s, in slow and steady
decline until a breakdown from the 11-year low finally set-up a sharp snapback
rally. Another correction in early 2003 set-up Oregon Steel's first multi-year rally since the late
80s! Amazing, right? And NOW I want to get interested?! Is two years of
stellar, hypersonic growth enough to erase 10+ years of pain?! Oregon Steel has now failed to break a high
punched out in 1997 and even if it does, we have to believe that the all-time
high set in 1991 will provide the ultimate wall. I imagine a failure there will signal the
final end of the run in OS (and steel) for this business cycle.
For final
emphasis, and perhaps a few good snickers and laughs, here is a chart of a
commodity index which clearly demonstrates how I picked a distinct top to
finally get deeply interested in the commodity story. Sure commodities could run again, but the
chart clearly shows that the time to buy is on sharp pullbacks (assuming you
believe in the fundamentals) and, even better, break-outs from consolidation
patterns.
So what to do
now? If the Fed continues to raise rates
and issues more and more hawkish statements on inflation, we should be very
cautious about diving into commodities.
But I think only a recession or similar economic malaise can completely
stop the march upwards: the U.S. dollar
remains weak,
Be careful out
there!