I love movies. They’re American. Hollywood may be the most important influence this country has ever had and ever will have. I’m no left-winger, and I get just as irritated as anybody else when some actor shoots off his mouth about “climate change,” but the signature on what comes out of the Left Coast on celluloid is as red, white and blue as Sam Adams or Betsy Ross. Nobody else does it like the USA.Having thus vented my spleen, I’ve never understood why Gordon Gecko’s “greed is good” speech takes top bill over “Larry the Liquidator’s” impassioned exhortation to stockholders near the end of Other People’s Money regarding the seductive nature of a rising share in a declining market. It’s simply brilliant:
This company is dead. I didn't kill it. Don't blame me. It was dead when I got here. It's too late for prayers.For even if the prayers were answeredand a miracle occurred......and the yen did thisand the dollar did that......and the infrastructure did the other thing,we would still be dead. You know why? Fiber optics.New technologies. Obsolescence.We're dead, alright. We're just not broke. And do you know the surest wayto go broke? Keep getting an increasing shareof a shrinking market. Down the tubes. Slow but sure. You know, at one time... ...there must have been dozensof companies making buggy whips. And I'll bet the last company aroundwas the one that made... ...the best goddamn buggy whipyou ever saw.
Now, in the case of commodities, we’re not necessarily talking about rising shares in declining markets. We also need to be specifically mindful of the distinctions between spot commodities, the companies that mine (or otherwise produce feedstocks and raw materials), manufacturers (for which the play would be stocks or bonds or derivatives), and the futures markets -- they all behave in related ways, but for unique sets of reasons, and they are anything but monolithic.But here’s the seduction that can kill you, and it goes to the very core of what makes people in the middle of a bubble complacent enough to get wiped out when the bottom falls out. Commodities are commodities. Each in its own right, they’re essentially the same (yes, I am aware of grades and purities but I emphasize “each in its own right”), and that means distinctions and competition in the marketplace revolve mostly around price, which in turn revolve around supply, demand, etc.But there are huge macro factors, too. In robust economies, there is little talk about commodities unless inflation becomes a problem, or unless a large exogenous event occurs (e.g., the Arab Oil Embargo, 1973). That’s because boom times tend to accompany stable currencies, low borrower default rates, adequate employment and income trends -- thus favoring equity/fixed-income investment and enterprise-oriented capital formation focused on creating value in new and creative ways (e.g., the technology sector). While commodities figure into evolving economic sophistication, and importantly so, they’re still commodities. Stability makes commodities sleepy.Commodities earn far greater attention when the bloom is off and uncertainties are on the rise. That’s when the alarm bell rings and commodities wake up.When central banks around the world are scrambling through the mechanisms of monetary inflation to keep the wheels on the wagon, stave off deflation, save the financial system and its subsegments deemed “too big to fail,” and prop up confidence about that which undergirds enterprise, then the whole perspective changes from prosperity to scarcity, from growing the pie to fighting over the slices.We are in such a latter phase now but it’s easy to overlook, given the rising stock market. And the mood is very skeptical. Did we overpay on TARP, TALF, stimulus, and the rest? Most people think we did, especially when they look at the unemployment rate, weekly jobless data, and recollect on phrases such as “green shoots” and when those acorns were supposed to have become mighty oaks. So we can see the “economy of scarcity” part, and while we can also see the increased action in commodities, we’re still seeing what appears to be a pretty healthy situation for stocks (although bonds have sold off lately, despite Fed QE I and QE II, and we may well look back upon that in time to come as an important precursor signal).
Here are some quotations from that release:
My comments: Supply trends are up over the long term -- despite a notable hiccup or two -- and those trends are especially worrisome at the top of the food chain: titanium sponge, which is the highest margin space but also subject to wild and unpredictable demand trends. Not unexpectedly, China is a looming and increasing factor (Russia and surrounding “stans” have already been there to dump product whenever they feel like it) -- just like that country seems to be in everything else. Demand for sponge appears robust at the moment but that demand is highly leveraged on aerospace and commercial aircraft. We know about the problems with the Boeing 787 and associated delays. We might be wondering about the political shift rightward in the new Congress and its effect on defense expenditures indirectly related to titanium. More companies, in an increasing number of countries, are getting involved in production, and all of them are interested in the “big enchilada”: sponge. Aside from aerospace and defense, there are interesting and important applications in the petrochemicals sector.Another report that caught my eye came from the Inspector General’s Office -- perhaps better thought of as a set of recommendations than as a report as such.This document, ominously dated October 29, 2009 (the 80th anniversary of The Great Stock Market Crash of October 1929) essentially observes the effect of US Department of Defense orders on titanium prices and suggests the importance of locking in long-term supplies based on index-driven trends so as to ameliorate price spikes. In checking with the Inspector General’s Office, I’ve learned that the document is alive and well in their memory banks and has been appropriately circulated and generally well-received.As for official implementation, that seems to be an area of question marks, and one of the things you will observe in reading this report, if you do, is that there is a language, tone, and culture all to its own in the world of government and procurement -- something I discovered on the Grace Commission so long ago I refuse to divulge the time frame. But that’s important with titanium, because much of the business is concentrated in the defense/military sector.But I can tell you this: After reading these documents, there was nothing related to sex on my mind and, if I wasn’t fully informed about titanium, I was certainly experiencing no bubble-oriented euphoria, either.Finally, my last investigation was a look at some stock charts and graphs, especially for Titanium Metals Corporation. They are interesting and I’ve decided not to share my conclusions about that. I will point to some recent price and trading activity worth noting if this company/industry is of interest to you. And I further suggest some in-depth probing regarding insiders, their “chains of ownership” (both personally and via business entities), interlocking directorates and officerships, background history, and recent filings.I found the this report quite informative in this regard -- especially in the “history repeats itself” department -- but reach out, as there are many places to look around, and the Web is a bottomless reservoir if you successfully fight “the rut.”Additional LaughsThere’s another report I discovered that gave me a good laugh but not much otherwise. It began with the sagacious observation that, concerning titanium, “excess capacity remains a barrier to entry,” which -- much like Larry the Liquidator’s “Show me a company with a rising share in a declining market, and I’ll show you the last buggy whip manufacturer” -- conveyed “this industry sucks,” but in a much less entertaining way.Obviously, excess capacity is a barrier of entry. It means there’s more of something, and the capability to produce even more on top of that, than the world wants. But “barrier of entry” makes it sound like there’s something in the way preventing interested parties from getting involved, when in fact “excess capacity” reflects the fact that the industry would have been better off if there had been something to keep competitors out once upon a time when demand was more consistently keeping pace with supply. The net benefit, however, in such less exciting situations, is to the end user in the general phenomenon of supply overhang keeping a ceiling on costs and prices.Navigate Your Own Research PathSo there you have it, and I hope I’ve set you down a path to investigate the topics of commodities, the circumstances surrounding shifts from financial to hard assets, and whatever micro industries and enterprises you may find appealing, informative, and profitable. As the French say when they’re going biking -- today on bicycles that sometimes contain liberal doses of titanium -- bonne route!
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