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, China and India are on long-term paths of increasing resource consumption, and there exist a host of other developing economies that thirst to join in on the party.

Be careful out there!


© DrDuru, 2005