In February, I mentioned the Legg Mason Value Trust, managed by Bill Miller, as the fund with the longest-running winning streak vs. the S&P 500. The streak runs 16 years.
A couple of weeks ago, Miller put out his quarterly market letter. I’m beginning to think I’m profound because I agree with his thinking.
Below is a paraphrased summary of what he wrote:
The Financial Times” headline on April 10 read, “Commodity Prices Set to Soar.”
Then Miller thought back to the spring of 1999 when commodity prices were in the tank and oil sold for $10 a barrel.
In the spring of 1999, the Financial Times’ sister publication, The Economist , had on its cover the headline “Drowning in Oil,” saying that $10 a barrel may be too optimistic and prices may be heading for $5 a barrel.
What the 1999 article did not say, as oil was making its lows, was the price was set to soar.
Since then, oil is a six-bagger, copper has quadrupled in four years, silver and sugar have tripled in three years, and orange juice has doubled in two.
So after the biggest commodity rally in 50 years, NOW prices are ‘set to soar?’
Pension funds are falling all over themselves to allocate a portion of their funds to commodities.
In the April 15 Wall Street Journal , Morgan Stanley and Citicorp recommended individuals double their allocation to commodities.
This move is being driven by pension fund consultants armed with data showing how well commodities have performed, how over 50 years they have performed as well as equities, and investing in hard assets, commodities, and hedge funds could be a ‘surer way’ to fund future obligations because commodities are noncorrelated with stocks.
However, it matters when you start the measurement period.
If you start in 1950 and end in 2000, it shows 47 years of prices oscillating around a zero rate of return and three or four years of a straight up move in the 1970s.
Now, moving the 50-year period forward five years includes the most recent three- or four-year boom in commodity prices and thus brings the 50-year returns in line with stocks.
The time to own commodities is (or at least has been) when they are down, when everybody has lost money in them, and when they trade below the marginal cost of production.
That time is not now. Every commodity we can get data on trades significantly above production cost.
Copper, for example, has a marginal production cost of about $1.30 per pound and has a current price of over $3.25. It is not a question of if copper prices will come down; it is a question of when.
Today’s argument for high prices is that it is different this time and we are in a new paradigm because of insatiable world demand.
The assumption is commodity demand will lead to price increases that exceed GDP and corporate profits. If it happens, it will be the first time in economic history.
Historically, commodity prices have fallen in real terms due to the improvements in technology for producing the item outpaces the demand for them.
Miller is skeptical of advice to buy commodities AFTER the biggest bull move in 50 years.
So where does Bill Miller see value today? I’ll tell you in two weeks.
Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or [email protected]