The new mantra creating a deflating speculative bubble is taking a new twist.  Even before Ospraie blew out its fund (and now after) there have been more rumors about commodity-related funds or commodity-stock related fund blow-ups.  In fact, today is no different and much of that is being tied to selling as new credit issues are bring about more and more de-leveraging. All you have to do is look at some of the top commodity stocks (below) to see how this is not just sector rotation. Or you can just look at the yield on the 10-Year T-Note at 3.65% today.  In mid-August this was 4% and if these levels hold here this will mark the lowest yields since mid-April.  Today feels like one of those days after a weak week where nothing works.  Only two of our old "defensive stocks for a crummy market" are trading up today.

The price action that was being seen in June in commodities like oil, coal, and gas were just the tip of things in a bubble.  For the first time in many of our professional careers the fertilizer business was cool and was rocking.  When potash and chicken poop are cool, well you know what it smells like.

So which major sector stocks have been swimming back in the bad-smelling fertilizer? 

Integrated Oil... Exxon Mobil Corp. (NYSE: XOM) is within a hair of the 52-week lows which were put in during August and are now down 20% from their 52-week highs and down almost $5.00 in just the last week.  Diversified metal & mining... BHP Billiton Ltd. (NYSE: BHP) has lost more than 37% from their 52-week highs and down over $10.00 from the $70 levels of just last week. Gold... Barrick Gold Corporation (NYSE: ABX) is down almost 45% from its 52-week highs and shares are down about 13% from last week.  Coal... Peabody Energy Corp. (NYSE: BTU) shares are down over 40% from their highs and down more than 20% over the last week. Potash/fertilizer... Potash Corp. of Saskatchewan, Inc. (NYSE: POT) shares are down nearly 40% from highs and down about 17% just over the last week.

And there is more bad news.  Technology companies aren't proving to be the haven investors were hoping and financial stocks failed to continue their rally.  The latest big rally groups were homebuilders and retail stocks as traders were trying to discount the current environment and look six months or nine months out.  Wal-Mart Stores Inc. (NYSE: WMT) is still within 1% of its 52-week and multi-year highs as it is winning from the trade-down economy.

This is what de-leveraging and bubbles popping looks like.  Would it be fair to call the commodity bubble of 2007 to 2008 the same as the tech bubble of 1999 to 2000?  No, it would not.  But it does look very similar while it is happening.  These are at least real companies with real histories, real products, and real needs that have to be met.  But again, the similarities are there.

When you have speculators on Capitol Hill telling Congressional hearings that they play no part in asset prices it becomes a bit like getting advice from the Alzheimer's ward patients at the nursing home. If not, it's no different than asking a fox if he's seen any threats to the chickens.  Unfortunately the Volatility Index ("VIX") is up over 2 points today alone at 23.79, and that will have over 25 or get to nearly 30 before the overall level gets too oversold.

But there is good news.  When you get to this point with these observation the old adage of "you have to buy when you feel horrible about things" sure comes to mind.  But there is another adage too to keep in mind.... What do you call it when bottom fishing doesn't work out? Bottom sniffing.

At least there is no recession.  The government keeps telling you that with those economic numbers not technically falling into an official recession.  The other good news is that the drop in raw commodities is taking the winds out of the inflation sails.  The bad news is that energy and commodities became a pretty big component of the markets, or at least large enough to take away the benefits from the market overall.

Jon C. Ogg

September 4, 2008