Great Investment Articles

This article is the draft of a speech by Clyde Harrison of Brookshire Raw Materials. It's a bit lengthy, but well worth the read. Below are excerpts relating to the stock market and commodities:

The equity market now has 84 million individual investors. Over 50% of these investors’ liquid assets are in the equities—but the historical average is 25%. Using the rules outlined by Graham and Dodd such as dividend yield, P/E Ratio, price ratio, price to sales ratio and price to assets, stocks are very expensive. They are over owned and over priced – a dangerous combination.

There has never been a ten year period in history when valuations have been as high as they are now and where the broad stock market indexes out performed money market funds – never!

I expect a moose market, not a bull or a bear but a moose, rhyming with the period of ’66 to ’82 where the market went nowhere.

I believe the paper bill market has ended and the stuff bull market has begun.

Between 1966 and 1982, equities gained nothing while the GNP gained 330%. The DOW went from 1000 to 875. From 1982 to 2000, the GNP gained 170% and the DOW rallied from 875 to 11,700. Currently the DOW is trading over 11,000, about a 25 P/E ratio. Between now and 2015 if the GNP gains 100% and earnings gain 100%, then the DOW could be at 10,000, trading at 10 times earnings. During the past 5 years the S&P is up 5%. And at that rate of compounding, you will have to work till you die.

During the last stuff cycle equity mutual funds were in a dead zone while stuff; raw materials, art and real estate had super returns.

In 1966 oil was $2.90/barrel and rallied to $28/barrel. Gold was at $35/oz and rallied to $850/oz. The average price of a home increased 180%.

In 1982 the stuff cycle ended and the great paper cycle began. In 1982, the public had 14% of their liquid assets in equities. The Business Week Magazine cover reported “The Death of Equities”. The P/E ratio was 7. Stocks were dirt-cheap and stuff was very expensive. Brokerage firms were selling real estate and oil and gas partnerships. 1982 was the beginning of a great bull market in paper.

By 2000, the DOW was up over 10 fold. The cost of one dollar’s worth of earnings (the P/E ratio) has risen from 7 to 44, and the public had 57% of their liquid assets in equities. The Time Magazine cover featured “The Committee To Save The World: Greenscam, Summers and Ruben”. Brokerage firms were selling tech and dot coms with no earnings. The paper bull market was ending. Paper was very overpriced and over owned. The Dow could be in a trading range of 7,000-11,000 for years.

Stuff, from 1982 to 2000, was in the dead zone. Oil went from $28/barrel to $26/barrel. Gold went from $850/oz to $280/oz. The average price of a house had increased 1.2% per year by ‘2000. Stuff was a bargain.

In the next 10 years paper could be a trading market while stuff is in a bull or buy and hold market.

30 years of restrained and neglected natural resource supply is being overwhelmed by demand.

Peace put 2 ½ billion people in the world labor market. India and China alone contain over 2 billion consumers. Suppose each of the 2 billion people consumes a mere quart of gasoline per week as their economy booms; that’s an additional 1.7 million barrels a day, new demand that is sure to increase price. Today, China is booming. They have declared the national bird to be the construction crane. Last year China’s factory floor produced 50% of the world’s cameras, 35% of the TV’s and 30% of the refrigerators sold worldwide. In the last five years china went from exporting oil to the second largest importer in the world. The Chinese will go from walking, to bikes, to motorcycles, and to autos. They will need oil and gas, chemicals, forest products and metals. At 80 cents per hour they are deflating manufacturing costs, but as they become more successful, they will throw away their bicycles and buy motorcycles and eat better, increasing the demand for raw materials.

China and India are transforming their economies from poor agrarian nations to the newest industrial powers, replete with heavy industries, mass transportation and higher education. Rising from these giant new economies will come millions of new consumers, the very people who are already straining the natural resources of the earth.

Real incomes are just beginning to rise to levels that create large demands for consumer goods. Between 1950 and 1970, Japan’s urban population increased 70%. Personal consumption increased 600%.

China currently is 40% urban, 60% rural. The US is 97% urban and 3% rural.

China has 20% of the world’s population and 7% of the world’s land. China’s grain imports will grow from 14 million tons today to 57 million tons in 2020.

Today, 1 billion people consume two thirds of the world’s raw materials. 5.6 billion people consume the other third and they are becoming more successful.

Demand for raw materials has increased. In many cases, the capacity to produce raw materials has declined dramatically in the last 20 years. Tops and bottoms are creatures of extreme. Markets rise above all expectation and then go higher and then fall further than common sense suggests. The most desirable investments for the future might not be in cyber space but back to the basics.

By the end of this bull market in commodities, there will be a bounty on caribou, you will be able to see an oil rig from every beach and they will be digging a copper mine in Barbra Streisand’s yard.

As you climb the ladder of financial success, check to make sure it’s leaning on the right wall. I believe raw materials will be one of the best investments for the next 10 to 15 years.