Will Commodities Please Experience
a Major Correction?

Commodities are due for a major correction, which will provide investors a good entry point for new stocksA lot of initial public offerings (IPOs) have hit the market recently, and that’s no surprise—the stock market’s been strong. Times have been tough in the investment banking industry, but this changed recently with the much improved sentiment in the broader market. We can never forget that everything in the investment business is about perception. It’s not a unique industry in this regard, but confidence in the system (rather than the individual security) is how the secondary markets (otherwise known as the equity and bond markets) hold themselves together. Without confidence, the entire system breaks down. Recent history is a very good example.

The broader market is pulling back, but this is well deserved and I feel the longer-term uptrend remains intact. Commodities especially have been due for a major correction and, although it will be painful if you’re long the sector, I hope the correction is pronounced. This would create an opportune entry point for new positions.

The inflation issue is beginning to present itself in Europe and this isn’t a good sign. And, even though agricultural commodities prices are pulling back a bit now, they’ve still been on a tear over the last several months. This pricing pressure on food stuffs will only add to the inflation data later this year. You can bet that your food is going to get a lot more expensive over the coming quarters.

I’d be buying the S&P 500 Index in the current environment, especially if the current retrenchment turns into a real correction. At the speculative end of the stock market, I still like mining companies and stocks—senior producers and junior miners. I also like a number of U.S.-listed Chinese companies, but this group has been lagging the rest of the market because of accounting worries. In some cases, this perception is warranted. In most cases, it is not and the situation has created some extremely good values. Despite China’s desire to cool its economy and inflation, I think Chinese equities are going to accelerate later this year.

I’m not too enthusiastic about buying individual large-cap stocks at this time. All the good, high-dividend-paying companies have already experienced a dramatic price run. Some veteran Wall Street stock-pickers are now musing about a major bull market going into 2013. This is certainly a plausible scenario if earnings growth momentum remains and there are no major confidence shocks to the system.

If you want to know where the stock market is going to go over the near term, the best indicator continues to be railroad stocks. This is still very much an economic recovery rally in stocks.