Bubble Talk Continues

Talk of a commodity bubble continues. This weekend in Barron´s there were two articles about a commodity bubble. Today, the front page of Yahoo! Finance has an article by by Jeremy Siegel about the commodity bubble. What´s going on? Should you sell all your oil investments?

Well, in my opinion, the problem with all these articles is that they group together all commodities into one sector, as if commodities, as a whole, represent one industry. However, to the disinterested observer, this is clearly far from the truth, which is why talk of a commodities bubble should be ignored, if you are invested in energy companies.

For the fact is that to compare metal commodities to oil and gas is simply silly and flat out wrong. So while it is possible, that certain commodities prices may have had no fundamental reason for rising, that in no way implies that that all commodity markets were or are in a bubble phase.

As it relates to oil there are clearly solid and rational reasons for the rise in price over the last several years on both the supply and demand side. Maybe I am naive, but I think it is simply ludicrous to believe that hedge funds are behind the multi-year rise in oil, a commodity with a strong long-term demand profile and a diminishing and questionable supply outlook.

The other major flaw in all these articles is that they fail to distinguish between investments in the commodity itself and the companies that profit from the commodity. On that score, I think you would be hard-pressed to find another industry, like oil and gas, where the leaders from decades ago, even from the height of the last oil boom, have not only maintained their financial value but have provided investors with above-average returns. As Mr. Siegel himself says: "Energy stocks have been great investments over the past half century, even before the latest oil price surge." Clearly the oil industry is of course cyclical, but it´s not a bubble. So don´t panic during this recent sell-off. Wait till the dust settles and rationality returns to the markets. In fact, it is best to wait to make any sell decisions till summer begins, and oil demands pick up and supply issues come to the forefront again.