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December 02, 2003

The Proboscis Closest to Your Heart



The Bet on commodity index funds, like stock index funds, which have the advantage of requiring very little overhead –after all, there are few trading costs involved in maintaining the portfolio’s balance since it’s rare for companies to be added or removed from an index—is now being offered by a few companies They are designed to rollover a fixed percentage of holdings based on the weighting the fund presets for key raw materials like petroleum, precious metals, coffee, pork bellies, etc. 


For most investors, and I use the term in contrast to “traders”, the buying and selling of various trades for commodities can be a daunting task.  Traders tend to both leverage their bets by using very generous margins and to hedge them by buying both sides of a play.  The trick, often, is not to guess a price direction so much as spot a price anomaly that is bound to break in one direction or the other.  At least, that’s the way it is supposed to work. 


Some of these trades are purely technical; others are based on macroeconomic factors.  As investors, it is important to be nimble enough to jump on opportunities where they might arise but we are mainly looking at macroeconomic factors in making our betting decisions.


The question here is whether a pure commodities play is a hedge against an overvalued stock market and a falling dollar.  The answer should be yes except that a stagnating economy and drying demand –the buyproducts of a fall in stock markets and the more general economy—will also affect commodity demand.  Some people are betting that internal growth in India and China will propel demand for commodities even if the global economy falls back to stagnation and delation.


Is the China story that big?


Sometimes, the opportunity lies right under our noses.  For instance, I like to collect old family style cameras and used to pick them up mainly at tag sales and flea markets.  Then came EBay and the range of choices increased enormously.  No longer was I looking at one or two cameras in a month’s time, instead, on any given day I could see 20 or 30 being offered on line.  What’s more, since the offers were so consistent, I could sit back and watch a few auctions to establish a price range in which they seemed to be valued.  Before that, I was subject to the whim of the seller who might guess anything when it came to the object in question. Of course, that sometimes worked to my buying advantage but it also was annoyingly frustrating trying to convince somebody that a, say, $50 camera, could be bought for $15 on most Sundays.


EBay ended all that.  It soon became clear that there was a market for these outdated but still quite common objects and that there were more or less desirable ones to be sought based on rarity and aesthetic considerations.  An amazing window had been opened up for butterfly collectors of all stripes!


Before long I was becoming great friends with my mailman, not to mention the UPS and FedEx drivers on my beat.  Furthermore, despite everything you heard about the pitfalls of doing business on the Internet, it became clear that most of the sample of people I dealt with delivered what they said they had in a fairly prompt manner at the price determined by the auction.  Sure, it was hard doing transactions without credit cards and intermediaries like Paypal but somehow, even with check payments that had to be first cleared before shipment, the packages would stream to my address.


To make my point, here was a system that was working big time.  And it had sticking power because once you hit a certain magic number of buyers and sellers the value of EBay to its overall community increased exponentially.


These were the days when there were any number of so called pure internet plays out there and there was much more chatter around, say, Amazon or WebMD, than there was on this flea market auction site where Piz box collectors were known to congregate.


But over the long haul and even through the valley of the shadow of death that opened in March of 2001 like the Red Sea being parted once again by Moses, EBay has been a winner.  This is not by any means a recommendation to buy EBay today since even they have their macro growth limitations and a very high valuation already built in.  But to say, when you start ordering the equivalent of your DVD’s from Netflix and the service turns out to function pretty well, then just maybe you might want to consider plunking down a bet.  Just 6 months ago, they had a valuation of little over $60 million dollars.  Since then, that has more than doubled to circa $1.2 billion.  Just a year ago you could have bought a share of Netflix for less than $10.  To get one today, you’d have to plunk down more than 5 times that.  So maybe it’s too late for them.  But keep your eyes out for those things that are right in front of your nose.  Sometimes the proboscis closest to your heart hides more than you think.






Copyright 2003 Richard Mendel-Black All Rights Reserved


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