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Bullish Bets on Commodities at March 2009 Lows, That Has to Be a Buy Signal Right? - Not According to Prem Watsa
Posted by: CanadianValue (IP Logged)
Date: March 14, 2013 09:59AM

I was a bit startled by a statistic I saw from Bloomberg this week. The number of net-long futures and options commodity positions amongst hedge funds is currently sitting at the lowest level since March 2009.

Ah March 2009, the good old days. Back when I was afraid to have my cash on deposit with virtually any bank. Back when oil sold for $30 and there were people actually concerned for the solvency of Berkshire Hathaway.

That March 2009 time period was some scary stuff. It was also of course the greatest time to buy almost any asset that most of us have ever seen.

I mean check out a company like Whole Foods (chart below). The stock price has gone up more than 10 times since March 2009. Why? Because people were so afraid in March 2009 that they thought consumers would never again be able to afford to pay up for Whole Foods' fancy groceries.

We were all headed for permanent diets of Kraft Dinner and hot dogs (my kids would love that)!

So is the fact that hedge funds are as pessimistic on commodities now as they were in March 2009 when the world was about to end a signal to buy?

The answer is definitely no if you ask one value investing luminary named Prem Watsa.

Here are some of his words on commodities from his recently released 2012 Fairfax (FFH) letter to shareholders:

We continue to be early – and bearish!

Commodity prices have yet to collapse (i.e., complete the down cycle), almost all the major mining com-pany CEOs have retired, including at Vale, Rio Tinto, BHP Billiton and Anglo-American, reflecting the sin of making acquisitions at the top of the market. Rio Tinto’s purchase of Alcan is a great case in point. Purchased for$38 billion in 2007 at the height of the commodity boom, Rio Tinto has already written off $20 billion or half of the purchase price!As we said last year, if commodity prices come down after their parabolic increase, Canada will not be spared.

Note his use of the word collapse. He certainly isn’t saying a flattening of commodity prices or an increase. Prem is expecting a significant drop.

And he is betting some of Fairfax’s money on it.

According to the most recent Fairfax letter the company still has several hundred million invested in CPI-linked derivatives that will pay off big in a deflationary environment. That investment is about three years old now and so far isn’t looking like a good use of shareholder money.

Of course we were saying that about the credit default swaps Watsa owned heading into the 2008 financial panic that became a windfall for Fairfax shareholders.

There is one commodity-related collapse that has already happened. That collapse is in small-cap Canadian resource stocks.

Check out the the S&P/TSX Venture index over the past year. In some places it really is March 2009 again!

Guru Discussed: Prem Watsa: Current Portfolio, Stock Picks
Stocks Discussed: FRFHF.PK, BRK.A,
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