Fund Times
Fund Times: Bill Miller's Case Against Commodities
by Lawrence Jones | 04-27-06 | 03:42 PM
In his latest commentary, Legg Mason Value LMVTX manager Bill Miller argues the rush to get on the commodities bandwagon by journalists and pension funds alike is yet another sign that we're nearing a ceiling for the category's performance.
"Since the (commodities) rally we are experiencing is already bigger and longer lasting than the one that kicked off the 70's, it takes a determined optimist to say that now is time to be putting money in commodities," Miller wrote.
"The reason to own commodities may be that one believes they provide equity like returns with little correlation with equities," he wrote. "The time to own commodities is (or at least has been) when they are down, when everybody has lost money in them, and when they trade below the cost of production. That time is not now. The data showing the returns of commodities will look very different if you start measuring just after prices have tripled."
"Every commodity we can get data on trades significantly above both the average and the marginal cost of production," Miller wrote. "Copper, for example, has an average cost of production of around 90 cents per pound, and a marginal cost of about $1.30 per pound. The marginal cost should approximate the equilibrium price over time. The current price is around $3.25 per pound. It is not a question of if copper prices are going down, it is a question of when."
He goes on to say: "The US equity market has lagged those of the rest of the world by a wide margin for several years, and within our market the mega cap S&P names have lagged the small and mid caps, which are in the 7th year of relative outperformance, quite long in the tooth by historic standards. Part of the reason for the relative lack of interest in US stocks has been the relentless rise in short rates. Our central bank has been noticeably more hawkish than the rest of world, and money has flowed to where money was the easiest, outside the US. As we end our tightening cycle, and others remain engaged in theirs, our market should become relatively more attractive."
He concludes, "In general, you can get a good sense of what to buy now by looking to see what the worst performing assets or groups were over the past five or six years. That is long term for most people, and long enough to convince them that the malaise is permanent and to have migrated their money elsewhere, such as to whatever has done best in the past 5 or 6 years. Given the choice of buying Commodities with a capital C, or buying capital C--Citigroup--at current prices, I'll take the latter. Check back in 5 years."
Fund Times: Bill Miller's Case Against Commodities
by Lawrence Jones | 04-27-06 | 03:42 PM
In his latest commentary, Legg Mason Value LMVTX manager Bill Miller argues the rush to get on the commodities bandwagon by journalists and pension funds alike is yet another sign that we're nearing a ceiling for the category's performance.
"Since the (commodities) rally we are experiencing is already bigger and longer lasting than the one that kicked off the 70's, it takes a determined optimist to say that now is time to be putting money in commodities," Miller wrote.
"The reason to own commodities may be that one believes they provide equity like returns with little correlation with equities," he wrote. "The time to own commodities is (or at least has been) when they are down, when everybody has lost money in them, and when they trade below the cost of production. That time is not now. The data showing the returns of commodities will look very different if you start measuring just after prices have tripled."
"Every commodity we can get data on trades significantly above both the average and the marginal cost of production," Miller wrote. "Copper, for example, has an average cost of production of around 90 cents per pound, and a marginal cost of about $1.30 per pound. The marginal cost should approximate the equilibrium price over time. The current price is around $3.25 per pound. It is not a question of if copper prices are going down, it is a question of when."
He goes on to say: "The US equity market has lagged those of the rest of the world by a wide margin for several years, and within our market the mega cap S&P names have lagged the small and mid caps, which are in the 7th year of relative outperformance, quite long in the tooth by historic standards. Part of the reason for the relative lack of interest in US stocks has been the relentless rise in short rates. Our central bank has been noticeably more hawkish than the rest of world, and money has flowed to where money was the easiest, outside the US. As we end our tightening cycle, and others remain engaged in theirs, our market should become relatively more attractive."
He concludes, "In general, you can get a good sense of what to buy now by looking to see what the worst performing assets or groups were over the past five or six years. That is long term for most people, and long enough to convince them that the malaise is permanent and to have migrated their money elsewhere, such as to whatever has done best in the past 5 or 6 years. Given the choice of buying Commodities with a capital C, or buying capital C--Citigroup--at current prices, I'll take the latter. Check back in 5 years."
