The Commodity Collapse Continues — Bret Jensen

My biggest worry for 2016 as I have stated more than a few times is the continuing price collapse in both the commodity and energy complexes. I believe if prices stay at these levels we will see some small and mid tier producers and miners go belly up. The markets could also be looking at some point at default situations at commodity reliant emerging markets like Russia, Argentina and Brazil. This could test both the credit and stock markets substantially and I expect this to cause turmoil for equities at some point in the New Year.

As I published in a free 15 page report, the demand & supply drivers in the crude market at the moment points to oil being in a range of roughly $40 a barrel to $65 a barrel over the next 6–12 months. Lately we have been in the low end of that range and to this point that ~$40 floor has held. If it is breached significantly, the stress on producers could get severe faster than I am currently forecasting.

It is just not oil that is getting hit. Natural gas is in the tank due to the continuing increase in production and a warmer than normal fall season so far which is reducing the need for heating. Gold hit lows not seen in more than five years this week. Not surprisingly miner Anglo American had its stock on the London exchange sell down to lows not seen since 1999.

VALE

Giant miner Vale (NYSE:VALE) is under huge duress as iron prices are at levels not seen since the financial crisis. It is also being hit by a huge suit by Brazil for its part of a recent huge mining disaster in the country. One has to worry about it and also Petrobras (NYSE:PBR) given their huge debt loads. We could also say the same for Brazil whose sovereign debt is on the cusp of junk status. My article “Bailing out of Brazil” in September of 2012 probably should go down as one of my most prescient calls in recent years. Of course I probably benefited from being in Miami on that one as you could see firsthand the bubble forming down south.

I obviously am extremely underweight both the commodity and energy sectors of the market. The only major holding I have that I can think of is in refiner Valero (NYSE:VLO). The company is benefiting from the low costs for its feedstock, continues to pay down debt and reduce capital expenditure needs, is reasonably priced and pays a nice dividend as well. It has been a mainstay in the Blue Chip Gems portfolio and has provided an almost 30% return including dividends since its inclusion in the portfolio this February.

Other than Valero, I nary have a sliver of anything else in these sectors. I don’t see we will see a turnaround in either energy or major commodities in 2016 as I believe global demand will continue to be weak and the dollar will continue to strengthen.

I continue to raise cash in my personal portfolio and have a goal to be at 30% by the time the New Year rolls around. A good portion of the rest of my portfolio is in large cap growth names like Apple (NASDAQ:AAPL) and AbbVie (NYSE:ABBV) that still sell at reasonable valuations. They also have rock solid balance sheets and pay nice dividends. More importantly, they can continue to crank out earnings and revenue growth even given the difficult global backdrop at the moment.

Bret Jensen

That is my take this Sunday morning.

Thank You & Happy Hunting

Bret Jensen

Founder, Biotech Forum

Disclosure: I am/we are long ABBV, AAPL, VLO.

For more information on Bret’s core investing strategy that is hugely successful in the lucrative biotech sector, consider Bret Jensen’s exclusive investment service, The Biotech Forum on Seeking Alpha.


Originally published at seekingalpha.com.