The Commodity Collapse Continues — Bret Jensen

My regular readers know that my biggest worry for 2016 is the accelerating impacts from collapsing commodity and crude prices. I have highlighted this many times as I do not think the market is appropriately pricing in the likelihood that the dismal state of these markets morphs into a significant “credit event” that brings significant turmoil to the equity markets in the New Year. This could be a replay of the deep but short lived Russian default scenario that rocked markets briefly in 1998 when oil was in the teens.

It is hard to overstate how ugly it is getting in these markets. Iron is at lows not seen since the financial crisis at barely over $43 a metric ton. Some pundits see the price falling under $40 a ton in the near future. The fall off of demand from China (steel production is down this year which one would not expect if its economy was truly growing at the “official” seven percent GDP figure) is the primary factor along with new capacity coming on line. Copper is also at multi-year lows.

Oil is getting some play today as Turkey downs a Russian jet that may or may not have been its territory but is still trading close to the bottom of its recent $40 a barrel to $65 a barrel range that crude should continue to be rangebound within over the next 6–12 months which I recently detailed in a free 15 page report. I continue to be completely out of the commodity and energy spaces other than an investment in giant refiner Valero (NYSE:VLO) which is holding up well.

Argentina welcomed a new political leader this week. Unfortunately, he inherits an economic mess after 12 years of populist Peronist mismanagement. Argentina, Russia, Venezuela and Brazil are in an extreme economic distress and at least one of them will default in my opinion if commodity and oil prices continue at these levels through 2016.

I continue to raise cash with a goal of getting back to the 30% allocation I had before I bought the recent dip in the market in August & September which took me down to an approximate 15% cash level. It is hard to find much value in the market here. Ford (NYSE:F) and General Motors (NYSE:GM) continue to benefit from a robust domestic auto market as well as low gas prices which is helping high margin sales of trucks and SUVs. Both can be had for less than eight time forward earnings and yield over four percent as well.

There are also good value in some of the large cap biotech stocks that easily beat both top and bottom line expectations during third quarter earnings season. These companies have solid balance sheets, good pipelines, impressive free cash flow and pay nice dividends. They also are selling at a significant discounts to the overall market multiple. These names include Gilead Sciences (NASDAQ:GILD), AbbVie (NYSE:ABBV) and Amgen (NASDAQ:AMGN).

Other than that it is hard to find much value in the current market. Sorry for sounding more like “Krampus” than jolly old Saint Nick before the holiday season. However, that is my view this Tuesday during this Thanksgiving shortened trading week.

Thank You & Happy Hunting

Bret Jensen

Founder, The Biotech Forum

Disclosure: I am/we are long ABBV,AMGN,F,GILD,GM, 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.