The Commodity Comeback: Sooner Than You Think

Since the hedge funds dropped commodities in early July, you have seen a dramatic sell-off in oil, coal, and fertilizers. This despite the fact that these commodities have excellent fundamentals going forward, stellar earnings, and continued demand.

The recent "rally" on Wall Street, with the illusion that with lower oil everything is right with the world, came to a reality check Tuesday when JPMorgan (JPM) reported a loss of 1.5 billion. What the market fails to accept is that the financial crisis is still in the middle innings and as long as the credit crunch, credit card defaults, mortgage crisis, and lower consumer spending continues, this crisis will not go away simply because oil is down in price.

This crisis has been years in the making. The continued budget deficits, a war in Iraq, complete disregard for oil alternatives, and a weak dollar created a financial credit crisis not seen since the great depression. But Wall Street, acting in a world where expectations are counted in minutes and not in years continues to assume that the financial crisis is over or will be over by a positive stimulation such as lower oil prices. This is not only an illusion but a complete denial of what is yet to come.

So where do you invest? Opportunities are limited and the game today is played in a field that changes quickly. No sector is bullet-proof. Not even to those that boasted that Visa (V) is depression-proof and its price is not affected by a bear market.

The one thing I believe in is that commodities are a stellar play now and in the future. I believe in this so much that the recent pull-back in commodities does not scare me one bit. I truly believe that the forces that led to the boom in commodities earlier this year will continue into the future. Demand for oil, coal, fertilizers, and other commodities in a world fighting for depleting natural resources will only make the fundamentals of these commodities stronger for a few more years to come.

Yes, there is great volatility. Yes, there will always be pull-backs. But do any here really believe that the dollar is coming back strong to stay? Do any here believe that the price of oil will go down further and stay at low levels? Or that the demand for fertilizers will be lowered?

There will be a prolonged bubble in the commodities sector eventually. And when that comes it will be bloody and very painful. But all indicators point to the fact that in this game we are only in the second inning. Those that see the opportunities in commodities and act on the cycles will be richly rewarded..seeking alpha