Commodities: A Twin Edged Sword

Mutual Funds and ULIPs will be Hit Hard
For more than four months, I've been telling you how rising oil, corn and commodities prices would split Dalal Street in two. The warning I issued in December has finally come true: "Consumer spending will decline, entire sectors will be abandoned and earnings will evaporate--and with it, the fortunes of millions of investors will vanish as well." Just look at the free fall the financial, construction and airline sectors have suffered on declining earnings and poor expectations. But as I also said, on the other side of this great divide, "Companies will be thriving, earnings will be accelerating, and investors will be enjoying their best returns in years, fully protected from the liquidity plague that will send millions of investors to the poorhouse." What most investors don't understand is that commodities (oil, food and natural resources) are the blood supply of global growth. What rising commodities prices have done, so tragically, is trigger one of the biggest stock declines in market history... increase borrowing costs...shrink profit margins...panic investors...and raise fear of global economic collapse. And while the Fed's move to flood the markets with more easy money continues to boost stocks temporarily, the worst is far from over... ...as the falling dollar continues to push prices higher, increase the price of oil and shrink profits--ultimately undermining consumer confidence and triggering inflation across the board. The bottom line is this: In a world where easy money and low interest rates have been the driving force behind the real estate boom of the past five years, the repercussions have resulted the in a falling dollar, rising oil and commodities prices, and collapsing real estate and stock market. Not just here in the U.S., but in all four corners of the Earth. Which is... Why You Must Reposition Your Assets Now But Let me sum up the dangers. The subprime credit squeeze has increased borrowing costs and put downward pressure on profit growth and consumer spending. The result has triggered a global sell-off, sending throngs of investors into commodities as a safe haven, trigging an epic rise in gold, oil and corn prices. The chain reaction has not only dried up merger and acquisition activity, and put the breaks on dozens of corporate buybacks, which not only supported stock prices but also helped drive the market higher... ...but also kindled inflation fears not only here in the U.S. but also around the globe. And this isn't even the worst of it. On top of that, hedge funds are bleeding bad debt, and many have already declared bankruptcy. As a result of the credit crunch, experts predict that nearly two-thirds of the hedge funds operation today will exist. When you add everything up, the subprime mess and following credit squeeze and commodities boom has not only crippled global markets, reduced investor confidence and stalled world growth... ... but also painted the Fed into a dangerous and frightening corner with only two options:Lower interest rates again on March 18th to reduce the chance of a slowdown, but fan the flames of commodity-induced inflation, or Leave interest rates unchanged to reduce the risk of a rampant commodities-inflation bubble, but likely allow the economy to slip into a recession in the process. Either move could blindside investors who have not adjusted their holdings accordingly.

Source: aiii
Credit: eagle eye