The sky’s the limit. The sky is falling. In the short term pretty that much describes the behavior of commodity stocks.

And it’s all too easy to get caught up on the drama of those short-term moves because the possible profits if you can outguess the market are all too tempting. (I know because I get caught up in it myself.)

But for most of us who aren’t blessed with market-beating 20/20 foresight, playing the short-term volatility of commodity stocks isn’t the best way to make money in this sector.

For most of us most of the time, it’s the long-term swings between scarce supply (which sends prices up and up) and scarce demand (which sends prices down and down) that can last for years and years and years that are the best source of profits.

And right now the long-term pattern says we’re an upswing that has at least two more years to run before it sees a significant downside challenge.

Why do I think that? Supply and demand tell me so. I’m going to end this post with my take on the supply/demand picture as I see it for several important industrial commodities. But first, let me try to put the current short-term volatility in some context.

It’s the potential rewards that get our attention in the short term. Iron miner Vale (VALE) was up 42% from the August 2010 low to the January high. One-stock commodities portfolio BHP Billiton (BHP) was up 44% from the August low to the February high. Molybdenum and copper miner Thompson Creek Metals (TC) was up 88% from the August low to its January high.

But the volatility? Who can stand the drops? Look at just one stock, Freeport McMoRan Copper & Gold (FCX).

On January 11, 2011 shares had rallied to $60.90. Two weeks, January 25, later the stock had dropped 12.6% to $53.22.

On November 11, 2010  it traded at $54.01. Six days later, on November 17, at $48.42. That’s a 10.3% drop, a correction, in just six days.

But by November 11 the stock had soared 62% from its August 25, 2010 low at $33.33. That’s 62% in two and a half months.

And just in case this volatility wasn’t enough by itself to make you insane, hovering over all of these moves is the memory of great commodity rally of 2007 when Freeport McMoRan climbed 86% and the great commodity collapse of 2008 when the stock dropped 74% for the year. The volatility in 2008 was even worse than that if you looked at just the last six months of the year. Freeport McMoRan fell from $61.65 on June 13, 208 to $9.03 on December 3 of that year.

But if this kind of short-term volatility is what you’re focused on, you’re paying attention to the wrong time frame. Read more

Update Vale(VALE)

And the biggest winner from Argentina’s huge natural gas from shale discovery in Patagonia?

YPF Sociedad Anonima (YPF) is certainly a winner. The find of 4.5 trillion cubic feet of gas is roughly double the Argentine company’s previous proved natural gas reserves of 2.7 trillion cubic feet. YPF already produces some natural gas from four wells at the Loma La Lata field with a daily output of 100,000 cubic meters.

Repsol YPF (REP), the Spanish oil and gas company that controls YPF, is certainly a winner. Media reports, unconfirmed by either company say the find could hold as much as 250 trillion cubic feet of gas. By contrast Argentina’s proved natural gas reserves before the find totaled 12 to 13 trillion cubic feet. (“Proved” is a much more meaningful measure than “reported in the newspaper,” I’d note.) Repsol is planning to sell 15% of YPF in a public offering.

But the biggest winner might actually be Vale (VALE). The Brazilian iron ore giant is moving to become the biggest fertilizer producer in Brazil and it’s new $4.3 billion Rio Colorado project sits in the neighboring Argentine province of Mendoza. To mine potash there Vale needs natural gas, lots of it, and until this find it looked like it was going to have to battle a tight Argentine natural gas market to get the supplies it needed or import it from somewhere. The alternative sources were all either politically iffy or likely to be very expensive. The Rio Colorado project is scheduled to begin production in the second half of 2013 with initial production capacity of 2.4 million tons and the potential for 4.4 million tons.

And now?

It’s clear now how Vale will find the gas it needs. (And in retrospect I doubt this find comes as a surprise to Vale. We are talking about a mining company that’s pretty good at assessing future resource potential.) Vale will invest $150 million along with YPF to begin developing the find with half of natural gas production going to Vale.

This is the second big deal that Vale has signed to secure infrastructure for the Rio Colorado mine. Read more

Update Fortescue Metals (FSUMY)

Some movement this week in simplifying the complicated balance sheet of Fortescue Metals Group (FSUMY), the third largest iron ore mining company in Australia.

The company’s stock climbed 7.8% on October 11 after Fortescue announced that it had signed a $2.04 billion loan agreement to expand its mining operations. The loan from JPMorgan Chase and Royal Bank of Scotland matures in 2015 with an initial interest rate of 7.5% linked to LIBOR (London Interbank Offered Rate). The bank loan replaces senior notes issued in August 2006 to fund Fortescue’s initial mine, and the construction of a port and railroad. Those notes will be paid off at a $605 million premium.

The money will let Fortescue expand its Solomon and Western Hub projects more quickly, the company said. Fortescue’s goal is to expand annual production to 155 million metric tons by fiscal 2014 from 40 million tons currently.

Also on October 11 Fitch Ratings gave Fortescue a BB+ credit rating. That’s Fitch’s highest non-investment grade rating.

This deal may, and it’s always wise to say may with Fortescue, help resolve the company’s nasty dispute with its third-largest investor Leucadia National. Read more

Iron ore prices retreat by 12% and iron ore mining stocks say, So what?, and move higher

It’s hard to imagine this happening with any other “product.”

The price of the product drops 12% for the next quarter.

And the stock market essentially shrugs it off. On a bad day for the market, August 30, when the Standard & Poor’s 500 stock index drops by 1.47%, the shares of the world’s biggest producer of this product fall by 1.29%. Shares of the second largest producer fall by 2.49%, it’s true, but that’s not unexpected since the beta of that stock (the measure of the stock’s volatility in comparison to the entire stock market) says that these shares are on average two-thirds more volatile that the stock market as a whole. (The drop in the shares is almost exactly what beta projects.)

And on a good day for the market, September 1, when the S&P 500 jumps by 3%, shares of the largest producer rocket upward by 5.5% and shares of No. 2 go up 6.1%

Guess when it comes to iron ore—and that’s the “product” in question—investors just don’t expect any price drop to last for very long.

Even after the drop iron ore prices would be120% higher than they were a year ago. So this disappointment would leave these miners still incredibly profitable. Read more

Acquisition fever burns hot–here are three stocks to profit from the frenzy

Acquisition frenzy is upon us. August is on a path to be the second best August ever for acquisitions. Making a profit from one of these deals ought to be as easy as shooting fish in a barrel.

Except it’s not.

Many of the barrels as completely void of deals: fire away as you like you’re not going to hit anything. Others are full of nothing but minnows: Nothing you hit is going to be worth the ammo.

There is a way to improve the odds, though.

If you understand the reasons behind the surge in acquisitions, you can figure out where the big fish might be hiding. (For more on the acquisitions boom see my post http://jubakpicks.com/2010/08/24/thinking-long-term-right-now-is-hard-which-is-why-its-worth-doing/ )

That can help you eliminate some barrels and prioritize others.

Using that process, I’ve come up with three acquisition candidates that I think are worth putting in your gun sights. Read more