Despite volatility,
commodities are
likely to stay high
in the short term

NEW YORK » Concerns about slowing growth in China sparked a selloff in commodities futures this past week, but some Wall Street watchers remain bullish about companies that produce what's called "stuff" -- goods like oil, metals and timber.

Many analysts believe oil prices are overextended, and speculation is likely to keep other raw materials volatile for the near future, as well; in a vivid illustration of this, copper hit a 15-year high on Wednesday only to tumble to a five-week low on Thursday. But with global demand generally on the rise, dividend-paying equities linked to commodities still hold a great deal of appeal for professional investors.

"If you look at the companies that produce industrial commodities, there is some fundamental support underneath them that could lead to continued increases in stock prices," said Kenneth McCarthy, chief economist with vFinance Investments Inc. "So even though the underlying commodities may jump around a lot, the basic trend is toward higher prices, in both commodities and the companies that produce them."

Reports out of China this week showed a slower rate of growth, in part due to the Chinese government's ongoing efforts to rein in its economy's feverish pace to more sustainable levels through higher interest rates. That spooked commodities traders, but some analysts say they reacted more in anticipation of a possible hard landing than because of an actual slowdown.

Even if China does suffer a painful decline, resulting in an overall slowing of global demand, some argue it wouldn't be enough to halt the momentum of the commodities market. It would take a significant slowdown in global demand and a sharp increase in supply to cause prices to drop substantially. So for investors who don't believe the recent surge in oil is enough to knock the global economy into recession, all this price volatility could create some buying opportunities.

"Just like you bought the dips in the tech space in the '90s, in the secular (long-term) bull market in tangible assets, while you would go through periodic corrections and selling squalls, you buy the dips," said Jeffrey D. Saut, chief investment strategist at Raymond James & Associates. "I'd be more sensitive about the prices I paid for individual securities. But buying the flop tends to take the price risk out to some degree."

Saut, who has focused part of his portfolio on commodities-linked equities, or "stuff stocks," for the better part of three years, sees great opportunities to capture gains in the years ahead as countries across Asia develop into more industrialized economies.

"It sounds real simplistic, but China, as they make the transition, is going to build a lot of McDonald's hamburger shops," Saut reasons. "And you can't build a hamburger shop without stainless steel counters. And you can't make stainless steel without nickel. It can't be done."

Rather than investing in China directly, Saut buys dividend-paying stocks or preferred convertible bonds of companies that make the stuff China and other developing nations will need to grow. He likes yields indexed to real assets -- coal, timber, precious metals and base metals such as iron ore and nickel.

"I think all those things are in a secular bull market, and I think it has years to the upside," Saut said. "I remain a steadfast bull on stuff."

Saut's "stuff" strategy extends to anything where he foresees a shortage. Producers of fertilizers and grain are on his radar, as are companies that build and maintain water treatment facilities and desalinization plants, since many parts of the developing world lack potable water.

"The world runs on oil and water," Saut said. "I don't hear anyone talking about water, but it's a very important thing. It's a huge problem. You watch."