On June 19 I posted my view that SQM is overbought short term and that DRYS is a good long term value, particularly in view of management’s prescient and potentially very rewarding expansion into a related asset class, deep water drilling. 

Here is an update.  Since my post  SQM has corrected down by 24% while DRYS has declined 4%.   I don’t try to time the market for short term trades, but on this one the market seems to have been somewhat in agreement with my thinking on June 19th, which was probably more luck than brilliance.

What now?   First, these are two totally different companies, as you know.   First SQM.   This mineral mining and distribution company tied to fertilizer, pharmaceuticals, and energy has perhaps the best positioned product line I know of, especially by virtue of being the world’s largest producer of lithium.  

Most investors have not focused on the gigantic increase in lithium that will be required over the next five years - and possibly a lot longer - as cars transition to plug in electric hybrids powered in part by lithium-ion batteries.  When investors come to understand this, I suspect SQM will continue its substantial rise in value. 

Do you buy SQM now?  It is clearly a 25% better value than it was on June 19th.  On the other hand both the direction of stocks and the SQM chart suggest that one hold back some enthusiasm right now.  My guess is that the stock market could have a good deal further to fall because the U.S. economy looks to be getting sicker at an increasing rate, the Fed continues to be “in irons” in their inability to support the U.S. dollar, and there has yet to be an investor “capitulation.” 

Additionally, the chart of SQM suggests that it might be able to be bought in the mid-30’s at some point in the not distant future, a further 15% below today.   So I have added slightly to my SQM position here but I  await lower prices to reach my full ownership objective.  

DRYS is a more difficult call for me.  I continue to be a fan of management, despite conflicts of interest that exist in the company’s governance structure and the “cowboy” (if not “playboy”) image of its controlling stockholder and moving force, Mr. Economou.  When I recently heard him speak I bought his argument that DRYS is undervalued relative to other shipping companies.  And I believe that when the drill-ship spinoff happens there will be a real bump in total valuation.

On the other hand, shipping still is a cyclical game unlike the energy service industry and energy in general which used to be cyclical but is now secular.  Eventually new shipping capacity will catch up to demand.   In fact, Economou indicated he is shifting to long term contracts as fast as he can, which is the best indication that he also sees more weakness ahead in shipping rates.

So the question with DRYS, really, is whether at some point the stock may rise relative to other shipping companies, but whether the whole group may continue to decline in absolute terms.  If shipping declines DRYS will be an unattractive holding despite its relative industry outperformance.

Based on growing weakness in the global economy and what I am coming to believe is a highly unusual degree of risk of a global equities meltdown of 1930’s proportions, I have reluctantly sold my DRYS position.  I have also cut back on TBS International (TBSI), another shipping company that I think has a brilliant strategy and management. 

Global stocks and indeed most of the global economy are now haunted by the OECD’s twin meltdowns in financial and homebuilding and related companies.  On top of that weakness, which would ordinarily be worked off in a typical cyclical process, every person on the face of the globe is experiencing the twin disasters of much higher food and energy prices.  All of these negative forces may simply be too strong for the global economy to remain healthy.

Just as all of the above is transpiring, the inexorable peaking of oil supplies is making the oil business - and to a lesser degree the natural gas business -  one of just two very healthy sectors that is growing in a secular manner. 

The other is the growth in the economies of oil exporting countries.  They are using the unprecedented transfer of wealth from the OECD to these relatively poor countries to build an industrial infrastructure on their own land.   That building process is providing a strong boost to OECD companies that assist in the process.   Plus it is keeping demand for oil and gas much higher than would ordinarily be the case during a global slowdown. 

What the world desperately needs at this juncture is some relief in the price of energy and food.   It might get the relief in food prices if U.S. policies promoting ethanol could be reversed, but so far Congress seems unable to comprehend how damaging those policies are. 

Oil could be in for a price correction.  We saw a $10 decline before the potential for an Iran/Israel conflict began to heat up.  Without a substantial threat of war, I think oil could well retreat back into the 120’s or perhaps a little lower.  That would be a great relief to the global economy because there is good fundamental ground for lower oil prices such as new Saudi production, lower OECD demand, and possibly lower Chinese demand post-Olympics. 

Starting in a couple of years oil supplies will begin a scary decline, I believe.  Energy prices will grow so high and so fast that recent oil issues will seem like hardly any challenge at all.  So the question is whether the near term opportunity for lower oil prices will be realized before the longer term reality hits.

My sense is that Israel (and Mr. Bush) are likely to be frustrated in their desire to “bomb bomb bomb, bomb bomb Iran” as Mr. McCain suggested might be a good idea a while ago.   It seems clear that the U.S. military capacity is in no position to deal with the aftermath of such a policy.  Military leaders are even daring to express that view in public.   Moreover, virtually all mainstream politicians are opposed to military action. 

Of course Israel could do it on their own without U.S. military coordination.  My guess is they will not want to go it alone and the Bushies are being watched too carefully to give them a tacit comitment.  On the other hand, the rhetoric may well continue at a high pitch because we are watching a game of “chicken”, the objective of which from the West’s viewpoint is to drive Iran to stop enriching uranium while talks take place.   The Iranians, on the other hand, are happy to talk.  But they show no signs of being willing to stop the enrichment while talks go on.  

So we have mutually assured threats from both sides which tends to keep oil prices high.   I wonder, who benefits from high oil prices, Iran or the West?  Hmmm.  There is truly no good answer on the horizon for the Iranian problem.  If “tensions” continue to escalate, there may also be little opportunity for oil prices to take the breather they so richly deserve based on fundamentals.

If there is no relief of high oil and food prices, investors are likely to experience declining equities which may even include the stocks of the extraordinarily  healthy energy sector.   So in terms of investing, you have to decide if you are a long term value investor in energy equities or whether you just want to step aside and go on vacation for a while.

I am staying invested in the energy sector, but I have no argument with someone who decides to take the other viewpoint.