Hard Assets

Up and Down Wall Street [¹]

By Alan Abelson | 21 October 2007

Lee Quaintance and Paul Brodsky run money under the sobriquet of QB Partners (how they ever arrived at such an eloquent name is a mystery). What distinguishes them is they're literate and thoughtful, two qualities not rampant among the breed. Like all of us, they have a skeleton in their closet; as we recall, they admit to having done time in the bond business.

In their latest— shall we make them happy and call it an essay?— Lee and Paul voice their reservations about the market, not dissimilar to our own. They're concerned about runaway monetary inflation, the decline of the U.S. dollar and the fact that financial-asset markets are not set up to anticipate economic downturns (since Big Brother is always there to bail them out).

But they are professional investors and they probably, though we can't say for sure, like to eat. So where to invest when the financial markets seem unduly risky and the risk/reward ratio generally unfavorable?

The answer, they believe, is that hard assets will provide more profits and carry less risk than most financial assets. And that since most "hard-asset derivatives (equity) remain unpopular among financial-market investors," they provide intriguing investment potential.

To illustrate, even with oil at record high prices above $80 a barrel, "energy-related public equities continue to be valued on implied assumptions of long-term crude prices of no more than $45 a barrel." In like vein, they note that the equity-market valuations of certain global agricultural, precious and industrial metals, and mineral concerns are trading at a fraction of their future production/reserve values. Lee and Paul allow as there are valid reasons why such shares sell below their optimum value, but the discounting is typically much too severe.

Basically, their view is that "investors have not begun to allocate to these sectors en masse because we think they have yet to recognize the relationship linking money creation (and fiat currency declines) to the intrinsic value of natural resources."

They go on to explain that "most stocks that derive their value from natural resources are cheap because most investors that could sponsor such plays haven't done so in 30 years." But the pros will be forced to change that stance when economic fundamentals give them no choice. And, in due course, they'll be followed by the investment masses, who, as always, will be late to the party.


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Hard Assets