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Tickers in this Article: STT, XES, XOP, XME, HAL, TIE, NEM
Technology stocks, real estate and commodities. What do these asset classes have in common?

The short answer: Each has been the object of near-ubiquitous adulation at some point over the past 10 years.

But as many veteran investors know, adulation can be fickle, and costly. Of late, commodities, namely metals and energy, have been subjected to this fickleness, making news for posting daily price declines, countering the consensus of a secular bull market.

To be sure, tight supply persists for a number of commodities such as nickel and zinc, while demand for other commodities continue to rise in many parts of the world, especially India and China. But higher prices have encouraged resource companies to ramp up exploration and development projects, suggesting additional supply will hit the market.

Additional supply isn't necessarily a precursor of a market top, but other factors are. For example, one precursor is the increased amount of investment offerings targeting popular asset classes. Over the past two years, the AMEX has been inundated with asset-specific exchanged traded funds.

State Street Corp. (STT) alone offered three exchange-traded funds related to metals and energy in June: SPDR Oil & Gas Equipment & Services ETF (XES), SPDR Oil & Gas Exploration & Production ETF (XOP), SPDR Metals & Mining ETF (XME). All are trading below their offering price and below the major market indices.

Another precursor is market-leader weakness. Halliburton (HAL) is more than Dick Cheney's old stomping ground; it's a leading provider of oilfield services to the energy industry. Halliburton's stock has risen fourfold over the past five years, driven by the strong demand for oil-well services. Recent financial performance has been admirable. Halliburton's total revenues rose 7.5% year-over-year to $5.5 billion in the second quarter of 2006. This top-line growth coupled with improved asset utilization boosted the company's net income 50.8% year-over-year to $591 million.

But as oil prices have weakened, so has Halliburton's stock, but more so. Over the past six months, Halliburton lost 35% of its value. In fact, its stock was losing value even as oil approached $78/barrel in July.

Titanium Metals Corp. (TIE), the world's only integrated producer of titanium products, is another leader whose knees are buckling. Titanium Metals melts and mills, not surprisingly, titanium. In the second quarter of 2006, it melted and milled enough of the stuff to produce sales of $301 million, up 64% from the year-ago period. In July, the company said that during the second quarter it achieved record sales levels, as it continued to experience increasing product demand and rising sales prices in all key market sectors. That said, its stock is off nearly 50% from its 52-week high.


Gold is another commodity that is supposed to maintain an upward trajectory into the relevant future. The dollar's value is shrinking and inflation will only erode the remains. If that's the case, no company is better-positioned to exploit the greenback's demise than Newmont Mining (NEM), the world's second largest gold company. To be sure, Newmont has benefited from the extended gold rally. Its average realized price of gold increased by 43.7% to $605/ounce in the second quarter of 2006, compared to the second quarter of 2005. As a result, net income more than tripled to $161.00 million over the period.

Nevertheless, Newmont's stock has moved mostly down over the past six months as the gold market sputters and the dollar strengthens. Today, Newmont is trading at a 32% discount to its 52-week high, with most of the loss occurring over the past six months.

The moral of this story is that an investment's popularity is inversely correlated to its return potential, regardless of the legitimacy for the popularity. A lesser moral is that weakness in security markets often precedes weakness in physical markets. Investors would do well to keep these lessons in mind during current, and future, instances of market adulation.

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