MILLBURN, N.J. (Stockpickr) -- I have said for some time that the synchronous and meteoric rise in the price of commodities is unsustainable. These markets were not being driven by the interaction of supply-demand dynamics. Rather, we had a situation in which speculative fervor was juiced up by the excessive leverage available through commodity futures and to a lesser extent leveraged commodity exchange-traded funds.

While in traditional economics, the market's equilibrium is set by buyers and sellers agreeing on a price and quantity, in commodity markets, the price of the commodity is mostly a function of the futures markets rather than the spot or cash markets.

Furthermore, from where we sit in the U.S., commodities are priced in U.S. dollars, but in other nations, those commodities are priced in their local currency. While the prices of crude oil and gold were surging in U.S. dollar terms, they were relatively unchanged when priced in euros. In essence, the recent commodity speculation was a dual trade on the price of commodities in U.S. dollars and the exchange rate of U.S. dollars vs. euros.

Add to the leverage in commodities the available leverage in the currency markets, and the product was a toxic combination of powerful unidirectional speculation. To me this was representative of the housing and mortgage market whereby the fiction of housing appraisals was masked by the unlimited amount of credit with little or no down.

Related: 11 Stocks for Lower Commodity Prices

History is always destined to repeat itself. Leverage cuts both ways. It is intoxicating on the way up and nauseating on the way down. Just ask the Hunt Brothers, who made and then lost fortunes several decades ago in the silver market. They were done in by leverage when forced to make margin calls.

I saw the commodity collapse coming, choosing to exit my metals and oil-related holdings, with the exception of Schlumberger ( SLB - Get Report), which is a long-term investment and part of my Bar Mitzvah Portfolio.

The commodity collapse was going to take part in three stages. The first stage is when stocks and commodities both begin to go down together. This is the opposite of what has occurred over the past few months, with both commodities and stocks rising in unison.

The next stage is a rational assessment of which stocks will benefit from a decline in commodities. Put another way, whereas we were all worried about which stocks would get hurt by the rise in commodities, now we must seek out the stocks that will benefit from the decline.

The third stage is a panic stage. We saw some of that on Thursday, May 5. During the third stage, hedge funds will be caught overleveraged in commodities or too deep in the long commodity/short U.S. trade paired trade and will have to liquidate en masse.

Let's focus our investment strategy on which companies or sectors will benefit from the decline in commodity prices. Here are a few ideas.


I have already outlined my thematic investment strategy for a rebuilding of Japan. That theme is going to benefit even to a greater extent in two ways. First, Japan is one of the largest imports of oil in the world, having no natural sources of that commodity. The decline in crude oil will greatly benefit that island nation.

Second, the cost of raw materials for the rebuilding is going to decline. While I initially proposed a portfolio of four Japanese ADRs or funds for investment on this theme, I am now going to add the iShares Japan ETF ( EWJ - Get Report).

Recently, just before the weeklong Golden Week Holidays in Japan, the Nikkei 225 closed above 10,000 for the first time since March 11. The Nikkei index, on the first day of trading after the holiday, dipped back below 10,000 to 9,859. Still, the Japanese stock index has regained what it lost on the first trading day after the earthquake and tsunami when the index closed at 9,620. Furthermore, the Japanese are a very superstitious culture. Regaining and holding the 10,000 level on the Nikkei could have psychological benefits to the people and its markets.

High-End Retail

With the sudden shock at the gas pump, as the price per gallon of gasoline passed $4 on average across the nation, consumers began to think twice about how they spend on a discretionary basis. Consumers were once again looking to trade down from luxury and higher-priced brands down to normal or discount brands.

The spike in oil prices did not last long enough for that trade down to cement itself in the psyche of consumers. However, it did put them on hold for a few weeks. Now we can expect consumers to once again think about trading back up to brands such as Coach ( COH) and Polo Ralph Lauren ( RL - Get Report).

Casual Dining Restaurants

After a lousy wintry weather season, consumers were poised to head back out to shop and dine. Then gas prices rose. In particular, one company's stock, Darden ( DRI - Get Report), was hit when the company's CEO, Clarence Otis, said on the quarterly conference call:

"I would say I think they'll have a dampening effect. They definitely serve as a tax on consumers, gasoline prices. That said, we saw that dampening effect I think in February, and so the industry results were stronger than they were in prior months. Would they have been stronger if gasoline was below $3? We think so. So it's an improving trend. The rate of improvement will be less at these gasoline levels than it would have been without them, but it's still an improving trend. And so that's essentially how we see it. We have no reason to believe otherwise, and I think February is a pretty good indicator of that, and I suspect March will be as well, because we're living with these elevated levels. I think our experience is that consumers adapt and they adjust their budgets."

With gasoline prices having spiked and headed lower, any concerns that investors had as a result of Otis' comments are certain to be ameliorated. I bought Darden after it sold off on Otis' comments. The stock has since increased in value from that sell-off. I have a $60 price target for Darden.

Travel-Related Stocks

With the price of gasoline on the decline and the U.S. dollar rebounding, the cost of travel in and outside of the U.S. is certain to decline. This comes just at a time when Americans are getting ready to hit the roads for the Memorial Day weekend or plan their summer vacations. Many of the travel-related Web sites, such as Travelzoo ( TZOO - Get Report) and Priceline ( PCLN), have posted very strong results and provided excellent forward guidance. That was before the drop in commodity prices and the dollar's rebound. Of those two stocks, Priceline is the better -stablished and more reasonably priced travel company.

-- Written by Scott Rothbort in Millburn, N.J.


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At the time of publication, author was long COH, DRI, RL and SLB, long EWJ calls and long SLV and GLD puts, although positions can change at any time.

Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of LakeView Asset Management, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of, an educational social networking site; and, publisher of The LakeView Restaurant & Food Chain Report. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.

Mr. Rothbort is a regular contributor to's RealMoney Silver website and has frequently appeared as a professional guest on Bloomberg Radio, Bloomberg Television, Fox Business Network, CNBC Television, TV and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.

Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.

Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.