Commodity Producers – Warren Buffett Doesn’t Peddle Dividends

Summary

Last week’s piece explained the issue.

Transocean and Seadrill have suspended dividends.

More cuts are on the horizon.

BHP makes a mistake.

Commodity stocks will not make a bottom until the dividends turn to retained earnings.

Dividends in the commodity sector are like a lethal drug that will destroy shareholders in the great bear market for raw material prices. Commodity producers and related companies need to take a Buffettesque approach to managing their business and shareholder dividend policies.

The volatility in all assets classes last week reached a crescendo as a combination of a slowdown in China and a supply war in crude oil clashed to create a cascade of selling early in the week. Crude oil made new lows at $37.75 per barrel on the active-month NYMEX futures contract. The Dow Jones Industrial Average plunged more than 1000 points last Monday, and copper made new multi-year lows at just over $2.20 per pound. Gold rallied to almost $1170 per ounce on the fear factor. Things looked bleak. Later in the week, the price of silver plummeted below the $14.10 support level and traded at the lowest level since August 2009 at $13.95 per ounce on Wednesday, which was COMEX expiration day for silver options. The Chinese government supported the local equity market on Thursday and cut interest rates once again during the week, lifting prices. As Chinese stocks rose, so did other asset prices around the world. The price of gold could not make it through $1170 and backed off $50. Oil staged an impressive rally on Thursday, closing almost $4 or over 10% higher than the previous session, copper rallied by over 13 cents and silver came back to the $14.50 level.

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