Commodity Crush

Commodities have been crushed and it doesn’t look like the decline will stop any time soon.

Why’s this happening? Cramer put the blame on a few key factors:

China, the once-great consumer of commodities, has virtually disappeared. Oil, steel, copper – you name it and China bought it with near insatiable fervor. Now that demand has dropped, and so have the prices of these commodities, as well as commodity-related stocks including infrastructure names and the rails.

Then there’s the McCain factor. He’s either pulled even with Obama in the polls or he’s ahead. And this is a guy who wants to drill, drill, drill. That means more supply and as a result lower prices. Cramer said a barrel of oil could drop to $80 and prices at the pump to $3.25.

Natural gas is hurting oil prices, too. Turns out we’ve got a ton of it here in the U.S. in shales spread out across the country. T. Boone Pickens has been talking up the resource is his pro-alternative energy commercials and now people are thinking we have enough nat gas to drop the price per 1,000 cubic feet to $5 from $7. Nat gas stocks could drop right along with the fuel.

Hedge funds have also played a roll in the commodities crash, but not exactly the way people think. These funds have huge investments in commodities-related stocks, and recently they’ve taken big losses. Now their clients want their money back, so the hedge funds are being forced to sell their positions en masse to raise money for these redemptions. So it’s not so much that hedge funds are hurting futures prices. In fact, they’re hurting the stocks that deal with these commodities. Cramer called the decline as a result of this huge sell-off “breath-taking.”

Another problem is that none of these stocks have dividends. If they did, then there’s probably be some buyers looking to pick them up on the cheap. These are the buyers – dividend seekers – who usually save a stock from total collapse when the market takes a downturn.

Cramer predicted a worst-case scenario for these names: They could lose all the gains they’ve seen since April 2005. That means Vale drops 68%; U.S. Steel 50%; fertilizer stocks like Potash , Mosaic and Agrium could fall 80% to 90%. But this is only if you believe that the rise of these stocks was due solely to the increased value of commodities and not any growth by the companies themselves, he said.

So what’s it going to take to stop this? The world’s central banks – U.S., Europe, even China – have to cut interest rates. Industry consolidation would help, too. A rate cut in China might revive that country’s appetite for commodities, and that would mean investors would be getting a great discount on all these stocks right now.

If China doesn’t come back, Cramer said, “the commodity collapse has the potential to bring down the whole market.”

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