Legg Mason's Miller Bearish on Commodities

When someone like Legg Mason Value Trust manager Bill Miller says a particular investment has run its course, odds are he's right, even if everyone else is still singing its praises.

Miller, who has beaten the S&P 500 in consecutive years since, oh, about the beginning of time itself, says the commodities sector is cooling, despite what we might read in the newspapers.

"Since the [commodities] rally we are experiencing is already bigger and longer lasting than the one that kicked off the 70's, it takes a determined optimist to say that now is the time to be putting money in commodities," Miller wrote in a research note that was recently republished in excerpts by Chicago fund tracker Morningstar.

Miller admits that one reason to own commodities is because they provide equity-like returns with little correlation to stocks, which would seem sensible, given the recently flat stock markets. But the time to buy commodities, the value manager says, is when they're beaten down and trading below the cost of production.

"That time is not now," said Miller, whose fund has beat its benchmark a record 15 years straight.

During the recent run-up, commodity prices as a group have tripled and every individual commodity that Miller can get data on is trading significantly higher than its cost of production.

In general, he continued, the assets or groups to buy are those that have been performing particularly badly over the last five or six years. That's usually enough to send investors elsewhere, thus creating a perfect buying opportunity.

"Given the choice of buying commodities with a capital C, or buying capital C - Citigroup - at current prices, I'll take the latter. Check back in five years," Miller wrote.