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Investment Opportunity #2

Investment Opportunity #2


     Getting back to our three part series surrounding great investment opportunities, you’ll notice a theme developing. The theme is about identifying potentially large reversals of current trends.

Counter to the greater fool theory employed by so many investors (ehemm, Bitcoin), we look for sectors, asset classes, countries or other segments of the market that are out of favor, overlooked and unloved. In these cases, we’re banking on major reversals where the dogs become the darlings over periods of years, not days or weeks. I hate to sound like Buffett but he does have a proven track record. Here’s the next one.


Commodities and Hard Assets


     This opportunity is developing but may not really bloom until later in 2018/19. Commodities of all sorts have been in decline, lagging or under rather sustained selling pressure since the middle of 2008. In my lengthening years of experience, I have found that major asset class rotations occur on 12-year windows. Don’t ask me why but there is a lot of evidence supporting these mega cycles. For instance, the S&P 500 registered a new 12 year low in price in March of 2009 after two devastating bear markets. That was the bottom. The US dollar found a major low point in 1990 and rose rather dramatically until 2001 (11.5 years), and then fell until the year 2013 (12 years). Treasury bonds have bucked the 12-year cycle and moved higher since the beginning of time but I suspect the Federal Reserve standing on the interest rate scales since the year 2000 might have something to do with artificial returns. So back to commodities, given the most recent top in 2008, we might be looking out closer to 2020 before we would really see a burst higher in commodities, but it could really come at any time.


     The case for commodities is a tough one right now with very little “juice” to push it higher. Inflation is almost non-existent even as we remain at full employment, after four rate hikes from the Fed and after nearly 8 years of economic expansion in the US. That’s pretty amazing. The culprit is productivity or lack thereof. Productivity has been falling per employee for several years so employers aren’t really in the mood to increase wages just because someone is warming up their seat daily. No wage pressure, no inflation, simple math. Typically inflation would be an issue under these circumstances and we would most certainly see an associated healthy rise in commodities by now. Not so, at least not yet. In fact, the markets are really oriented more toward a mild recession than anything at this point. The bond market is certainly telling that story loud and clear as is the trend of the US dollar, which is making new multi-year, lows this week. Did you notice that the Fed isn’t talking about rate hikes anymore, especially now that Stanley “the hawk” Fischer is out? I think they sense that any more pressure on borrowing costs and our fragile (read stuck at 2% GDP economy) would buckle. Furthermore, oil and gas are huge components of the commodities complex and this is one area of the market that is structurally evolving. We’re going to see some mega mergers before this is over, like when Exxon bought Mobil in the last energy crunch. We’re going to see some high profile failures and the sector will begin to look like airlines do today; a few players controlling everything. We also need to see the five-year supply glut in oil shrink by a few million barrels. Without energy moving higher, aggregate commodity funds are going to have a tough time moving higher.


     Thankfully commodities come in many flavors and there are plenty of sub categories in this space to invest in. Right now, we’re starting to see some real buy side activity in copper, gold, silver and several other industrial and precious metals. Here’s a quick snapshot of an ETF that we own offered by State Street SPDRs, symbol XME – SPDR Metals and Mining. You can see a very large and dramatic exhaustive sell spike in early 2016, followed by an equally large and sustained rally off those lows. This most recent low corresponds to the same levels of 2008, which serves as long term support.


      Technically, this presents a near picture perfect price pattern to accumulate shares on pullbacks.


     There are other commodities ETFs or investments that fall into this category but aren’t necessarily aggregate commodities funds, remembering that we still want to avoid oil! These include Palladium, Platinum, Copper, Aluminum, and Timber. They are all bubbling now after sitting quiet and cold for years. Please do not run out and buy any of these tomorrow. We are looking for a mega move in commodities, lasting years, which might have some early leadership among the industrial metals. But the macro environment is not supportive of a big, aggregate move yet. We need to be patient but expectant.


     Gold is most recently joining the party but I’m always leery of suggesting gold in any market. It serves no purpose beyond a hedge and a fear trade. Then again, it’s doing its job well at the moment. Again, you can see the same pattern of the exhaustive low in early 2016 followed by a very robust rally, pullback to the trend line and now another push higher. This appears to be a new uptrend and a tidy pullback for buyers to step into. In full disclosure, we do not own the GDX ETF, but other ETFs and mutual funds with similar holdings.


     Investors should also recognize that a bottom in commodities is often associated with a top in Treasury bonds from a timing perspective. One could argue that bonds topped in 2015 and I can make a case that commodities put in a long term low in the same year. Perhaps it’s game on! But again, without a supporting expansion in our global economic growth rates, especially as the US seems to be angling toward recession, the environment doesn’t seem quite right yet. Honestly, normal intramarket analysis is being seriously distorted by central bank intervention, forcing negative bond yields and all the stuff that mom told you not to do. It’s hard to say if the “normal” relationships still work.


     So this is our second great investment opportunity in development. It will happen and present some very profitable gains for investors who are awake, knowledgeable and willing to act. If that’s not you, call our office 303-837-1187



Sam Jones