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In two of my recent commentaries, "Commodity
Boom? You Ain't Seen Nothing
Yet?" and "Fishing in the Commodity Pond" I attempt to make
the case for a commodity rally resumption and rapid rocket-like rise. As of
this Wednesday's close, commodities are thumping world stock markets once
again. This might be the resumption of the rally on to new highs or simply a
bounce from the lows and the forming of a healthy consolidation
pattern. Given the fact that oil hit a new high yesterday, I
am betting on the former. If my view on commodities is correct, then expect
to see more action like yesterday when commodities soared almost
across-the-board and the broader US stock indexes sold off:
The focus of this commentary is on the
trend which has been developing over the last six to twelve months, depending
on the commodity. While commodity prices themselves are seeing tremendous
gains, we are starting to see the companies which mine, produce, drill for,
or grow the commodities lag. Yesterday's trading activity decidedly
illustrates this point. Look at the charts (from yesterday) below for select
commodity groups:
In each of the charts above the
ETN/ETF for the underlying commodity(s) is presented first followed by the
sector ETF which represents the companies which either provide the equipment
or products for the commodity or produce the commodity. Then I have provided
select names of the types of companies you are likely to find in the
company ETF.
My first observation is that while all four commodity categories had huge up
days--ranging from 2.5% in grains and in precious metals, to an
over 3% rise for base metals (composite of copper, zinc, aluminum,
and nickel), and to almost 4% gains for natural gas--the stocks of
companies in these commodities significantly underperformed with two groups,base metal miners and
agriculturally-focused companies, actually experienced negative gains. The
Amex Natural Gas Index barely eked out a 0.17% gain on a day when natural gas
exploded almost 4% higher. Though gold and silver prices were up
roughly 2.5%, the Gold Miners ETF GDX was up only 1.90%.
While yesterday's price dichotomy was
stark, this trend has been emerging for over a year and it raises several
questions: Could this phenomenon be a harbinger of a new trend and if so,
what might explain it and how should you adjust your portfolio?
I think we need more time before we
make any conclusions. I am not yet ready to ditch my mining, equipment, and
agriculture companies and go full bore into the commodities themselves. I am,
however, sufficiently motivated at this point to consider the possibility
that this might one day be the right move. Each of the four commodity groups
exhibits and trades on different characteristics which need to be factored in
accordingly. Some factors which may be negatively affecting all groups,
however, could be input costs such as the higher price of oil, the price of labor and a diminishing qualified labor
pool, and, most importantly, new sources of supply becoming harder to find or
grow.
Examples of CEOs
and other company spokesmen voicing such concerns are becoming more frequent.
During the first few years of the commodity boom, you would see companies'
leverage result in gains in share price that far surpassed the gain in the
price of the underlying commodity. In gold for example, we would consistently
see a 3% gain in the gold miners index for every 1% gain in the price of
gold. Over the last year, however, the price of gold is up almost 50% while
the gold indexes (HUI
and XAU)
have only risen around 40%. Not only have gold and silver mining company
share prices not kept up, it is registering less of a gain. If this continues
to be the case, you would be a fool to invest in the gold and silver mining
companies because of all the operational, political, and environmental risks
associated with owning them. For all of the risks, I believe that we need to
be paid at least a "2X" premium versus the gains in the price of silver
and gold in order to justify continuing to own them. Perhaps the mining
companies' share prices got ahead of themselves and the prices of gold and
silver have merely caught up. If this is the case, then we should see
significant outperformance of the mining companies
in short order. We will see.
As I mentioned earlier, the commodity
groups all have different characteristics and need to be evaluated on their
own specific factors. At this point we need to carefully monitor this
developing trend and be open to the possibility that it might be necessary to
at least overweight positions in the underlying commodity relative to
positions in the commodity companies themselves.
Kurt Kasun
www.greenfaucet.com
A
contributing writer to GreenFaucet.com, Kurt Kasun writes a high-end investment timing service, GlobalMacro, which is focused on identifying
opportunities that produce returns in excess of market with reasonable risk.
He is strategically located in Washington,
D.C., a key to maintaining
contacts and relationships which help Kurt understand global policy and economic
factors as they emerge. His investment approach has always been macro in
nature largely due to his undergraduate studies at the U.S. Military
Academy at West Point (B. S.
National Security, Public Affairs, 1989) and his graduate studies at George Mason University
(M.A. International Commerce and Policy, 2006).
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