After touting the hydrocarbon equities for the last six months, Barron's may have caught on to the fact that the decline in prices is a sea-change and that listening to some hipster analyst, whose long-term frame of reference maybe goes back to 2009 and who may not have the intellectual chops to figure it out, might prove dangerous to their readers.There were dozens of articles along the lines of December 20, 2014's cover story "5 Oils to Buy".
XLE $80.34; XOP $51.69; WTI $49.17.
Good on Ben Levisohn for posting this, the first cautionary piece I can remember....
Two of those Buy rec's, Chevron and Schlumberger, are top three holdings of the S&P 500 Energy Sector ETF. Throw in EOG, the old Enron Oil & Gas and you have three of the top five. Here's how the ETF has performed:
One of the problems a lot of analysts seem to encounter is understanding the long cycles of investment and capital destruction in commodities. Another conceptual problem folks have is grasping that the long term return on commodity futures investment is ~0%.
This is exactly the point on which Goldman et al screwed their idiot clients CalPERS et al when they introduced the concept of "Long-only commodity index investing".
Self-referencing again, mainly because I explicate so cogently (note the first sentence in this excerpt) here's 2010's:
Société Générale's Dylan Grice-"Commodities: ‘Their Expected Long-Run Real Return is 0%’
Well duh.Anyhoo, all that being said, we try to remain alert to the possibility a countertrend trade could pop up at any moment.
Commodities are for tradin' not investin'.
Which makes one wonder how CalPERS and the other big institutions got snookered by Goldman Sachs into being "Long-Only Index Investors".
Do you, gentle reader, think for one minute that Goldman's crown jewel, Alaron Trading, just buys and socks the stuff away?
Of course not. Alaron makes directional bets, both long and short, to take advantage of the movement.
To a competent trader, volatility is your friend.
In the case of the grains the darn things are mean-reverting.
If wheat doubles in price, the acreage devoted to wheat goes up and prices come down. The substitution effects at the producer level are predictable if not timeable:
better net profit for soybeans than corn? Beans it is boys!
In the metals and in energy the more important substitutions are at the user level. If a utility's cost of a BTU is cheaper when gas-fired, the coal orders slow down.
And over-arching everything is the point that Mr. Grice is making. Human beings are adaptable....
From Barron's Cover:
Sentiment on energy and gold -- and oil and metals stocks -- may be nearing capitulation. Now is a good time to lean against the wind and start to buy.
It’s time to consider commodities. While the Standard & Poor’s 500, Nasdaq Composite, and other key equity indexes are near record levels, commodity stocks, including energy shares, are way below their peaks. Commodities are probably the most out-of-favor industry group in the stock market.
“The commodities space represents great value versus the rest of the market,” says Roland Morris, a commodity strategist and portfolio manager at Van Eck Global, a New York firm with most of its investments in commodity-related stocks. “There has been no place to hide -- gold, industrial metals, and energy have all been weak. The underperformance versus the broader market has been dramatic. Unfortunately, he adds, “that doesn’t tell you when it will change.”Energy giants such as ExxonMobil (ticker: XOM), Chevron (CVX), and Royal Dutch Shell (RDSA) now trade at multiyear lows. Chevron has been hit hard after a disappointing earnings report in July. Down 24% this year, to a recent $85, it is the worst-performing stock in the Dow Jones Industrial Average.OIL HAS TUMBLED 25% since late June, to $45 a barrel, and is off 55% in the past year. Gold has dropped below $1,100 per ounce, down 8% this year and 43% below its 2011 high of $1,900 an ounce. Silver, copper, iron ore, and natural gas all are in bear markets, with “Dr. Copper” -- so-called because of its predictive value for the economy -- hitting a six-year low of $2.30 a pound last week. Iron ore, at about $55 a ton, is down 70% from its 2011 high. The energy-heavy S&P GSCI commodity index is less than half of its 2011 peak, and the Bloomberg commodity index is below its 2009 low.The consensus view is that there is no rush to buy because commodity prices will be “lower for longer.” Reduced production costs are cutting break-even prices, and demand is being dampened by slowing economic growth in China and much of the rest of the formerly commodity-hungry developing world.
A strong dollar is helping commodity producers outside of the U.S., because their revenue is usually in dollars and their costs are in local currencies. Many say commodities won’t rally until the dollar weakens and the U.S. economy’s stronger performance compared with other developed countries makes the prospect of a dollar decline less likely.WHILE CALLING A BOTTOM is dangerous, we think it’s prudent to start adding commodities to your core portfolio at these prices. And we’re not alone in saying it’s time to lean against the wind.
Time to Buy Commodities“Investors finally appear to be capitulating on energy for the first time since energy prices started falling,” says Gina Adams, equity strategist at Wells Fargo Securities. “Investors had been trying to time a bottom and found themselves riding a steep downward slope.” She says the recent selloff could be a sign that a bottom is near. She also cites fund flows into energy and resources mutual funds, which have turned negative in recent weeks after steady positive flows earlier this year.Says Scott Colyer, chief executive of Advisors Asset Management in Monument, Colo. “Now is the bottom of the commodity cycle. Nearly every central bank in the world is stimulating and trying to create inflation. That suggests it’s time to be a buyer of the asset class and not a seller.”Others aren’t so certain. Goldman Sachs commodities analysts, who were correctly bearish earlier this year, remain cautious, writing in a report last month that what they call “the 3Ds” would likely keep a lid on prices: deflation in costs “following a decade of investment in commodity productive capacity”; divergence in growth between a stronger U.S. and the rest of the world, which lifts the dollar and pressures commodity prices; and deleveraging, as emerging economies focus more on balanced economic growth than on commodity-heavy expansion pegged to areas such as infrastructure spending and housing....MUCH MORE
As is our wont when making our own predictions we'll give prices to make future comparisons easier, here are Friday's closing quotes. The GDX is the gold miners ETF:
Brent $48.61
WTI $43.75
Gold $1093.30
Corn $373'4
Wheat $513'0
GDX $13.40
XLE $67.03
If interested take a look at "Classic Paper: Returns from Commodity Futures" from way back in 2008.
A couple other Barron's stories that got an "It's too early" (our catch-phrase for most of the decline) but have plenty of names when the time is right:
Feb. 2015
It’s Not Too Late to Buy These Stocks for an Oil Recovery
Feb 2015
Oil Prices: Four Experts Size Up the Energy Market
Finally an interesting little basket of stocks:
Commodity Producers Still Struggling (CRBQ)
