On October 24th, 2011 I posted the following:
“Look for commodity stocks to continue to bounce in December, and in January & February all those fund managers who want to be seen with a decent weight in a strong sector will continue buying.”
Based on headlines, it would seem to be a pretty silly bet to have made. After all, Europe is still a mess and there’s more talk of a potential global recession than ever and rampant pessimism converning the potential for economic recovery. Even the last bastion of good economic tidings is proving to be disappointing. In today’s news:
BEIJING, Jan 17 (Reuters) – China’s economy expanded at its weakest pace in 2-1/2 years in the latest quarter, with the sagging real estate and export sectors heralding a sharper slowdown in coming months and fresh pro-growth measures from the government.
Growth of 8.9 percent over a year earlier was slightly stronger than the 8.7 percent forecast by economists in a Reuters poll, but the data on Tuesday raised concerns about the immediate outlook and how much support China can offer a struggling global economy.
So why has the price of copper risen since my October call? Once again (the subject of both my books fyi) it’s uncommon sense and experience that help one profit from markets, even if it’s impossible to totally understand those same markets.
The copper price was rougly $3.25 per pound back in October, and it has climbed to nearly $3.75 (a paltry 15% gain). China’s copper consumption has tripled over the past decade, and they now buy 38% of the world’s copper supply. An investor in resources has to keep in mind some simple economics – China’s growth may slow, but it’s economy (and demand) is nearly twice the size it was a decade ago. What works is to buy stocks (see my comments concerning ALCOA in previous posting) like these when nobody else wants them and the consensus outlook is miserable. Some of you might recall this video I made in late October.
Since commodity prices generally lead published economic data (remember, it took almost a full year for authorities to declare we were in this recent recession) the stocks of resource companies can linger at attractive valuations for awhile…but when they do lift off there’s no catching up to them.
The wild card today, which I believe explains the sudden turnaround, is an improving U.S. economy. As I’ve mentioned many times, it’s America who will launch the next major cycle (as it has almost all others) which will ignite Europe and then Asia.
By the way, now might be a good time to re-read my blog of September 29th. Since then the S&P 500 is up 12% and the TSX is up about 5% (which I’ve expected to underperform since late 2010 – both numbers are in local currency).
Don’t forget my other rule of thumb based on a few years of experience…..whichever asset class institutional investors are underweight is likely to perform best going forward.