Sunday, December 16, 2012

Money talks--it says 'good-bye'." --Brian Kluth

INVESTORS ARE FINALLY SHIFTING FROM SAFETY TO RISK (December 16, 2012): During the past week, hidden beneath the overhyped headlines about the U.S. fiscal cliff, the S&P 500 briefly touched its highest point since October 19, 2012. TLT, a fund of U.S. Treasuries averaging 28 years to maturity which has been a favorite of the "recession is coming soon" crowd, quietly slid to its lowest level since November 6, 2012. We are seeing the earliest stages of an important global shift from safe-haven assets including the U.S. dollar and U.S. Treasuries, along with popular defensive high-dividend equities, into low-yielding cyclical shares including semiconductors, steel manufacturers, and the shares of numerous commodity producers. Some subsectors such as gold mining shares, which had rebounded strongly in the late summer but had been slumping in recent months, probably resumed their uptrends by completing additional important higher lows. Lagging subsectors including solar energy (TAN, KWT), uranium shares and their funds (URA, NLR), and the shares of rare-earth metals producers (REMX), all of which had recently slid to their lowest levels since the summer of 2009, have been joining other cyclical names in ending their respective downtrends. An increasing number of funds of commodity producers and emerging-market bourses with a heavy concentration of commodity production including Russia and Brazil have been outperforming the broader equity market in recent weeks. Meanwhile, the shares of defensive equities including utilities, tobacco, REITs, telecom shares, and other assets with above-average yields which have been the darlings of financial advisors during the past year have also been recovering from their early autumn declines, but less energetically than cyclical shares.

Now that almost everyone has been desperately stretching for yield throughout 2012, the winners will be those who acted in a contrarian manner to intentionally purchase assets with little or no yield. Being out of favor with institutions desperate to show above-average dividends on their books, many such low-yielding assets during the past several months had retreated to their lowest levels since July 2009. If cyclical equities continue to rebound, which is especially likely as assets continue to move out of Treasuries and bond funds into stock funds, then many commodity producers will gain 20%-40% in order to retest their highs from February-March 2012. Some could even potentially climb more than 40% if the U.S. dollar stages a more significant pullback; this is becoming increasingly likely as investors progressively realize that the fiscal cliff will be resolved in a manner which perpetuates trillion-dollar annual U.S. budget deficits indefinitely.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they are forming higher lows. From my largest to my smallest position, I own GDXJ, VFWPX, KOL, XME, EWZ, REMX, SLX, VEMPX, VINIX, RERGX, RSX, TNRPX, VGPMX, TRIEX, FCG, TRSPX, ACTIX, TAN, GDX, and NLR.