Sunday, February 17, 2013

"A hike in the minimum wage is not far from the front burner for the Clinton Administration, but it's not even near the stove for the Republican majority." --Donald H. Straszheim


COMMODITY SHARES WILL PROGRESSIVELY OUTPERFORM GENERAL EQUITIES (February 18, 2013): For most of 2013, the shares of commodity producers had been consistently retreating while the S&P 500 and other well-known general equity indices were rallying to their highest levels since 2007 or even reaching new all-time peaks. During the past few weeks, however, there has been a reversal of fortune in which one commodity-related subsector after another has been starting to outperform. Looking at a daily chart of XME shows this large-cap collection of energy and mining companies to have established an important rally continuation on January 30, 2013. KOL, a fund of coal mining shares, began to resume its uptrend on February 7.

Gold mining shares have been a notable exception, slumping almost all the way back to their lows of May 2012--which were very close to their depressed levels from July 2009. It is rare to find any equity group which has made virtually no net progress in more than 3-1/2 years. Almost everyone has been forecasting additional weakness for gold and silver and their shares, especially in the short run, which makes gold and silver mining shares especially compelling since the financial markets almost never reward any nearly unanimous consensus.

What would be a fundamental reason for the shares of commodity producers to shine brightly during the next half year or so? The prospect of rising inflation is a common theme during any era of stagnation, especially whenever a bull market is maturing. As worldwide stock markets stop routinely surging higher, the few assets which are able to achieve double-digit percentage gains during the next several weeks will stand out in sharp contrast to almost everything else which is mostly moving sideways. The shares of commodity producers will likely rebound strongly merely to compensate for their irrationally oversold conditions; as this occurs, momentum players will notice their top-performing behavior and will eagerly buy them in anticipation of even greater gains. Compared with other equity groups, the shares of commodity producers can become huge winners by climbing halfway from their current levels toward their 2011 peaks.

The last major multi-year equity bull market began in October 2002 and ended at various points in 2007 and 2008. During the final months of 2007 and the first several months of 2008, the shares of commodity producers enjoyed dramatic increases in their share prices. GDX, an exchange-traded fund of large- and mid-cap gold mining shares, surged from its August 16, 2007 bottom of 32.76 to a March 14, 2008 top of 56.87, which along with its 74.5-cent dividend on December 24, 2007 generated a total gain of nearly 76%. Coal mining shares and emerging markets which correlate closely with commodity production were also among the most reliable bull-market performers in late 2007 and early 2008. These shares ended up plummeting during the second half of 2008, but not before first establishing important historic highs.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they have been forming higher lows. I also bought many funds of general equities near all of their important low points in 2012. From my largest to my smallest position, I own GDXJ, KOL, XME, REMX, SLX, VGPMX, VFWPX, FCG, GLDX, TNRPX, VINIX, GDX, BGEIX, VEMPX, RERGX, TRIEX, and ACTIX. On January 28 I sold all of my RSX, TAN, and NLR; I sold EWZ on February 1. Since January 28, I have gradually sold 90% of my general equity holdings in VFWPX, VEMPX, VINIX, RERGX, TNRPX, TRIEX, TRSPX, and ACTIX.