Monday, April 8, 2013

"In the business world, the rear-view mirror is always clearer than the windshield." --Warren Buffett


BUY COMMODITY SHARES LOW, SELL HIGH-YIELDING ASSETS HIGH (April 8, 2013): There exists an all-time record disparity between the shares of high-yielding assets and those of commodity producers. While everyone wants to buy the former and unload or even sell short the latter, it is essential to do the exact opposite.

During the past couple of years, bank accounts, money market funds, and other safe time deposits have been paying one percent annualized interest or less. Therefore, people are deciding in droves that they "need income" and have gone on a quixotic quest for yield. Whether encouraged by their financial advisors or not, this has caused the prices of high-yielding assets such as utilities, REITs, telecommunications companies, household consumer names, and similar assets with above-average yields to double in price or more since July 2009. Because everyone wants to own these income-producing securities, they have become dangerously overvalued, and yet are ironically perceived as being the safest equities. The bubble in these assets is no less dangerous than similarly overpriced peaks for technology shares in early 2000 or U.S. residential real estate in 2006.

While the media have been trumpeting new all-time highs for many benchmark equity indices, they have ignored the important fact that the valuations of several sectors have slumped all the way back to their levels of July 2009. These include the shares of many mining and energy companies, along with industries like steel manufacturing which are closely related to commodity production. Most investors, being bombarded with media coverage which is dominated by Cyprus or how close the Dow Jones Industrial Average is to a new all-time high, aren't even aware that these bargains exist. Insiders know exactly what has been going on: they have been aggressively accumulating the shares of commodity producers with a ratio of seven to one of top executives' buying to selling for many subsectors on the Toronto Venture Exchange.

There are numerous quantitative indicators signaling that this disparity has become irrationally extended. The traders' commitments for copper futures show commercials sporting a net long position which is closely approaching its highest level in a decade. The commitments for the Canadian dollar recently reached their highest level in more than six years. Both copper and the Canadian dollar have a strong positive historic correlation with the future behavior of the shares of commodity producers.

During the first week of April 2013, gold mining shares plummeted all the way back to their lowest prices since the spring of 2009. GDX is a fund of large- and mid-cap gold mining shares which touched 33.71 on April 4; the last time it had been so low was on May 4, 2009. Brokerages have been rushing to downgrade their forecasts for precious metals and their shares, and often for other metals and energy commodities. The respected Daily Sentiment Index showed both gold and silver tied with all-time record lows with only 3% of traders being bullish.

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, which I have been progressively selling since January 28, 2013. From my largest to my smallest position, I currently own GDXJ, KOL, XME, REMX, SLX, VGPMX, COPX, GLDX, FCG, SIL, BGEIX, GDX, and VFWPX.