Saturday, May 4, 2013

"The way to make money is to buy when blood is running in the streets." --John D. Rockefeller

MONEY COMING OUT OF SAFE TIME DEPOSITS WILL FIND ITS WAY INTO THE SHARES OF COMMODITY PRODUCERS (May 3, 2013): One of the most important and least appreciated developments of the past several months has been the dramatic exodus from bank accounts, money market funds, and other safe time deposits. No doubt this is due to the fact that they generally pay interest of one percent or less, and are therefore yielding less than the inflation rate. Around the world, investors are unhappy with negative real yields. They have therefore been eager buyers of real estate, high-yielding stocks and REITs, and bond funds of all stripes, while shunning commodities and the shares of their producers.

Once money comes out of safe time deposits, it doesn't usually quickly go back in. Investors who have recently taken the emotional plunge to invest in fluctuating assets aren't necessarily pleased with the accompanying volatility, but have concluded that it's better than having their money "just sitting there doing nothing". As long as high-dividend securities like XLU, XLP, VNQ, and IYZ remain in strong uptrends, while the S&P 500 and the Dow Jones Industrial Average continue to repeatedly set new all-time highs, investors are unlikely to consider alternatives. However, the outperformance by high-yielding assets has been diminishing in recent weeks, with many such sectors likely soon initiating downtrends. When this happens, there will be trillions of dollars in these assets owned by investors who will become discontent with losing money and will desire something different.

If cyclical shares continue their rebounds from their lowest levels in nearly four years, then they will likely become increasingly attractive as a potential source of substantial percentage gains. These include many mining, energy, and agricultural companies and related assets such as steel manufacturing. It would also include emerging-market equities, especially in countries with a high percentage of their GDP which is associated with the above industries. Exchange-traded funds of stocks in these countries include Brazil (EWZ), Russia (RSX), South Africa (EZA), Peru (EPU), and Colombia (GXG). Many shares of commodity producers have lost more than half of their value from their respective 2011 peaks, and therefore have tremendous upside which could be achieved without having to set new all-time highs or to exhibit anything resembling bubble behavior.

Eventually, there will be notable fund flows back into safe time deposits. However, that isn't likely to occur until at least 2014. As previously popular high-dividend stocks go progressively out of favor, some investors will become increasingly eager to switch into the shares of undervalued assets which could enjoy additional double-digit gains, rather than putting their money back into the bank and earning one percent or less. Looking at all transitions from multi-year equity bull markets to their subsequent bear markets over the past century, it is common to see a progressive rotation out of defensive high-dividend stocks and into commodity and emerging-market shares while this transition is underway. The most recent example is the second half of 2007 and the first half of 2008.

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 just completed selling many funds of general equities which I had bought near their important low points in 2012, and which I unloaded on a gradual basis from January 28, 2013 through May 3, 2013. From my largest to my smallest position, I currently own GDXJ, KOL, XME, REMX, SLX, COPX, VGPMX, FCG, GLDX, SIL, ZJG (Toronto), BGEIX, and GDX.