Commodities Still a Lot More Attractive Than Stocks

By: Graham_Summers

One has to admit, the stock market has shown remarkable resilience during this crisis. If we are to assume that the stock market has bottomed (I doubt it), then stocks managed to do so at levels far higher than they usually hit during recessions.

Jeremy Grantham, the legendary manager of GMO points out that:

…the bottoms of other important comparative bear markets were much more impressive. On a similar basis, the low in 1921 – the post WWI depression – was about 300; the U.K. in 1974 was at the current S&P equivalent of about 300. In 1982 and
1974, the lows in the U.S. were equal to about 450. Of our six best comparable examples, only in Japan, three years into the market crash, was the market still above 880
equivalent.

In comparison, our recent bottom (666) occurred at levels twice as high. Grantham believes the reason for this was due to the world’s central banks printing money and maintaining extremely low interest rates: approaches Grantham states only work in the short-term (a year of so).

Commodities have also bottomed at much higher levels than they historically do during recessions. However, the commodity story is driven more by fundamentals than is the case for stocks (the S&P is currently at a P/E of 24… hardly cheap).

Indeed, David Rosenberg notes that commodities’ recent bottoms occurred at levels far higher than their historic recessionary lows (across the board). Rosenberg notes that the CRB index bottomed at 307 this recent cycle, vs. 211 in 2001, 237 in 1992, 226 in 2982, 187 in 1975 and 107 in 1971.

With stocks so disconnected from reality (again, a P/E of 24 while unemployment is nearing 10%, half of US states can’t balance their budgets and economic bell-weathers are all showing outright collapses in sales and earnings YoY !?!?) commodities have a lot more to offer from a fundamental standpoint.

For one thing, commodities are in a secular bull market (as opposed to stocks which entered a secular bear market in 2001). Rosenberg notes that stocks and commodities tend to move in 18-year cycles. The last cycle (1982-2001) saw stock outperforming commodities. This cycle the reverse is happening.

Indeed, stocks have done nothing since 1997. But oil, which collapsed from $150 to $30 is still up more than 100% from its 2001 lows (when the commodity bull market began). Gold is still up 300%. And so on.

Rosenberg is also bullish from a supply/ demand perspective. He notes that the commodity space (natural resources) has undergone a dramatic wave of consolidation in the last 30 years. Consequently, there are now fewer players in the market. Indeed, the number of publicly traded materials companies on the Toronto Stock Exchange has halved since 1997.

Then there is also the increased demand from Asia. Rosenberg points out that throughout history, emerging markets accounted for 50% of global GDP. They’re now making up for lost time, rising from 7% of GDP in 1973 to 21% in 2006.

Indeed, China and India look to be the only major economies that continue to expand today. They’re also forecast to be the leaders next year. And while the Western economies (especially the US) have been big buyers of “services” for the last 30 years. China et al have been big buyers of “materials.” That trend will continue and it bodes well for commodities.

Personally I think the commodity sector will undergo a correction when stocks take a dive (the inflation trade is over-played to say the least). But long-term commodities offer better opportunities than stocks.

In a nutshell, “stuff” remains king for the next decade. Rosenberg, states that pull-backs should be seen as buying opportunities.

In particular, I’m interested in gold.

No investment ever goes straight up or straight down. During the last bull market in gold, the precious metal rose 2,329% from a low of $35 in 1970 to a high of $850 in 1980. However, during that time, there was a period of 18 months in which gold fell nearly 50% (see the chart below).

As you can see, from mid-1971 to December 1974, gold rose 471%. It then fell 50%, from December ’74 to August ’76. After that, it began its next leg up, exploding 750% higher from August ’76 to January 1980.

Now, in its current bull market (2001 to March 2008), gold rose over 300% from $250 to a little over $1,000. And just like in the mid-70s, it began showing signs of weakness after its first big rally up to $1,014 in March ’08. At one point, it even fell to $700, a 30% retraction. Granted, it wasn’t a full 50% retraction like the one that occurred from 1974-76. But we are experiencing a financial crisis. And gold is the most common catastrophe insurance.

If we were to go by the historic pattern of the gold market in the ‘70s, gold should experience upwards resistance for 19 months after its first peak today. Gold’s recent peak was $1,014 in March ’08 (roughly 14 months before the writing of this report). If this bull market parallels the last one, then gold should renew its upward momentum in a very serious way starting in October 2009. And this next leg up should be a major one (the biggest gains came during the second rally in gold’s bull market in the ‘70s).

I’ve prepared a FREE Special Report detailing three investments that will soar when the Second Round of the Financial Crisis hits. I call it the Financial Crisis Round Two Survival Kit. Swing by www.gainspainscapital.com/roundtwo.html to pick up your free copy today.

Good Investing!

Graham Summers

http://gainspainscapital.com

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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