How to Play the Next Great Bull - Matt McCall 36 comments
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By Lara Crigger
The author of ‘The Next Great Bull Market' shares his thoughts on how investors can play the coming commodities boom.
- Why he's still in UNG
- Bull market benefits base metals, gold and oil
- How (and why) investors should play lithium
Commodities are on a tear lately—and by all signs, they're only headed higher, says Matt McCall, author of the upcoming book, "The Next Great Bull Market" (Wiley, November 2009). And now, he adds, is the perfect time for investors to jump in.
Mr. McCall is the founder and president of Penn Financial Group, LLC, and co-author of 2009's "The Swing Trader's Bible: Strategies to Profit from Market Volatility." A vocal advocate of ETF investing, he's also a regular commentator on CNBC, Fox Business Network, Fox News Channel and Bloomberg.
Recently, HAI associate editor Lara Crigger sat down with Mr. McCall to discuss his thoughts on the bull market for commodities, including which sectors stand to benefit, why he likes UNG and lithium, and why he's not worried about tough talk from the government on regulation.
Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): When we last spoke back in March, you said you were laying low on commodities. As the recovery has strengthened, have you become more heavily invested?
Matt McCall, founder & president, Penn Financial Group (McCall): Yes, actually, commodities are the sector I'm most heavily invested in right now; my three largest holdings are gold, silver and natural gas. But I have been adding to everything from precious metals to energy to base metals.
Crigger: Natural gas? Even with inventories at record highs?
McCall: Yes. I believe we're going to have a much colder winter; a lot of forecasters have been calling for that. I believe we're going to see a spike in natural gas between now, the end of winter and the first quarter 2010. I've been buying on every bit of dip that we have.
I've been buying UNG [U.S. Natural Gas Fund], which isn't the greatest vehicle, but it's easy for us to play it without having a futures account. Most people I've talked to are staying way away from UNG—in fact, they're shorting it. But I think that natural gas is going to pop, and when it does, the difference between the ETF and the actual futures price will narrow. UNG could pop at $15-$16 (it's currently trading at $11) in the next four-to-six months. If that's the case, there will be a very large percentage gain.
Crigger: In your book, you predict a coming "long-term commodities bull market." What do you see driving this trend?
McCall: It's a combination of three key factors. The first is longer-term inflation, which I believe could actually turn into hyperinflation in the coming years. Here in the U.S., we just continue to print money, and that's eventually going to catch up with us, and inflation's going to be a concern. Look back at history, thousands of years: Any time an empire flooded the population with currency, inflation was always the end result eventually. I think that's going to be the case here, too. And obviously commodities do very well in an inflationary environment.
Second, the U.S dollar hit a 14-month low recently. I think that trend will continue, the way our government is going; they want to have a weaker U.S. dollar, as far as exports are concerned. I don't really believe in that, but I think that's the way we're going. And commodities also do well with a weaker U.S. dollar.
Third, I believe the global economy has turned. We were in a recession, but I think we're well on our way out of it. Countries such as Brazil are already out of the recession. That's going to create a greater demand for base metals and energy.
All three combined would give us an amazing bull market for the next five-to-10 years. Even two of the three would still get a bull market. So I think you're really set up with those three key factors, fundamentally speaking. Technically, we've been in an uptrend for several years now; I don't see that momentum stopping.
Crigger: Which commodities do you think will perform best in this bull market?
McCall: I really like base metals; they're one of my largest holdings. I invest through DBB [PowerShares DB Base Metals Fund], you know: copper, aluminum and zinc. The reason I like that is you're going to need copper for the build-out. China is still growing steadily, as well as India and other BRIC countries. So demand for copper will continue, and that's a great way to play it.
Another one is, obviously, gold. I'm pretty heavily invested in gold; GLD is my biggest holding, at this point. It's going to be more of an inflation play than a play on the global economy turning around. But it's also hedging. If I'm wrong, and the global economy falls apart, gold turns into a safe haven as well.
We also own GDX (Market Vectors Gold Miners ETF) and individual gold stocks as well. One of our largest holdings, as far as individual stocks, is Goldcorp. You want to have a little diversification. The term I use in my book is "conversification": You concentrate on commodities, but within it, you diversify, getting a little exposure to miners, the futures, and so on. You can get exposure to a little bit of everything through ETFs.
So that's two. Three, finally, there's going to be oil. We hit nearly $150 as the all-time high on crude, and I think we'll probably hit that again as demand picks up, and the global economy starts on all cylinders again.
Crigger: In this environment, which commodities—if any—will lag?
McCall: It's going to be tough to say which ones will not do well. But one that's lagged recently has been the ags. Just in the past week or so, they've been coming back, but this year, they really haven't had the performance of something like energy. It's a wild card.
But just this week I've been thinking very heavily about putting some money back into the agriculture ETFs. There is a nice value here, and we had a drought in Australia, one of the worst droughts in the history of the country, sending wheat prices higher. So wheat, corn and soybeans could take off. If that's the situation, then we could be looking at DBA (PowerShares DB Agriculture Fund), which is sitting at a very nice value price over time.
I don't know that there are any commodities that I do not like, but some will lag others. I'd rather be diversified throughout all of them, have a little piece of all of them in my portfolio.
Crigger: Do you recommend any out-of-the-ordinary commodity plays that investors may not have already considered?
McCall: Something that I do own is plays for lithium. I don't know if people often consider lithium a commodity, but it really is. It's a long-term story, and eventually we're going to see a supply crunch when it comes to lithium.
The reason I love lithium goes back to lithium-ion batteries. As we move toward electric cars—and I really believe we'll move toward electric cars in the future—we're going to see greater demand for lithium. Yes, there's lithium in the laptop I'm using and the cell phone I'm talking on, but the amount needed for cars is much higher than for the smaller electronic components that we already use. Now, there's no guarantee that the lithium-ion battery will be the only battery for electric cars, but right now, it looks like a viable alternative.
So three companies at the forefront of the lithium angle: FMC Corp (NYSE: FMC), which is a major chemical company and the third-largest lithium supplier in the world; SQM (NYSE: SQM), which is based in Chile and also has exposure to agricultural chemicals, so you get exposure to both; and Rockwood Holdings (NYSE: ROC), the largest lithium supplier in the world. I own FMC and SQM for my clients, and I've been looking to buy more on any type of weakness.
Crigger: There's been a lot of talk in the government about increasing regulation over the commodities market. How would increased regulation impact the U.S. position in this commodities bull market?
McCall: What it would do is really hurt the ETFs, depending how ETFs react. But I'm not as concerned as a lot of people are when it comes to the potential regulation. At the end of the day, it makes a good sound bite for them to say, "We're going to regulate this and knock out the 'speculators.'"
But most people who actually are in the know about the commodity markets—or any markets, for that matter—know that speculators are needed to make the market; without speculators, there is no market. So I'm not too worried. It's just a lot of talk from the government; we've been promised a lot of changes that we're not seeing. If it does happen, we'll probably add more bureaucracy to the situation, but as long as you're on the up and up, I don't think it's going to affect the markets much at all.
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I think GLD is a terrible risk and probably does not own the gold they say they do so someday that will be exposed.
For a balanced exposure to all commodities I like GCC, which has an equal allocation to all. It is not exciting, but rides the commodities boom and protects against a falling dollar.
It is still difficult to say how much of the commodities boom is real profit and how much is just dollar decline, but at least it protects some purchasing power.
i) If this guy is so smart, why is he messing around with ETF's. Why not pick best of breed in each sector and not a basket of stocks of which some are underperformers. I do like the three lithium plays he did mention. Yet, I'll take my chances with Jaguar Mining (JAG), or Northern Dynasty (NAK), or Nova Gold (NG) going up in multiples much more than the Barrick's and Kinross's and the metals ETF's of the investing world. As for lithium, I'm betting that American Lithium Minerals (AMLM) is a multibagger more so than (SQM).
ii) Maybe he's right about a 10 year bull market, I hope so. But the myriad of debts this country is piling up will sooner or later have to be addressed. These millions, billions, trillions of debt make me highly wary of another meltdown. Possibly, we can escape future financial eclipse through the huge number of people worldwide who now can, or soon will be able to buy things that their parents never dreamed of, or were compltely unaware ever before existed.
Also as Mayascribe infers, there is a distinct lack of fundamental economic proof backing his bullish views. One should never overlook economics when investing, especially if you want to call a bull. To fail to do so makes your bull argument, well pun intended, pure bull.
well, how about 'dollar-cost-average' as you see fit.
Base metals have risen because 1) the weak dollar 2) China bought extra copper in May/June (punters got excited and seem unable to distinguish between copper and the other base metals so they all went up) and 3) speculation of a return of global demand. ...and perhaps a 4th -- you have to put your money somewhere.
"The reason I like that is you're going to need copper for the build-out. China is still growing steadily, as well as India and other BRIC countries. So demand for copper will continue, and that's a great way to play it."
Rising stockpiles at a time of lower supply than 2008 is indicative of soft demand ...the opposite of what he is talking about. Sure if an when genuine global growth returns prices will rise ...sharply. But the China share of base metal consumption is nowhere near what its share in iron ore and coal consumption is. Therefore you need more than China (and BRI) to see genuine demand.
If you stick some money in a commodity and it rises 20% because the dollar fell 20% have you gained anything? We need global growth for "real" gains unless the free money causes a speculative bubble but that isn't investing that is roulette/musical chairs.
I have an extra bet.
This is going to be a N recession, not a V, and not a W.
The dip is coming fast latest January 10 and once more the dollar is going to soar, Gold will hit its true 5000 price on the last leg of the N, in one to two years time.
There is a 100% chance Im wrong, but thats my bet.
On Oct 16 04:15 PM The shark wrote:
> oh boy!!! Mr McCall is definitely on the slippery slope of hope.
> If he is so heavily invested as one assumes by his commentary then
> he will soon be confronted with the wall of worry as his investments
> head "south". Mr McCall has a 5 to 10 year horizon so his predictions
> within this timeframe have a very high probability of being correct
> - however, before then there should be another period of strong correction
> (ie we should still go back and retest the March lows - probably
> below). The current Equity rally is "over cooked" which has created
> an over valued market - earnings are to a high degree "fudged" and
> more significantly propped up by overhead cutting - revenue income
> is still significantly down. Bear in mind earning estimates / guidelines
> are ridiculously low and do not reflect anything that would be classified
> as "recovery". Unfortunately, in the absence of any meaningful return
> from other investments, investors are forced to increase their risk
> threshold and place their funds into the market - clever money will
> either start to exit shortly or remain on the side until more clear
> cut evidence of "recovery". Cash is king and will remain so until
> the delationary bubble abates and is replaced with inflation - at
> this point, my guess 2 to 3 years down the road McCall will be right
> - BUT NOT NOW!!!!
The Toyota Prius, for instance, uses a Nickel-Metal-Hydride (NiMH) type of battery. The second-generation model battery is 15% smaller, 25% lighter, and has 35% more specific power than the first. See the top paragraph - the difference is more like 85% smaller for a camera battery.
Buying a Prius is probably a not so good investment because the technology will become outdated relatively quickly. Toyota says the cost of nickel has increased threefold in the past few years, largely because China is buying lots of it to make stainless steel. Also, lithium-ion batteries offer a higher power density that would allow a similarly powerful battery to be smaller and lighter.
But Toyota notes there are still some problems to be overcome before lithium-ion batteries are ready for prime time--at least in cars like the Prius. One is that the batteries have a dangerous tendency to catch fire. The second is that the life span of a lithium-ion battery in an application like the Prius can't yet match that of a NiMH battery. But neither of these problems seems insurmountable, as Toyota estimates lithium-ion batteries might be used in the Prius in as little as two or three years. For now, however, Toyota stands by the durability of its NiMH battery packs. And it doesn't plan on selling many replacements any time soon. (see consumerguideauto.hows.../ )
Why stick with one sector other than to write a book? His selection of ETFs also tells us this is not a book for the average SA reader, more a book for main street retail investor.
Is it good advice? If a time line is 10-15 years, any scenario advice is good advice, depending on the day. In the next 15 years...Good lord, a lotta stuff is gonna happen.
I don't think you will maximize what is going to happen in the next 15 years with any idea you have today.
1. This guy is talking about Lithium Ion, and Toyota has already made it quite clear that they will stay with the Ni batteries for the forseeable future because of the advances made with being able to clean the internal buildups, and the much lower price of production and reliability than that of Lithium.
2. Not a word about the biggest bull market already in ascent, Rare Earth Elements. This is so last year.
3. All the REE producers are either already mining or have the properties to mine gold, silver, tin, copper, lead, zinc ,and they are all Junior Miners. They won't be for long as the largest miners on the planet know full well that Rare Earths are absolutely essential to technology , and they will soon gobble up all the juniors they can.
This is the kind of "foresight" that keeps investors always one step behind the curve.
The article is two moves off the mark.
A123 Systems (AONE) went public at $17 last quarter, and went to a high of $28.20., closing this week at 23.52. They are in the rechargeable lithium-ion batteries business. How sustainable this business will be, time will tell.
Boone Pickens (see en.wikipedia.org/wiki/...) invested a couple of billion U.S. dollars in quixotic windmills (not the romantic kind), and his net worth went from about $3 billion to approx. $1 billion (see pickensplan.com).
Tekton, rather than ranting, could you please provide a reference re: your assertion, "Toyota has already made it quite clear that they will stay with the Ni batteries for the forseeable future." Thanks.
Perhaps you may not have read the last paragraph of the post: <<But Toyota notes there are still some problems to be overcome before lithium-ion batteries are ready for prime time--at least in cars like the Prius. One is that the batteries have a dangerous tendency to catch fire. The second is that the life span of a lithium-ion battery in an application like the Prius can't yet match that of a NiMH battery. But neither of these problems seems insurmountable, as Toyota estimates lithium-ion batteries might be used in the Prius in as little as two or three years. For now, however, Toyota stands by the durability of its NiMH battery packs. And it doesn't plan on selling many replacements any time soon.>>
> one metal he did not mention is moly(molybedm) used in steel. If indeed there is a recovery this metal will be highly sought after. Look for thomson creek mines and for a junior ( moly mines@1.20 in Toronto)<
r_soles, your comment was kind of quiet and might be overlooked because you didn't include any symbols.... but you're call on Moly Mines (MOL.TO) looks to me to be bang on the money. At least it's currently sporting a very nice chart that suggests it could be a multi-bagger. Nice find!
Thumbs up for you!
"But neither of these problems seems insurmountable, as Toyota estimates lithium-ion batteries might be used in the Prius in as little as two or three years. For now, however, Toyota stands by the durability of its NiMH battery packs. And it doesn't plan on selling many replacements any time soon.
Agreed none of these problems are insurmountable, and I would consider the "two or three years " you mention to be the forseeable future considering how rapidly these technologies change. The whole physical configuration of electric motors is being redesigned so the motors require less of the rare earths and simultaneously get lighter and more powerful.
If it sounded like a rant, it's just that in reading the interview I got a distinct impression of uninformed advice, especially when trying to look 10 years into the future. Didn't we hear similar rosy comments this time last year,walkng right into the teeth of a complete meltdown only weeks away?
Intriguing title! Without trying to sound smug, I think the best way to play the next great bull market is to wait for it to start, probably sometime in 2011. Then buy everything.