For many commodity-related stocks the bounce from the March, 2009 lows to the first peak in June encompasses the bulk of their respective gains in the past 15 months. The current, on-going correction has delivered such heavy losses to some of these stocks that they are now trading at those June, 2009 prices. About 1/3 of the 133 commodity-related stocks I actively track are trapped in this bucket. (I maintain a separate list for oil and gas stocks). This list includes some particularly significant and striking members:
AK Steel Holding Corporation (AKS)
Aluminum Corporation of China (ACH)
Arcelor Mittal (MT)
Commercial Metals Company (CMC)
Consol Energy (CNX)
Dynamic Materials Corp (BOOM)
Harsco Corporation (HSC)
James River Coal Company (JRCC)
Schnitzer Steel (SCHN)
Texas Industries (TXI)
Thompson Creek Metals Company (TC)
Another 7 stocks have gained less than 5% in a year’s time. Here are the most notable in this group:
Granted, many of these stocks are still up significantly from their March, 2009 and/or 2008 lows, but given the S&P 500 is still up 13% in a year, I am struck by the amount of futility now building in many commodity stocks. The chart of the Commodity Research Bureau Index shows the stark year-long struggle of many commodities:
The growing peril for commodities was highlighted in the past week by recent comments in a Bloomberg interview with the CEO of Freeport-McMoran Copper & Gold Inc (FCX). CEO Richard Adkerson called China’s attempt to thwart inflationary pressures “…a risk to the world’s [copper] market place in the near term” although “it will likely lead to a more sustainable situation going forward.”
I have tended to think of deflationary scares as opportunities for picking up commodity-related names “on the cheap.” It was quite painful to do so in the Fall of 2008, and it was quite fruitful in the spring of 2009. However, I was quite premature in jettisoning the rest of my holdings in FCX in April given my concerns over Chinese stockpiling. (I kept a firm grip on my gold and silver though). Now, I find myself at a bit of a crossroads.
It seems to me that the government’s response to deflationary pressures will always be to do whatever it takes to reflate and inflate. In particular, the Federal Reserve appears ready to print and print and print. Even as deflationary forces dominate the short-term, over the longer-term, real assets should remain dear in a world awash in paper currencies (yes, credit must also be in ample supply). However, after reading Frederisk Sheehan’s “The 2004 Fed Transcripts: A Methodical, Diabolical Destruction of America’s ‘Wealth’” (May 13, 2010), I realized that my faith in this “reflation thesis” is analogous to the prevailing faith in the “Greenspan put” that is now the “Bernanke put.” Many market participants assume that investing in the stock market is virtually without risk because the Federal Reserve stands ready to do whatever is necessary to prop up the market and inflate financial and real assets. As the parable goes, the longer one holds stocks, the more likely it is this prop will succeed.
Sheehan insists that the bursting of the bubbles of 2000 and 2008 are evidence that this put is always doomed to fail – efforts to distort asset prices to pursue a given policy goal are not sustainable. So, the question for the trader/investor is whether to nibble while the goosing is good or whether to step aside and wait for the bargains that a crash creates. This question is particularly important for those of us interested in commodities since they tend to rise and fall faster than non-commodity related stocks. For now, I am assuming I want to be a nibbler here…while keeping an ample bundle of puts in my back pocket (as Sheehan essentially recommends).
For some entertaining (scary?) contrarian thought on this topic, The Contrary Investing Report notes that the California Teachers Fund is getting long and strong on commodities again – the last time was February, 2008.
On the flip side, Chris Ciovacco of Ciovacco Capital Management suggests that history is firmly on the side of the bulls immediately following a correction such as the one we are currently experiencing: “Deflationary Forces and Historical Market Corrections.”
Time will soon tell.
Be careful out there.