I don’t consider myself to have an ounce of skill when it comes to market timing. I try to buy things for less than I think they are worth and wait for the market to value them appropriately. A lot of my portfolio is currently directed toward what I think are undervalued oil reserves inside publicly traded companies. I know oil is going to bounce around on a regular basis, but I think the long term trend is up so I’m generally willing to take the volatility and focus on the long term.
But if I’m being honest this Glencore IPO does concern me with respect to what it signals for commodity prices near term. Because it isn’t much of a mystery, they wouldn’t be selling a portion of the company if they thought it would be worth twice as much a year from now.
And we are talking big bucks here, so timing is very important for Glencore. According to Reuters Glencore’s equity valuation for the flotation is somewhere close to $70 billion and it is looking to raise $11 billion to $12 billion.
It is hard to know a lot about exactly what Glencore is into as it has always operated in a pretty secretive manner. One thing is for certain and that is that it is plugged into far better information than virtually any other commodity investor. Reuters reported that Glencore controls 60% of the global zinc market, 50% of the trade in copper, 45% of lead and the list continues. So if it senses a top in the commodity market and is trying to cash in before it breaks investors would be silly not to pay attention.
Of course we have seen this movie before, where giant private companies send us a signal about their respective markets as they try to cash in while times are good. It feels like yesterday that I was reading articles about the Blackstone (BGX) 2007 IPO being a signal that things were about as good as they were ever going to get in the Private Equity Industry. I’d say that was definitely a signal that was worth listening to. Prior to that we had Goldman Sachs (GS) in 1999 finally going public after years and years of going back and forth over doing so. Again that signal was not much in front of the popping of the technology bubble.
So what am I doing? I’m still looking at securities in the oil sector. But I’ve put a pause on making any purchases. I had already pretty much done so when oil crossed $100 as I’d prefer to be buying oil stocks when people in the street aren’t complaining about gas prices. It isn’t that I think that the oil stocks I’m looking at are priced for $100 oil, quite the contrary actually as I find that most of them aren’t even priced for $70 oil. But after years of learning the hard way I am fully aware that there is always another great buying opportunity in the fairly near future and I’m determined to be sitting on some cash when it appears.
If you really think a sharp correction in oil specifically is coming you could consider buying an inverse ETF like the Horizons BetaPro NYMEX Oil Bear Plus exchange traded fund, which is listed on the Toronto Stock Exchange as HOD or the Proshares Ultra Short (SCO). People who did so in the summer of 2008 were up about 7x their money in a couple of months. If you are wrong and oil doesn’t drop then your oil investments should work out fine. I think you would just need to make sure to limit your exposure to such an ETF to a small amount of your capital, which if a collapse occurs would likely provide a big enough return to cushion the blow from your oil stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.