Today we would like to focus on what we think are the three biggest trends in the world and markets, even – or perhaps we should say ‘especially’ – in the context of the current setback in stocks.
Regarding Trend #1, clearly we’re not backing away from resources. Obviously the corrections we’re seeing in gold, silver and copper have been much greater than we expected. But in a way, the moves strongly affirm the leveraged relationship between resources and growth.
The fears that the world might sink into a recession, that the calamity in Europe might spread beyond the EU’s borders and engulf developing countries, has led to a major shock in the commodity markets. And this shows that the fundamental relationship between growth and resource leverage and resource scarcity remains very much a fact of life.
Yes, we’ve spent the last several weeks experiencing the downside to that relationship. But in a world in which growth will reassert itself, the upside will be all the more apparent.
Keep in mind that at the moment copper is trading at levels that will make many planned copper mining projects no longer profitable. The same goes for silver, and for other base metals. So if prices were to continue to go down, clearly the leverage to the upside will increase significantly when the situation does turn around.
Could an actual depression occur in the world? Of course. And what would that do to resources? They would get crushed. After all, supply constraints don’t really matter if you have no use for the supply.
But as we’ve pointed out before, even in that worst-case scenario gold will still shine and outperform virtually every other investment. This was certainly the case in the 1930s.
So that first relationship that we’ve been stressing for so long – growth/resources/resource scarcity – is still meaningful. Resources remain inextricably tied in with growth and do so in a leveraged way.
As an offbeat sidebar: China recently announced that it has installed in Beijing its first vending machine that sells gold. The machine allows the withdrawal of up to $150,000 in gold, dispensed in the form of bullion bars, and China plans to install many more such vending machines in secure places.
For those of you who are concerned that China is affected by the current meltdown: Of course they could be, and if so they would be in no position to protect the price of gold and other commodities. But we maintain that they would be the last domino to fall, in the event that dominoes do in fact start falling. Interestingly, when the International Monetary Fund (IMF) lowered their growth projections for the world from 4.3 to 4.0 percent, Chinese growth not only remained by far the highest, but also was lowered less than any other country – and not just on a percentage basis, but on a nominal basis. The lowering of growth in China was from 9.6 to 9.5 percent.
So our first trend clearly remains intact – which means that we see the current pullback as an exceptional “real-time” buying opportunity to pick up gold, silver, copper rare earth stocks at low prices. Names we would mention here are Freeport McMoRan Copper & Gold (FCX), NovaGold Resources (NG), and rare earths miner Lynas Corp. (LYSCF.PK).
It’s important to note that anyone who bought gold at its previous high in 2008 (at just over $1,000 an ounce) is still doing extremely well: Even with the recent sell-off, they are up over 55 percent. And for silver the number is over 30 percent. Those figures prove that even if you buy at the worst possible time in a bull market, while you may suffer short-term pain during the inevitable periodic corrections, you will still make out like a bandit if you keep your eye on the long-term horizon.
Again, the message is pretty clear: The reassertion of economic growth will lead to very good returns – not just from current lower prices, but from the recent highs in both gold and silver (of around $1,900 and over $40, respectively). Sometimes we just have to suck it up, ask ourselves what happens if conditions change, and make decisions accordingly. And again, the only condition of significance that could possibly change would be a world that segues into total deflation and chaos. And that would be one in which gold still rules.
Our second trend (and let me assure you here that we’ll talk about the second and third trends in greater detail in future updates) has to do with inequalities in U.S. income distribution. Now, don’t get upset; we’re not going to make any kind of political statement here – far from it. We just want to trace out what the investment implications of these income inequalities are.
When it comes to retailing, what this trend suggests is a barbell strategy: The ultra-high retailers, such as Tiffany (TIF) and Coach (COH), should continue to do well. The big rally in bonds means the very rich have not been significantly impacted by stocks’ contraction. But as far as the lower-end of the income spectrum, it’s almost a zero-sum game goes. Those companies with the franchises at the low end (and the low prices), are going to continue to gain market share at the expense of mid-level retailers. Among our favorites profiting from this trend are Walmart (WMT), The TJX Companies (TJX) and on the smaller side, Dollar Tree (DLTR).
Don’t forget, when we talk of income inequalities, and especially at the lower end, despite the cascading down in many commodity prices, the price of gasoline remains high. Although they have come down recently, on average 2011 is still on track to have the highest gasoline prices ever. If there’s any statistic that’s more remarkable than this, or more telling, we don’t know it. In a world that’s possibly on the brink of a massive decline, to be able to say that both Brent crude oil and gasoline prices in the U.S. this year will easily be the highest ever on an annual average basis is absolutely extraordinary.
The third trend (which, again, we’ll come back to in future updates) has been the slowdown in technological advances. Yes, we acknowledge that marvelous gadgets continue to come along; but truly meaningful updates in IT, other than some increase in speed, have not been apparent. Tablets and smart phones are wonderful, but essentially derivatives of what we already have.
Our point here is not to bemoan a lack of technological progress, but rather to say that the tech investment arena has changed. The slowdown in progress translates into the importance of meaningful franchises in this space – companies that are strongly identified by brand, marketing, etc. Admittedly, growth is not going to be spectacular for any of these companies, but it is going to be solid. Investment opportunities for them are going to be few, the consequences of which are going to be massive cash positions, share buy-backs, and in many cases, high dividends.
Intel (INTC) is perhaps our most interesting pick here. Yes, we admit that Intel hasn’t set the world on fire in recent years – but nevertheless it is probably the strongest franchise in the tech arena. How can a company that is such a strong franchise be such a dog in the market?
Well, one reason is that average selling prices for their products continues to go down, so they continue to be on a treadmill, needing to sell ever more of them. Sooner or later, however, and maybe it will be sooner, average selling prices will level off. Moore’s Law does not rise to the level of E=MC2. And when average selling prices do level off or even rise, Intel’s ability to grow and make money will for at least a few years be astronomical. In the meantime, you can sit back and relax with its close to 4 percent yield and nearly pristine balance sheet.
Disclosure: Leeb Group, its officers, directors, shareholders, employees and affiliated entities and/or clients of such affiliated entities may currently maintain direct or indirect ownership positions in financial instruments (i.e., stocks, bonds, options, warrants, etc.) of companies or entities whose underlying exposure is in the companies mentioned in this article.