2011 was a wild year in the financial markets. In these series of articles I will address some of my top performing picks and underperformers since I started writing here in March. I will explain some of the drivers behind these moves and my outlook for these investments for the next six months to one year.
It has been very volatile and two economic drivers are battling to control the performance of the sector. The first is inflation risk. With central banks printing money to either stimulate the economy or cover up reckless fiscal policy, the global money supply has ballooned. On the other hand, a serious slowdown in China has outweighed inflation fears. Since Chinese demand accounts for 40% of copper and industrial metals (and a large percentage of other commodities), a hard landing in China would crush commodities and the basic materials perspective. In the second half of 2011, the risk of a hard landing outweighed inflation fears, so basic materials have severely underperformed.
Below I analyze how my recommendations and trades for my investors in the sector have performed throughout the year.
Long Gold (GLD)- Gold has been a top performer in 2011, and during my holding period from February 22nd to December 12th it has risen 19.6%. As for the future outlook for gold, I expect to pull back to around $1450 per ounce due to the European crisis. However, the continuing debasement of the US dollar keeps the fundamentals of gold bullish beyond $2000 per ounce.
Long Terra Nitrogen (TNH)- Terra Nitrogen has been the best performer in the fertilizer industry this year. Since my recommendation on May 20th, the stock has run up 34%. Even at these heightened levels, the company still pays out a 8.8% yield due to higher profitability. My long run outlook continues to remain bullish as growing populations in the emerging world will increase demand for food products and fertilizers that increase yield. Cheap natural gas also is a bullish factor for TNH.
Bearish outlook for Vale (VALE)- Vale is Brazil's leading mining company, but lower demand for iron ore and conflicts of interest between its private and government ownership continue to hurt the stock's performance. Since May 1st, Vale has underperformed the basic materials index (XLB) by 16.45% and is down 34.5% overall in this time period. My outlook on Vale remains bearish, because their main products such as iron ore, copper, and aluminum are the most sensitive to China demand.
Long Industrial Metals and Agricultural Commodities- My long positions related to these sectors span from commodity ETFs in agriculture (DBA) and platinum (PPLT) to companies such as BHP Billiton (BHP), Freeport McMoran (FCX), and Potash (POT). The risk of a Chinese hard landing and a slowdown of the global economy has crushed these stocks. Technicals for all of these investments remain bearish as they remain mired in downward channels and have broken below recent support levels on Monday. For 2012, I expect the run down for these commodities and respective companies' stock to continue to decline for the first half of the year. I expect industrial metals to remain down even longer because stockpiles of iron, steel, and copper have grown substantially due to lack of demand from China. However, I expect agriculture to rebound as food demand is relatively inelastic to economic growth. Despite sliding down to $40.22, Potash is still an excellent value with a forward P/E of 8.7 and a ROIC of over 22%. Buy the stock when it breaks out of its bearish trend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.