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Hedge fund manager, growth at reasonable price, medium-term horizon, contrarian
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Our models have turned, it's as simple as that, and we need to respect it. Being bearish and consensus, as we have been as of late, is not a good place to be. So we're shifting in a big way and we are absolutely not changing until credit conditions meaningfully change for the worse and/or monetary policy becomes constrained.

Now mind you, in reading recent posts you've probably noticed some reticence in being bearish. For instance, in our previous market thermometer we cited "cheap cyclicals" and "market positioning" as well as "surprisingly good" credit conditions and monetary policy as potential wildcards. Heck, we even wrote about our bullishness on housing. Going forward, we think we need to pay more attention and be more respectful to those factors going forward.

As mentioned in our Central Policy for Dummies post, policymakers have the ability to keep this party going for a little while longer so long as the commodities market cooperates. And now, by all indications, it looks like they will print. Accordingly, it's up to the commodities market participants to put up or shut up.

So rather than being perma-bearish, we need to understand the next logical step. To me, it points to shifting toward a pro-cyclical posture. With investor sentiment so beaten down, and most if not all major global indices below their 52 week highs from this spring, we think there is still plenty of time to get in. But get into where?

When I survey my screen of cheap stocks with beaten down sell-side earnings estimates (thereby giving the capacity to beat going forward), invariably I see three major sectors popping out: Materials, Energy, and Industrials - in that order. All of these sectors have massively under-performed the general market for nearly 2 years now. With respect to Materials and Energy, we are back to the 2009 lows versus the general market. With the specter of monetary easing within a slow, but growing environment, 3 years into a maturing economic expansion, and a general aversion to risk/equities (as measured by investor sentiment) this represents an incredible opportunity to take advantage of what will likely be a perfect storm for commodities sector companies (and direct investments into commodities).

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Source: Bloomberg

Below find the charts of the sectors which stand most to benefit from the bankers' monetary crack.

Chart 1: Materials vs S&P500 - XLB

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Chart 2: Energy vs. S&P500 - XLE

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Chart 3: Industrials vs. S&P500 - XLI

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While I will rarely talk individual stocks (happy to discuss my top picks privately), there are definitely some sub-sectors within the main sectors I have outlined which stand out in our contrarian model. Currently, GDX is the only ETF I would suggest, but there are plenty of outstanding miners if you're willing to do the hard work. Given that development and the danger of being caught in a poorly run gold miner, the ETFs are a logical choice.

  1. Gold Miners/Junior Gold Miners - GDX, GDXJ

  2. Autos/Auto Parts

  3. Steel

  4. Oil and Gas Equipment/Drilling

Conclusion:

Don't get me wrong, we are still long-term bears. Every bearish pundit is right about all the things which are wrong in the global economy, the problem is always one of timing. Historically, every major market event has occurred within an environment of policy constraint, not policy looseness. As the most politically sensitive commodity, a super-spike in oil prices that constrains central bankers' largesse is what will be required in order for the bears' predictions to come true.

If the world couldn't end in 2011 with $120 oil, well then it's going to take $180 oil and $2500+ gold to handcuff policy makers and kill profit margins. Yes, you should begin to get ready for some stagflation and a 2007/2008 redux.

So we're switching sides. We're selectively bullish and we think there can be meaningful alpha produced by being in the right stocks and sectors for this phase of the market cycle, and those sectors and stocks are potentially very different than the Defensives + Consumer Discretionary leadership of the past two years. We will become bearish again when the sentiment and sell-side extrapolation pendulum swings the other way.

Source: Bulls Will Win The Battle, Bears Will Win The War