Brutal Reckoning Ahead for Commodities
04/12/2011 4:01 pm EST
With recent enthusiasm at frothy peaks, this week’s selling could grow into a protracted shakedown, writes Eric Roseman, editor of Commodity Trend Alert.
I’ve been investing in commodities for 20 years, and I’ve never seen such blatant euphoria.
Every week, there’s a new commodity ETF being listed. They’re sprouting like Dutch tulips. This reminds me of the tech bubble in the late 1990s—same trends, same crazy enthusiasm.
Investor sentiment, measured by Investor’s Intelligence surveys, shows the highest number of bulls since last fall and the fewest bears since last spring. Inflows into natural-resource funds are now at record highs.
Mutual fund investors, the worst market-timers, have been dumping bond funds to buy stock funds. Margin account activity at US brokerages is now at its highest levels since before the 2007 market peak.
The market is clearly overbought. We’re just about to enter, in May, the weakest time of the year for stocks and commodities. I’m predicting a huge, short-term correction for stocks and natural resources from now until the fall.
The Bernanke Fed wants investors in the stock market. Fed officials don’t want you to save. They want you to spend, liquidate your money-market assets, and throw it all into stocks, because rates are almost 0%.
I’ve grown very defensive over the past several weeks because broader markets are being driven almost exclusively by manic buying concentrated in the energy sector, namely the oil drillers. The multiples investors are paying for these stocks are becoming stupid.
For example, the biggest company in the oil services field, Schlumberger (SLB), trades at 28 times earnings and more than four times book value. Yes, it’s a great company and it’s a sector leader. But the oil drillers need a rest—and when they pull back, you’ll see a dizzy correction in natural resource equity indexes.
Watch Copper and Corn
Then there’s Dr. Copper, widely viewed as the leading commodity because of its economic forecasting reliability. Copper (JJC) probably peaked in February, and is now rolling over.
Corn is the latest commodity leader. Corn had recently traded at limit-up prices following USDA crop forecasts. Farmers intend to plant the largest acreage to corn in four years and the second largest since 1944.
The markets don’t think farmers will grow sufficient corn because global demand is too strong—including US subsidies for ethanol, which consumes almost 40% of the annual yield. China is about to import the largest amount of US corn in 15 years—another shot in the arm.
Corn is in a mini-bubble. Every farmer worth his grain will plant corn now. It’s a bad idea to buy corn at this price.
I think we’re at the cusp of massive speculative opportunities betting against commodities. Put-option premiums are going for next to nothing.
The Correction Is Coming
The bullish sentiment is out of control. I’ve seen this before and I think we’ll see most commodities roll over very soon.
Copper is already topping out. If other commodities begin to follow, then we’ll start issuing a series of put options spread out across different sectors of the complex.
This market reeks of over-confidence, and the resilience we’ve seen over the past few weeks is nothing more than unwavering enthusiasm on the part of investors dumping bonds for stocks. What this market needs is a brutal correction. And that is coming.
For the record, I spent the better part of the last few days scouring for bargains in resources. I can’t find a single company that warrants your dollars. Not one. A few issues trade at lows in the oil patch, but they harbor poor fundamentals. No point in bargain-hunting because the sell-off will smash everything in its path.
I urge you to hold quality names—buy the gold and silver miners and sit tight. Don’t throw more money at this crazy market as we enter seasonal weakness for raw materials.
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