The following is an excerpt from our Macro Intelligence Report (MIR). If you’d like to learn more about the MIR, click here.
2018 will be the year the commodity bull gets running…
When a man makes his play in a commodity market he must not permit himself set opinions. He must have an open mind and flexibility. It is not wise to disregard the message of the tape, no matter what your opinion of crop conditions or of the probable demand may be. ~ Jesse Livermore
The stock market has far more short-term countertrends. After the market has gone up, it always wants to come down. The commodity markets are driven by supply and demand for physical goods; if there is a true shortage, prices will tend to keep trending higher. ~ Bruce Kovner
In late August we turned outright bullish on crude oil and energy related stocks. At the time this was a deeply unpopular opinion. No sooner than when we published did we start receiving emails giving us a list of reasons why we were wrong. I love this type of response when I take a real contrarian viewpoint. The more derided and unpopular our market stance, the more profitable the trade usually ends up being.
At the time, WTI crude was trading around $46bbl. And most market players were calling for a return to the $30s. Instead, crude went on a run rising over 30% to +$60bbl where it is today.
The energy stocks we’ve recommended over the last four months have done well.
- WTI is up over 100%
- RIG is up 36%
- CRR is up 70%
- ESV is up near 50%
- COG is up 14%
Despite this run up in oil and energy stocks, we’re still hearing primarily bearish takes on the sector with traders looking to call a top after every rise.
Typically after a 30% rise over a short few months, a bullish narrative becomes popularized and widely adopted. But we have yet to see that. This is all the better because the greatest bull runs climb a mountain of disbelief. And that is what we’re seeing here.
This negative sentiment just bolsters the bull case. We think 2018 will be the year of the commodity bull. We expect WTI crude oil to climb over 20% higher and finish the year above $75bbl. This will drive energy stocks (our basket included) up by multiples, and the energy sector will finish the year as one of the best performing sectors.
The evidence is increasingly pointing to this potentially being a secular bottom in commodities and energy stocks in particular.
We have commodity valuations relative to stocks at 100 year lows.
Commodity pricing relative to stocks tends to follow a full 15.5 year cycle. We’re at the trough of the current cycle — a point that has marked the start of the last three commodity bull markets.
And energy’s relative total returns to stocks is classically a late cycle performer, as we’ve noted at length in our September report on where we are in the Investment Clock cycle.
We are at a long-term inflection point for commodities.
Global growth continues to surprise to the upside, which we expect to continue in 2018. And inflationary pressures are starting to build which will become apparent next year (note: we don’t expect “bad” as in high rampant inflation, but we expect stronger, around 2% inflation to persist towards the second half of the year). And beaten down commodity/value stocks do well in this environment.
Throw in the potential for a new infrastructure spending bill here in the US, as well as increasing expansionary policies in other parts of the world (ie, India), along with the wealth S-curve, and we have the makings for a large secular bull market in commodities that’s ready to get started.
The above was an excerpt from our Macro Intelligence Report (MIR). If you’d like to learn more about the MIR, click here.
