The Commodity Boom of 2018

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.

The Commodity Boom of 2018

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

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Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

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Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

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