The Start of a New Commodity Super Cycle [DIRTY DOZEN]

Some narratives are contagious because they seem to offer a confirming fact. We can say with some accuracy that most people put on a show of their own knowledgeability and try to conceal their ignorance of millions of facts. Hence narratives that seem contrary to prevailing thought may have lower contagion rates that do not result in epidemics. ~ Robert Shiller, “Narrative Economics”

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at breadth signals indicating high odds of positive forward market returns, inflation expectations driving yields up, signs of a major cyclical if not secular bottom in energy, uranium, and commodities in general. We then talk about a turning point in DRAM pricing and what that means for our highest conviction equity play, and end with a DEEP value Australian uranium miner that’s likely to 10x or more before all is said and done, plus more…

Let’s dive in.

***click charts to enlarge***

  1. This was the first year since 2009 where net share issuance was flat or positive. Anemic buybacks (down 54% this year) met a wave of share issuance as company’s sought to shore up balance sheets. Net issuance is a critical part of our Equity Supply & Demand Equation so it’s a good sign the market has held up as well as it has, considering. And it bodes well for 2021 when cash flush companies are expected to more than double their share repurchases.

 

  1. Last week, the NYSE McClellan Summation Index (NYSI) surpassed 900 for the first time since August. @twillo1 points out that SPX forward returns following a NYSI reading above 900 leads to consistently good returns over most timeframes. Read another way, this is not something you see at tops (h/t @ukarlewitz).

 

  1. Positive vaccine news, constrained global supply chains, waves of fiscal stimulus, and a falling dollar are driving inflation expectations higher, which are to account for the majority of the rise we’ve seen in yields.

 

  1. A new USD bear market meeting an extreme Capital Cycle meeting rebounding global growth = a cyclical turning point in energy shares.

The % of energy stocks trading above their 200dma is 97% after spending time near 0% for the better part of the year. It’s not a coincidence there are a number of similarities between today’s breadth and technical picture and that of the prior two major cyclical bottoms.

 

  1. Small-caps are extremely extended from their 200-day moving average. There’s a few ways to think about this (1) is that the only other two times the index was this extended over the last 40-years it happened to mark a major top or (2) looked at in context, this extension follows a severe extension under the moving average and is much more like 2009 than 2000.

 

  1. I want to reiterate that this is the most important chart to watch right now. If yields stay suppressed then equities can extend an overheated rally. If they rise they’ll meet hot sentiment and increasingly crowded positioning.

 

  1. Asset managers are holding record short positions in the US dollar. I’m looking at the 18’ lows for a potential rest / retrace in the new USD bear trend (chart via BBG).

 

  1. Like short USD positions, emerging markets are increasingly becoming a consensus trade. But they have a lot of room left for repositioning. The chart below shows that EM equity and bond flows are still negative on the year (chart via BBG).

 

  1. Our highest conviction equity bet this year has been Micron Technology (MU) which is off to a good start. But this trend is only just getting started… DRAM pricing has bottomed and is now kicking off what will be a multi-year bull cycle.

 

  1. Commodities have put in at least a cyclical if not a secular bottom. Over the next two decades we’ll see demand juiced by incredibly powerful Wealth s-curve tailwinds. You want exposure to this trend.

 

  1. Veteran technician Martin Pring (@martin_pring) tweeted out the following last week.

“When gold is outperforming commodities, it is discounting future inflation. When the ratio’s KST peaks a commodity rally typically becomes a reality. The KST has peaked again. Surprise, commodities have also started to firm up…”

 

  1. A sector that is joining in on this cycle turn is the uranium space. Australian miner/producer Paladin Energy (ASX: PDN) is one of two of my favorite ways to play this thematic, the other is Centrus Energy (LEU). If nuclear becomes popularized into the ESG trend (which it should), then these stocks will 10x or more.

 

Stay safe out there and keep your head on a swivel.