Disclosure: The following represents my opinions only. I am long ORO.V (Image credit to Seth Schweit on Unsplash)
I’ve been thinking about writing something lately and this seems like as good a day as any to do it. I’m a big fan of knowing what I own and why I own it, so days like today in the commodity sector don’t bother me much. Today, I know that if I hold cash in my portfolio, its free cash flow yield is precisely zero. Meanwhile, I know that the energy stocks in my portfolio have free cash flow yields of anywhere from 15 to 50%. I know that gold companies are trading at their widest discounts to NAV, and their lowest cash flow/earnings multiples, in quite some time. Likewise for base metal producers. Hmmmm… not a tough decision in terms of what I think I’m better off holding these days, but hey, that’s just me. Commodities and the companies that produce them do bob up and down like buoys in the market ocean, but the “tide” is where I try to focus my attention. For today, the tide of the falling dollar is ebbing, but I don’t see the metals and energy markets being significantly different today than they were yesterday. I’d actually argue that action like today is a gift to traders, or perhaps to those who were a little slow off the mark when it came to recognizing the inherent value being offered by the commodity sector in this market. But don’t just take my word for it… Paul Tudor Jones lays out his thinking on the topic of “inflation trades” in this video, which I think folks should seriously consider. Pay particular attention to his points re commodity asset allocation relative to what might be considered “normal”. Then consider that there is absolutely nothing normal about The Great Restart and the trillions of dollars behind it… and ahead of it. I listened to all of Chairman Powell’s comments and question and answer period after the FOMC meeting yesterday and the message was that “the inflation you’re seeing is transitory”. The market seems to have taken that at face value. I’d ask people, “What else could he have said?” Imagine if when asked about inflation concerns, Powell’s answer was “Yes, we are deathly afraid of it, we are tapering our bond purchases immediately, and we are looking to start increasing rates in Q1 2022.” Even acknowledging that inflation is of any concern could cause market mayhem, especially in the bond market, where the scariest part of the current balancing act lives. Instead the message was (and this is me paraphrasing): “We don’t care how hot inflation runs… it could run hot for 12-18 months, but then we think it’ll relax.” Okay, sure, that’s a view, but it’s a guess (and Powell openly admits there is no playbook for this)… and during those 12-18 months, while we “run hot”, is the market going to just to brush that off? Bah. I don’t think the market has the fortitude to do that for long in the face of what will continue to be some hot economic numbers (and seemingly persistently constrained supply chains). Sure copper was overbought short term, so maybe it could drop into the mid-$3’s as China steps away from the market (and actively tries to manage prices… good luck…), but how can anyone argue with the long term theme given the Green New Deal narrative out there? It’s a lot to chew on, but in a nutshell I’m unfazed by days like this.