By
Macro Economist
:
Our models have turned, it's as simple as that, and we need to
respect it. Being bearish and consensus, as we have been as of
late, is not a good place to be. So we're shifting in a big way and
we are absolutely not changing until credit conditions
meaningfully change for the worse and/or monetary policy becomes
constrained.
Now mind you, in reading recent posts you've probably noticed
some reticence in being bearish. For instance, in our previous
market thermometer we cited "cheap cyclicals" and "market
positioning" as well as "surprisingly good" credit conditions and
monetary policy as potential wildcards. Heck, we even wrote about
our bullishness on
housing
. Going forward, we think we need to pay more attention and be more
respectful to those factors going forward.
As mentioned in our
Central
Policy for Dummies
post, policymakers have the ability to keep this party going for a
little while longer so long as the commodities market cooperates.
And now, by all indications, it looks like they will print.
Accordingly, it's up to the commodities market participants to put
up or shut up.
So rather than being perma-bearish, we need to understand the
next logical step. To me, it points to shifting toward a
pro-cyclical posture. With investor sentiment so beaten down, and
most if not all major global indices below their 52 week highs from
this spring, we think there is still plenty of time to get in. But
get into where?
When I survey my screen of cheap stocks with beaten down
sell-side earnings estimates (thereby giving the capacity to beat
going forward), invariably I see three major sectors popping out:
Materials, Energy, and Industrials - in that order. All of these
sectors have massively under-performed the general market for
nearly 2 years now. With respect to Materials and Energy, we are
back to the 2009 lows versus the general market. With the specter
of monetary easing within a slow, but growing environment, 3 years
into a maturing economic expansion, and a general aversion to
risk/equities (as measured by investor sentiment) this represents
an incredible opportunity to take advantage of what will likely be
a perfect storm for commodities sector companies (and direct
investments into commodities).
(click to enlarge)
Source: Bloomberg
Below find the charts of the sectors which stand most to benefit
from the bankers' monetary crack.
Chart 1: Materials vs S&P500 - [[XLB]]
(click to enlarge)
Chart 2: Energy vs. S&P500 - [[XLE]]
(click to enlarge)
Chart 3: Industrials vs. S&P500 - [[XLI]]
(click to enlarge)
While I will rarely talk individual stocks (happy to discuss my
top picks privately), there are definitely some sub-sectors within
the main sectors I have outlined which stand out in our contrarian
model. Currently, GDX is the only ETF I would suggest, but there
are plenty of outstanding miners if you're willing to do the hard
work. Given that development and the danger of being caught in a
poorly run gold miner, the ETFs are a logical choice.
-
Gold Miners/Junior Gold Miners - [[GDX]], [[GDXJ]]
-
Autos/Auto Parts
-
Steel
-
Oil and Gas Equipment/Drilling
Conclusion:
Don't get me wrong, we are still long-term bears. Every bearish
pundit is right about all the things which are wrong in the global
economy, the problem is always one of timing. Historically, every
major market event has occurred within an environment of policy
constraint, not policy looseness. As the most politically sensitive
commodity, a super-spike in oil prices that constrains central
bankers' largesse is what will be required in order for the bears'
predictions to come true.
If the world couldn't end in 2011 with $120 oil, well then it's
going to take $180 oil and $2500+ gold to handcuff policy makers
and kill profit margins. Yes, you should begin to get ready for
some stagflation and a 2007/2008 redux.
So we're switching sides. We're selectively bullish and we think
there can be meaningful alpha produced by being in the right stocks
and sectors for this phase of the market cycle, and those sectors
and stocks are potentially very different than the Defensives +
Consumer Discretionary leadership of the past two years. We will
become bearish again when the sentiment and sell-side extrapolation
pendulum swings the other way.
Disclosure:
I am long [[XLB]], [[XLI]], [[XLE]], [[GDXJ]].
See also
Is First Solar On The Rebound?
on seekingalpha.com