Materials have been beaten down for years, but they're finally
starting to look attractive.
Almost every chart in the metals and mining space appears to be
bottoming or starting to climb. Steel makers, for instance, have
been moving sideways for the last six months after an 18-month
slide. Coal producers are behaving similarly and starting to see
bullish call buying
. Copper miners look even better.
These companies have been on the wrong side of the trade for the
last year as the market priced in slow growth in China and then
financial calamity in Europe. Both conditions are old news, but
these stocks are still priced at panic levels.
One consideration is China, the world's second-largest economy. It
will probably never return to the breakneck growth from a few years
ago, but all the evidence points to re-acceleration in the last two
months, with electricity consumption and industrial indexes
starting to improve.
The situation is also slowly getting better in Europe with the
Greek and Spanish debt crises seemingly contained. Key leaders,
especially in Germany, have committed themselves to support Greece.
Sadly the ailing country itself will probably end up blighted for
decades like Detroit or Camden, N.J., but contagion is unlikely.
Then we have a budding positive in the U.S. housing market, which
continues to show strength across the board. Whether you're looking
at homebuilders such as Lennar or suppliers such as
Louisiana-Pacific, these stocks have been moving. The same applies
to less-followed companies, which include cement maker Texas
Industries and gravel supplier Vulcan Materials.
Lumber is also telling an interesting tale. I like this commodity
because it's a pure "use" commodity, with almost no speculation. It
started falling in early 2005 as the housing market began to cool
and continued dropping into 2008 even as gold, oil, and copper
have been rising since the summer as homebuilding rebounds, despite
weakness in oil. Eventually that home construction will also filter
through to prices for other materials, providing real demand rather
than speculation. This is especially true for copper (and, by
extension, emerging markets).
Speaking of the "red metal," that
is also bullish. Copper has been working higher for more than a
year but remains at levels from late 2009. Given all we have been
through since then, with China slowing and sovereign-debt panic
sweeping the markets, copper looks especially strong. Producers
such as Freeport-McMoRan and Southern Copper have also been making
steadily higher lows. (FCX looks pretty interesting with today's
The "fiscal cliff" remains the big wild card, and there is no way
to predict how or whether it will be resolved. But materials stocks
might be safe regardless, because government spending is
increasingly dedicated to simple transfer payments rather than
fixed investment on things like highways. So if we do go off the
cliff, the real pain would probably be felt by retailers and
All of this points to the risk/reward in metals and materials
looking definitely interesting here. Unless the world ends, it
seems as if all the bad news is priced in--and the tide is turning.
I am long FCX.
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of Dec. 5.)
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