Commodity stocks — A pillar of streng th in this growing bear market

Thursday, 13 October 2022 — Albert Park

[7 min read]

Dear Reader,

When it comes to the doom and gloom in markets RIGHT NOW, there is a bright spot on the horizon…

Commodities.

Despite enormous falls in the US market over the last few weeks, if you’re holding large-cap mining stocks, you’re probably faring pretty well. This was the message I conveyed to readers of The Insider last week.

It’s one reason Australia’s leading index, the S&P ASX 200, continues to pivot away from the US S&P 500.

Why?

While both indices represent the largest companies for their respective countries, it’s Australia’s heavy weighting toward mining stocks that is giving it an edge against the tech-dominant US index.

As you can see from the chart below, the 12% decline in the Aussie looks reasonable when you compare it to the huge 25% sell-off in US markets since the beginning of the year:

2022 Performance: S&P ASX 200 versus US S&P 500

Overlaying Australia’s two largest diversified mining companies indicates why the Aussie index might be holding up quite well. BHP [ASX:BHP] is strongly ahead of the ASX 200, up 5% for the year, and Rio Tinto [ASX:RIO] is down a moderate 6%.

The weighting of these two stocks (within the index), in addition to other large-cap miners, has given the Aussie market a boost relative to global indices:

2022 Performance: S&P ASX 200 versus RIO and BHP

From the strongest to the weakest

In every boom-and-bust story, there’s always a winner and a loser.

It’s not often you see BHP or RIO stock prices overlayed against the Nasdaq Tech Index, but I thought it would offer an interesting comparison to see the diverging markets and highlight the stark contrast.

I’ve used the Nasdaq 100, as it holds the world’s 100 largest tech firms. As you can see, it’s been a brutal year for the group, down a whopping 41%. But the story for our two largest diversified miners is very different, as you can see below:

2022 Performance: Nasdaq 100 Tech Sector versus RIO and BHP

It demonstrates a point I made in The Daily Recking Australia just last month; this global bear market is squarely focused on overvalued tech stocks.It’s why I drew the comparison to the dotcom bubble of 2000.

What that bubble showed us a little more than 20 years ago is that bear markets affect all equities. But the impact is not the same across the board.

In a reflection of today’s market, as back then, the ASX 200 — with its heavy weighting to ‘real asset stocks’ — performed well relative to its tech heavy US cousin.

But the trillion-dollar question everyone wants to know is, have we reached a bottom?

Rewind 22 years, and the Nasdaq Composite Index made an all-time high in February 2000. From there, it was all downhill.

This tech-heavy index proceeded to fall more than 75% over the following two years, making a final low in September 2002.

This crash would go down as one of the biggest booms to bust stories in financial history.

To date, that same index has fallen 32% from its new all-time high, recorded in December 2021.

As I’ll demonstrate below, there could be further pain on the way for tech investors.

The charts paint a bleak future for tech, but emerging opportunities for mining

As tech declines, mining stocks continue to hold a very important support level.

As you might recall, all equities suffered a brutal sell-off mid-way through 2022. Most global indices (and stocks) made major lows around late June. These lows gave us a valuable reference for gauging future strength (or weakness) in the market.

Bringing up the chart for the Nasdaq 100 Index below, you can see the all-important June level breaking.

This is an extremely weak signal indicating more pain is on its way for tech investors.

The index is now on its way to making yet another NEW low major low:

Nasdaq 100 Tech Sector

On the other hand, the situation for resource stocks looks far more optimistic!

Using this same June low as a support reference, the mining sector is holding up well.

I’ve demonstrated this on the chart below using the ASX 300 Metals and Mining Index as a proxy for the mining industry at large:

ASX 300 Metals and Mining Index

The comparison between the two sectors is a stark reminder that not all stocks perform terribly in a market sell-off.

But the key is to find stocks holding strength. This is where the opportunity rests, quite literally, waiting patiently for the market to turn bullish.

Sell-offs provide a two-fold advantage for savvy investors; they expose the weakest stocks while also highlighting the strongest opportunities.

Market gurus always claim that the best time to buy stocks is during a major market sell-off.

The key point they miss, however, is that in times like these, you should ONLY buy companies that are holding up against market pressure.

Buying any old stock in freefall (like most tech stocks right now) is like trying to catch a falling knife, and that’s not what I consider a value play for long-term investors.

Finding stocks with relative strength is.

If you are looking to take advantage of this market sell-off; identify the strongest stocks first.

Watch how they react to future market declines. Monitor their relative strength against other stocks or indices. Then, take any future market drop as an opportunity to add the position to your portfolio.

Right NOW, the strength is in mining.

Until then — happy hunting!

Regards,

James Cooper,
Editor, The Daily Reckoning Australia

PS: Stay tuned as next week I’ll be capping off the final issue of our special three-part series covering critical metals.

Dear Reader,

What’s great about the US is that anyone can grow up to be president…or win a Nobel Prize.

Donald Trump proved the first point. Now, Ben Bernanke has proved the second.

Here’s Politico with the story:

‘Former U.S. Federal Reserve Chair Ben Bernanke, who put his academic expertise on the Great Depression to work reviving the American economy after the 2007-2008 financial crisis, won the Nobel Prize in economic sciences along with two other U.S.-based economists for their research into the fallout from bank failures.

‘Bernanke, 68, who was Fed chair from early 2006 to early 2014 and is now with the Brookings Institution in Washington, examined the Great Depression of the 1930s, showing the danger of bank runs — when panicked people withdraw their savings — and how bank collapses led to widespread economic devastation. Before Bernanke, economists saw bank failures as a consequence, not a cause, of economic downturns.’

Unread, overlooked

In our book, Win-Win or Lose, recently updated and soon to be re-released by John Wiley & Sons…we explained how economies really work. While not officially on the short-list for a Nobel Prize, we nevertheless held out hope. Maybe one member of the Nobel committee would pick up a copy for 25 cents at a yard sale…its pages unbent, unread. And perhaps he would find it so compelling he would share it with the rest of the committee...

…and then, in an insult to mainstream, academic economists…

…we would get a call giving us the surprising, good news.

We stayed close to the phone on Sunday…but it didn’t ring. The place they weren’t calling from was Stockholm.

Maybe they couldn’t find our number. Or maybe they are as clueless as Ben Bernanke.

And earlier this week…first we thought it might be a joke…but there he was, Ben Bernanke, sharing the Nobel with two unknown academics. He was smiling…with a look that betrayed his soul — self-satisfied, witless, and dishonest.

Yes, the Nobel Committee laid its top award for economics onto someone who has no idea how economies work. It was as if they had awarded Vladimir Putin the Peace Prize.

But in the spirit of runaway generosity, we give our applause to Ben Shalom Bernanke. And herewith, we help him with his memoirs:

‘I, Bernanke

‘Twerp…dweeb…nerd. Yes, that’s what they called me in school. In Hebrew School they had even worse words for me — putz…schmuck…and so on.

‘But I showed them, didn’t I? They didn’t get the Nobel Prize. I did.

‘How did I do it?

‘That’s the interesting story. Even in Washington they took me for bupkis.

‘I followed Alan “Bubbles” Greenspan at the Fed. He understood how markets function. He had spent his time on Wall Street. He had studied the Austrian classics. He dated Barbara Walters and married Andrea Mitchell. He also knew what he wanted — power, fame, and status. He sold out and everybody knew it.

‘In Washington, you have to choose — power or honesty. Not both. Greenspan went with power. And me, I was a guy with no experience, neither on Wall Street nor Main Street. I was an “academic economist”, they said, with no knowledge of the real world.

‘But I played them all. I was the consummate technocrat, with a PhD, spouting BS like an overflowing toilet. The “neutral rate”…economic capacity…excess saving…dynamic stochastic models — all nonsense, of course. But if you really want to play the game in Washington, you need to play on both sides.

‘Old Greenspan was too clever by half. Everybody knew he was lying. And he didn’t get the Nobel Prize. But when I lied, they just thought I was stupid. That was my great achievement.

‘I did my academic work in the shadow of the great Milton Friedman. Friedman was “great” because he recognised that governments are fundamentally parasites and that the less government you have the better off you are.

‘He saw the money supply as the critical variant…and the collapse of banks in the 1930s as the main cause of the Great Depression. When the banks failed, depositors lost money, the money supply fell…and you had — a depression.

‘I knew perfectly well that the bank failures did not actually cause the Great Depression. Banks failed because they had lent too much money to too many people who couldn’t pay it back. Left alone, the bank failures would wipe out bad debt and the system could soon get back on its feet.

‘But I knew that view would never fly in Washington. So, when I was put on the spot on Friday, 3 October 2008, I pretended to be a moron.

‘If you don’t pass this legislation, I told Congress, you may not even have an economy by Monday.

‘This was pure claptrap. I was surprised the clowns went for it. Markets adjust to whatever news they get. The failure of a few over-stretched mortgage lenders was never going to stop the whole economy.

‘Markets don’t care who fails. And they don’t care about prices either. Or interest rates. They only care that they be true. I deliberately distorted them. First, by helping panic Congress into funding a huge Wall Street bailout. Then, by taking the Fed on a printing-spree…adding US$21 trillion to the national debt since 2008. This is what led to the Bubble Epoch — 2009 to 2021 — and made it almost impossible to return to “normal” without catastrophic losses.

‘By then I had fully realised how fraudulent the whole system had become…with the cretins in Congress pretending to carefully consider the issues…the mountebanks at the Fed pretending that they know what interest rates should be…and “The People” themselves pretending to have any idea of what is going on.

‘It was then I decided on the title for my book, The Courage to Act. It was a laugh I shared only with my wife. Courage? It didn’t take courage to print trillions of dollars and set the stage for today’s inflation. No, it didn’t take courage. It took cynicism.

‘I, Bernanke, mastered it. I did it. And I got the Nobel Prize for it.’

Do we begrudge Mr Bernanke his good fortune? Of course, we do. The little twerp deserves recognition — but for making things worse, not making them better.

And as for us…there’s always next year.

Regards,

Bill Bonner,
For The Daily Reckoning Australia