Commodities Investing

[Viking]

I did a quick search in the archives and was not able to find a general thread on investing in commodities. I am listening to the pod cast linked below and am finding it very educational. Lyn Alden is quickly becoming one of my favourite investment professionals to listen to, and not just from a commodities perspective.

 

Podcast: We Study Billionaires

Guest: Lyn Alden

Posted: Sat Feb 26

https://podcasts.apple.com/ca/podcast/we-study-billionaires-the-investors-podcast-network/id928933489?i=1000552327751

 

IN THIS EPISODE, YOU’LL LEARN:
    •    01:03 - Why do commodities perform well in inflationary periods?
    •    08:55 - Why do different generations and nationalities look differently at gold?
    •    11:26 - How to best invest in commodities.
    •    15:21 - How can commodities markets be manipulated andHow much should your portfolio be exposed to commodities?
    •    19:57 - Why you should compare the price of gold to real interest rates.
    •    29:13 - Are there any classes that investors should not hold? 
    •    33:30 - Why the M2 money supply growth should be your default yardstick when measuring real returns for asset classes. 
    •    52:18 - Should you own gold or gold stocks? 
    •    1:03:03 - What will the next monetary system look like? 

[Viking]

So does anyone have any strong views on the commodity complex these days? It is getting taken out behind the woodshed due to recession fears + parabolic move higher the past 4 months (way over owned). Is the bull market already over? Or is this just a healthy move lower before commodities make their next move higher? What parts of the commodity complex/companies are people getting interested in buying?
 

Commodities, especially oil/energy, was the best performing sector this year. The bear market is now doing its thing. 
 

Oil: of all the sectors this is the one that looks most interesting to me in the near term.

Fertilizer: not sure a mild recession changes the bull thesis all that much… perhaps time to get up to speed on this sector.

Copper/metals: the supply/demand picture (due to EV transition) is very bullish for copper in the medium term. But over the next 6 months? Not sure…

Lumber: i do follow this sector pretty closely and i am surprised the lumber stocks are holding up as well as they are given the near term outlook.

Steel: i am watching Stelco. I hope it keeps selling off… they have so much cash on the balance sheet…
Other sectors worth looking at?
 

The question is if we get a mild recession in the coming months how low could the commodity complex go? A big commodity sell off would also be very helpful for the inflation picture in the near term (expectations of lower inflation also will reduce demand to own commodities as a hedge). Is the super cycle already dead? 

Edited June 23, 2022 by Viking

[Sweet]

I think you have said it, some of the parabolic moves cannot last and will have a swift correction.

 

Doesn't really mean anything about the long term trend IMO for commodity related equities.

 

Price stability would be far better for investors than these wild swings which just puts people off, especially anyone managing their beta LOL.

 

Edited June 23, 2022 by Sweet

[Ulti]

Commodities reverse lower on recession fears Key points: The Bloomberg Spot Commodity Index registered a new 63-day low on 6/21/22 The new low occurred in 25 trading sessions or fewer from a 252-day high After similar signals, commodities struggled in the next few months What's the market message from the reversal in commodities I've had a bullish outlook on commodities since the fall of 2021,  note titled Since the publish date, the Bloomberg Spot Commodity Index is up 17.3%. At the same time, the S&P 500 is down 13.5%. As an investor, it's always important to remain flexible and keep an open mind to all outcomes as new data emerges.  So, with commodities crumbling on recession fears, let's assess the outlook for the Bloomberg Spot Commodity index when the index reverses from a 252-day high to a 63-day low in 25 trading sessions or fewer. I used closing prices for the study.  Commodity momentum since the pandemic low has been historic, registering the 2nd highest 2-year rolling return in history. The two previous momentum surges preceded or coincided with recessions in 1973-75 and 1980. While the sample size is small, potential recession fears are not unfounded. Interestingly, commodities suffered several sharp setbacks in the 1973-75 recession while maintaining a bullish secular trend. Similar signals preceded negative returns for commodities This study generated a signal 17 other times over the past 88 years. After the others, commodity returns, win rates, and z-scores look unfavorable across short and medium-term time frames. The 1-4 week window shows a loss at some point in 14 out of 17 cases.  What happens to copper after commodity reversal signals Given the reversal in copper that I shared in a note on Wednesday, let's apply the commodity signal dates to copper to see if the momentum shift impacts the economically sensitive metal. As with the commodity index, copper returns and win rates look unfavorable across short and medium-term time frames.    What happens to stocks after commodity reversal signals Stocks show a positive return across all time frames, with the 1-year window looking solid except for the recessionary bear markets in 1937, 1980, and 2008.    What the research tells us... When the Bloomberg Spot Commodity Index reverses from a 252-day high to a 63-day low in 25 trading sessions or fewer, the shift in momentum typically leads to more adverse price action for commodities. Similar setups to what we're seeing now have preceded unfriendly commodity returns, win rates and z-scores across short and medium-term time frames. When I apply the signals to copper, forward returns look unfavorable in the next few months. An assessment of stocks looks constructive, especially on a 1-year time frame, as long as we avoid a recession.

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[Spekulatius]

1 hour ago, Viking said:

So does anyone have any strong views on the commodity complex these days? It is getting taken out behind the woodshed due to recession fears + parabolic move higher the past 4 months (way over owned). Is the bull market already over? Or is this just a healthy move lower before commodities make their next move higher? What parts of the commodity complex/companies are people getting interested in buying?
 

Commodities, especially oil/energy, was the best performing sector this year. The bear market is now doing its thing. 
 

Oil: of all the sectors this is the one that looks most interesting to me in the near term.

Fertilizer: not sure a mild recession changes the bull thesis all that much… perhaps time to get up to speed on this sector.

Copper/metals: the supply/demand picture (due to EV transition) is very bullish for copper in the medium term. But over the next 6 months? Not sure…

Lumber: i do follow this sector pretty closely and i am surprised the lumber stocks are holding up as well as they are given the near term outlook.

Steel: i am watching Stelco. I hope it keeps selling off… they have so much cash on the balance sheet…
Other sectors worth looking at?
 

The question is if we get a mild recession in the coming months how low could the commodity complex go? A big commodity sell off would also be very helpful for the inflation picture in the near term (expectations of lower inflation also will reduce demand to own commodities as a hedge). Is the super cycle already dead? 

if you think a light recession is coming, I would switch to growth stonks and sell the commodity stocks. The commodity stocks are likely to go down the drain with lower commodity prices. I  know there are a lot of energy/commodity bulls out there, but I feel this has been a momentum trade that started to unwind (imo).

 

If you think a serious recession is coming you should not own any stocks at all.

Edited June 23, 2022 by Spekulatius

[Viking]

@Spekulatius makes sense. I did re-establish a small position in Suncor today (my usual go to for oil). Along with Buffett I am drinking the oil Kool-Aid. I also am going to look more closely into Potash given the wars large impact on this specific commodity. Everything else (metals, lumber, steel) i am going to just monitor given the near term outlook (not good should we get a slow down). As compared to 2 years ago lots of commodity producers have reduced debt and are sitting on substantial cash piles creating a very interesting set up should the shares continue to go lower.
 

Crazy how quickly sentiment changes. 

[Spekulatius]

9 minutes ago, Viking said:

@Spekulatius makes sense. I did re-establish a small position in Suncor today (my usual go to for oil). Along with Buffett I am drinking the oil Kool-Aid. I also am going to look more closely into Potash given the wars large impact on this specific commodity. Everything else (metals, lumber, steel) i am going to just monitor given the near term outlook (not good should we get a slow down). As compared to 2 years ago lots of commodity producers have reduced debt and are sitting on substantial cash piles creating a very interesting set up should the shares continue to go lower.
 

Crazy how quickly sentiment changes. 

I bought a little PBR-A today. Drinking the dividend cool aid as long as it lasts. I don't mind commodity plays, but I like them for the capital return, preferably over dividends (holding stocks in the IRA). Those who think any of this is a compounder will probably get wrecked.

 

Something like BHP or RIO on the metal side might work too. One thing is for sure, the big cos are operating more on cash returns and are now paying out excess earnings, unlike in the past where they tended to deworsify (just look at BHP's energy adventure).  I think over a cycle one could get a high single digit dividend return at current prices and higher if the shares go lower. I prefer cash over buybacks because management will always buy back stocks when they are flush and the stocks are pricy and stop the buyback when things get a bit iffy and the shares cheap.

 

BHP has one of the best iron ore reserves that exist in a political safe space (together with VALE), so they should be able to make money throughout the cycle. These are the plays to look for when prices go much lower.

Edited June 23, 2022 by Spekulatius

[Saluki]

I used to own Suncor, and it's like Pabrai says that you don't really understand a company until after you own it.  They have billions in invested in equipment so that they can process the tar sand onsite, and that's a pretty good moat.  It's not like a fracking play where someone can just buy the plot next to you and start pumping. But the capex required just to keep it going is incredible. That oily sand going through those metal pipes is basically sand paper and they have to keep replacing everything that the sand goes through whether the oil price is high or low. Good luck, but not for me. 

 

I noticed that all the potash producers are down today.  Intrepid (which I've jumped into and out of) was down 16%.  It's crazy.  When they were making $20 million a year on the water rights and just breaking even on the Potash, this was in the $40s. (it dropped below $10 at march 2020 during the Covid rout). When the war in Ukraine brokeout, it got up to $120.  Now potash has gone from $220 a ton to $750 and Intrepid is on track to make $120 million this year and the share price is....in the $40s. These cyclical commodity plays are ruled by fear and greed and you gotta have an iron stomach to sail in these waters. 

 

Why are they all down?  Who knows?  I saw an article about a potential new entrant in Michigan that wants to start mining.  So what? The big guys are ramping up production too.  Trade embargoes took 30% of the Russian/Ukraine supply offline, so that should already be priced in. 

[Spekulatius]

7 minutes ago, Saluki said:

I used to own Suncor, and it's like Pabrai says that you don't really understand a company until after you own it.  They have billions in invested in equipment so that they can process the tar sand onsite, and that's a pretty good moat.  It's not like a fracking play where someone can just buy the plot next to you and start pumping. But the capex required just to keep it going is incredible. That oily sand going through those metal pipes is basically sand paper and they have to keep replacing everything that the sand goes through whether the oil price is high or low. Good luck, but not for me. 

 

I noticed that all the potash producers are down today.  Intrepid (which I've jumped into and out of) was down 16%.  It's crazy.  When they were making $20 million a year on the water rights and just breaking even on the Potash, this was in the $40s. (it dropped below $10 at march 2020 during the Covid rout). When the war in Ukraine brokeout, it got up to $120.  Now potash has gone from $220 a ton to $750 and Intrepid is on track to make $120 million this year and the share price is....in the $40s. These cyclical commodity plays are ruled by fear and greed and you gotta have an iron stomach to sail in these waters. 

 

Why are they all down?  Who knows?  I saw an article about a potential new entrant in Michigan that wants to start mining.  So what? The big guys are ramping up production too.  Trade embargoes took 30% of the Russian/Ukraine supply offline, so that should already be priced in. 

They are down because the price of commodities is trending down. It's Munger's elevator (going up or down matters, not which level you are). 80% of the success in commodities is being correct about the direction of the commodity prices, not because you analyze a company correctly (the missing 20%).

[Gregmal]

Agree. Commodity investing is all about timing. You seem to make a fortune in a short period of time once every 5-10 years. The rest of the time you tread water or lose your shirt. I hate it, but you have to go where the money is being made if you consistently want to be making money. Just dont forget to take money off the table as you make it cuz one way or another what you have in this space tends to get wiped out. 

[Castanza]

SCCO starting to look a little interesting here 

[Spekulatius]

I sort of like BHP and RIO. SCCO is in Peru which is iffy politically. I think you could invest in BHP and RIO and do Ok over the cycle if you buy at a good price (maybe lower than current prices) just from the dividends alone. Don’t expect any multiple expansion.

https://www.reuters.com/world/americas/perus-ruling-party-turns-castillo-calls-president-step-down-2023-2022-04-29/

Edited June 23, 2022 by Spekulatius

[Parsad]

Looks like oil prices are flattening and reserves are building as recession fears and high prices hit consumers.  Cheers!

 

https://finance.yahoo.com/news/oil-price-fundamental-daily-forecast-093607544.html

[meiroy]

5 hours ago, Parsad said:

Looks like oil prices are flattening and reserves are building as recession fears and high prices hit consumers.  Cheers!

 

https://finance.yahoo.com/news/oil-price-fundamental-daily-forecast-093607544.html

 

Look at crack spreads which are a better indicator of demand -- upwards.  There's SPR release going on which will eventually end as the reserves are being emptied. EIA crude inventories report are delayed to next week, for whichever reason, so it's not clear what's going on right now.  There's some demand destruction in Europe (they so fucked) but in the USA? The only thing that can crash oil is Russia/Ukraine being resolved or of course some serious recession. If it's demand destruction via recession, how well would financials do? Google and friends? No place to hide.

Edited June 24, 2022 by meiroy

[Pelagic]

Interesting note comparing valuations today to recent commodity lows in 09 and 15/16. 

 

 

 

[scorpioncapital]

From a theoretical angle, is it better to invest in commodities or value-added companies that sit slightly above the commodity layer? Or even higher? Is it better to own an oil stock, a semiconductor stock, a cloud infrastructure stock, or an app on that infrastructure? Is abstraction more profitable? Or perhaps the division should be recurring revenue versus capital goods one time sales?

Edited July 7, 2022 by scorpioncapital