Chip Hanlon, a colleague of mine at RealMoney was just on CNBC talking about commodities and investor demand for commodities.
He drew a parallel between commodity stock excitement today and Internet stock excitement six years ago. I did not take his meaning to be that they are identical manias but he sees similarities. I think the magnitude is much less than six years ago but he made an excellent point that stands up right now.
He talked about secondary and tertiary names making moves higher on speculation. The idea here is that investors are buying lower quality names to chase returns. In that sense it is like the tech boom. Too much invested in these types of stocks could have a very bad ending.
I hadn't thought about it before, but a friend of mine is doing just that, chasing returns. He tells me all the time about all these Canadian stocks he is trading. I'm sure he is making money but I don't know if he learned anything from the tech wreck in which he got torched.
A 1 percent weight in a couple of very speculative commodity stocks will not crush a portfolio but there will be, if there aren't already, a lot of investors with way too much in these low quality names.
For anecdotal evidence, watch the Nasdaq/Amex ticker on CNBC and you will see all sorts Amex listed mining stocks going by. The number of trades in these things is very high. Watch out.
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11 comments:
So true. Already seeing interest in the $1-$2 range. You can hear the freight train comming...and it is also helpful to remember that Cisco went from $64 to $8 or so....does this mean XOM could do the same? Worth pondering.
g
XOM to $8. Never, Impossible, Energy is different.
Ahem.
I will say that energy is only 10% of the market down from 30% 25 years ago.
Not to say evolving into something like the tech bubble can't happen.
Another point would be that blowups of that magnitude have never occurred so close to each other but who can say for sure?
Deutche Bank's commodity ETF started trading last Friday (ticker DBC.) They will be perpetually long crude, heating oil, aluminum, gold, wheat, and corn, but have enough of their assets invested in debt instruments to yield about 3% after mgmt. fees. What do you think about this ETF?
Is not commodities driven by demand in China and India?
Check out the list of Chinese cities with more than 1 million people, how many have you heard of?
Scroll down to #30 or so, that is Los Angeles!
http://www.isop.ucla.edu/eas/statistics/chinacty.htm
Even with a slow-down it is hard to understand how demand would slow in these markets unless there is some complete reversal to non-market economy.
Roger: your friend's comparison will surely be 'spot on'...
... someday
(maybe 5 or 10 years from now).
Despite the inevitable booms and busts that will no doubt accompany this commodities bull (which has probably just got under way -- leg one, in Dow Theory) -- just ask yourself: how many bbls of oil or bcf of NG could you buy for the current mkt. cap of GOOG -- and which would you rather have come 2010...?
Those who think that the future will always be just like the past (most wall street forcasters included) -- low rates eternal, a peaceful world, climbing nasdaq stocks as far as the eye can see... -- may soon be dancing over the rainbow's edge...
DBC, for now is a good way to capture the effect. It is a first to market type of product and I expect (hope?) subsequent offerings could be better.
Alex the average; I have been investing around this very them for three and half years now, I'm as on board as anyone.
Too much of anything no matter how great or obvious takes on a lot of risk. Look at it from the what can go wrong aspect. Any theme can unravel.
Speaking of tech, Roger, what do you think of the sector currently? Too me, it looks alot like SP500, mediocre, sort of standard industrial growth.
But I don't know if the valuations are attractive in relation to that kind of growth profile, or whether it's still high? What do you think Roger?
BTW, I agree that when secondary and tertiary issues start seeing great growth, it's a sign to be somewhat cautious of the sector. OTOH, many years of underinvestment allows for a lot of additional investment befor e the sector becomes overvalued. Two contrary thoughts.
Jay Walker
I am big on commodities but I have started to notice somthing similar to your friends recently: more people are talking about it and even people with limited stock or ETF experience. When the taxi driver will start to talk to you about commodities, it will be time to reallocate. Long-term prospect is still very good but short/medium-term, some people might want to take profits at some point.
Vincent may have a good point.
I saw the headline for this piece was "Quality"...and after reading many pundits recommending quality stocks in here, I thought I's look at a few.
Have you guys noticed the downward trend in JNJ, GE, KO, and many other "Quality" names??
Makes me wonder.\
g
My only point was abotu chasing returns in a hot sector with lesser quality names. It was in no way a clarion call to go overweight mega caps.
No, no...I was wandering if anybody thought it weird that the mega cap high quality names were going down, with so many ( not Roger ) advocating overweighting this area.
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