Does the start of 2014 feel like Déjà vu? Does anyone get the feeling all analysts on the sell side woke up and predicted the same market/sector performance trends from 2013 for 2014 – just in smaller magnitudes? Big thanks to Larry Tesler for his innovation in the 1970’s – don’t we all just love copy and paste! Not too sure the buy side would love the same repeat of performance. They’re happy having a clean slate and a 0 pnl to start the year. It’s the best time for them to come in guns blazing full of adrenalin ready to take risks again!
Reading the FT article earlier this week on “The only way is up for Commodities” made me chuckle. I mean after all it’s such an “easy call”. Go long commodities purely because they have been underperforming for the past 3 years and were in bear markets, so surely it has got to turn. I am all for contrarian trading IF and only if there is a fundamental reason for the turn to establish itself. The authors have it easy to present “bullish” factors like US and global economic growth picking up, prices bottoming, demand picking up, or potentially Fed liquidity getting out of control and USD to weaken as money velocity increases. Sure I am all for that but people tend to forget the supply side!
If supply was constant, and growth was picking up, sure I can see a reason for markets to slowly tighten and prices to move higher. But the amount of projects coming on stream in Copper, Iron-Ore and even Oil (post Libya, Iran and Iraq), the risk on supply is to the upside. So even if demand picks up, it won’t be high enough to soak the excess supply. One has to look at the rate of change of demand over the rate of change of supply (now we are talking second derivative – Calculus 101 anyone?).
We are facing a new paradigm trading in Commodities; boring! The tightest of Commodities will see flat to stable prices and others like Nickel or Aluminum can continue dwindling even lower as supply is just too much. Commodities need to be in a deficit or tight market for prices to rise. The Great Rotation trade is alive and well. Last year was the year that the 30-year bull market in bonds ended. Global stocks were up about 20%, bonds down 1.7% and commodities down 3.7% (on an annualised basis). Last year we saw multiple expansion, rightly so as the Equity risk premium was too high and a genuine recovery was being seen. This year, it will all be about earnings growth and those top line forecasts analysts are predicting as a direct consequence of an economic recovery.
2014 will be a year for micro, stock selection, as the macro is expected to be quite stable and conducive to intelligent investing. It will be about dusting off those fundamental tools and really zeroing in on stock specifics; proper alpha generation.
