Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Tweeting for Turmoil: Roiling the Capital Markets with Less Than 280 Characters
Earnings season is beginning to wind down, and we have heard from many of our companies of interest at this point. However, company and industry specifics mattered very little this week as macro headwinds continued to dominate. In many cases, companies that “beat and raised” underperformed if they were in the “wrong” sector – meaning anything cyclical or in some way related to China. Specifically, global natural resources had a difficult week, and there was bloodshed in the energy patch, with crude having dipped into bear market territory. This is despite capital expenditure cuts on the part of US producers, OPEC production at five-year lows, and Saudi Arabia committing to looking at “all options” to support oil prices. Base metals, such as “Doctor Copper,” iron ore, and others were also hit hard despite tightening supply and significant purchases by China across many commodities. In fact, we saw copper concentrate imports by China at record highs, and up 12 percent year-over-year. Even electric vehicle metals, despite the announcement of supply curtailments by a major, have underperformed. This suggests that the market is focused on demand, and specifically what the implications of a material slowdown in China mean for raw materials demand.
Gold was the lone standout for the week. We saw a material safe haven bid as the equity markets sold off dramatically on Monday. The follow-through to $1500 is encouraging as it is clear that, at least for now, the Fed stands ready to try to prop up asset prices in the event that trade wars continue to escalate. In this area of the market, company fundamentals do seem to matter as we saw stocks that materially beat projections have big moves to the upside, and companies that missed were clobbered. Mining is fundamentally a very long cycle business, and the investment decisions that were made during the downturn, or even during the prior cycle boom, can have implications for operational performance today. We currently see mines struggling because of capital allocation decisions made several years ago. Problems with a specific asset often linger for many quarters, and even years, as mine plans need to be altered – which takes both time and capital. So although the stocks in general have outperformed the commodity, they have not done so to a normally expected degree due to indigestion from years of underinvestment and/or malinvestment. Gold equities continue to be a market for stock pickers, which argues for sticking with quality.
Global negative real rates are a reality, and appear to be here to stay for the foreseeable future. However, what was different in this Monday’s sell-off was that companies that have outperformed and have a significant yield component also began to crack after seeing a huge run-up on a year-to-date basis. We are carefully watching this dynamic for opportunities to slowly move into names that will ultimately be core long-term holdings for the MAPS strategies.
We are all too cognizant of (and somewhat frustrated by) the notion that one tweet can change the entire macro landscape and capital market environment, particularly with a Fed that seems increasingly politicized – or at least willing to do the job of propping up asset prices as China trade and the possibility of an ensuing global economic slowdown hangs over market sentiment. As nominal yields get closer to zero, achieving this as a policy target becomes more and more challenging, as there are simply fewer bullets left in the gun. This volatile, binary, and highly uncertain market dynamic continues to argue for a decidedly incremental approach to allocating the MAPS portfolios for the long-term.
Best Regards,
David McAlvany
Chief Executive Officer
MWM LLC
