On Wednesday evening I filed an article for the Fool containing the immortal words “I really can’t see Anglo American enjoying much respite this year”, and then went to bed.
Next day there was respite all over the place, with the stock ending “Super Thursday” an incredible 19.95% higher, as the commodity sector enjoyed its best day in seven years. At time of writing, Friday lunchtime, AAL is up another 9.05%.
I am now considering a change of career, but before I move on I must ask this question: can the outlook for commodities really have changed overnight?
Lows And Highs
What a difference a day makes. At close of trading on not-so-super Wednesday the FTSE 100 had extended its losing streak to a third day. Anglo American, Antofagasta, Rio Tinto and Glencore did top the daily risers charts, but there was little sign of the Thursday supernova.
Analysts have attributed Super Thursday to sudden weakness in the dollar. Poor services sector data forced markets to downgrade assumptions about US rate hikes, hitting the greenback and making dollar-priced commodities cheaper for holders of other currencies. With signs of a pick-up in Chinese iron ore demand, and a month-high for the copper price, the bargain hunters needed no further encouragement.
Cheap As Chips
Commodity valuations had been driven to such dismal lows that the excitement is forgivable. Even after the recent bounce Anglo-American trades at just 2.8 times earnings. BHP Billiton is also cheap at 8.6 times earnings, Rio Tinto cheaper at 5.4 times and Royal Dutch Shell at 7.4 times. If you think this is the start of the commodity price recovery it isn’t too late to bag a bargain.
I’m sticking to my guns. Commodity stocks are volatile even in the good times, topping or trailing the FTSE 100 daily leaderboards more than any other sector. Volatile assets tend to overshoot both on the way up and way down, so maybe the sell-off had just gone too far. Super Thursday felt so super because everything that came before was so super bad. Prices could just as easily collapse again on Monday.
Monday Is Another Week
Stock markets may have laughed in my face yesterday, but it is the long-term that counts and I still think the sector is in trouble. China is menaced by debt and its murky “shadow banking” system, which hides all sorts of Ponzi horrors.
Oil may struggle to punch higher. A new report by consultants Wood Mackenzie reveals that just only 0.1% percent of global production has been curtailed because it is unprofitable. The commodity supply glut continues, with US crude inventories up for the fourth consecutive week. Today’s poor non-farm payrolls data suggests the US is slowing.
There is tremendous value in the sector, even if the 11.9% BHP Billiton yield does not hold. Oil giants and miners have been slashing costs and undergoing painful restructuring, and investors could reap the rewards if commodity prices do start rising again. As I wrote on Wednesday, I reckon oil will move first and fastest, making BP and Shell increasingly exciting plays. But the outlook is still tough for commodities, as next week may show.
