Tag Archives: Commodities

February Commentary

In February, our net weighted average return in was +2.67%. Our net average return for the month by strategy:

  • Conservative: +0.54%;
  • Balanced: +2.53%
  • Growth: +4.34%.

Since 2015, we have generated a net weighted average return of +61.10%.

In last month’s commentary we spoke about how an increase in vaccinations, economic reflation and fiscal spending by major economies are having a positive impact on markets. These trends continued to gather strength in February. Although there is still trepidation about current and future virus mutations, countries that have been leaders in vaccination numbers are showing lower transmission rates and lower fatalities. These are very good things for the continued global recovery.

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Our net weighted average return in 2020 was +18.23%. Since 2015, we have generated a net weighted average return of +54.39%.

2020 was a challenging year. We were forced to navigate an all-out panic in financial markets while weighing the staggering human costs of the Covid-19 pandemic. Shortly after what turned out to be the market lows of the year in March we wrote the following:

“The most significant reasons as to why markets have rebounded are 1) the massive rescue package passed by the US Congress, and 2) the massive balance sheet expansion by the Federal Reserve. The amount of money with which the richest country in the world is ready to attack this crisis is without comparison in the history of the world. And what you learn in capital markets is that you don’t fight against the guys that make the bullets.”

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Vaccines are coming, what’s next?

Pfizer, Moderna, AstraZeneca.

Three weeks and three potential vaccines with extremely promising Phase III trial results that likely mean the first vaccinations will start within a few weeks.

These are remarkable scientific achievements well worth reading more about, but I want to focus on what this means for financial markets.

After stumbling through the darkness of much of this year, market participants finally see the light at the end of the Covid-19 tunnel. With a vaccine almost certainly coming within the next six months, and even sooner for targeted at-risk groups like doctors, nurses and other frontline workers, as well as the elderly, we can now plan ahead for a return to normalcy by next summer.

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Our weighted average return in February was -3.18%. Since 2015, we have generated a net return of +35.68% with a Sharpe ratio of 1.24.

In terms of investment strategy performance, our weighted average net returns for February were (a) -0.36% for conservative strategies, (b) -3.25% for balanced strategies, and (c)-4.37% for aggressive strategies.

February was a difficult month. January’s euphoria gave way to massive selling across all asset classes and served as a reminder that investing in capital markets is not easy.

Selloffs like the one that we witnessed in February trigger fear and doubt in investors. There is no way of being completely certain how much asset prices may fall on a short-term basis or how quickly they will recover. Although we invest client assets based on what we believe will transpire in the long-term, we are always aware of the psychological strain that such sell-offs can induce.

In our January commentary, we wrote:
Unfortunately, since the start of February we have witnessed a brutal sell-off that has reclaimed many of our January gains. We see this sell-off as temporary and do not see reason to panic. Our theses remain intact and we will be looking to add to discounted positions.

Thus far, our reaction has been correct. Although we are not always able to convince all of our clients to weather the storm, we try to take advantage of price weakness to set up future profits for others.

The primary instigator for February’s sell-off was higher inflation, which was signaled by a better than expected average hourly earnings data on February 2nd. If you have been reading our monthly reports, you will know that we have been keenly aware of inflationary forces and have shifted our investment strategy to accommodate the impact of inflation on our portfolios – namely by overweighting commodity producers. Unfortunately, commodities and commodity stocks were caught in the downdraft as well last month, but our thesis remains intact.

In February, Jerome Powell replaced Janet Yellen as Chair of the US Federal Reserve. We do not foresee that his policy will differ significantly from Yellen’s and anticipate that rates will continue to rise at a gradual pace. Unlike his predecessors for the past forty years, Powell has a background in investment banking and is not an economist.

We would be remiss not to mention that Trump’s corporate tax cut has elevated the issue of twin deficits (fiscal and trade) in the US. We find this to be the most appropriate explanation for the recent weakness of the US dollar. However, we believe this rationale to be overdone. Capital flows to where it is treated best, and Trump’s corporate tax cut has been the strongest encouragement to date for enterprise to flourish in America. That being said, Trump’s decision to implement tariffs on imported steel and aluminum sent tremors through financial markets at the start of March and led to the resignation of Gary Cohn from his post as Director of the White House’s National Economic Council. Tariff wars are terrible economic policy, but it has since become clear that the tariffs will not be imposed on all trading partners. It is rumored that Larry Kudlow will replace Cohn. Kudlow is an outspoken supporter of a strong dollar policy.

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support!

FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.

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On Nickel and the Battery Revolution

If you have been reading this blog, you will have understood that we quite like the prospects of base metals and base metals miners (Because You Know I’m All About That Base, ‘Bout That Base, Base Metals…).

Here is a nice primer on nickel’s not-so-know role in electric vehicles: Nickel: The Secret Driver of the Battery Revolution

Here is some more info on how analysts have been upgrading their pricing forecasts:

Here is how nickel has been doing lately:

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Because You Know I’m All About That Base, ‘Bout That Base, Base Metals…

People tend to get preoccupied with things that are shiny. Investors often fall prey to the same instinct – especially those that are obsessed with gold. Such people are often referred to as ‘Gold Bugs’.

This years, Gold Bugs have been excited to point out that gold has outperformed the S&P 500 index year-to-date:

Congratulations! However, there is a far more interesting metals trade going on at the moment: base metals.

After a slow start to the year, base metals such as copper (sometimes referred to as “Dr.Copper”), zinc, and nickel have seen their prices appreciate significantly:

One way that Gold Bugs like to play movements in the price of gold is to trade the VanEck Vectors Junior Gold Miners ETF (GDXJ US). This ETF holds a basket of speculative gold mining companies and currently has around $4.4 billion USD in assets. In comparison, the Global X Copper Miners ETF (COPX US) only has around $53 million USD in assets. It stands to reason that given this disparity in investor interest, copper/base metals miners are hardly on the radar of most retail investors. However, the YTD performance of base metal miners has been phenomenal:

Another reason why base metals miners do not attract a lot of attention is due to the fact that they carry such a small weighting on major US stock indices.

For instance, there is no longer a single mining company in the Dow Jones Industrial index. Moreover, the S&P 500 Index only has one base metals miner: Freeport-McMoRan Inc. (FCX US). It has a 0.1% weighting. Therefore, for US money managers, the mining sector barely registers in terms of being potentially overweight or underweight versus your benchmark.

Speaking of benchmarks, the escalating supremacy of low cost index ETFs is forcing institutional money managers to differentiate themselves and seek out investments that do not just track their benchmarks. Base metal mining companies look like an excellent place to start…

Here’s a link to our post on May 31st where in the last paragraph we mentioned that we were delving into material stocks:
LINK: We Have Been Busy

Tune in next week when we will delve deeper into why base metals and base metals miners have been performing so well..

P.S. my apologies if you know the song that I referenced in the title of this post. I really hope that it is not playing in your head right now… Sorry. read more

Keeping up with Lithium demand becomes more challenging

Electric vehicles have been in the spotlight lately, which creates an opportunity as well as a problem for the producers of the metal that the batteries of electric vehicles are made off – lithium. A mineral for which, as long as the demand for electric vehicles continues to increase and an economically viable alternative is not found, the demand is also going to increase respectively. The prices of lithium carbonate have more than doubled in the last two years.

Currently, 67% of global lithium reserves are located in Chile and Argentina, even though Australia is the biggest lithium producer.

Reportedly, Orocobre Ltd. – an Australian mineral resource company, has run into problems when attempting to pump the brine solution, which eventually evaporates and leaves behind lithium.  The problems were mainly bad weather conditions and pump glitches, which proves that entering the lithium production business is rather difficult.

Occurrences like that of Orocobre as well as create uncertainty on the supply side, making the process of raising funds for new initiatives more challenging, ultimately driving up the prices of lithium.

LINK: It’s Hard to Keep Up With All That Lithium Demand read more

Lithium: A Study in Some Old Fashioned Commodity Speculation

The recent rise in the price of gold and the possible bottoming out of industrial commodity prices has some brave investors flocking back into mining stocks. While the gold rally looks like it is primarily based on sentiment, the move in the price of lithium over the past year exhibits a more classic example of what drives the cyclical nature of mining stocks perceived supply and demand.

Lithium is the primary component of the lithium ion batteries. You have a lithium ion battery in your cell phone as well as in countless other personal electronic devices. Currently, the billion dollar question revolves around the future demand for the considerably larger lithium ion batteries that are used in electric cars.

The article includes price targets for lithium going out into the future. Ignore them. In these scenarios, prices rarely move in an organized, linear fashion. The lithium market is also quite small and, thus, by definition, most likely prone to countless inefficiencies, and, most importantly, subject to manipulation.

Fundamentally, money is made in commodity stocks when everybody wants the underlying commodity, and very few can supply it. Higher prices for the underlying commodity can make stock prices go parabolic; lower underlying prices send them crashing back down to earth. Boom, bust.


For the sake of contrast, here is a chart that didn’t make it into the article. This is the Global X Lithium ETF which holds a basket of ‘lithium themed’ stocks:

LIT BigCharts read more

Genies and Asset Prices

In this link, Tyler Cowan of George Mason University is asked the following question:

You are an investor with $10 million planning to cash out in 20 years. A genie appears and offers to send you the price of one but only one asset 20 years from now to inform your investment decisions (a stock, currency pair, commodity, equity index, etc.). What do you want to know?


This simple question is actually quite an interesting thought experiment. Cowan states that he would look for “a price with some persistence, and which contains lots of information about other prices too.” He settles on the Shanghai Composite Index. It makes sense that an economist would provide this answer. China is poised to become the world’s largest economy and surely the performance of its major stock index should be a revealing indicator of many other asset prices as well.

Barry Ritholtz of Ritholtz Wealth Management addresses this question and argues that it is fundamentally inadequate.


He claims that discovering only one asset price is a flawed proposition, and that it cannot tell you where to definitively “park your money”.

Ritholtz is right. Asset prices are completely relative, and as wealth managers our mission should be to use comprehensive strategies that account for the fact that we cannot guess the future when managing client portfolios.

But sometimes you can ask and answer a question just for fun. So here I go: I would like to know the name and price of the stock with the largest weighting on the Shanghai Composite. Does that count? read more

Oil & Stocks: Time to Break Up

The corollary dynamic between oil prices and major stock indices is one of the more confounding trends in financial markets right now. This article sums this complicated relationship nicely.


To expand upon the theme of lower oil prices being a benefit to consumer, it is worth pointing out that two years ago, American consumers were paying $4 per gallon at the pump. Now they are paying $2 per gallon. Therefore, filling up the tank on an SUV has gone from $120 to $60. If you filled up your tank twice a month, that’s an extra $120 in your pocket every month. To borrow from one of the commentators in the article – that’s a lot of Starbucks! (Actually, my illustrious uncle Mal pointed out the gas price/Starbucks trade to me over a year ago. Great call Mal!) read more