What to Buy at Market Tops

I will start today’s letter by listing six more data points showing how overbought stocks have become.

  1. While the number of outstanding shares in the US has remained unchanged since 2006, thanks to M&A, buy backs, bankruptcies, and privatizations, the price has more than doubled from $50.15 to $107.00.
  2. The Volatility Index has seen the lowest two-year run since 1885! No typo here. It’s the lowest in 133 years.
  3. Retail investors’ equity allocation at the end of 2017 reached all-time highs, never a good sign. After a nine-year slog, the dumb money is finally coming in by the bucket load.
  4. Margin debt is up 16% year on year and is rising rapidly, but is nowhere near historic highs in terms of the percentage of market capitalization.
  5. Almost every investor now has a major overweight position in technology.
  6. The stock market has had its best start for the year since 1987. Grizzled, long in the tooth readers will remember that year did not end well (down 22% in one day), not because of a recession, but a market event.

Please digest all of this, and then go out and buy as much stock as you can with both hands. For when the universal assumption become to buy the next dip, the next dip never happens.

The best you get is a temporary sideways move, like we have seen with the FANG’s over the past two months. As I have been pounding the table about lately, market tops take years to form.

This all leads to the urgent question of the day, WHICH stocks do you buy as we approach market tops? The answer is very simple. You buy cheap ones. And what are the cheapest stocks out there?

Commodity stocks.

My friend, Jim Umpleby, said yesterday that we are just entering a ten-year super cycle in commodities.

Jim should know. He is the CEO of Caterpillar (CAT), a company I have been following for 45 years. I even have one of their worn yellow baseball caps from years past.

Thanks to the new tax bill, companies can now buy Caterpillar’s bulldozers, backhoes, and heavy trucks, and expense 100% of the investment this year.

That makes a purchase of (CAT)’s products one of the best tax breaks ever. By the way, the same is true of a Tesla S-1, as long as you buy it in your company’s name.

Needless to say, this has created a stampede to buy the companies heavy machinery because they fear this tax windfall will be reversed by the next administration. This is equipment with a 30 year life or longer.

Industrial commodities are in fact the perfect sector to buy right now. Take a look at the long-term chart for copper prices, which are a great bellwether for the entire industry.

Copper last peaked at the beginning of 2011, when the Chinese infrastructure build out suddenly stopped to a juddering halt. Prices cratered from $4.60 a pound to a lowly $1.90. Mines were sold off, mothballed, or permanently closed at a record rate.

Copper prices fell so low that the US Mint finally started making a profit on pennies struck.

Then a funny thing happened.

Copper bottomed, assisted by the global synchronized economic recovery I have been writing about for years. Then in the fourth quarter, investors smelled a recovery in a severely oversold, bargain basement, lagging sector. Copper prices rocketed from $2.50 to $3.30, up 32% in the wink of an eye.

The share prices of copper and other major commodity producers went ballistic. Freeport-McMoRan (FCX), the world’s largest copper producer, (whose management are a long-time reader of this letter) saw its stock jump from a near liquidation value of $3.00 a share to $19.17. If this sounds rich recall that the peak during the last cycle was at $51.

Other big commodity producers did as well. Australia’s BHP Billiton (BHP) leapt from $18 to $49. Another Australian company Rio Tinto (RIO) similarly roared from $20 to $56, due to the heavy China demand.

You may think that it’s too late to get into the commodities space, but you’d be wrong. Having covered the sector for nearly a half century there is one thing you learn quickly. While you can shut down a mine in weeks, it can take years to bring them back on line.

As for developing a new mine from scratch, that can take a decade by the time you get design, permits, infrastructure, equipment, and labor in place.

My Australian readers tell me that (BHP) is flying young skilled workers from Brisbane an incredible 2,000 miles to work in Northwest mines in a six week on-six week off work schedule, and paying them $200,000 a year to do it. And they’re making a profit doing this!

The bottom line here is that a short squeeze has developed for industrial commodities which will last for years.

Oh, and that global economic recovery? It will last a lot longer than anyone believes as well. It will take years for Europe and Japan to catch up with the US.

At least you have something to buy now besides more technology stocks.


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