Gold, Copper, FCX and Inflation

Podcast Transcript

Hey, this is Jeffrey with another edition of Stock Smart, March 2^nd, 2021 edition. Hope you’re doing well. After a big move yesterday where we saw a 3% rise in the NASDAQ. We’re still a bit oversold believe it or not in the S&P 500 oscillator, which measures overbought and oversold conditions, so a little bit over sold today. We’re going to have a little bit of a pullback, It looks like, as we got a little too heated up yesterday. Probably 1-2% in the oscillator after the end of the day, it seems like, and the positive move yesterday may have been a bit too big as the market still a little bit unsure of itself and we’re going to get into this dead period here where we’re not going to have as many catalysts as companies leave the earning season and we’re going to have a dead period

[00:00:41]
of about four to five weeks until we get into bank earnings again, which will start off all over again we’ll have catalysts, so VIX is slightly up today, about 1%, nothing too concerning, there’s still 700 billion dollars that’s waiting in money market funds that’s been there since we’ve had the whole Covid recession that we’ve had so there’s still a lot of money on the sidelines waiting for these dips, so a good strategy right now, is keep a little extra powder, and if you see an opportunity, buy. We are going to get more and more oversold slightly I’d say in the next 3-4 weeks, not dramatically, but slightly. We’re going to get a day like today, where we’re going to be down anywhere from 70 basis points to 100 basis points today. And tomorrow we’ll probably get a little bounce back up, maybe get some of it back. And that’s what I would expect for the next 4-5 weeks. So we’re looking at the utilities yesterday. Just wanted to talk more, we did this charting thing we did, and I took the 10-year treasury and I put it on top of the XLU, which is the ETF that tracks utilities and if you look at that over the last 3 months it’s pretty indicative of what we talked about with inflation going up, or the rise in interest rates, and that 10-year treasury note over the last 3 months is up 50 basis points up to about almost 1.5% and we have a decline in utilities. Utilities in that same time almost down 5%. So again, that’s a great inverse corollary position showing you that when bond prices go up, utilities go down, couldn’t have a better inversely correlated situation right there. GameStop, still very interesting and I wonder if this is a time when you can look at GameStop now and say hey, maybe we do have support somewhere around a hundred.

[00:02:32]
You know, that’s a number where we’ve seen GameStop settle in a bit. It seems unlikely, but perhaps people are holding a little bit longer, going to see what the new Chewy CEO does and how they turn around this company because could they go and be a competitor in a space? Like what I always thought about GameStop is why isn’t it may be like a Netflix? Why didn’t they go online sooner and create their own network and channel of online video games? Using the same concept as Netflix does for videos and TV and we see so many competitors. I mean Netflix was dying itself when Netflix was doing that 3 male CD thing. That was all right, but it didn’t achieve these spectacular growth it has seen until it went all online with streaming.

[00:03:18]
So wondering what you know, when Gamestop goes that direction this could be viable. How does it get out of the 5000 leases it’s in, that’s one of the problems. It’s going to have to find some other way to use those and you know commercial properties if you go to malls, malls have this problem anyway. There’s plenty of open spaces in the malls. If you want to rent a small space for your baseball cards to hurt and lose all your money. There’s plenty of space in the malls to find one. So, you know, that’s a problem for GameStop. They still have a lot of hurdles but it seems like it’s found some support somewhere in the $100 range, which is kind of interesting, it blew through and you know that month back it blew down to 45, that seems like that might be the support.

[00:04:00]
But now it’s establishing a regular support range somewhere in the 100-115 range, that’s going to be interesting, that has to build over time to really be valuable to a qualified support level for GameStop. We are seeing continuous buying. It’s up again today, 3%, the shorts again are not that heavy in GameStop, very light in the 30-35% range, that is not an extreme short at all, comparatively to where it was when it was maybe up to 100% short or over a hundred percent short with the synthetic shorts that we’re going on.

STOCK WATCH

So, let’s take a look at a stock or in this case, a basket of stocks, or a stock group, or a sector.

[00:04:42]
Commodities. So the clearest sign that we’re seeing inflation is commodities, and most people don’t directly invest in commodities because you’d have to do complicated futures contract which are extremely risky, you have to be extremely knowledgeable. Commodities traders know one thing, they’ll know a grain or they’ll know the oil or they’ll know wheat or something specific or pork bellies. They know that they know everything about that, it’s a really tough marketplace. So most people don’t have a direct access to the futures contracts in the commodities world, but this is an area right now the smart investor wants to be in. Because we’re getting inflation. What is inflation? It’s directly the prices we pay for goods and we’re seeing that in many goods and if you look at the commodity price indexes and changes, we already talked about it about a month ago. We talked about how energy has increased.

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So let’s take a look at the increasing in commodity prices over the last 3 months. Energy up 15%, non-energy 4.66%, agriculture’s up 2%, beverage’s up 1%, approximately, food prices up 3%, raw materials up about 2%, fertilizer’s up about 2%, and metals and minerals up about 11% and then precious metals up about 50 basis-points. So this is inflation. It’s right there looking at you in the face, prices are going up and that’s because of cheap money as the fed continues to print money, our dollar goes down, the cheap money increases the price of goods and that’s what we’re getting in there, then interest rates rise with inflation. So, let’s see who’s a perfect investor for commodities when interest rates are rising? Will they have to protect their portfolios? So a fixed income investor who is at risk to inflation would be a natural investor in commodities.

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So the same investor who is investing in things like utilities who is now moving away from utilities is now going towards commodities as a potential investment and you can see that happening and a good way to do this is not by getting in each individual commodity, the best way to do this is pretty simple, very complex to know if I should be in copper, wheat, get into a basket of commodities, buy a simple ETF. DBC Invesco’s commodity index, up 15-16% this year already. So in just this 2 month period, commodities are up 15, 16%. It’s boring. You’re not going to want to go out with your friends and talk over drinks and say hey, you know, I just bought this really exciting stock, DBC Commodities index. Wow, it’s super but it’s up 15% and that’s worth talking about and so we’re going to continue to see this.

[00:07:22]
So your hedge against inflation is being invested in commodities. So you ride along with everyone else and some people may want to get access to specific stocks. You know, there’s some good stocks that you can get in there, Dow chemical commodity, doing very well if you want to play this field with a company, great choice. Or Freeport-McMoRan has been on fire because the rise in home building. So, you know, if your hedge is generally buying gold, maybe you want to get into a company like Freeport-McMoRan where you get the diversified metals industry and you get access to something that’s actually usable where gold may be usable in some aspects if you have something like copper, which is exploding in growth 50% up over the last five six months because of the home building boom.

[00:08:10]
So when you put your pipes in you’re putting in copper pipes, it’s expensive copper is going way up. So maybe instead of using gold as your hedge right now, you want to be in a diversified company like a Freeport-McMoRan who’s done extremely well, that stock, up huge, up again today up 2% in a down day but year-to-date the return on Freeport McMoRan is 36% and the chart’s spectacular by the way. So that’s FCX, Freeport-McMoRan. And again, they’re taking advantage in the shortgage in copper, gold, of course is always in demand, but a lot of precious metals. So a great idea there.

THE AVERAGE INVESTOR

So I got a question from Frank. And one more thing I want to say about commodities, and an ETF like the BBC pays a dividend, it pays $0.25 a year per share. So that’s also extremely attractive to an investor who is a fixed income investor.

[00:09:04]
So as you see them move out of utilities, you see them move into certain things like commodities, which will protect against the rise in inflation. So I got a question from Frank and Frank wants to know about what we talked about yesterday. And he’s asking, I said that the 2.5 would be the key number on the 10-year note and he wants to know why and you know again, thanks for the questions keep them coming, appreciate all the questions, podcast does continue to grow at a rate of about 10% a week. So that’s exciting to me as well.

[00:09:34]
Well again this investor that we want to call the fixed-income type investor and don’t get kind of confused by the term fixed-income. Fixed-income generally refers to things like CDs, money markets and bonds, but they are safe and they’re looking for yields, dividend yields, 3 to 4%. So if you can tell a fixed income investor or let’s say a portfolio manager. Now again, what we talked about on the show is portfolio managers had been pushed into the risk curve the last two years because bond prices are terrible. So with bond prices terrible in the years past, they had to go and put their clients in riskier positions.

[00:10:12]
They are excited to put their clients now into bonds and other fixed-income products that have less risk so when we talked about the two and a half percent on the 10-year note being a number that’s going to be scary for equities. It’s because of this so when you look at a return, you know people are trying to get a low beta in a fixed income type portfolio. They’re looking for a low beta stock and that’s, low beta means essentially it’s a measure against the S&P 500, the return, so you have a benchmark, the S&P 500. Let’s say that the S&P 500 returns 10% and the beta of a position and Equity is .70 that means that it will return 70% of the S&P 500 or in this case would be 7%. That’s what beta is.

[00:10:58]
So when a fixed-income portfolio is looking for a low beta, meaning good return safer stock not a lot of deviation and then a dividend potentially. So a good stock to pays a regular dividend, Dow was one we talked about earlier, that pays a dividend of 4%, so that has risk because it’s a company but if you get a note which has no risk because the only risk it has is interest rate risk. But if you can get a note for 2.5% that’s backed by the US government which doesn’t default, always makes its payment against an equity that has a three to three and a half percent dividend. You’re going to go in that 10-year note with the two and a half percent. So that’s why two and a half percent is a key number.

[00:11:44]
I would say a benchmark or a number to watch as interest rates continue to escalate, So hey thanks for listening, another great show and we’ll see you again next time on Stock Smart.