Commodities Get Clobbered

Let me help explain what’s been going on in the market over the past few days. Now that earnings season is mostly over, there’s been a rush out of formerly hot commodities as investors have sought shelter in very low-risk bonds or in stocks in non-cyclical industries.

To give you an example, the Silver ETF ($SLV) got as high as $48.35 two weeks ago. Today it’s been as low as $31.97. Ouch! The Gold ETF ($GLD) has backed off from $153.61 last Monday to $145 today. Oil ($USO) has dropped from $45.60 to $38.59. (Prices at the pump, however, are still high.)

Now let’s check out what’s happening in the debt market: The yield on the one-year Treasury has dropped below 0.17%. Sure, it’s one thing for short term rates to be microscopic, but now we’re talking about one full year.

Let’s take a step back and see what that means. One year at 0.17% works out to about 21 Dow points stretched out over a full year. Plus, that doesn’t include dividends. In other words, the Treasury investor would lose to the broad-based investor even if the Dow fell by (roughly) 1.8% over the next twelve months. So what is it that debt investors want so badly? The answer is security. They want it so badly, they’re willing to vastly overpay for it.

I think that’s nuts, but there’s a buyer for every seller.

On the stock front, the damage has mostly hit the commodity stocks. These are the stocks you find in the Energy ($XLE) and Materials ($XLB) sectors. The fall off in oil is really starting to hurt some of the major oil stocks. The market value of ExxonMobil ($XOM) has dropped by $40 billion this month. There are only a handful of companies in the world that are worth $40 billion.

Energy and Materials stocks are the core of the cyclical side of the stock market. As I’ve been expecting, investors are rotating out of cyclical stocks and finding safe refuge in stable stocks. Cyclical stocks tend to lead the market on the way up, but they are punished more on the way down.

Since our Buy List is focused away from cyclicals, we’re not down nearly as much as the rest of the market is. In fact, some of our stocks continue to rally. Jos. A. Bank ($JOSB), for example, is at another new high today. Sysco ($SYY) is also holding up well after its massive jump after the earnings report. Outside of our Buy List, defensive stocks like CVS ($CVS) and Southern Company ($SO) are at new 52-week highs.

According to Bloomberg’s latest numbers, 72% of companies beat analysts’ estimates this earnings season. S&P has the S&P 500 on track to earn $22.58 for Q1. That’s a 16.51% increase over Q1 of 2010. It’s very likely that this current quarter will top the record earnings ($24.06) made in Q2 of 2007.

For all of 2011, the S&P 500 is projected to earn $98.19. Going by yesterday’s close, the index is trading at 13.67 times this year’s forecast. That works out to an earnings yield of 7.32%. That’s about 400 basis points more than a 10-year Treasury. For next year, the S&P 500 is projected to earn $111.82.

Posted by on May 12th, 2011 at 11:07 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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