Bloomberg
For all the signs of a U.S. slowdown, American stocks are up 4 percent in the third quarter, led by commodity producers that have been trading at the most expensive levels since 2004.
The 32 mining companies, seed-makers and chemical suppliers in the Standard & Poor’s 500 Index gained 10 percent since the end of June, pushing the average price to 17.4 times annual profits, the highest level of any industry, data compiled by Bloomberg show. Premium valuations for companies from Dow Chemical Co. to Allegheny Technologies Inc. preceded rallies in the past as demand for raw materials signaled economic growth.
Optimism in commodity stocks runs counter to reports last week showing U.S. jobless claims rose to the highest level since November and housing starts trailed economists’ estimates. David Rosenberg, the chief economist for Gluskin Sheff & Associates Inc., says the probability of the second recession in three years is greater than 50 percent.
“If the market really believed the double-dip story, which I don’t think the stock market believes, materials stocks would not be doing this well, that’s for certain,” said Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees more than $30 billion. “The interesting thing is that materials would do as well as they did. I would have expected some softening of commodity prices.”
Weekly Loss
Basic-resources stocks were the biggest gainers today in European trading, led by BHP Billiton Ltd., amid speculation that a proposed mining tax in Australia will be scrapped or diluted after the ruling Labor party failed to win a majority at the weekend election.
The S&P 500 rose 0.7 percent as of 9:42 a.m. in New York.
The S&P 500 slipped 0.7 percent to 1,071.69 last week, falling to the lowest level in a month and bringing its 2010 loss to 4 percent. Commodity suppliers gained 0.6 percent after Melbourne-based BHP Billiton Ltd. bid $40 billion for Potash Corp. of Saskatchewan Inc. More than $165 billion in takeovers of raw-materials producers has been announced this year, the most since 2007, according to data compiled by Bloomberg.
Mining and chemical companies in the S&P 500 are about 22 percent more expensive than the index based on price-earnings ratios using profits over the last 12 months, data compiled by Bloomberg show. The industry has been the most expensive relative to income since June, data compiled by Bloomberg show.
Economy Proxy
Before 2009, when the S&P 500 gained 24 percent for its biggest rally in six years, the last time metals and mining shares traded so far above the index was in 2004, data compiled by Bloomberg show. That was just after the start of a five-year rally in which the S&P 500 doubled. They commanded a bigger premium in 1994, before the S&P 500 tripled over six years, the data show.
“It’s an important leading indicator,” said Bruce McCain, who oversees $25 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland. “The strength we see in some of those is good reassurance there is more underlying economic strength than had been feared.”
Money managers at JPMorgan Chase & Co. and Russell Investments are confident about mining stocks even as the U.S. slows because they expect China to spur demand. The American economy’s growth rate in the second quarter is forecast to be revised down to 1.4 percent on Aug. 27 from the last estimate of 2.4 percent on July 30, according to a survey of economists.
‘Growth Story’
While Chinese GDP slowed between March and June, the rate of expansion remained above 10 percent for a third quarter, data from the National Bureau of Statistics showed. It’s projected to increase by 10 percent in 2010 and 8.9 percent next year, according to the median estimate of economists surveyed by Bloomberg.
“We are trying to take advantage of a very real global growth story” with investments in materials companies, said Stephen Wood, the New York-based chief market strategist for Russell Investments, which manages $140 billion. “It’s not a brisk one, but it’s a real one. A double-dip recession is a low- probability scenario.”
The Reuters/Jefferies CRB Index of 19 raw materials has gained 3.3 percent since the end of June, led by wheat, which climbed 41 percent as droughts in exporting countries including Russia threatened to reduce supplies. Sugar advanced 24 percent as delays worsened at ports in Brazil, the world’s biggest exporter. Copper increased 11 percent and cotton rallied 9 percent, according to data compiled by Bloomberg.
‘Growth Dynamics’
Rising materials prices and high valuations for producers say little about prospects for growth in the U.S. and Europe, Rosenberg said in a telephone interview from Toronto. The economist was among the first to predict the 2008 recession that sent the S&P 500 down 38 percent, propelling him to the No. 2 ranking by Institutional Investor magazine that year.
“The basic materials complex is no longer just a cyclical play, it’s also a play on secular growth dynamics as it pertains to the most dynamic part of the global economy right now, which is emerging Asia,” Rosenberg said. “It’s commanding a premium relative to how it’s traded in the past.”
A 1.4 percent U.S. growth rate in the second quarter would be the slowest since the economy contracted in last year’s third quarter. Forecasts for the second half and next year are deteriorating. The median estimate of 55 economists surveyed by Bloomberg is for U.S. GDP to increase by 3 percent in 2010 and 2.8 percent in 2011, down from 3.2 percent and 3.1 percent in May.
TIPS Spread
Initial jobless claims rose by 12,000 to 500,000 in the week ended Aug. 14, exceeding all estimates of economists surveyed by Bloomberg, the Labor Department said Aug. 19. Work began on 546,000 houses at an annual rate last month, fewer than the 560,000 median forecast of economists surveyed by Bloomberg, Commerce Department figures showed on Aug. 17.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed last week to 1.56 percentage points, the smallest gap since September 2009, from a high of 2.49 percentage points in January, data compiled by Bloomberg show. Yields on two-year Treasury notes last week declined to the lowest level on record, data compiled by Bloomberg show.
Concern about deflation is higher than at any time since November 2002, equity derivatives strategists at Citigroup Inc. wrote in an Aug. 16 report. U.S. stocks had their biggest one- day drop in three weeks on Aug. 11 after Federal Reserve policy makers led by Chairman Ben S. Bernanke said the pace of economic recovery “slowed in recent months.”
July Rally
“Most companies borrow for their businesses,” said Olivier Sarfati, head of equity trading strategies at Citigroup Inc. in New York. “With deflation, the price of whatever you’re selling decreases, but your debt doesn’t. It makes debt difficult to repay, and just repaying debt takes all your profits.”
Stocks surged in July as companies in the benchmark measure of U.S. shares topped the average analyst profit projection by 10 percent. S&P 500 earnings increased 49 percent during the second quarter from the year-earlier period, based on reports by the 484 companies through Aug. 20, and the index jumped 6.9 percent.
The third straight increase in profits followed a record nine-quarter slump, data compiled by Bloomberg show. The recovery is forecast to produce earnings gains of 36 percent this year and 16 percent next year, according to forecasts compiled by Bloomberg. Raw-materials producers are projected to help lead the increase, with net income gaining 67 percent in 2010 and 26 percent in 2011, the data show.
Market Multiple
Dow Chemical, the largest U.S. chemical maker, trades at about 17.6 times earnings over the past 12 months, compared with a 14.2 multiple for the S&P 500. It’s among the materials stocks Morgan Stanley recommends, said David Darst, the New York-based chief investment strategist for the firm’s brokerage clients. In March 2003, the valuation was almost five times the market’s.
Allegheny Technologies, a producer of titanium, nickel and steel held in Russell Investments’ U.S. Core Equity Fund, trades at 46 times trailing earnings. Its premium peaked in March 2003 at nearly 8 times the index’s multiple.
“We’re still in this period where the redeployment of capital at the business level is very strong, which means we’re going to increase utilization of materials very heavily at a time where people are very bought into the notion of not necessarily a double-dip recession, but slower economic growth,” said Kenneth Fisher, the chief executive officer of Fisher Investments Inc., which oversees $35 billion from Woodside, California. “That’s a big argument for overweighting materials across the board.”
The 32 mining companies, seed-makers and chemical suppliers in the Standard & Poor’s 500 Index gained 10 percent since the end of June, pushing the average price to 17.4 times annual profits, the highest level of any industry, data compiled by Bloomberg show. Premium valuations for companies from Dow Chemical Co. to Allegheny Technologies Inc. preceded rallies in the past as demand for raw materials signaled economic growth.
Optimism in commodity stocks runs counter to reports last week showing U.S. jobless claims rose to the highest level since November and housing starts trailed economists’ estimates. David Rosenberg, the chief economist for Gluskin Sheff & Associates Inc., says the probability of the second recession in three years is greater than 50 percent.
“If the market really believed the double-dip story, which I don’t think the stock market believes, materials stocks would not be doing this well, that’s for certain,” said Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees more than $30 billion. “The interesting thing is that materials would do as well as they did. I would have expected some softening of commodity prices.”
Weekly Loss
Basic-resources stocks were the biggest gainers today in European trading, led by BHP Billiton Ltd., amid speculation that a proposed mining tax in Australia will be scrapped or diluted after the ruling Labor party failed to win a majority at the weekend election.
The S&P 500 rose 0.7 percent as of 9:42 a.m. in New York.
The S&P 500 slipped 0.7 percent to 1,071.69 last week, falling to the lowest level in a month and bringing its 2010 loss to 4 percent. Commodity suppliers gained 0.6 percent after Melbourne-based BHP Billiton Ltd. bid $40 billion for Potash Corp. of Saskatchewan Inc. More than $165 billion in takeovers of raw-materials producers has been announced this year, the most since 2007, according to data compiled by Bloomberg.
Mining and chemical companies in the S&P 500 are about 22 percent more expensive than the index based on price-earnings ratios using profits over the last 12 months, data compiled by Bloomberg show. The industry has been the most expensive relative to income since June, data compiled by Bloomberg show.
Economy Proxy
Before 2009, when the S&P 500 gained 24 percent for its biggest rally in six years, the last time metals and mining shares traded so far above the index was in 2004, data compiled by Bloomberg show. That was just after the start of a five-year rally in which the S&P 500 doubled. They commanded a bigger premium in 1994, before the S&P 500 tripled over six years, the data show.
“It’s an important leading indicator,” said Bruce McCain, who oversees $25 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland. “The strength we see in some of those is good reassurance there is more underlying economic strength than had been feared.”
Money managers at JPMorgan Chase & Co. and Russell Investments are confident about mining stocks even as the U.S. slows because they expect China to spur demand. The American economy’s growth rate in the second quarter is forecast to be revised down to 1.4 percent on Aug. 27 from the last estimate of 2.4 percent on July 30, according to a survey of economists.
‘Growth Story’
While Chinese GDP slowed between March and June, the rate of expansion remained above 10 percent for a third quarter, data from the National Bureau of Statistics showed. It’s projected to increase by 10 percent in 2010 and 8.9 percent next year, according to the median estimate of economists surveyed by Bloomberg.
“We are trying to take advantage of a very real global growth story” with investments in materials companies, said Stephen Wood, the New York-based chief market strategist for Russell Investments, which manages $140 billion. “It’s not a brisk one, but it’s a real one. A double-dip recession is a low- probability scenario.”
The Reuters/Jefferies CRB Index of 19 raw materials has gained 3.3 percent since the end of June, led by wheat, which climbed 41 percent as droughts in exporting countries including Russia threatened to reduce supplies. Sugar advanced 24 percent as delays worsened at ports in Brazil, the world’s biggest exporter. Copper increased 11 percent and cotton rallied 9 percent, according to data compiled by Bloomberg.
‘Growth Dynamics’
Rising materials prices and high valuations for producers say little about prospects for growth in the U.S. and Europe, Rosenberg said in a telephone interview from Toronto. The economist was among the first to predict the 2008 recession that sent the S&P 500 down 38 percent, propelling him to the No. 2 ranking by Institutional Investor magazine that year.
“The basic materials complex is no longer just a cyclical play, it’s also a play on secular growth dynamics as it pertains to the most dynamic part of the global economy right now, which is emerging Asia,” Rosenberg said. “It’s commanding a premium relative to how it’s traded in the past.”
A 1.4 percent U.S. growth rate in the second quarter would be the slowest since the economy contracted in last year’s third quarter. Forecasts for the second half and next year are deteriorating. The median estimate of 55 economists surveyed by Bloomberg is for U.S. GDP to increase by 3 percent in 2010 and 2.8 percent in 2011, down from 3.2 percent and 3.1 percent in May.
TIPS Spread
Initial jobless claims rose by 12,000 to 500,000 in the week ended Aug. 14, exceeding all estimates of economists surveyed by Bloomberg, the Labor Department said Aug. 19. Work began on 546,000 houses at an annual rate last month, fewer than the 560,000 median forecast of economists surveyed by Bloomberg, Commerce Department figures showed on Aug. 17.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed last week to 1.56 percentage points, the smallest gap since September 2009, from a high of 2.49 percentage points in January, data compiled by Bloomberg show. Yields on two-year Treasury notes last week declined to the lowest level on record, data compiled by Bloomberg show.
Concern about deflation is higher than at any time since November 2002, equity derivatives strategists at Citigroup Inc. wrote in an Aug. 16 report. U.S. stocks had their biggest one- day drop in three weeks on Aug. 11 after Federal Reserve policy makers led by Chairman Ben S. Bernanke said the pace of economic recovery “slowed in recent months.”
July Rally
“Most companies borrow for their businesses,” said Olivier Sarfati, head of equity trading strategies at Citigroup Inc. in New York. “With deflation, the price of whatever you’re selling decreases, but your debt doesn’t. It makes debt difficult to repay, and just repaying debt takes all your profits.”
Stocks surged in July as companies in the benchmark measure of U.S. shares topped the average analyst profit projection by 10 percent. S&P 500 earnings increased 49 percent during the second quarter from the year-earlier period, based on reports by the 484 companies through Aug. 20, and the index jumped 6.9 percent.
The third straight increase in profits followed a record nine-quarter slump, data compiled by Bloomberg show. The recovery is forecast to produce earnings gains of 36 percent this year and 16 percent next year, according to forecasts compiled by Bloomberg. Raw-materials producers are projected to help lead the increase, with net income gaining 67 percent in 2010 and 26 percent in 2011, the data show.
Market Multiple
Dow Chemical, the largest U.S. chemical maker, trades at about 17.6 times earnings over the past 12 months, compared with a 14.2 multiple for the S&P 500. It’s among the materials stocks Morgan Stanley recommends, said David Darst, the New York-based chief investment strategist for the firm’s brokerage clients. In March 2003, the valuation was almost five times the market’s.
Allegheny Technologies, a producer of titanium, nickel and steel held in Russell Investments’ U.S. Core Equity Fund, trades at 46 times trailing earnings. Its premium peaked in March 2003 at nearly 8 times the index’s multiple.
“We’re still in this period where the redeployment of capital at the business level is very strong, which means we’re going to increase utilization of materials very heavily at a time where people are very bought into the notion of not necessarily a double-dip recession, but slower economic growth,” said Kenneth Fisher, the chief executive officer of Fisher Investments Inc., which oversees $35 billion from Woodside, California. “That’s a big argument for overweighting materials across the board.”
