On Wednesday evening I filedan article for the Fool containing the immortal words I really cant see Anglo American enjoyingmuch respitethis year, and then went to bed.
Next day there was respite all over the place, with the stockending Super Thursday an incredible19.95% higher, as the commodity sector enjoyed its best day in seven years. At time of writing, Friday lunchtime, AALis up another 9.05%.
I am nowconsidering a change of career, but before I move on I must ask this question: can the outlook for commodities really have changed overnight?
Lows And Highs
What a difference a day makes. At close of trading on not-so-super Wednesday the FTSE 100 had extended its losing streak to a third day. Anglo American, Antofagasta, Rio Tinto and Glencoredid top the daily risers charts, but there was littlesignof the Thursdaysupernova.
Analysts have attributedSuper Thursday to sudden weakness in the dollar. Poorservices sector data forcedmarkets to downgradeassumptions about US rate hikes, hittingthe greenbackand makingdollar-priced commodities cheaper for holders of other currencies. Withsigns of a pick-upin Chinese iron ore demand, and a month-high for the copper price, the bargain hunters needed no further encouragement.
Cheap As Chips
Commodity valuations had been driven to such dismal lows that the excitement is forgivable. Even after the recentbounceAnglo-American trades at just 2.8 times earnings. BHP Billiton is also cheapat8.6 times earnings, Rio Tinto cheaper at 5.4 timesandRoyal Dutch Shell at7.4 times. If you think this is the start of the commodity price recovery it isnt too late to baga bargain.
Im sticking to my guns. Commodity stocks are volatile even in the good times, toppingor trailing the FTSE 100 daily leaderboards more than any other sector. Volatile assets tend to overshoot both on the way up and way down, so maybe the sell-off had just gonetoo far. Super Thursday felt so super because everything that came before was so super bad. Prices could just as easily collapse again on Monday.
Monday Is Another Week
Stock markets may have laughed in my face yesterday, but itis the long-term that countsand I still think the sectoris in trouble. China is menaced by debt and its murky shadow banking system, which hides all sorts of Ponzi horrors.
Oilmay struggle to punch higher. Anew report by consultants Wood Mackenzie revealsthat justonly 0.1% percent of global production has been curtailed because it is unprofitable. The commodity supply glut continues, withUS crude inventories upfor the fourth consecutive week.Todays poor non-farm payrolls data suggests the US is slowing.
There is tremendous value in the sector, even if the 11.9% BHP Billiton yield does not hold. Oil giants and miners have been slashing costs and undergoing painful restructuring, and investorscould reap the rewards if commodityprices do start rising again. As I wrote on Wednesday, I reckonoilwill move first and fastest, makingBP and Shellincreasingly exciting plays. But the outlook is still tough for commodities, asnext week may show.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Shell. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
