Resources Bottom Forming… Buy Commodities!

I stole today’s headline out of this week’s UBS Equities Sales trading revise. The major investment bank said (with my emphasis):

‘On the macro side our focus remains mainly on commodities. After the sharp August bullish reversal in crude oil we argued that the low in oil is very likely in. We remain bullish oil and energy stocks!

‘Copper is forming a potential base, which silver is close to completing. [And] gold trades inside a triangle pattern, where a break of $1150 would be bullish.

‘Together with initial breakouts in soft commodities we see a major strategic bottom in commodities forming, that is bullish Emerging Markets as well as suggests that a reflationary trade just started.‘

In other words, UBS believes which resources bull market is going to be born.

Terry Campbell, Chairman associated with Australian Foundation Investment Company [ASX:AFI], would be licking his lips if he read that comment.

According to the Australian Financial Review, Terry has plans to dive head first into the sources sector:

‘The signals we are seeing pointing toward a bottoming of the sector are sounding very noisally right now, whether it is how reduced the rates of return are on invested capital that companies are now achieving, whether it is how deep we are now into the cost curve in nickel and other commodities, whether it’s the emergence of private equity groups coming onto the registers of companies… Production cuts are also now coming via, so there are a lot of signals saying that this sector is very interesting.’

His bullishness does not surprise me. The Bloomberg Item Index is, indeed, hanging around 1999 level lows.

Said otherwise, resources are buying and selling near their lowest level these days.?You can see this on the chart below:

Source: Bloomberg

So have resources bottomed?

Unfortunately, not if you ask me.

Far too much euphoria continues to be in the sector. What we’re seeing is a classic ‘bear marketplace rally’.

For a resources bottom, we have to see huge distress overall — either on the balance linen or the share price level. With every man and his dog turning bullish on resources, obviously this isn’t the case.

Time should alter this. In fact, hope should start fading into the darkish after this month’s US rate hike.

First interest rate rise will be bearish for resources

While you may not think it, US interest rates have an important bearing on resource prices. Higher interest rates will send the US dollar dramatically higher. As the US buck goes higher, resource prices — denominated in US dollars — will mind lower.

In other words, the first US rates rise won’t be good for commodity prices.

On this topic, I’ve long said the united states Fed will raise prices in September or Oct. Followed by, potentially, a second rate rise in December.

After last month’s non-event, the Fed’s credibility is now on the line. All year they’ve prepared the market for a 2015 rate hike. This would be the first rate lift in nearly a decade.

Many believe that the Fed won’t raise rates.

But…

On Wednesday, Federal Reserve Bank of Bay area President, John Williams?reiterated that rates should rise this year. And possibly, with the economy improving, as soon as this month.

When Mr. Williams speaks, Walls Street takes note. Their views tend to reflect the centre of thinking inside the Fed.

While John’s positivity may seem worrying with regard to resource punters, he insists that a rate rise will be ‘data dependent’. He noted that September’s conference was ‘a very close call‘. And that officials don’t need much brand new economic data before walking rates.

October US rate increase to kick start financial avalanche

Looking forward, the primary focus will be upon two data points:

1. Employment information;
2. Concerns over China’s economic slowdown.

Regarding employment, last Friday’s number was a terrible. The?US?economy made a mere 142,000?jobs?in?September. This compared to the 203,000 job number expected.

While the united states dollar got hammered, stock exchange punters popped open the champagne cork. We’ve since seen the celebrations run just about all week. Resource punters have joined the party.

Unfortunately, Mister. Williams may turn out the lights. According to CNBC he said,

‘The [labour] market, continues to improve, a key metric as the Fed considers a possible rate hike at its last two meetings of this 12 months, in October and December.’

Mr. Williams cautioned against last Friday’s shock reading. And said,

‘The economic climate will soon need no more than One hundred,000 new jobs per month to feed a healthy [labour] market.

‘Every time all of us add jobs we are really moving down the field.

‘Unemployment is at 5.1 percent; full work for the U.S. economy is around 5 percent.

‘We’re essentially at full employment. We’re still adding jobs. We can’t get caught up in short-term volatility.

Furthermore, just before you thought about buying stocks today — ahead of the subsequent rate rise — Mr. Williams is much more positive on the macro front.

‘Since the actual Fed’s September meeting, there has been no signs of a deteriorating global outlook, and while current trade data was worse than expected, data upon consumer spending has topped his expectations.

This isn’t surprising…

After a week long holiday, the Chinese Shanghai Composite Index rose 2.97% the other day. And it’s recovered nicely since August’s market low.

Looking at the actual economy, even Chinese foreign currency outflows have slowed…

On this be aware, it should be said that no data point is more important than People’s Bank of China’s (PBOC’s) foreign exchange reserves. During China’s economic changeover it can, if needed, dump countless billions of US treasuries to support the yuan.

As is stands, the actual PBOC’s foreign exchange reserves fell by US$43 billion to US$3.514 trillion within September. In comparison, August’s outflows totalled US$94 billion. August was a turbulent month in China.

As such, it’s my personal view that a rate backpack remains on the cards this month.

Stock market and goods — expect lower lows ahead

This will not be good for confidence.

If a rate backpack comes, expect the market to panic. And for it and resource prices to head dramatically lower.

You should prepare your portfolio for another 10-13% correction. I say ‘another’ since i warned you about the very first correction at the top of the market upon 30 April, here. Because this time, the ASX has misplaced more than 12%.

If the Dow Johnson cracks 16,000 factors on a weekly basis, watch out. There’s a pretty good possibility it will head to 14,750 points. That said, at the very least, we will have a re-test the August reduced of 15,370 points. During this period, the ASX will surely follow. As well as your resources portfolio will get hit hard.

On the flipside, to stave off a correction for now, we need to see a weekly close above 17,000 factors. It also needs to hold above this particular level in the weeks ahead. As the market is trading closer to 17,000 points, this favorable case seems unlikely soon.

In this case, while UBS is counseling you of a major low on the cards, I strongly suggest you consider their advice. While the stock exchange correction will be short lived, source prices are due for a final crash.

I’ve been preparing Resource Speculator readers for this final crash for some time right now. There will be a smarter time to buy. That time hasn’t come however. If you don’t buy near this point, you’ll surely be i’m sorry when the sovereign debt crisis comes in 2016/17. If you want to know when to buy, see here.

Regards,

Jason Stevenson,

Resources Analyst, Resource Speculator

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