Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Commodities Create Fireworks for the 4th
I hope you all had a safe and happy Independence Day.
Although it has been a shortened week, it has been eventful. The week started with the 176th 2-day OPEC meeting on July 1stand 2nd. Pretty much in line with expectations, the meeting left production quotas unchanged for the next nine months (typically this is a six-month agreement). However, the market focused on concerns around the macro picture. The weekly Department of Energy inventory data disappointed the market because of lower draws than expected across all products. This served to alarm the market around a potential slowdown in global demand. We continue to believe that this particular dynamic is largely transitory, as wet weather has likely significantly impacted miles driven as well as economic activity domestically. Further, geopolitical tensions show no signs of abating as we see hostilities in the Straits of Hormuz that have disrupted transportation in the Persian Gulf. For context, this affects over 30 percent of global oil shipments. What’s more, OPEC is targeting the excess global inventory situation, and is specifically targeting drawdowns toward the five-year OECD average in order to support pricing. This suggests further OPEC cooperation into 2020.
We are seeing inventories built in other areas as well. London Metals Exchange copper inventories are at one-year highs, despite producer shortfalls, a labor strike at the largest open pit copper mine in the world (which ended this week), and a collapse at a large mine in Democratic Republic of Congo (DRC). This suggests a less than robust demand picture. We remain constructive on copper demand over the long run. Electric vehicle technology is copper-intense, and we see a supply gap developing over the coming years.
On the other hand, as global yields collapse, we have seen defensive stocks and most stocks with yield components continue their march higher (although they are – finally – taking a bit of a breather today). Increasingly, valuations are becoming somewhat stretched in the near-term as yield-hungry investors pile into REITs, utilities, consumer staples, and other areas where stocks tend to have rich yields. We have identified some pockets of opportunity in relatively inexpensive, stable cash flow equities, and have put incremental capital to work in the last week. However, as a whole, we are not aggressively chasing the melt-up in defensives. Today, they have taken a bit of a breather, and we are hopeful that a sector rotation will bring opportunities in which we have fundamental conviction our way.
Gold had a solid week despite today’s break below the psychologically important $1400 level driven by better than expected non-farm payroll data. The stocks have had a nice run recently, but we do not see valuations as particularly stretched. We will continue to add to positions in companies with high asset quality that operate in stable geopolitical jurisdictions and have strong governance. We see good economic news as being bad news for gold as the Fed continues to evaluate all data in front of the next Fed meeting at the end of this month. As of Wednesday, the markets had been pricing in a virtually 100 percent chance of a cut at that meeting. Any threat to that prospect, whether real or perceived, is an incremental negative for gold. We do not believe that a “no cut” scenario is likely at this juncture, however. It is also interesting to point out that Trump is considering two doves for the FOMC – Judy Shelton and Christopher Waller. We believe that the Fed will ultimately err on the side of caution rather than the risk of deflating the global asset bubble. Therefore, we remain constructive on gold.
Again we thank you for your continued interest and support.
Chief Executive Officer