There are plenty of shrills piling on the poor 1Q numbers by Joy Global this AM before the market opened. I have to wonder when the “masters of the obvious” will acknowledge that we didn’t learn anything new today from JOYG that we didn’t price in 3 months ago.
Commodity prices have been destroyed and capex budgets slashed for 3 quarters. Last night, China coincidentally told us on what we already knew about their economy. So do you want to trade yesterday’s news?
JOY is talking about an extended trough in the commodity cycle. When I hear trough I think bottom. When I think bottom I a place where the bad news is priced in. When I think “extended trough” I see a place where there is no near term turn in the demand cycle. When I look at commodity prices I think about what I have seen multiple times over 15 years with commodities. There is often a violent move lower followed by a period of convalescence, whose end is never easy to spot. We are in this period.
What did JOYG tell us today:
- Coal markets have been weak
- 4Q oil price reduction a problem for their business
- European growth has been slow
I'm not sure anyone needed them to tell us any of these long running themes.
Let’s focus on a couple things that are FORWARD looking:
- Copper underlying fundamentals remains strong with low global inventory levels and a production deficit of 500K in ’14
- Seaborne metallurgical coal seems to be finding an equilibrium price as we have averaged $114 since April ’14; global steel production is expected to grow 2% in 2015
Meanwhile a look at the Dollar chart and the CRB (commodities index) chart today speaks to change in the long running pattern:
- The Dollar has rallied 2.4% in the last 10days and yet somehow counter to well defined relationship, commodities are actually +0.93% during that time
Until proven otherwise, commodity prices (other than Gold) bottomed in the 2nd week of January.
Just because a mining equipment company tells you the industry struggled in the 4Q and has been mired in a long term slump doesn’t mean the underlying miners themselves are suffering anywhere near as badly.
Trading miners that are diversified and have a disciplined approach to their balance sheet and capex is something we would endorse at this juncture:
- FCX(+14% in last 1month)
- BHP (+5.8% in last month)
- TCK (+4.9% in last month)
Also look at steel companies, doing the same dance. We remind you of our steel basket endorsement of 2 weeks ago:
- PKX: improving margins, demand, eps stabilizing
- MT: focus on premium products and cost cutting
- X: oversold high short interest, key level holding at $21