If They Want It So Bad, Let 'Em Have It
That seems to be the theme lately. The vast investing herd has had enough of bad news already, and appears ready to move on.
The flow of quarterly reports is pretty much done, and most of them stank. Folks bought anyway. The excuse: “Could’ve been worse. Heck, should’ve been worse. Maybe it was worse and they’re fibbing again. We don’t care!”
The Institute for Supply Management’s latest Manufacturing Survey Index figure came in at 40.1, indicating factories orders shrank again in April. The herd bought anyway: “40.1 beats 35. And besides, the New Orders Index is up to 47.2.”
Most all of Mexico just closed down for a month because of swine flu fears. “Don’t care! It’s not here in my hometown.” Four schools here in Maryland were closed for most of May by the flu: “Lalalala – we can’t hear you – we’re too busy buying stocks!”
As I said in a recent Taipan Daily column, this is exactly why I study both value and technical analysis: Sometimes, they just want to buy, and that’s all there is to it.
Recovery on the Way?
There are certainly arguments to be made that a recovery is coming – eventually, anyway. At the annual Berkshire Hathaway hoedown, Warren Buffett told his 35,000 “Buffetters” that the short term looks tough, but the long term is looking remarkably rosy: “I remain incredibly optimistic about the future of this country over time.”
Then again, he would say that, as he is trying to explain away BRK’s worst year ever. Still, I can see how he might think that things appear to be looking up, even if he can’t say exactly when anyone will garner the benefits.
One “green shoot” has particularly caught my eye. Here in the States, we are still screwing around trying to get stimulus monies all the way downstream into the hands of the folks who need stimulating.
But in the short term, that money is actually starting to get a move on; especially in the area of already planned, approved construction projects that were simply awaiting delayed checks. Indeed, after five straight declining months, U.S. construction spending was actually up already by last March.
Private residential construction is still in the doghouse, down 4.2% in March. But pending residential sales actually looked up a bit. The National Association of Realtors tells us that their seasonally adjusted new sales index has risen for two straight months and is 1.1% higher than it was at this time last year.
Thin, I know, but in a room that has been this dark for this long, even a lit match can look like daylight. And non-residential construction is looking positively robust by comparison: March’s 2.7% pop is the biggest advance in the past nine months.
Globally, we are mere pikers when it comes to handing out cash. China may be officially paying out fewer yuans, but Beijing’s experience with centrally controlled economics has allowed China to get rubber on the road a great deal faster than the U.S.
As a result, China’s Purchasing Managers Index is up over the expansion threshold of 50 for the second month in a row. It’s not a pure recovery, but certainly broad enough, with eight out of 11 subcategories seeing increases.
The Pure Play
Where’s the play in all this? I don’t think I am quite ready to start picking up local homebuilders. But raw materials are another story.
And the nice thing about raw materials is that they are fungible. That is to say, it doesn’t matter where the demand hits first, here in the States, in China or in Timbuktu: When global demand exceeds global supply, the price picks up.
So I say it’s time for you to take a step into a pure construction and infrastructure commodities play.
PowerShares DB Base Metals (DBB:NYSE) is composed of futures contracts on base metals such as aluminum, zinc and grade A copper – all vital components of any building and manufacturing boom.
Because this collection does not include gold or silver, not too many investors are even aware of it. But as you’ll see, owning exposure to these three metals will offer you a powerful investment opportunity.
From a demand standpoint, copper has been one of the best performing metals this year – and it’s easy to understand why. In an effort to extricate themselves away from the U.S. dollar – and at the same time secure decades worth of supply to support their growing economy – the Chinese are using their $1.9 trillion in currency reserves to buy up as many raw materials as they possibly can.
As a result, China’s State Reserve Bureau has also been buying metals such as aluminum, copper, zinc and nickel. And since hybrid cars need copper, a larger percentage of China’s buying has gone towards accumulating copper resources. Copper is also used for wiring in-home appliances, buildings and telecom networks – which is why China is such a strong buyer right now. As a direct result, copper prices have witnessed a nice recent rally.
And from the looks of the chart below, this rally will continue well into the summer. DBB has put in a nice rounding bottom, with a strong floor at $11. Dining downside risk like this allows the big players to get comfy with the asset, as confirmed by a 1,000% increase in daily share volume.
We already saw our initial buy signal when the price beat the 10-week average and Money Flow turned positive. Now we are approaching a major break out. Price will probably hold for a couple of days below $15.10. But once it beats that resistance node, we should see a fast spike to $20.23. Follow-on moves as high as $25.30 are certainly not out of the question.
Follow this link to view larger chart here.
Since the DBB has a copper allocation of 40%, this looks like a nice time to jump on board and ride the upside momentum. Over the last 12 months, the DBB has given up 46%. But since the beginning of 2009, it has gained 10.75%. This far exceeds the 0.06% return from the major market averages.
It’s time for you to consider PowerShares DB Base Metals (DBB:NYSE) for your portfolio.
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