In this edition we‘ll discuss the huge rally in gold miners - a topic I remain cautious on - and also provide Citi’s top U.S. stock picks for the muddled market backdrop. For the diversion, an interesting argument that refrigeration is, while maybe not completely ruining our food, significantly reducing its quality.
Gold Bullion from the American Precious Metals Exchange.Mike Segar/Reuters
Trending sectors
Fund managers may need to chase gold rally
Four out of the top five performing S&P/TSX Composite stocks are gold miners. The numbers are big, too – top two performers Iamgold Corp. and Lundin Gold are up 152.7 and 116.4 per cent, respectively, year to date. Scotiabank strategist Hugo Ste-Marie’s Wednesday research report TSX Gold Sector Getting Harder to Ignore sees five reasons for gold stocks to continue higher.
The strategist noted before starting the list that gold stocks have climbed to over eight per cent of the S&P/TSX Composite Index market cap. This makes the sector impossible to ignore for fund managers gauging their performance against the broader index. Managers who don’t buy enough gold miners to match the eight per cent weighting are likely to underperform the benchmark if the rally continues as Mr. Ste-Marie expects.
The first reason it’s not too late to buy gold is that gold miner stock prices have lagged the performance of gold bullion and are likely to play catchup in the weeks ahead. The bullion price is up almost US$700 this year to US$2,736 per ounce.
At the same time, the bullion price divided by mining stock prices (as measured by dividing gold by the price of the prominent New York-traded VanEck Vectors Gold Miners ETF) has dropped from almost 80 times earlier in the year to less than 65 times.
Gold stock performance relative to the TSX has yet to peak, according to reason No. 2 for why the gold sector has further to run. Previous gold bull markets have seen the TSX gold sector outperforming the broader benchmark by two standard deviations. That’s 50-60 per cent based on current conditions and that hasn’t happened yet – the gold TSX subindex is only 15 per cent higher than the broader benchmark.
Reason three is that the profitability and balance sheet quality of gold miners are improving along with the bullion price – earnings are up and debt is down – making them more attractive to institutional investors.
The U.S. presidential election is reason four. The potential for political shenanigans, and I’m not mentioning any names here, surrounding the vote result have investors buying gold. The election is only two weeks away so this argument only applies for short-term traders.
The last reason is the Federal Reserve. The clear direction of U.S. interest rates is lower, which will weaken the U.S. dollar, all else being equal. A lower dollar means higher gold prices in greenback terms.
I don’t hate gold as much as John Maynard Keynes did, but I remain agnostic about its value in the modern economy. I certainly respect gold’s history as currency and as a limiting factor for government profligacy. But as Warren Buffett frequently mentions, it just sits there, not producing cash flow. I don’t make the rules, however, and my caution has me missing a significant rally, and one that’s likely to continue as more investors join in.
Stock picks
Best stocks for a ‘no cycle’ environment
The characteristics of economic cycles were determined by post-World War II data driven by manufacturing activity. Recessions occurred when businesses got cocky and spent too much to expand production, leading to inventory buildups and weaker employment.
I’ve often wondered how this template fits in a world where software companies have no need to invest in new assembly lines and social media and streaming giants don’t either. I think a lot of conventional knowledge about cycles is archaic.
Citi U.S. equity strategist Scott Chronert agrees with me, at least for now. In a research report this week, he writes, “We are in a “no cycle” environment [that] render traditional cycle-driven investment approaches, like factor and size rotations, ineffective.”
Mr. Chronert’s solution for clients is to emphasize companies with higher profitability as measured by return on equity (ROE) ratios. These have historically shown low correlation to macroeconomic variables like bond yield spreads or crude prices.
U.S. stocks in Citi’s so-called large cap positive ROE trend basket that are likely to interest Canadian investors include Micron Technology Inc., Newmont Corp., Carnival Corp., Northrup Grumman Corp., Netflix Inc., Pfizer Inc., CBRE Group Inc, Advanced Micro Devices Inc. and Honeywell International Inc.
Shoppers consider an array of items in refrigerators in a Costco warehouse Thursday, Aug. 22, 2024, in Parker, Colo.David Zalubowski/The Associated Press
Diversions
No telling how old our food is
The M.I.T. Technology Review’s How Refrigeration Ruined Fresh Food (subscription may be required) is a fascinating look at what happens between the farm and the table. The story features author Nicola Twilley and her deep dive into the complex chain of cooled transportation and warehousing that extends the shelf life of food.
The examples of food preservation are surprising. Orange juice at the grocery store might be reconstituted two years after having its water and flavour molecules removed. An apple bought in summer is likely almost 12 months old. As consumers we really don’t have much idea when the nutrients we eat left the farm.
Ms. Twilley believes refrigeration has changed the taste and nutritional value of what we consume. She also feels that new methods, including nanotechnology-derived coatings, can work better.
I found this to be a perspective-bending feature well worth reading in full.
The essentials
Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.
Globe Investor highlights
Electric vehicles were supposed to supercharge demand for metals such as lithium, nickel and cobalt. Yet prices for all three EV battery inputs have fallen to such bombed-out levels that producers are curtailing output and deferring new projects, reports veteran metals reporter Andy Home.
Rob Carrick presents five thoughts on what to do when all those GICs you bought mature.
Markets and (some) economists are suggesting today’s large 50 basis point cut in the Bank of Canada’s overnight rate won’t be repeated at future meetings.
Someone has to sell and service the heavy equipment used to clear the ground and build new battery plants and data centres. And that’s why veteran small-cap investor Robert Tattersall thinks Canada’s Wajax Corp. is a good bet.
What’s up next
The Bank of Canada’s 50 basis point rate cut today will soak up all the economics media oxygen for a few days. Investors shouldn’t forget about retail sales, however, my pick for the most important indicator of rate stress on indebted households. It’s out Friday, and a 0.4 per cent month over month gain for August is expected.
As update on domestic GDP for August will be reported on Halloween.
In the U.S., this S&P Global U.S. Manufacturing PMI will be released Thursday with a small improvement to 47.5 forecasted – still in contractionary territory. Durable goods orders for September will be reported on Friday. A month-over-month decline of 1.0 per cent is expected.
On Oct. 30, annualized quarter over quarter U.S. GDP is out, a reading of 3.0 per cent is expected. Everyone’s favourite data point, non-farm payrolls, will be released on Nov. 1.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)