Concurrent with the Federal Reserve's decision to buy more bonds in an attempt to keep interest rates artificially low, gold, oil and other commodity prices have staged a rally. The administration has told the world that it fully intends to devalue the dollar, and the natural result is inflation in commodity prices. It is hard to know how long this can continue, but it's probably another instance where it doesn't pay to "fight the Fed," and though the portfolio has maintained its gold position for most of the past 18 months, up until recently it has paid not to be in oil, so the portfolios have been underweighted energy and natural resources for several months.
Energy is the most significant component of the natural resources complex. Oil prices are going up. Importantly, refining margins are also strong. Earnings in the oil sector are also correlated to employment and miles traveled, and each of those indicators is moving up. Dividend yields in the sector are more attractive than normal, and today's low payout ratio suggests that dividends - which are already increasing faster than the market's - can continue to be increased from current levels.
Nine out of ten top fund holdings are energy sector stocks. ExxonMobil and Chevron are the most heavily weighted positions. The energy complex has lagged gold, and the gold mining companies, this year. The divergence from industrial metals may have been caused by the BP oil spill, which hurt the broad sector and raised the specter of an international economic bust (the oil spill happened at roughly the same time that the Euro was having problems). As evidence of continued economic growth mounts, and evidence that the Federal Reserve is bound and determined to trash the dollar in order to jump start U.S. exports, the energy sector has turned up.
By adding this natural resource position to a portfolio which already owns gold stocks and Latin America investments, our position in "hard assets" is rising toward maximum weightings. We have a little more room to add some more commodity exposure, but not much more.
The good news is that we are approaching our "good news portfolio" which will be heavily weighted to overseas and commodity investments. This is similar to the portfolio that performed so well for us in 2006 and 2007. Even more importantly, it is not a portfolio that we would expect to do well if an economic collapse were right around the corner. This is the sort of portfolio that would do well if the economic recovery will prove sustaintable, and global growth continues. Whereas the latest data from our own Leading Economic Index is indicating a sustainable rebound, current market activity seems to confirm this good news.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .
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