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business newsWhy Energy, Materials and Their Assets Are Being Bid On the Most
By
Ryan Krueger
Nov 03, 2010 10:45 am
Through mid-September these two sectors were home to more than $411 billion in bids year-to-date, and there will be more to come.
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I had to explain after the Gingerbread Man met his untimely demise on the jaws of an alligator, “Sometimes things change, kids.” You cannot always assume you're so fast that nobody can catch you. If only our elected Gingerbread Men in DC were listening.
Sure enough, the Canadian dollar caught the US dollar, trading around “Par” this year. Canada is rich in natural resources which are in tight supply, bid on by swelling demand. The US has an over-supply of IOUs on paper called Treasury Bills instead. Even the price of the raw material pulp needed for paper is going up, and we get that from Canada also. It should come as no surprise then to learn that Canada is as busy as ever producing what the rest of the world wants to buy. They've already recovered all jobs lost during recession, while the US is years from accomplishing that goal in best-case scenarios.
Click to enlarge
(Source: Bloomberg)
The silver line threading through all those best- and worst-case scenarios and eroding value of the US dollar as a result, is just how much more attractive certain “stuff” becomes as a result. Across all sectors, US dollar-denominated assets can be found exceedingly cheap to buy now, and those backed by hard assets even cheaper.
The 1,000 biggest companies worldwide have amassed about $2.87 trillion in cash based on their latest filings. The past quarter saw $562.6 billion in worldwide acquisitions. Let me share the most quietly bullish fact that I doubt you've read elsewhere about stocks when I looked back at the worst decade they've ever seen. I compared the total number of issues traded on the New York Stock Exchange 10 years ago to that number today. Total supply is down 12%. And even among the 3,186 issues I currently count, of those, 549 aren't even stocks, they're other investment structures. The supply of stocks has dropped significantly while the amount of cash looking for a higher rate of return has skyrocketed. August is typically the slowest month of the year for mergers and acquisitions. August of 2010 was the busiest month of any over the past two years. If investors don't want to buy stocks, then CEOs will do it for them.
At my firm we're particularly interested in Energy and Materials, and their assets are being bid on more than any other sector. Through mid-September these two sectors were home to more than $411 billion in bids year-to-date at last check according to Bloomberg. The largest deal pending is for a fertilizer company. There will be more to come as worldwide crops have been under-fertilized to begin with and their prices are now allowing farmers to buy more of a lot of stuff to grow stuff.
How much more room to the upside do grains (and the Materials stocks that follow them) have? Consider this comparison within a secular bull market for grains and gold, showing how many baskets containing one bushel each of corn, wheat, and soybeans could be purchased with one ounce of gold.
How crowded is this Materials idea by equity investors? I built a “Neighborhood Report” years ago that my firm runs every month across all 10 S&P sectors objectively. If you blend the average analyst rating on each underlying stock along with the number of institutions that own the sector’s ETFs you'll find that Materials is the single most UN-loved sector.
This chart shows that the market cap weighting of the Materials Sector is now less than 4% of the S&P 500 which is below its own 20-year average. Despite historically attractive fundamental tailwinds, the sector is under-owned. As a money manager, that's precisely how I like my storybook of positions to read.
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Positions in Canadian dollar, gold, corn, wheat, soybeans.
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