Get Ready For Commodity Liftoff: Global Manufacturing Just Made A HUGE Move! by Frank Holmes

By most standards, October was an explosive month, with domestic equities recording their biggest monthly gains in four years.

But the most exciting news was that the global purchasing manager’s index (PMI) reading for the month of October rocketed up to 51.4, almost a point higher than September’s 50.7. Not only does this represent the strongest monthly surge in nearly two years, but the index shot above its three-month moving average for the first time since March.

As Donald Trump might say: This is going to be huge.

Commodity Liftoff

We monitor the global PMI very closely because in the past it has reliably anticipated how commodity prices might behave in later months. Our own research shows that when a PMI “cross-above” occurs—that is, when the monthly reading crosses above the three-month moving average—it has signaled a possible spike in certain commodities, materials and energy. Three months following previous breakouts, copper had an 81 percent probabilty of rising approximately 7 percent, while crude oil jumped 7 percent three quarters of the time.

Commodity Liftoff

Indeed, oil prices have tended to track the global PMI pretty closely. With manufacturing exploding off the launch pad, could oil be very far behind?

Commodity Liftoff

What’s more, domestic equities are strongly correlated with global PMI readings. Investment research firm Cornerstone Macro shows that in five separate incidences since 2001, a PMI liftoff after hitting a bottom was soon followed by a rally in the S&P 500 Index.

Commodity Liftoff

A similar trend can be observed in world equities. In the past, the MSCI World Index has rallied when the global PMI turned up.

Commodity Liftoff

Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), agrees that the PMI reading is promising.

“It’s definitely constructive for commodities going forward,” he said.

One of our holdings in PSPFX, by the way, had a huge jump this week. British Columbia-based Sunridge Gold announced that it would be selling its 60 percent interest in the Asmara Mining Share Company, holder of the Asmara Project in northeastern Africa, to Sichuan Road & Bridge Mining Investment Development, a Chinese company, for $65 million. Sunridge jumped 41 percent this week alone and for the year is up 71 percent.

Did I mention that U.S. Global Investors is the largest holder of Sunridge stock (by a very wide margin)? That’s the power of active portfolio management.

So When Will Liftoff Occur?

As exciting as this news already is, we believe the real commodity liftoff should occur when the U.S., Europe, China and global PMIs all score above a 50.0, with the one-month readings above the three-month trends.

Of those regions, China is the only one whose reading still trails below the 50.0 level. For the month of October, it came in at 48.3, up from 47.2 in September.

But like the global PMI, the Caixin China Manufacturing PMI crossed above its three-month moving average, suggesting that manufacturing activity is contracting at a slower pace and preparing to reverse course into expansion mode.

It’s crucial that China’s PMI move above 50.0, as the Asian giant is the top driver of global commodities demand. We believe that once purchases, new orders and exports gain further momentum, commodities might have the fuel they need to skyrocket.

Heading Down Under

I’m nearing the end of my worldwide conference tour, which kicked off last week at the 2015 New Orleans Investment Conference.

This week I was in beautiful Lima, Peru—the third-largest city in the Americas—where I attended and spoke at the Mining & Investment Latin America Summit.

Get Ready For Commodity Liftoff: Global Manufacturing Just Made A HUGE Move!

During this leg of the trip I managed to gain some tacit knowledge by visiting the Mineral Museum Andrés del Castillo as well as downtown Lima, which is currently undergoing lots of construction and rapid population growth.

Right now I’m on the 12-hour red eye to Melbourne, Australia, for the International Mining and Resources Conference. Stay tuned for my thoughts and insights on what I saw and heard during my travels!

Index Summary

  • The major market indices finished up this week.  The Dow Jones Industrial Average gained 1.40 percent. The S&P 500 Stock Index rose 0.95 percent, while the Nasdaq Composite climbed 1.85 percent. The Russell 2000 small capitalization index gained 3.26 percent this week.
  • The Hang Seng Composite gained 1.39 percent this week; while Taiwan was up 1.63 percent and the KOSPI rose 0.57 percent.
  • The 10-year Treasury bond yield rose 18 basis points to 2.33 percent.

Domestic Equity Market

Commodity Liftoff

Strengths

  • Financials was the best performing sector on a relative basis, up 2.68 percent for the week versus a 0.83 percent gain for the S&P 500 Index.
  • The energy, information technology, industrials, consumer discretion and health care sectors all beat the S&P 500, returning 2.41 percent, 1.83 percent, 1.14 percent, 0.55 percent and 0.48 percent respectively.
  • Qorvo Inc. was the best-performing stock in the S&P 500, up 26.45 percent. It serves the mobile device, networks infrastructure and defense and aerospace markets.

Weaknesses

  • The utilities sector had a tough week, ending as the worst performer with a return of -3.58 percent, due in part to the profit taking seen after the substantial gain that occurred during recent weeks.
  • Telecommunication services and consumer staples also lagged the S&P 500, both returning below the S&P 500’s performance of 0.73 percent.
  • The worst-performing stock in the S&P 500 was Qualcomm Inc., which fell 10.10 percent. Qualcomm designs, develops, manufactures and markets digital communications products and services in China, South Korea, Taiwan and the United States.

Opportunities

  • A wave of mergers and acquisitions is unlocking value in software companies, which should be supported by positive surprises in operating performance. Sales growth expectations have come down relative to the overall market, even though weak productivity growth calls for an increase in relative business investment on software. When overall corporate sector profit margins are under pressure, the incentive to invest in productivity-enhancing software with relative quick payback periods rises. The implication is that a breakout in relative share price performance is a high probability outcome as the industry surpasses depressed expectations.
  • Health care facilities companies have been hit hard in the past month, but there is a good chance of a recovery. Employment is up across the health care sector, and while that will raise costs, pricing power is also improving and other costs remain under control. The cost of physician services and medical supplies outside of pharmaceuticals is also running at a low tick. As long as overall employment growth does not crumble, the trend in provisions for doubtful accounts should remain lower for the industry, as the unemployment rate leads bad debt expenses. If that happens, profit margins should not suffer the widespread contraction on the back of rising wage and drug expenses that has put the sector under pressure.