Norislk vs. Metal Prices

Norilsk is a relatively large stock position for me. Here's a graph of it versus the prices of the metals it mines. The metals average is 50% nickel, 25% copper and 25% palladium. This isn't exact, and platinum should figure into the mix, but it's close. It shows how the stock is a proxy for metals prices. That is fine with me.

Hey, What About this Rally?

I haven't been blogging much recently. I've been on a bike trip, and I didn't have much to say anyway. Since the last few posts, the commodity markets have continued rallying. Here's what I find interesting: I talk to / read about a lot of commodities traders and analysts, and virtually all of them hate this rally. Yesterday I read the latest JPM strategy take. It was pretty much the same: the rally is caused by:

1. Short covering from a severely depressed psychology, and
2. The debt-fueled electroshock the Chinese government is giving to its economy.

These are both true, but in my view they ignore the most important point: Many commodities had gotten to very cheap long-run levels. They were at levels which given time would lead to significant cuts in production or at least left no room for any production or consumption risks. Nickel (my largest position) is the former. Soybeans (my second largest) is the latter.

This is really key for value-biased strategists like me. At some points you don't have to anticipate a catalyst. If you can buy it cheaply enough, you can just stay with it, knowing that the catalyst will eventually come. This time it's the Chinese electroshock. Who knows what the next one will be?

What am I doing here? I did cut back on beans a bit, mostly by rotating some into corn and also selling some OTM calls. Keeping the nickel.

One of the pieces I posted here and on Seeking Alpha was my view that the bottom in commodities was basically in, and that I would be trading from the long side for the next few years. I got a fair bit of blowback on it from various traders (BTW, how do you guys get my phone number? I prefer you comment below.) The basic thrust of the criticism is that previous down cycles have taken many years to play out, and we are only partly into this one. I beg to differ. First off, the top in this cycle was in 2008 (using the IMF index as usual). So we are eight years into the down cycle. Second, there are shorter cycles within cycles that operate on the span we consider here, two to seven years.

I'm going to write a long piece on this for next week. In the meantime, look at this chart of inflation-adjusted copper prices going back to 1913 with 2016=100.0. See if you can spot the cycles I'm talking about.

Copper in 2016 Cents / lb.

Do Over on the Fertilizers

There's a saying among data analysts that most of the work is in getting the data in the right form. After that the analysis is usually easy. That was my problem, but I now have it solved. So here are the 10-year forward graphs for the fertilizers:

Urea seems fairly valued.

Potassium and phosphate do not graph well. The problem is that prices for these rose very sharply in 2008/9 and have only retraced part of the move up. Since the 10-year graph stops in 2006, the current price is off the charts. I suppose that means that there is more downside to come. I'm not getting involved. Here are the charts FWIW:

Retraction

I took down the post on the undervaluation of the three major fertilizers. I found a programming error. I'll get to it this weekend and republish the results.

Peabody Energy Files for Bankruptacy

So BTU filed for Chapter 11. What to do now? Well, the equity is just about zero, so my position is now effectively only long the subordinated bonds. These are still trading in the 5.5 - 6.5 range (nice). I'm going to cut the position back now. When I had the cap structure position on (long bonds, short stock) it was a hedged bet. Now it's just a lottery ticket on the sub bonds being worth something. That depends on how much time the Court and the senior creditors give them. Coal prices probably will recover later this year, but it may all be over by then.

This is a great trade for someone willing to go through all the documents to see what avenues are open to all the remaining participants. This takes time and an ability to fight boredom. That's not me.