Conquer The Wallstreet !!!: Did late October see the end of the bear market for commodity stocks?

From MoneyWeb
November 2, 2008 13:01

The following quote from Canaccord Capital's Chief Portfolio Strategist Nick Majendie:

"If we are close to a bottom, we believe it will be the quality blue chip stocks that will recover the fastest. Why? The answer is because when there is financial panic, investors sell the good with the bad. With all the recent de-leveraging by financial institutions and in particular hedge funds, the margin clerk has been king. Whatever could catch a bid was often sold so that even blue chip stocks have traded down to Depression-type valuations. Quality stocks with strong balance sheets, good and sustainable dividends and good long-term prospects should then be the first to recover."

How true this has been/is likely to be in the metals commodities sector as is highlighted in the various tabulations of stock price performance from my colleague Barry Sergeant. In times of market panic any liquid stock gets sold regardless of quality. Ironically non-liquid stocks where there is little buy or sell interest tend to perform best, but this represents such a tiny sector of the market as to be irrelevant.

Rod Blake also highlights in a weekly ‘blog' a most interesting observation from the Gartman Letter in that "Bear markets panics end in late October. Do not ask us why this is so; we note only that it is so. We note that panic, after panic, after panic has begun in September and has ended in October. More importantly than that, the last week of October has been the ending point for those panics. More importantly still, October 27th is the average ending date for so many of them in the past." This note was written on October 27th - and there has certainly been a major pick-up in world stock markets over the last few days of last month. Let's hope this observation proves true yet again.

But while markets in general may be picking up, metals commodity prices are still in serious trouble and the sector may continue to underperform until the fallout abates and analysts can truly assess how the supply/demand patterns are really panning out. Will the "China syndrome" continue almost unabated bar a brief hiccup, or will metals demand crash there too? No-one really seems to know and it is going to take a few months for the anomalies introduced into the markets by the financial panic to unwind and the true situation become clear.

In as much that stocks in general have probably been oversold, with the blue chips falling alongside the real dogs, then this is probably true of commodities also. After all latest serious estimates of global activity still point to an increase of 1.3 percent next year in global GDP. OK - well below levels seen of late, but growth nonetheless.

So what is the essence of the above. If the commentators quoted are correct, the markets bottomed last week and while we may not yet be in a real bull run, we could be out of the true bear phase. Better quality stocks have been oversold, and this applies to metals and minerals stocks as much as anything else, so there are some big bargains to be found out there.

Meanwhile the weak will continue to suffer as debt is well-nigh impossible to refinance if the tiniest degree of risk is apparent. As we noted here before, the fallout among the weaker mining juniors could be catastrophic - even if the market has now bottomed. Even the majors say they are conserving cash - note the latest reports from Barrick and Goldcorp - and this means future projects are going to be heavily delayed, or in some cases postponed indefinitely with a corresponding effect on projected medium and long term metals supplies. If the global economy keeps growing, even at a tiny rate, but metals supplies are likely to fall, then when the real picture is understood there could be a fast and dramatic rise in commodity prices - perhaps not back to the recent bubble-driven highs, but high enough to pull the mining sector out of the current gloom and doom scenario.

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Is the metals commodities bear market over or is there grief still to come?

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