Massive rotation flows will bag big bucks

Hey There Income Hunters,

What a wild week, including the comeback of the year for the S&P 500.

I have to take a victory lap for last weekend’s letter when I wrote there were zero signs of systemic risk and encouraged buying commodities and energy.

Yet, even with the ferocious rally in the US, global equities registered their first week of net outflows for 2021.

It is no coincidence that as many as 20 central banks around the world have begun either reducing their bond purchases (QE) or have begun raising rates.

As you can see below, overall the S&P 500 was down on the week. However, the real story is the rotation of allocation away from growth stocks into energy …

The energy sector was not only the leading sector this week, it actually closed higher from Monday. Oil is now within 2.5% of its July high up at $77 after trading at $62 just one month ago.

There is a lot left in the tank (as they say) and there is another “old school” power player that’s ready to get fired up for the big infrastructure build that’s coming.

Today I’ll give you a few supporting arguments behind the reallocation argument and a couple of trades well worth consideration.


Wakey, Wakey

This past week will be looked back on as the week that investors woke up. As I said this week, Thursday was a game changer and Jerome Powell finally became the boy who cried wolf.

Investors are moving on from transitory inflation to possibly holy crap inflation.

And now we’re entering a GLOBAL reopening quarter heading into the holidays.

Let’s take a look at my favorite chart for starters. This chart illustrates the potential for the largest reallocation trade in history …

$112 trillion in financial assets that will be a drain on portfolios during an inflationary period …

  • $17 trillion in the Nasdaq 100

  • $15 trillion in negative-yielding bonds

  • $80 trillion of bonds below 2% in yield

The Bloomberg commodity index used in the chart above would have to rise 15x relative to the S&P 500 just to reach the mean since 1971.

The commodity party is just starting.

Think about this, the SPDR Select Sector Mining ETF (Ticker: XME) and XLE are a combined 1/10 the size of the NASDAQ 100 …

Yes, we will have inflation come off a bit due to high base effects from 2021 … however, after that, it will settle in much higher than the pre-Covid averages.

There are trillions of dollars sitting in the wrong asset classes,

Coal, Oil and Gas will be the immediate big winners because emerging economies don’t have a choiceThey are going to need fuel to build their middle class and they will have zero help from developed countries.

This is survival in a post-covid world … this is not a time for fantasizing about a zero-carbon emissions.

Quality Companies to Consider

Teck Resources (Ticker: TECK) is a coal and copper play. They are  top-ranked in their industry and have recently corrected due to the China slump.

This correction is a bonus because India will pick up the slack for energy, and the Indian economy is running on all cylinders. Plus India’s Covid cases are in a downtrend while their stock market is in a major bull market.

Tech’s stock price will take out its $30 dollar 2018 high and could easily reach its 2010 high of $60. There is an enormous environmental, social and governance energy (ESG) crisis brewing.

Traditional financing is just not available to most oil, gas, metals and coal companies, so the response time to get new exploration going is delayed.

Now, with new infrastructure projects coming online in 2022, demand will run ahead of supply.

Teck has the resources to supply coal and copper. Plus they are considering spinning off their coal assets, which could produce a nice near-term windfall for investors.

Let’s check the technicals

Teck recently continued its long-term bullish trend after consolidating above the 200-day moving average.

You can put on a bullish option strategy looking to challenge the $30 high at a minimum.

Here are two options to consider. The first will maximize your return on capital investment and the second will maximize the upside potential …

1. BTO $TECK Nov. 19 28/30 CS for $.42 … A 350% max return if TECK expires above 29.89 …

2. BTO TECK Nov19 26 Call for $1.56 … unlimited upside with greater risk to the downside.

Both good choices depending on your risk profile ….

Other names I like for the scenario discussed above include:

Arch Resources Inc. (Ticker: ARCH)

Sibanye-Stillwater (Ticker: SBSW)

Bring It Home

The foundation is set for these companies to return real value to their shareholders. They have extended the maturities of their debt and have free cash flow for new projects.

We will discuss opportunities to also participate in fast profits by considering bearish strategies on the financial assets that will be sold to allocate into real assets.

You have to be willing to go both ways.

While trading at the global banks for many years, I learned to love making money on the short side. It can be extremely fun, because the market goes down much faster than it goes up.

Have a great weekend and as always …

Live and Trade With Passion My Friends,

Griff


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