Morgan Stanley has turned bullish on commodities…

Regular readers know commodity prices are extremely low right now. In August, the Bloomberg Commodity Index, which tracks 22 different commodities, hit its lowest level since 1999.

The commodities crash has hit everything from energy prices to metals to “soft” commodities like sugar and oats. The price of oil is down 42% since its June 2014 peak. Oats and coffee prices are both down more than 40%. On top of that, silver recently hit a six-year low…but is now rebounding sharply.

In a note on Wednesday, Morgan Stanley (MS) said it expects commodities to have a “sharp reversal from the experience in the last 18 months.” It expects commodity prices to rise 14% next year and another 19% in 2017.

•  Morgan Stanley expects commodity demand from China to pick up…

Regular readers know China’s economy has been growing at its slowest pace since 1990. This has created big problems for commodities. That’s because China is the world’s biggest commodity consumer. It accounts for half of the copper, aluminum, nickel, steel, and coal used every year.

Fear that China’s economic growth might continue slowing is a big reason why commodities prices have crashed over the past 18 months.

In its note on Wednesday, Morgan Stanley said China would “remain key to commodities demand.” China’s economy is growing slower than it was before…but it’s still growing faster than most of the rest of the world…

The International Monetary Fund (IMF) expects the Chinese economy to grow by 6.8% this year. That’s twice as fast as it expects the world economy (3.1%) to grow…and almost three times as fast as it expects the U.S. economy (2.6%) to grow.

•  Morgan Stanley also turned bullish on mining stocks…

The firm says mining companies are a once-in-a-generation bargain right now. In fact, it sees 19% upside in its favorite miners…and not just because it sees commodity prices rising.

Regular readers know that falling commodity prices have slammed mining companies. Glencore (GLEN.L), one of the world’s largest mining companies, has been hit especially hard. Glencore’s sales dropped 25% during the first half of the year. The company posted a $676 million loss for the period.

Glencore’s stock price plummeted 54% over the past year. It hit an all-time low last month.

Other big mining companies have plunged, too. Australian mining giant BHP Billiton Limited (BHP) is down 33% over the past year. And U.K.-based mining company Rio Tinto (RIO) is down 19%.

Morgan Stanley says miners are now cheaper than they’ve been in three decades. Business Insider reports:

“Valuation is attractive in a historical context both at sector and company level,” Morgan Stanley wrote. “That means a change in perception around commodity prices can have a significant impact on the shares in our view”…

“The sector's absolute trailing P/B of 0.85…is the lowest level since the global recession of 1982,” it said.

Price-to-book (P/B) is a popular way to value stocks. It compares a company’s stock price to the “book value” of its assets. If a P/B ratio is under 1.0, this often means a sector is undervalued. The mining sector’s P/B ratio of 0.85 suggests mining stocks are extremely cheap.

On Wednesday, Morgan Stanley upgraded its ratings on BHP Billiton and Rio Tinto from “equal weight” to “overweight.” Both stocks jumped on Morgan Stanley’s bullish comments. BHP Billiton rose 4.6% yesterday, and it’s up another 1.2% today. Rio Tinto rose 1.62% yesterday, and it’s up another 2.4% today.

•  Global commodity stocks are rallying this week…

This morning, Bloomberg Business reported that commodities are headed for their biggest weekly gain since 2012. As we write, the Bloomberg Commodity Index is up 3.5% this week.

Meanwhile, Glencore’s stock price has nearly doubled since hitting an all-time low last month. And Canadian energy stocks hit a seven-week high, Bloomberg Business reports.

•  Commodity investors have been waiting for good news like this…

Until this week, there was nothing but bad news coming out of the commodity market…

Two weeks ago, Royal Dutch Shell (RDS.A), one of the world’s biggest publicly-traded oil companies, decided to drop its $7 billion Artic oil project. And early last month, Glencore suspended its two upcoming dividends and issued new shares to raise money. As a group, global mining and energy companies are on track to reduce capital spending by 14% this year.

When an industry is getting nothing but bad news, it’s typically the sign of a bottom. We believe commodities and the companies that produce them are likely in a bottoming process right now.

•  Moving along, investors are betting on tougher gun laws…

You likely heard that last Thursday, a deranged gunman opened fire at Umpqua Community College in Oregon. The shooter killed nine people and left another nine wounded. It was a horrible tragedy.

Later that day, President Obama gave a speech calling for tougher gun laws. On Monday, Secretary of State and presidential candidate Hillary Clinton called for stricter gun laws as well.

Clinton wants to require tougher background checks on gun buyers. She also wants to repeal laws that protect gun manufacturers and dealers from legal liability after fatal shootings.

Gunmaker stocks jumped just hours after Clinton’s comments. Gunmaker Smith & Wesson (SWHC) jumped 7.9% on Monday. Another gunmaker, Sturm, Ruger & Co. (RGR) rallied 2.8%.

Retailers that sell guns rallied, too…Dicks Sporting Goods (DKS) and Cabela’s (CAB) both gained more than 2.5%.

•  Gunmaker stocks have been soaring all year on reports of record-high gun sales…

Smith & Wesson is up 90% this year. And Sturm, Ruger & Co. is up 71%. Meanwhile, the S&P 500 is down 2% over the same period.

Gun sales hit an all-time high in 2013. But Financial Times reports guns sales are on track to set a new record this year…

In the first nine months of this year, 15.6m of the background checks needed to purchase guns from federally licensed sellers have been processed, compared with the 15.5m applications in the same period in 2013, according to the National Instant Criminal Background Check System.

That said, these “record sales” aren’t translating into big revenue gains for gunmakers yet…

Smith & Wesson’s quarterly revenues grew by 9%, on average, over the past two quarters. That’s decent. But given the wide reports of record sales, it’s not as high as you might expect.

Meanwhile, revenues for Sturm, Ruger & Co. are actually falling. Its second-quarter revenues dropped 8% from a year ago.

Record gun sales could translate into stronger revenue growth for the last two quarters of 2015. But for now, this rally is being driven by speculation that gun laws will get stricter…not by huge increases in revenue.

What’s your take on gun control and gunmaker stocks? Email us at [email protected] and let us know.

Chart of the Day

Gold miners are rallying along with other commodity stocks…

Today’s chart compares the performance of the Market Vectors Gold Miners ETF (GDX) and the S&P 500 over the past month. GDX holds some of the largest gold mining companies on the planet.

Gold mining stocks are leveraged to the price of gold. And it doesn’t necessarily take a big move in the price of gold to make gold mining stocks skyrocket.

The price of gold is up 2% over the past month. But GDX has risen 19%. Meanwhile, the S&P 500 is up just 2%.

Today, gold jumped 1.6%…and GDX jumped 5.5% to a two-month high.


Justin Spittler
Delray Beach, Florida
October 09, 2015

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