Josh Brown is out with a thoughtful piece, covering the underlying reasons behind the recent underperformance of industrial metals ($KOL, $FCX, $X):
Really cyclical stocks always are most dangerous when they look the cheapest – because the smart money knows the earnings are peaking for the cycle (think homebuilders with PE multiples of 6 or 7 back in 2006)… Right now I think they’re in no-man’s-land and earnings revisions will be to the downside if China deteriorates even further.
Many of the industrial metal stocks look like a bargain for the naked eye and they have become popular bottom fishing targets. Sooner or later, everything should go up in a bull market, right? Well, this has never been the case. Unlike bear markets, bull markets are markets of stocks,where correlation is relatively low and stock picking matters.
Events are rarely discounted in advance due to their short-term nature. An event that provide new information could start, confirm or stop the discounting of a process.
The so called smart money has learned to discount cycles before they happen. For example, at the beginning of a new bull market, cyclical stocks often look terribly “expensive” just before their earnings start to recover. Prices rise before fundamentals improve, resulting in extremely high P/E ratios. In this case, multiple expansion is a sign of improving perceptions and growing positive expectations, not a sign of dangerously high valuation.
If Wall Street is always forward looking, how come it doesn’t take into account the fact that economic cycles are predictably repetitive and therefore should not matter in the big scheme of things. Well, the market is forward looking and short-sighted at the same time. It usually doesn’t discount more than 6 to 12 months ahead. Uncertainty is too big beyond that.
Sometimes prices change before fundamentals, sometimes fundamentals change before prices, but prices never change before perceptions and expectations change.
