Materials Ready to Move!

August is always a strange and headline driven month for stock investors. With a majority of companies in the S&P 500 Index having reported solid and supportive quarterly earnings, we enter the weird and a little squirrely month of August that seems to have a mind of its own. Therefore, I try to look for signs that may be more meaningful in the months ahead.

One sector that has been left out of the positive stock market gain this year is the material sector. As one commentator is fond of saying, “Materials have components that if they fell on your foot, you would notice.” It includes iron ore, copper, steel, aluminum, and other metals that are commodities that often foretell a major move in economic activity when investors start moving in. Last week, with the S&P 500 Index down approximately 1% last week, the material sector was the only major sector to deliver a positive performance. Commodities as a group were up 3% last week.

While data from China is seen as circumspect by many, data released last week supports this positive action from materials. The China July trade data saw imports up 10.9% year over year and exports to the U.S. up more than 5%. Industrial production pushed up 9.7%, a five-month high, complementing very good PMI statistics out the week before. Auto sales and bank lending also topped expectations. And, electricity demand widely considered the most reliable indicator of Chinese growth surged 8.1% to near record levels.

Another positive that even the mega-bears favor is the thought that you want to move away from paper assets, currency, and market manipulated bond markets around the world toward hard assets such as materials, energy, and precious metals. Gold is also finding recent support by new investors from its recent deep correction and adds to the support of materials.

Finally, we will use any market jitters in August to add to our positions in materials and precious metals. Companies such as BHP Billiton, Freeport-McMoRan Copper and Gold, and Nucor all support steady dividends and strong financials to allow them to benefit from any positive long term improvement. Gold also offers a better risk/reward today for new investors that want a hard asset hedge against most global governments printing money.

Have a great week,

Roger N. Steed

August 12, 2013

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