A “must” asset for your portfolio … the yield curve is flattening, how to monitor it … a destroyed sector to keep on your radar

 

Please, buy copper.

Regular Digest readers know that we’re incredibly bullish on this mega-growth story. Much of our enthusiasm is due to research put together by our macro specialist, Eric Fry, editor of Investment Report.

As Eric has pointed out, we can’t have a green future with amazing new technologies without batteries, which are hugely reliant on copper:

The average EV uses almost half as much copper as the average American house, and EVs aren’t the only “green” products that are “metal hogs.”

• Wind energy uses five to 10 times more copper per unit of electrical energy than does the conventional burning of coal.
• Photovoltaic solar power uses six times more copper per unit of electrical energy.
• A Tesla Model 3 requires 240 pounds of copper, which is nearly four times what a midsized internal combustion vehicle requires.

Therefore, as the renewable energy boom gains momentum, it will produce an echo-boom in demand for key battery metals.

Goldman Sach’s Chief Commodity Strategist, Jeff Currie, is on the same page as Eric.

In a recent interview on CNBC, Currie was discussing the bullish set-up in oil, before pivoting to the even greater opportunity in copper:

The metals are the primary beneficiary of this super-cycle… And the reason why is the green cap-ex story.

You have every country in the world pursuing the exact same policies at the exact same time. And there’s no way you’re going to decarbonize the world without copper.

Copper is the strategically most important commodity out there. We like to say “copper is the new oil.”

Inventories are dropping like a brick. Inadequate supply already. And we haven’t even started to decarbonize the world.

Copper is the one that really benefits from that story.

In past Digests, we’ve highlighted the Global X Copper Miners ETF (COPX) as a way to play copper. Eric has recommended COPX in the past as well. His official trades have profited to the tune of 100% and 85% respectively (he sold in tranches).

Below, you can see COPX soaring out of the pandemic March lows, then consolidating over the last year. The last six weeks have seen growing bullish momentum.

It’s only a matter of time before this trade surges. For a long-term investor, this is a no-brainer.

Bottom-line, the future is tech. And tech needs copper.

For more of Eric’s research and investment recommendations on copper and battery metals as an Investment Report subscriber, click here.

***Meanwhile, the 10-year Treasury yield jumped to its highest point in two years yesterday, topping 1.86%

On the closer end of the yield curve, we saw the 2-year Treasury yield break above 1% for the first time since February 2020.

Long-dated bond yields rose as well. The 30-year Treasury climbed to nearly 2.18%.

Now, if you’re reading this thinking “yawn fest,” I get it – bond yields aren’t all that sexy.

However, we need to monitor what they’re doing because of what they suggest about the economy, as well as how they impact our stock portfolios.

In last Friday’s Digest, we walked through the shape of a normal yield curve, as well as an inverted yield curve. Summing up briefly, we want to see a healthy yield curve that moves from “lower left to upper right.”

A curve that’s flat or “upper left to lower right” reflects an ailing economy. It usually spells trouble for stocks (though the trouble usually isn’t immediate).

To monitor this, we can look at a single chart that shows us the spread between the 10-year Treasury yield and the 2-year Treasury yield (the “10-2” spread).

A 10-2 spread headed toward “0” signifies the flattening yield curve we don’t want.

And if you’re wondering why, if we go past flat, a negative 10-2 yield spread has predicted every recession from 1955 to 2018. This inverted curve has happened 6-24 months before the recession occurred.

Below, we look at the 10-2 spread since January 1 of last year. As you’ll see, it hit its widest recent point in the spring, but has been falling since.

As I write, the spread sits at 0.79%. For context, over the last year, it’s averaged 0.99%. And the long-term average is 0.93%.

The good news is we’re not wildly off those averages. The bad news is the direction the spread is moving.

Everyone is talking about the spike in yields. But just as important is this 10-2 spread.

As we noted last week, the “Bond King” Jeffrey Gundlach recently said “the yield curve, like consumer confidence, is not sending a ‘Don’t Worry, Be Happy’ signal.”

We agree, and will be keeping you updated on this here in the Digest.

***Finally, keep your eye on another pain-train for big profits when it reverses

Biotech stocks are getting destroyed.

You would think we’d be seeing the opposite. After all, biotech just saved the world with the Covid vaccine. A victory lap from the sector would seem to be appropriate.

Not so much.

Below, we look at the SPDR S&P Biotech ETF, XBI. Since early February of last year, it’s lost nearly half of its value at the same time the S&P has tacked on 17%.

Why?

There’s not a clear-cut answer.

I’ve read speculation that private, early-stage biotech companies are sucking up all the capital. In other words, the deep-pocketed institutional players are pulling money from publicly-traded biotechs and rotating into private companies, seeking greater returns.

Other explanations include the price run-up in 2020, which some investors suggest resulted in froth that needed to be burned off.

Then there are always lingering uncertainties surrounding the FDA’s approval process, not to mention the Federal Trade Commission’s impact on mergers and drug pricing.

At the end of the day, I suspect it’s simpler – biotech is a risk-on sector. Historically, it experiences massive booms and painful busts.

As investors have rotated out of riskier assets in recent months, biotech has gotten lumped in despite the respectable financial positioning of many individual biotech companies.

But such fundamentals don’t always matter.

Legendary investor, Jim Grant, has a great quote on this irrationality:

To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed.

Logical explanation or not, biotech is getting creamed.

Watch it. When it turns, it’s going to set-up a great trade.

We’ll be watching for you here in the Digest.

Have a good evening,

Jeff Remsburg