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Lawrence G. McDonald says to buy certain beaten-down commodities
By
MichaelBrush
With the stock market in such a funk, it’s a great time to check in with someone who knows a thing or two about meltdowns.
That would be Lawrence G. McDonald, who says (with Patrick Robinson) in his New York Times best-seller, “A Colossal Failure of Common Sense,” that he warned colleagues at Lehman Brothers of the coming subprime storm and how it might hurt the investment bank.
Nowadays, McDonald is the head of U.S. macro strategy at Newedge, where he uses a six-factor capitulation model to judge when sentiment has broken down so much, a sector is worth buying.
It’s an indicator for true contrarians that can suggest the best time to buy a sector because everyone else hates it so much, they’re all trying to get out at once.
“Too many people have the attitude of ‘don’t try to catch a falling knife.’ But you can take advantage of big sell-offs.”
Lawrence G. McDonald
This is the kind of tool that might come in handy right about now, given concern over the stock market — and the outright hatred of asset classes like gold, coal, uranium — all of which McDonald favors for a bounce right now.
I’ve watched McDonald make some great market-timing calls over the years, so I think he’s worth listening to. Like anyone, he’s not always right. But most recently, McDonald was bullish on Brazil right before the 7% jump in the iShares MSCI Brazil Index EWZ, +3.75% on Oct. 6. He was bullish on U.S. bonds in late August 2013, and late September 2014 ahead of big rallies; and gold last December ahead of a huge, three-month rally.
“Too many people have the attitude of ‘don’t try to catch a falling knife.’ But you can take advantage of big sell-offs,” says McDonald. “When the selling abates, it is like a storm that clears. The sky is blue and there is really nobody left to sell for the next three weeks to three months.”
Take note of that last phrase. A lot of times, these are just short-term trading calls of one to three months, and not buy-and-forget calls. He also prefers to play capitulations via ETFs, as opposed to stocks, which are riskier.
With those provisos, let’s take a look at some of his current calls.
Lawrence G. McDonald, head of U.S. macro strategy at Newedge, expects gold, coal and uranium to bounce from their lows.
U.S. stocks headed for more losses: McDonald expects a correction of 10% or more, which means we are less than halfway there, at best. Three factors point to more trouble ahead.
1. Oil and gas make up a big part of the S&P 500, and they probably have more downside — and some profit warnings to boot — because oil has fallen so much.
2. Many companies with big foreign exposure will report earnings misses and downward guidance, because the strong dollar means overseas earnings translate back into fewer greenbacks. That might shake up investors some more.
3. A lot of investors around the globe own U.S. stocks, and they’re now selling on concerns about global weakness hurting the U.S. economy. “Everyone was crowded into the U.S. trade,” says McDonald.
While there will no doubt be rallies on the way down, all of this spells trouble. “Between now and year-end you buy fear and sell rallies,” he says.
One hedged trade to consider: Go long small caps, or the iShares Russell 2000 ETF IWN, -0.90% because those stocks are so washed out, trading near a 52-week low. And go short an equal amount on large caps, say, the SPDR S&P 500 ETF SPY, +0.11% because it probably has greater downside, since it has not fallen as much.
The dollar weakness will continue: McDonald was negative on the dollar before Wednesday’s reversal on news of the Fed’s concern about greenback strength damaging U.S. economic growth. Now he thinks dollar weakness will continue for three reasons.
1. The dollar was simply way too overbought.
2. The U.S. is under pressure from China to weaken the dollar to help China’s economy. The Chinese yuan is linked to the U.S. dollar via a “crawling peg,” so a stronger yuan hurts non-U.S. demand for Chinese exports.
3. Global economic weakness is bound to bring down U.S. growth. That will push Fed interest-rate hikes out into 2016, he says. Many investors are not expecting this, since consensus recently suggested the Fed to start rate hikes in June 2015. That’s not going to happen, maintains McDonald. A delay in rates hikes would lower demand for dollars, in part because U.S.-denominated debt would look less attractive.
McDonald expects dollar weakness to continue for about three months.
Gold, coal and uranium are due for a bounce: If he’s right about the dollar weakness ahead, that would help commodities like gold, coal and uranium, which have been absolutely trashed.
Since those commodities are priced in dollars, a weakening dollar boosts demand.
But those three commodities are also due for a bounce simply because they look way too oversold. “These three areas have been an unmitigated disaster,” says McDonald. “They are coming up the strongest in our capitulation models.”
Two other factors might help these commodities.
1. China is reportedly bringing in a new central bank chairperson. McDonald takes this as a signal that it’s moving toward more aggressively stimulative monetary policy to help its economy, which McDonald believes is in recession. Signs of more aggressive monetary policy in China would have investors betting that China will soon be buying more commodities.
2. He also thinks coal will get a boost because Republicans will retake control of the Senate in November. Investors may take that to mean more coal-friendly policies are on the way.
McDonald expects gold, coal and uranium to rally over the next three weeks or so. Then there’s a good chance they might retest their lows. “Buy now for a bounce and sell half in a rally,” he says.
He suggests playing these moves via ETFs like Market Vectors Gold Miners ETF GDX, -2.12% Market Vectors Coal ETF KOL, -1.73% and Global X Uranium ETF URA, -2.54%
Don’t buy oil-service companies yet: While the energy sector has been trashed due to weakening oil prices, McDonald thinks it is too early to buy oil-service companies because they still have more to fall.
Michael Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks. At the time of publication, Brush owned none of the securities mentioned in this column.
By
MichaelBrush
With the stock market in such a funk, it’s a great time to check in with someone who knows a thing or two about meltdowns.
That would be Lawrence G. McDonald, who says (with Patrick Robinson) in his New York Times best-seller, “A Colossal Failure of Common Sense,” that he warned colleagues at Lehman Brothers of the coming subprime storm and how it might hurt the investment bank.
Nowadays, McDonald is the head of U.S. macro strategy at Newedge, where he uses a six-factor capitulation model to judge when sentiment has broken down so much, a sector is worth buying.
It’s an indicator for true contrarians that can suggest the best time to buy a sector because everyone else hates it so much, they’re all trying to get out at once.
“Too many people have the attitude of ‘don’t try to catch a falling knife.’ But you can take advantage of big sell-offs.”
Lawrence G. McDonald
This is the kind of tool that might come in handy right about now, given concern over the stock market — and the outright hatred of asset classes like gold, coal, uranium — all of which McDonald favors for a bounce right now.
I’ve watched McDonald make some great market-timing calls over the years, so I think he’s worth listening to. Like anyone, he’s not always right. But most recently, McDonald was bullish on Brazil right before the 7% jump in the iShares MSCI Brazil Index EWZ, +3.75% on Oct. 6. He was bullish on U.S. bonds in late August 2013, and late September 2014 ahead of big rallies; and gold last December ahead of a huge, three-month rally.
“Too many people have the attitude of ‘don’t try to catch a falling knife.’ But you can take advantage of big sell-offs,” says McDonald. “When the selling abates, it is like a storm that clears. The sky is blue and there is really nobody left to sell for the next three weeks to three months.”
Take note of that last phrase. A lot of times, these are just short-term trading calls of one to three months, and not buy-and-forget calls. He also prefers to play capitulations via ETFs, as opposed to stocks, which are riskier.
With those provisos, let’s take a look at some of his current calls.
Lawrence G. McDonald, head of U.S. macro strategy at Newedge, expects gold, coal and uranium to bounce from their lows.
U.S. stocks headed for more losses: McDonald expects a correction of 10% or more, which means we are less than halfway there, at best. Three factors point to more trouble ahead.
1. Oil and gas make up a big part of the S&P 500, and they probably have more downside — and some profit warnings to boot — because oil has fallen so much.
2. Many companies with big foreign exposure will report earnings misses and downward guidance, because the strong dollar means overseas earnings translate back into fewer greenbacks. That might shake up investors some more.
3. A lot of investors around the globe own U.S. stocks, and they’re now selling on concerns about global weakness hurting the U.S. economy. “Everyone was crowded into the U.S. trade,” says McDonald.
While there will no doubt be rallies on the way down, all of this spells trouble. “Between now and year-end you buy fear and sell rallies,” he says.
One hedged trade to consider: Go long small caps, or the iShares Russell 2000 ETF IWN, -0.90% because those stocks are so washed out, trading near a 52-week low. And go short an equal amount on large caps, say, the SPDR S&P 500 ETF SPY, +0.11% because it probably has greater downside, since it has not fallen as much.
The dollar weakness will continue: McDonald was negative on the dollar before Wednesday’s reversal on news of the Fed’s concern about greenback strength damaging U.S. economic growth. Now he thinks dollar weakness will continue for three reasons.
1. The dollar was simply way too overbought.
2. The U.S. is under pressure from China to weaken the dollar to help China’s economy. The Chinese yuan is linked to the U.S. dollar via a “crawling peg,” so a stronger yuan hurts non-U.S. demand for Chinese exports.
3. Global economic weakness is bound to bring down U.S. growth. That will push Fed interest-rate hikes out into 2016, he says. Many investors are not expecting this, since consensus recently suggested the Fed to start rate hikes in June 2015. That’s not going to happen, maintains McDonald. A delay in rates hikes would lower demand for dollars, in part because U.S.-denominated debt would look less attractive.
McDonald expects dollar weakness to continue for about three months.
Gold, coal and uranium are due for a bounce: If he’s right about the dollar weakness ahead, that would help commodities like gold, coal and uranium, which have been absolutely trashed.
Since those commodities are priced in dollars, a weakening dollar boosts demand.
But those three commodities are also due for a bounce simply because they look way too oversold. “These three areas have been an unmitigated disaster,” says McDonald. “They are coming up the strongest in our capitulation models.”
Two other factors might help these commodities.
1. China is reportedly bringing in a new central bank chairperson. McDonald takes this as a signal that it’s moving toward more aggressively stimulative monetary policy to help its economy, which McDonald believes is in recession. Signs of more aggressive monetary policy in China would have investors betting that China will soon be buying more commodities.
2. He also thinks coal will get a boost because Republicans will retake control of the Senate in November. Investors may take that to mean more coal-friendly policies are on the way.
McDonald expects gold, coal and uranium to rally over the next three weeks or so. Then there’s a good chance they might retest their lows. “Buy now for a bounce and sell half in a rally,” he says.
He suggests playing these moves via ETFs like Market Vectors Gold Miners ETF GDX, -2.12% Market Vectors Coal ETF KOL, -1.73% and Global X Uranium ETF URA, -2.54%
Don’t buy oil-service companies yet: While the energy sector has been trashed due to weakening oil prices, McDonald thinks it is too early to buy oil-service companies because they still have more to fall.
Michael Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks. At the time of publication, Brush owned none of the securities mentioned in this column.
