In 1999, I was a young trader working for a small hedge fund. The stock market was going straight up, the economy was doing great, and commodities markets were forgotten entirely. As everyone knows, we were in the last stages of one of the most ridiculous bubbles in history (the dot com bubble). In the middle of 1999, I became more and more bearish on stocks (especially high-tech stocks) and increasingly bullish on commodities (especially gold) and natural resource stocks. While I trade short-term as well as long-term, at heart, I’m a value investor. Needless to say, it was not an easy year for me. Value was ignored entirely, and investors were only interested in stocks with .com at the end of their names. Well, I stuck with my views and convictions, and over the next several years, I managed to make quite a bit of money for my clients and a name for myself.
2024 is not 1999, but it begins to resemble it. I can draw a lot of parallels. The stock market had a marvelous year, but it was primarily driven by a handful of AI stocks, while value investing has been lagging badly. Some commodities had a positive performance, but the equities associated with them didn’t participate much because money was sucked into high tech again. Interest rates went up despite the FED starting the easing cycle. And the biggest winner was cryptocurrencies, which nobody can explain what they are; they have no intrinsic value, don’t generate products and services, can’t buy anything with them, and are mostly used by third-world countries and fraud criminals. In the last sentence, I just quoted Warren Buffet and Jamie Dimon.
Please don’t get me wrong. I’m not one of those permanent stock market bears who constantly predicts bear markets and crashes. I do trade and invest in growth, innovative companies, just like most of us do. But valuations are beginning to reach an absurd level during a highly uncertain environment, while value equities, especially commodity-related equities, are significantly underowned and undervalued.
Am I predicting a bear market? It is not a certainty by any means, but it is becoming increasingly probable. However, I am confidently predicting that over the next several years, value stocks will dramatically outperform growth stocks.
Multiple economic and statistical metrics warrant caution. Here is one little long-term concern: The following chart shows the ratio of the S&P 500 index to the equal-weight S&P 500.
When the market advance gets too selected, it warrants paying attention. I’m afraid we will run into some problems next year. What can cause it? Three things:
- Simple overvaluation. It is not a market timing tool, but eventually it starts to matter. That is why Mr. Buffet holds a record cash level in his portfolio.
- Reduced government spending. They are badly needed to reduce our huge debt, but they will cause substantial layoffs and restructuring, which in turn may cause an economic slowdown as a side effect.
- Tariffs. They are designed to boost domestic manufacturing, which I agree with, but they may cause inflationary pressures and some supply disruptions.
Let’s keep an eye on those developments early next year.
The following chart compares growth vs. value stocks performance over the last 5 years.
Here is the table of stock market valuations:
The table above looks outright horrific. The percentile numbers on the right side of the table show that the closer we are to 100%, the worse the performance will be going forward four to ten years. Based on current numbers and history, we should expect stock market performance to be between negative and 2% over the next several years!
Well, you get the picture.
Back to the old days. Twenty-five years ago, I met Andy Millette. We were both commodity brokers and traders at the same firm. Since then, Andy and I have worked on multiple investment projects, including running a hedge fund. Andy has a beautiful financial mind; he is an expert in commodities and natural resource equities and a successful investor. I’m privileged to call Andy my friend. Several years ago, Andy founded a website (NaturalResourceStocks.Net) and a YouTube channel where he interviews portfolio managers and executives of mining and energy companies. I’m proud to assist him in this venture.
Andy has enjoyed great success, achieving hundreds of thousands of monthly viewers and generating tremendous interest. Most importantly, it allowed us to meet and converse with the most talented and successful executives, traders, Wall Street managers, and industry insiders. It has been the most fascinating learning experience, where we have gained knowledge of industry trends and developments as well as individual companies’ views and insights.
Our long-term experience, rigorous research, and the knowledge Andy and I gained over the last several years have led to a logical progression — we decided to launch a hedge fund specializing in trading and investing in Natural Resource equities and derivatives.
Value investing is returning, and long-term investments with short-term derivatives overlay in natural resource stocks are a unique niche. The most value we see is in metal stocks, energy stocks (traditional and alternative), and rare earth metal stocks, to name a few.
We strongly believe that value investing in natural resource stocks is the place to be over the next several years and we are excited about this opportunity.
Let’s have a happy, healthy, and prosperous 2025. Happy New Year, everybody!
Dennis Leontyev
@TraderLeontyev
