Tech and Growth Make Me Nervous

 | Jul 10, 2014 | 12:00 PM EDT
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I have always been scornful when people claim that Alcoa earnings have some kind of predictive power just because the stock ticker is at the beginning of the phone book. But I got an email on that yesterday and, as it turns out, Alcoa (AA) earnings really are a predictor of short-term stock performance, with statistical significance. Who knew?

That's not really what I wanted to talk about, though. I want to talk about base metals in general -- and if you've been following me closely, you know that I got bullish on copper in particular about six months ago. It's taken some time, but the trade is starting to work. There is a lot to know about Freeport McMoRan (FCX), but the short-term catalyst is that the royalty situation surrounding the Grasberg mine in Indonesia seems like it will resolve itself soon. And the catalyst for Alcoa was some months ago with the Ford (F) announcement of the aluminum F-150.

More importantly, the China bear case seems to be slipping away (as it usually does).

So it's funny, both of these stocks, technically speaking, are running away to the upside, while the rest of the market (ex-utilities) is quite wobbly. Tech was a disaster on Tuesday, and it brought back memories of the momentum collapse of a few months ago. It makes me kind of not wanting to invest in tech, which can go down 5% in a day. It makes me want to invest in base metals, which are breaking out of long downtrends.

Portfolio construction is an art, not a science, and it should be everyone's goal to build an anti-fragile portfolio, one that outperforms or even makes money in a down tape.  My portfolio, which is constructed around emerging markets and basic materials/energy, acts great. It feels pretty bulletproof. I would not want a portfolio jammed with tech and growth right now. It would make me very nervous.

The part of this that I haven't even discussed is the inflation aspect of the trade.  Inflation is rising -- contrary to what you read in the news.  And even if it's not, inflation trades don't necessarily work on inflation, they work on the fear of inflation. We should know that from the last commodities boom. But seriously, there really does seem to be inflation this time -- just go to the Billion Prices Project website and see for yourself. And if you look at where fed funds are compared to what is dictated by the Mankiw Rule, the Fed is more accommodative than any point in history.

The market usually does what hurts people the most, and I suspect that what would hurt people the most is a commodities bull market right after investors have left them for dead. Remember the commodity index swaps back in 2007, Mike Masters testifying about speculators making food and fuel more expensive for everyone?  We've gone from that to the opposite extreme, complete revulsion for commodities, and yet we're chasing tech stocks around.

As I always say, it is better to be contrarian for the sake of being contrarian, than to be consensus for the sake of being consensus.

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