The commodities markets have gone into meltdown. In the last month we’ve seen silver fall 27%. We’ve seen $15 wiped off the price of oil. And now many are saying the IPO of commodities giant Glencore has signalled the top of the market.
But things aren’t as bad as they would seem. Today I want to put this commodities panic in perspective. Because news just out on the IPO tells me that this bull market looks far from over.
And in fact I’ve been looking to get a hold of some Glencore stock myself. That has been a little more difficult than you might expect. With large investment banks getting in early, private investors have been shut out…
But I have found a potential way in. I’ll tell you about that in a bit. First let’s look at why Glencore’s IPO suggests the commodities bull still has legs.
Don’t trust commodities prices
Last week I argued that one of the reasons for silver’s tremendous volatility lies with the tactics and trading leverage used by commodities traders.
I made the point that getting exposure to silver through the mining sector may be a better bet. That’s because stock traders (as opposed to commodities traders) don’t use the kind of leverage that leads to such vicious price swings.
The FTSE Mining five year performance
Source: Bloomberg
The chart of London’s main quoted miners illustrates the point. It puts the recent commodities plunge into perspective. Sure the chart has plateaued since last summer’s run, but it doesn’t look like an outright top to me. This could very likely be part of a consolidation phase before the next move up.
And remember, a commodity is priced on the basis of a tangible good for delivery at a specific date. A stock, on the other hand reflects the value of all future cash flows for a business. Effectively these mining stocks reflect the expectations on commodity prices way out into the future. And that market is looking strong.
I’m not going to make the long-term argument for commodities again here. The point I want to make is that if stock prices are anything to go by, there’s no need to worry that prices have topped out.
In fact news out on Glencore’s IPO says that the recent sell off in commodities may not be a long-term issue.
Over the last week or so Glencore has been soliciting orders for its IPO from major institutions. Sources have told Reuters that the order book was filled the first day it opened. Since then none of the investors have scaled back orders despite trouble in the commodities markets. As of Friday the offer was three times oversubscribed!
As I said last week, this deal looks like it’s going to be a good one for initial investors. The only problem is private investors are being stonewalled…
Our seat at Glencore’s table
When I described my reasons for getting in on the Glencore issue, I said that getting hold of stock wasn’t going to be easy. But I didn’t think it was going to be this hard.
The big banks advising on the deal will only deal with other big banks and brokers. They think they’re onto a good thing and they aren’t letting anyone else in.
They claim that this is all to do with costs – it would cost too much to open the book to retail clients they say. And of course it’s true, there’d be a bit more administration; but those costs would be peanuts in the grand scheme of things.
I also think they are ignoring the benefit of having lots of small investors. A broad base of shareholders helps keep price volatility down. That’s because there are many more investors providing liquidity to the market.
But we shouldn’t be surprised by this turn of events. The City institutions like to keep the good IPOs to themselves. They only pump out the tat to retail investors.
That said, I have found one potential way in….
Only one way in for private investors
The only way I’ve found to get in on the ground level of this offer is via a stockbroker. And it’s only available on a certain type of account.
Stockbrokers generally offer execution only accounts – where all they’ll do is place your trades. The next step up is an advisory service where they’ll advise clients on trades as well as placing those trades.
At the top of the tree is the discretionary service. That’s where the broker takes full control of managing a client portfolio. He’ll create an individualised portfolio based on the clients needs. So if you have a discretionary account, or you choose to open one, you may just be able to get hold of Glencore stock. Check with your broker to see if they offer discretionary – and whether they’re going for the Glencore offer.
Last week I called a guy that I used to work with in my City days. He’s a partner at stockbroker Killik’s now and he told me he was applying for Glencore stock on behalf of his discretionary clients.
He has said that he’ll be happy to talk to any Right Side readers interested in opening a discretionary account with them. Unfortunately there’s not much time left to take advantage – you’ll have to open your account today or tomorrow to have any chance of participating in this offer.
If you want to talk to my friend Mike Pate of stockbroker Killik’s, you can reach him on 020 7337 0443. Please be aware that MoneyWeek have a relationship Killik’s and will receive a commission should you open an account.
Finally, just to note that with a discretionary account the broker will build your portfolio on the basis of your needs and risk profile. So Glencore may not be deemed a suitable investment for all Right Side readers. You should ask your broker to run through it with you.
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