Over-extended equities valuations, excellent fundamentals and balance sheets for miners, and the volatility that election results would bring to stocks are contributing factors to the following three trade ideas: long mining stocks, short broad equity indices, and short emerging market currencies, said Tavi Costa, portfolio manager at Crescat Capital.
"I would say that the equity markets, on the short side, look very appealing to me in the next 12 months, so there is a possibility of a decoupling [between mining stocks and broad equities indices]. If there isn't I think the miners will outperform the equity markets going forward," Costa told Kitco News.
Costa said that when looking at price to earnings, tech stock valuations are in bubble territory.
Importantly, during the last tech bubble burst in 2001, gold stocks were relatively unaffected and continued to rise even as the NASDAQ tumbled to its lows in 2003.
The miners themselves have excellent fundamental, Costa said.
“They have the cleanest balance sheet of the economy here in the U.S. today, especially when you look across sectors. Growing free cash flow, no equity dilution as they had in the past, they’re paying down debt, so I think that those guys are going to benefit tremendously going forward,” he said.
Costa noted that the markets have priced in a Blue Wave victory, hence the volatility last week in equities.
“It certainly seems to me like the markets have priced in a real probability of a Blue Wave,” he said.
The worst case scenario for equities is if we have a Trump re-election but a divided government, in which case gridlocks would prevent legislation and fiscal bills from being passed soon, he added.
The best case scenario for equities would be if a Republican sweep happens, but the chances of that are low, Costa said.
While the third quarter annualized real gross domestic grew at 33%, Costa noted that the economy is still fundamentally unsound, and that nothing has significantly changed.
“When you look at the coincident indicators of the economy, they were still just as low as they were in the worst part of the global financial crisis, the consumer spending growth just looks dismal, it just came out yesterday or Tuesday with the GDP number. When you look at just consumer spending relative to GDP, the component of consumer spending has never been so low in history,” he said.