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Teck results suggest Bernanke now shooting blanks with QE3

The market seems to be losing faith in Ben Bernanke's ability to engineer a strong recovery.

The share price of Teck Resources Ltd., which reported quarterly results Wednesday, is lagging the prices of the commodities that the company sells. The divergence highlights waning optimism about the U.S. Federal Reserve's ability to keep global asset prices elevated with its policy of quantitative easing.

Over the past several years, Teck's stock performance has closely mirrored a commodity price benchmark that replicates the company's commodity exposure – approximately 50 per cent coal revenue with the remainder evenly split between zinc and copper (see chart). The two major divergences between Teck's share price and the benchmark began in September, 2010, during the lead-up to the second round of quantitative easing, known as QE2, and August, 2012, in the wake of the third round, QE3.

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Investors poured into mining stocks in mid-2010 on the assumption that QE2's policy of printing money would both weaken the U.S. dollar and stimulate economic activity. Both factors were expected to increase commodity prices and miners' profits.

In fact, the 12 months following the announcement of QE2 in November, 2010, saw mining stocks, including Teck, make a round trip. The sector initially surged only to give back gains when global economic growth failed to materialize.

The recent behaviour of mining stocks suggests that investors have learned from the experience and are hesitant to take them higher in the wake of QE3. The commodity prices that determine Teck's revenue growth have climbed while the stock has tread water.

There are numerous factors complicating the outlook for commodity prices, including a Romney effect on coal prices, as investors bet a victorious Republican presidential challenger would open the doors to wider use of the fuel. But this should not obscure the fact that investors' blind faith in Mr. Bernanke, apparent in the market response to QE2, has faded.

There are two ways in which the divergence between Teck's share price and commodity prices can correct. The positive scenario for investors would see market skittishness fade and the stock rise to reflect the stronger prices for the commodities it sells.

If the market's more dour outlook proves to be right, however, commodity prices are poised to fall. That would raise serious questions about the Fed's ability to affect asset prices and the U.S. economy at a time when global investors are in dire need of assistance

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More


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