Investors love a contrarian idea. Though terrified of actually investing in such ideas, they love discussing them. Believing they're "in the know." Part of the smart money.
Discerning when such ideas have taken root? Easy. Everyone from clients, third cousins' spouses and the local barista wish to discuss them.
"Hey, listen. I know some guys who have been buying up XYZ. Been really beaten down. Think it's gonna go through the roof and soon. What ya' think?"
Probably the most loaded question ever asked. Because distressed, beaten up contrarian plays will, eventually, rise again. But, the catalyst for such a move could be hours, days or years away.
Lately, everyone has been asking about commodity stocks. Because low prices have brought much attention to these cyclical plays. Oil. Corn. Uranium. Potash. Coal. Each of which have seen values decimated over the last six to twelve months. Time to buy?

Realize that all commodity prices are cyclical in nature. Aggregate demand increases. So, commodity prices rise. Leading producers -- who sense opportunity -- to increase production. Eventually, growing prices curb consumer appetites, depressing demand. Prices drop. Producers begin making less. Eventually, significantly less. Leading many to go out of business. Eventually, super low prices catch the public's attention and stokes aggregate demand. Leading the entire cycle to begin anew.
While that sums up the cyclical nature of most asset class, it is especially true of commodities. Which embody the economic principles of supply and demand.
Today, we detect an additional reason for lower commodity prices. That being the parabolic move higher in the U.S. dollar. These dramatic moves -- often sending an asset straight up -- always end. Currently, however, traders are betting that the dollar will continue higher. In fact, the most recent Commitment of Traders (COT) report revealed that speculators are now more bullish on the dollar than at any other time in history. Which tells me, something's got to give.
True, commodity bear markets can last a long time. While the S&P 500 sits 50 percent higher than its value in January 2008, KOL -- the Market Vectors Coal ETF -- is 58 percent below its value at that time. That 108 percent divergence? Eventually, we anticipate a reversion to the mean. Where stocks head sideways or lower, and coal, and other commodities for that matter, head dramatically higher.
Any short-term catalysts? Well, yes. OPEC meets in Vienna tomorrow. Many OPEC producer nations are struggling with currently low oil prices. Iraq. Iran. Libya. Nigeria. Algeria. Venezuela. These nations struggle to keep the lights on when oil prices drop. Accordingly, they're going to cajole, caterwaul, conjure and cry their way to higher prices. It wouldn't surprise us to see oil being creeping higher shortly thereafter. Which would lead to a quick turnaround in natural gas and oil stocks. And, perhaps, other commodities.
Easiest way to play such a turnaround? A diversified handful of coal, potash, uranium, oil and precious metals companies. All of which have been brought low by market forces. Eventually, the pendulum will swing. As those same forces carry commodities higher.
Of course, such contrarian thinking doesn't solely relegate itself to commodities. Any detested asset class or geography can participate.
Consider China, which global investors have hated for much of the last seven years. While U.S. equities have soared since the financial crisis, Chinese stocks remain lower. The S&P 500 is up nearly 100 percent since that time. While China's CSI 300 remains beneath its early 2009 value by 20 percent.
Since the global recovery took hold, China's economy has disappointed. In 2012, GDP grew by 7.7 percent. Recently, the Chinese economy grew by 7.3 percent. Down from 7.5 percent in Q2. All of which pales by comparison to the 11 percent per year by which Chinese GDP grew from 2003 to 2011.
Which brings us up to date. Investors abhor China. And Chinese stocks are cheap. Trading at 11 times earnings compared to 18 times earnings for the S&P 500.
Of course, this is where two contrarian plays intersect. Because, as the world's largest commodity producer, Chinese growth powers worldwide commodity demand. Much like a lack thereof leads to commodity stock destruction. Iron ore. Platinum. Both have been laid low as Chinese demand has waned.
Yet, the Chinese drama remains a long-term story. One that will see China continuing to serve as an engine for global growth.
President Xi, due to China's centralized economy, can allocate cash to anything from real estate and infrastructure to agriculture or physical plants. Xi says China will import $10 trillion this next decade. And analysts expect China's direct foreign investment to increase to $1.3 trillion. From $526 billion in 2013.
Moreover, China seeks to develop a modern day "Silk Road" economic region. This will include an infrastructural network consisting of highways, ports, railways, storage and industrial facilities throughout Asia, the Middle East, Africa and Europe. Xi recently announced the government's intention to finance these plans by contributing $40 billion to a Silk Road fund. Representatives from a couple dozen Asian nations agreed to create an Asian Infrastructure Investment Bank, beginning with $50 billion in funding.
Further, the Silk Road has already seen progress. As China and Australia recently announced a free-trade agreement that was a decade in the making. This enables China to diversify its massive reserves by easing restrictions on Chinese investments in Australia. And opens Chinese markets to Australian farm exports and other products and services. Moreover, this opens to the door for Australian commodity companies, that have long traded with China, to do so more dynamically.
The iShare China Large-Cap ETF (FXI) remains 34 percent beneath is October 2007 price. Conversely, the S&P 500 sits -- coincidentally -- 34 percent above its price at that time. Numerologists, take note.
The world's leading emerging market happens to be cheap. It's universally despised. Oh, it's also in an uptrend. Having handily outperformed the S&P 500 over the last month. The last five trading days have seen the FXI rise by 6.5 percent. While the S&P 500 has gained 1.5 percent.
One need not be a mystic to sense those Chinese tea leaves talking. And as China goes, so go the fortunes of countless commodity producing regions and corporations. As China remains their biggest client.
No, we're not insinuating that investors should dump U.S. equities and reallocate to Chinese and various commodity indexes. The S&P 500 continues to see too many tailwinds to bet against it. However, for those paying attention, you can already see the breeze coming in from the Far East. Whispering winds carrying signs of the market's next bullish asset classes.
Eventually, the Chinese Dragon will rise again. Taking investors, economies and commodities along.
Contrarian know that everything eventually comes full circle. Cycles play out. Means revert. Improbable scenarios become reality. Pay attention and you can see it happening.
The Seattle Seahawks eventually win a Super Bowl. The Kansas City Royals clinch the American League Pennant. An African American from Hawaii becomes president. A male Olympic decathlon gold medalist begins dressing like a woman. A Cupertino company named after a fruit variety sells enough consumer electronics to displace ExxonMobil as the world's largest company. Or, just a walk on the moon.
One of life's beautiful aspects remains the fact that everything -- even the most impossible scenario -- eventually becomes more than likely. If even, probable.