The Curious Case of Copper and Its Compatriots

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


While traders are scratching their heads about how the stock market can continue to go up while the economic news continues to get worse, they also should be puzzled over the sharp rise in copper and other industrial metals in recent weeks. These metals move with building and manufacturing activity and a rise in their prices is not just an indication of an improving economy, but is also an indication of inflation - not the deflation that the Fed and its friends have been worrying about lately.

The base metals, copper, aluminum, nickel, zinc and lead, all bottomed in early June. They mounted lackluster rallies into the middle of July. Their rallies went into overdrive after Fed Chair Bernanke testified before congress that it might be years before the U.S. economy fully recovers. Stocks also mounted a significant rally on this gloomy news, which followed a host of economic reports with falling numbers that came in below expectations. Leading indicators had also turned down and were pointing toward an impending recession. Stocks and industrial metals should have tanked, but instead rallied strongly on the news. Only a lot of liquidity flowing into the financial system at that point could make something like this happen.

When trying to analyze the metals markets, the first place to look is China, the primary driver of demand. In June, China imported 212,000 metric tons (tonnes) of copper, 67,000 tonnes less than in May and a drop of 44% year over year. Moreover, projections came out for Chinese demand growth to ease for the industrial metals in the second half of the year. Then the HSBC Purchasing Managers Index for July came in below 50, indicating a decline in Chinese manufacturing. So far, none of this news has stopped the rally.

So if the news from China is bearish, the next place to look is the U.S. dollar. All commodities are priced in dollars and are affected by swings in the currency. The U.S. dollar peaked in early June at the same time that the industrial commodities bottomed. It has since lost about 10% of its value. However, much of this loss took place before Bernanke's congressional testimony and much of the base metal rally took place after. The metals rally has also been too big to be accounted for by the drop in the dollar alone. From the June low to the high of August 4th, Copper (JJC) rose 25%, Nickel (JJN) 24%, Aluminum (JJU) 23% and Lead (LD) 46%.

So we are left with a picture of strongly rallying stocks, even more strongly rallying industrial metals and lots of evidence of an economy falling apart. Has this situation ever existed before?  Indeed it has plenty of times in world financial history. This is what happens when there's massive inflation. It ruins the economy, but makes the prices of assets go up because people want to get rid of their currency. Yet the economic elites are currently worried about deflation and not inflation. Well, that's also happened before as well. In 1920s Weimar Germany, economists even managed to prove definitively that deflation existed and that inflation was not a worry, so it was OK for the government to print all the money it wanted to. Of course, after inflation reached a trillion percent, many people became skeptical.

Disclosure: No Positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Alcoa and CSX Earnings: Not as Positive as They Look

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The Q2 earnings season began with aluminum company Alcoa and rail freight operator CSX reporting on Monday. The stock market reacted jubilantly to the news. Careful examination however indicates there is very little reason for economic optimism based on these releases.

On the surface, comparisons looked good versus the Q2 2009. However, Q2 2009 was right off the Great Recession bottom and it would be almost impossible not to do a lot better. Alcoa's (AA) revenue was up 18% and CSX's (CSX) was up 22%. A 44% increased in metals freight shipments by CSX were seen as verification that Alcoa should be doing better. Automotive shipments by CSX were up 63% by volume year over year and vehicle manufacturing requires a lot of aluminum. It all looks really good as long as you don't look any further.

New car sales were in the dumps in Q2 2009 with only around 9.6 million vehicles sold. By Q3 2009 however around 11.5 million vehicles were sold (thanks to Cash for Clunkers), so comparisons next quarter are going to be difficult for both CSX and Alcoa. Approximately 11.2 million vehicles were sold in the U.S. in Q2 2010, but sales dropped 11% between May and June (the usual seasonal drop is 3%). So it looks like the summer will be weak for auto sales and sales for Q3 2010 will possibly be much lower than the previous year's level. This can only negatively impact next quarter's earnings for both Alcoa and CSX.

The market also got excited about Alcoa's revising its global demand forecast up 10% to 12%. While this would certainly be good news if it happens, traders seemed skeptical based on the action in the stock. Alcoa peaked in January and has been trading in a bearish pattern since mid-May. The stock is up only a very modest amount so far today. After a six-month drop, a more enthusiastic reaction should be expected on good news.

The stock market is supposed to look forward at least six months. Earnings are backward looking. They are only significant to the extent that the underlying trends that created last quarter's earnings continue to hold. There is a lot of reason to believe that this will not be the case. Big government stimulus programs are fading and the economy is weakening, not strengthening as it was a year ago.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Invest Now for the Coming Inflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The Federal Reserve finally fessed up yesterday, announcing it was going to print new money to buy U.S. Treasury bonds. While my initial reaction was, 'so what else is new?', the public has not previously been officially informed of the massive inflationary policies that the Fed is implementing. While Bernanke did admit that the Fed was printing money to pay for the bailouts (how else could they have been paid for?) in his 60 Minutes interview, the markets didn't react to his statements on Monday... but they did yesterday. The dollar dropped like a rock, gold shot straight up and interest rates plummeted. Financials had the biggest rally on the good news that worthless government paper was going to be used to purchase their worthless debt paper (for some reason this seems like some sort of scam to me), although all metals and oil went up as well.

In yesterday's announcement the Fed said it will buy $300 billion of U.S treasuries (mostly in the 2 to 10 year range), $750 billion in Mortgage Backed Securities (MBSs) from Fannie Mae and Freddie Mac (both bailouts are black holes for government money), and increase purchase of Fannie Mae and Freddie Mac debt to $200 billion. The Fed signalled it would increase its balance sheet to $4 trillion. It was $900 billion last year and $2 trillion more recently. Take these numbers with a grain of salt, they are on balance sheet only (think Enron accounting). To increase its balance sheet the Fed must print new money. Even without knowing this, it is obvious that new money was being printed for some time now. To pay for all the bailouts, there has been huge new issuance of treasury bonds. Even though this created a big increase in supply, interest rates went down indicating that demand for U.S. treasuries was increasing even faster. Where do you think all of this extra demand came from?

The reaction to the Fed's announcement is a prelude to the future. The dollar tanked almost 3% in minutes, something that previously would have been a major move in a month. Gold which had been selling down and traded as low as $889 reversed course and rallied $57, also in minutes. Silver which traded as low as the 11.75 went up a dollar - and is still a major bargain. Oil which was also selling off Wednesday morning, reversed and closed up. It traded as high as $51.65 a barrel overnight, which is a breakout that confirms that a double bottom was made last December and February. All other metals and coal went up as well and you should consider them to be good inflation hedges too. It is possible that even steel stocks put in a bottom because of the Fed's move.

You should be adding to your commodity positions at this point. Consider buying commodities that you don't already own or have large postions in. If you already own enough oil, you might want to buy some more silver for instance. You might want to consider picking up some base metals and coal, if you already own a lot of gold. While, gold, silver and oil are the foundation for inflation investing, any tangible asset that has a useful function and a limited supply that can't be increased significantly is also a good choice.

NEXT: Commodities Rumble, Financials Tumble

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

When Bad News is Good News and Vice-a-Versa

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The U.S. government claims that construction on new homes and apartments jumped 22% in January. Why not 222% or 2222% or the future inflation rate of 222,222%? If you are going to publish fantastic figures you might as well go for some big splashy number that indicates every existing house in the U.S. had its land subdivided and an extra house was built on it. Well, maybe people wouldn't believe that one (although the mainstream media would publish it as if it were true). Somewhat more realistic is the PPI report released today which indicates February wholesale prices went up 0.1% after a 0.8% rise in January. Dropping oil prices are still lowering the numbers, although even with much cheaper oil, the coming big deflation that the media reported all last fall and this winter has yet to show up. Oil prices have already begun inching back up and even the highly manipulated government figures are likely to soon be showing that inflation is rising again.

Oil acted quite bullish yesterday. Even though OPEC refused to cut it production quotas at its Sunday meeting, oil prices were essentially unaffected. While oil went down about 3% in Asian trading after the meeting, it recovered its losses by the close in New York. Nymex light sweet crude is trading at 47.50 a barrel as I write this, almost as high as its gotten since the double bottom made in the high 33's on February 18th. When an investment doesn't go down on what should be bearish news, what will make it go down? The market is telling you that the selling is done (this works quite well for analyst downgrades by the way, if a stock goes up on a downgrade there are no sellers left). DXO, which New York Investing said was a good purchase on the evening of February 17th is hitting its highest high since that date today.

Sometimes assets do indeed go down on bad news, but don't hit new lows. This is also bullish. You should be watching Alcoa (AA), which had horrendous news yesterday. While the dividend cut was expected by any rational person, the issuing of new stock and convertibles is dilutive for current shareholders. AA's yearly low was 4.97 reached on March 6th and it has not been breached yet in today's trading with the low so far being 5.37. AA is not the first metal stock to cut its dividend, reduce capital spending, etc., etc. Freeport McMoran Copper and Gold (FCX) did so last December 3rd and the stock bottomed 2 days later at 15.70. It has gotten over 38.00 since then. When really bad news comes out, you need to ask yourself what else could happen. If there is nothing worse, how can the investment go down further? Unlike FCX, AA does have one additional risk and that is it could be thrown out of the Dow Jones Industrial Average.

The stock market is filled with beaten down stocks at the moment. To find the real bargains you need to determine if the company will still be in business tomorrow. In some cases, the answer to that is no (think financials and anything related to them). In others like FCX, which is the lowest cost copper producer in the world, the demise of the company would mean the disappearance of an entire essential industry. If the industry isn't going to disappear, the lowest cost producer will still be around. You should find out who these companies are for every commodity.

NEXT: What Happened to Deflation?

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Stocks - the Good, the Bad and the Ugly

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

U.S. stocks gapped up today with the indices up 4% or more as I write this. Many individual stocks are up over 10%. While almost everything is up right now (except for gold and silver which are looking ugly at the moment), some of the rallies are more sustainable than others. In many cases, insolvent financial companies are up the most. Only for really short term traders do they offer opportunity however. Natural resource stocks on the other hand have real long term potential.

The oversold condition of the market is so extreme that it may be at historical levels. Under such circumstances, any little piece of news can ignite a sudden rally. Such bear market rallies are explosive and can last for weeks or even months. They are very tradeable and you can make a lot of money, but you have to get out and take your profits because the market is likely to go right back to where the rally started of even lower.

The news that started the rally today was Citigroup claiming it made a profit the first two months of this year. Indeed if the government pumps enough money into any given company it will eventually become profitable, no matter how insolvent it might be. This was followed up by a statement by Fed Chair Bernanke that major U.S. banks would not be allowed to fail (no matter how incompetent their management is and no matter how much it costs the taxpayer - he left that part out). Bad financials are bad investments though no matter what the government does.

Natural resource stocks are where the good values are to found in the market right now. They own tangible assets that will not only maintain their worth, but will increase substantially in an inflationary environment. They have had incredible sell offs that have sent them to major bargain prices. Other than oil, which made a double bottom on the charts in December and February and is in a seasonally strong period until the summer, a number of non-precious metal stocks seemed to have bottomed last fall. Like oil, they have not hit new lows with the market. Such relative strength is impressive and should not be ignored.

NEXT: Analysis of Tuesday's Market Action

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.