($COPPER) Archives

What to Buy at Market Tops?

I will start today’s letter by listing six more data points showing how overbought stocks have become.

1) While the number of outstanding shares in the US has remained unchanged since 2006, thanks to M&A, buybacks, bankruptcies, and privatizations, the average weighted share price has more than doubled from $50.15 to $137.00.

2) The Volatility Index (VIX) has just collapsed from a high of $41 in November to $20 today.

3) The Mad Hedge Market Timing Index has just soared from a record low of 2 eight months ago to 76 today, deep into “SELL” territory.

4) 2000 forward stock earnings growth has collapsed from 26% a year ago, to 0% in a few months.

5) Almost every investor now bullish once more, now that their stocks are going up.

6) The stock market has had its best month since 1987. Grizzled, long in the tooth readers can’t be more cautious right now.

This all leads to the urgent question of the day, WHICH stocks do you buy as we approach market tops? The answer is very simple. You buy cheap ones. And what are the cheapest stocks out there?

Commodity stocks.

My friend, Jim Umpleby, said that we are just entering a ten-year super cycle in commodities.

Jim should know. He is the CEO of Caterpillar (CAT), a company I have been following for 45 years. I even have one of their cool worn yellow baseball caps from years past.

Thanks to the 2017 tax bill, companies can now buy Caterpillar’s bulldozers, backhoes, and heavy trucks, and expense 100% of the investment in the first year. (Last year, I bought a new $162,500 Tesla Model X using the same break). That makes a purchase of (CAT)’s products one of the best tax breaks ever.

Needless to say, this has created a stampede to buy the companies heavy machinery because they fear this tax windfall will be reversed by the next administration. This is equipment with a 30-year life or longer.

Industrial commodities are in fact the perfect sector to buy right now. Take a look at the long-term chart for copper prices, which are a great bellwether for the entire industry. They are imminently poised to make a long-term upside breakout.

Copper last peaked at the beginning of 2011, when the Chinese infrastructure build-out suddenly outdrew to a juddering halt. Prices cratered from $4.60 a pound to a lowly $1.90. Mines were sold off, mothballed, or permanently closed at a record rate.

Copper prices fell so low that the US Mint finally started making a profit on pennies they struck.

Then a funny thing happened.

Copper bottomed, assisted by the global synchronized economic recovery I have been writing about for years. Then at the beginning of this year, investors smelled a recovery in a severely oversold, bargain basement, lagging sector. Copper prices jumped from $2.60 to $3.6, up 42% since June.

The share prices of copper and other major commodity producers went ballistic. Freeport McMoRan (FCX), the world’s largest copper producer, (whose management is a long-time reader of this letter) has just seen its stock jump six-fold from a near $4.00 a share to $24.00. If this sounds rich, recall that the peak during the last cycle was at $51.

Other big commodity producers did as well. Australia’s BHP Billiton (BHP) leaped 41% in a month!

You may think that it’s too late to get into the commodities space, but you’d be wrong. Having covered the sector for nearly a half-century there is one thing you learn quickly. While you can shut down a mine in weeks, it can take years to bring them back on line.

As for developing a new mine from scratch, that can take a decade by the time you get the design, permits, infrastructure, equipment, and labor in place.

My Australian readers tell me that (BHP) is flying young skilled workers from Brisbane an incredible 2,000 miles to work in Northwest mines in a six week on, six week off work schedule and paying them $200,000 a year to do it. And they’re making a profit doing this!

The bottom line here is that a short squeeze has developed for industrial commodities which will last for years.

Oh, and that global economic recovery? It is on vacation until the pandemic ends. That could happen in a few months, and no more than a year.

At least you have something to buy now besides more technology stocks. As much as we here at the Mad Hedge Fund Trader all love them for the long term, they are extremely overbought for the short term. Up 50% in a month? I’ll pass.

Commodities Are In Our Blood

December 16, 2020/by Arthur Henry

December 11, 2019

Diary, Newsletter, Summary

Global Market Comments
December 11, 2019
Fiat Lux

Featured Trade:

(WHAT TO BUY AT MARKET TOPS?),
(CAT), ($COPPER), (FCX), (BHP), (RIO),
(EUROPEAN STYLE HOMELAND SECURITY),
(TESTIMONIAL)

December 11, 2019/by Mad Hedge Fund Trader

February 7, 2019

Diary, Newsletter, Summary

Global Market Comments
February 7, 2019
Fiat Lux

Featured Trade:
(WHAT TO BUY AT MARKET TOPS?),
(CAT), ($COPPER), (FCX), (BHP), (RIO),
(EUROPEAN STYLE HOMELAND SECURITY),
(TESTIMONIAL)

February 7, 2019/by Mad Hedge Fund Trader

August 22, 2018

Diary, Newsletter, Summary

Global Market Comments
August 22, 2018
Fiat Lux

Featured Trade:
(WHY DOCTOR COPPER IS WAVING A RED FLAG),
($COPPER), (FCX), (USO),
(HANGING OUT WITH THE WOZ),
(AAPL)

August 22, 2018/by MHFTR

Why Doctor Copper is Waving a Red Flag

Diary, Newsletter, Research

One of my responsibilities as a global strategist is to talk about how cheap stocks are at market bottoms, and how expensive they are at market tops. In all honesty I have to tell you that 9 ½ years into a bull market, we are now much closer to a top than a bottom.

If Dr. Copper has anything to say about it the global economy is already in a recession. Since the June peak, trade wars have taken the red metal down a gut-punching 22.7%. The world’s largest copper producer Freeport-McMoRan (FCX), a Carl Icahn favorite, is off an eye-popping 30.6% during the same period.

Should we be running around with our hair on fire? Is it time to throw up on our shoes? I don’t think so…not yet anyway.

Dr. Copper achieved its vaunted status as a leading indicator of economic cycles for the simple reason that everyone uses copper. Building and construction took up 43% of the supply in 2017, followed by electronics (19%) and transportation equipment (17%).

China is far and away the world’s largest consumer of copper. In 2017, it bought 48% of total world output. However, red flags there are flying everywhere.

Back in the 2000s, when China was building a “Rome a Day,” demand for copper seemed limitless. Since then, Chinese construction has fallen to a low ebb as the greatest infrastructure build-out in history came to completion.

China has steadily moved from an export-oriented to a services-driven economy, further eroding the need for copper. I warned investors of this seven years ago. That is why the Mad Hedge Fund Trader has issued virtually NO commodities-based Trade Alerts since then.

Before the last financial crisis Chinese banks accepted copper ingots as collateral for business loans. That practice is now banned.

In the second quarter, nonperforming loans at Chinese banks notched their biggest rise in more than a decade, according to research from Capital Economics. Corporate bond defaults are on the rise, and earlier this week, official reports showed Chinese investment growth, which has long been a driver of the economy, fell to its lowest level since the late 1990s.

The pressure on the Chinese economy is beginning to take its toll in other places, too. China’s currency, the renminbi, has fallen more than 9% against the dollar in the past six months, and China’s CSI 300 index of blue chip stocks is off 19% this year.

The net effect of all of this has been to dilute the predictive power of copper. Copper may no longer deserve its PhD in economics, perhaps only a master’s degree or an associate of arts.

Copper is not alone in predicting imminent economic disaster. Oil (USO) has also been shouting the same. Texas tea has fallen by 15.8% since copper began its swan dive two months ago.

For sure, oil has been falling for its own reasons. Iran has sidestepped American sanctions by selling its oil directly to China, and there is nothing the U.S. can do about it. Every year, global GDP growth needs less oil to grow than before thanks to alternative energy sources and conservation. A recent bout of OPEC quota cheating hasn’t helped either.

As any market strategist will tell you, falling copper and oil prices are not what sustainable bull markets in stocks are made of. I’m not saying a crash will happen tomorrow.

Personally, I believe that the bull market should spill into 2019. But when corporate earnings growth downshifts from 26% to 5% YOY, as it will in Q1 2019, watch out below!

The Big Trade War Victim

August 22, 2018/by MHFTR

Emerging Markets Are Back!

Diary, Newsletter

Boy, did we have a great run in emerging markets during the 2000s!

A global commodity boom caused many of these markets to rise tenfold or more.

Go back to the earliest newsletters published by the Diary of a Mad Hedge Fund Trader in 2008, and you will find them chock full of recommendations to buy hard assets, emerging market ETFs, debt, and currencies.

As former colonies, many of these countries still base their economies on production of the precious and base metals, energy, and foodstuffs they once supplied the motherland.

And as a former correspondent for The Economist magazine covering this territory, I knew them well.

Then in 2011, the party abruptly ended, and a vicious five-year bear market ensued.

Oil peaked first, eventually nosediving some 82.5%, from $149 to $26.

Remember Dr. Copper, the only commodity with a PhD in economics? He gave up 57.9%.

And gold, that ultimate store of value for Armageddonists and conspiracy theorists everywhere? It plunged by 48.2%.

There are still a lot of unhappy American gold eagles sitting in bank deposit boxes around the country gathering dust, thanks to those ridiculous theories.

It didn?t help that a raging bull market in developed market government bonds sucked even more money out of these beleaguered countries.

The Emerging market debt ETF (ELD), collapsed by 32%. The emerging market currency ETF (CEW) dropped by 35.5%.

My long-term subscribers can already see where this is going.

The wonderful thing about all of these cross asset class declines is that they have a leveraged effect on each other.

So while the ishares MSCI Emerging Market ETF (EEM) fell by 38.9%, in dollar terms it declined by more than half.

Then a funny thing happened during the second week of January 2016.

Gold took off like a rocket.

It was closely followed by silver, oil copper, palladium, platinum, and iron ore. Only the ags failed to participate.

The bull market was back!

Portfolio managers were given a simple choice.

Should they chase developed market assets trading at all time highs with yields approaching zero. Or should they load up on emerging assets at decade lows with yields approaching 12%?

Yields that high can cover up a lot of mistakes and preserve principal.

If you voted for the latter, you deserve a brass ring.

Here we are some eight months later, and the emerging bull market is alive and well. In fact, it is about to take another substantial new leg upwards.

My money is on emerging market handily beating the major US stock indexes for the rest of 2016.

The reasons for this are many and complex.

For a start, the iShares MSCI Emerging Market ETF (EEM) is still cheap.

It has to rise by 21.6% just to get back up to its 2011 highs. As a laggard play, it is beyond reproach.

In emerging market debt, the positive carry is enormous.

The Wisdom Tree Emerging Market Local Debt Fund (ELD) is yielding 5.46%, some 390 basis points high than the ten year Treasury bond (TLT).

And if you want to go with individual rifle shots in single countries, you can earn as much as 11.90% in Brazil.

The ?lower for longer? philosophy of the Fed just shines a giant great spotlight on this paper.

And guess what happened while you weren?t looking?

Emerging market debt has ?emerged.?

Five years of balance sheet repair means their credit quality has improved.

Local credit markets have grown up too.

Once dominated by huge inflows and outflows from foreign investors, markets are now much more in balance, thanks to the rise of? local institutional investors and pension funds.

The fundamentals of these countries have been steadily improving.

Falling currencies gave them a competitive advantage that allowed? trade surpluses to dramatically improve.

Political stability is improving. During my journalist days, you used to be able to count on one good coup d??tat or revolution in the area a year. No more.

Many business friendly, pro trade governments have come into power, such as in Argentina, India and Peru.

Emerging market GDP growth rates are still double those found in developed markets.

Markets themselves are improving. Spreads for stocks and bonds are now much tighter in emerging markets and liquidity has improved. They are ?roach motel? markets no more, where you can check in, but you can?t check out.

Get this one right, and the cross asset class hockey stick effect we saw on the downside will work just as well on the upside.

In short, there is a lot more to the emerging market dollar than there used to be. It is just a matter of time before financial markets figure this out.

Looking for the Next Bull Market

August 26, 2016/by DougD

Don?t Be Short China Here

Diary, Newsletter

Everyone who has been reading this letter for the past eight years (yes, there are quite a few of you), know that I am a fundamentalist first and a technician second.

Of course you need to use both, as those who mistakenly leave one tool in the bag reliably underperform indexes.

The one liner here is that I use fundamentals to identify broad, long term, even epochal trends, and technicals for the short-term timing of my Trade Alerts.

Do both well, and you will prosper mightily.

Strategists often like to cloak themselves in the fundamental or technical mantle. But parse their words carefully, and the best fundamentalists talk about support and resistance levels, while the ace technicians refer to the latest economic data points.

The reality is that the best of the best are using both all the time. The differential titles have more to do with marketing purposes than anything else.

Having said all that, you better take a good, hard look at the chart below for the Shanghai Stock Exchange Composite Index ($SSEC). This is a classic narrowing triangle spread over the entire five years of the Chinese bear market that is imminently going to explode one way or the other.

My bet is that it resolves to the upside. All it would be doing then is coming in line with the rest of the global equity markets, including those of many emerging markets.

Since the top, the earnings multiple of Chinese companies have plunged, from 35 times to a mere 15 times. This means that the 6% a year growing economy (China) is trading at a lower multiple than the 2% a year growing one (the US). The big question among strategists since 2009 has been how far these valuations would diverge.

If I am right, then you can expect a rally of at least 25% in the Shanghai market soon, and more in peripheral markets, like Hong Kong (EWH) and in single Chinese names.

The rally will also place a laser like focus on the Chinese Internet sector, so you won?t go wrong picking up some Baidu (BIDU) around $180, if you can get it.? I originally recommended buying the stock at $12 seven years ago.

If you are looking for further confirmation of the coming bull move in China across asset classes, please peruse the chart below for copper. The red metal has one of the closest correlations out there with the fate of the Middle Kingdom?s economy and stock markets. It appears to be breaking out of a major three-year downtrend as well.

The other nice thing about this scenario is that it provides more fodder for my expectation of another global bull market move in the fall, when you can expect major indexes to tack on another 5% by yearend.

Jim Chanos, watch your back!

April 8, 2016/by Mad Hedge Fund Trader

Here is Your Big New Year Trade

Diary, Newsletter, Research

When Dr. Copper (CU), the only commodity with a PhD in economics, suddenly collapses from a heart attack, risk takers everywhere have to sit up and take notice.

Since the 2011 top, the red metal has collapsed a shocking 40%. It has given back a nausea inducing 10% just in the last two weeks. Will copper take down the rest of the financial markets with it?

Is the bull case for risk assets over?

I doubt it.

So called because of its uncanny ability to predict the future of the global economy, copper is warning of dire things to come. The price drop suggests that the great Chinese economic miracle is coming to an end, or is at least facing a substantial slowdown, the government?s 7.5% GDP target for 2014 notwithstanding.

It?s a little more complicated than that. Copper is no longer the metal it once was. Because of the lack of a consumer banking system in the Middle Kingdom, individuals are now hoarding 100 pound copper bars and posting them as collateral for loans from banks or backstreet money lenders.

China is, in effect, on a copper standard. Get any weakness of the kind we have seen this year, and lenders panic, dumping their collateral for cash, crushing spot prices.

The latest plunge has been fueled by continuing rumors of an imminent Chinese banking crisis. The Middle Kingdom?s first corporate bond default in history, by a third tier solar company a few years ago, further heightened fears. The implicit government guarantee that was believed to back this paper suddenly went missing in action.

The high frequency traders are now in the copper futures and spot markets in force, whipping around prices and creating unprecedented volatility. Notice how they seem to be running the movie on fast forward everywhere these days? Because of this, we could now be seeing an overshoot on the downside in copper.

Copper, along with all other hard assets, have also been taking a pasting from the strong US dollar. A robust greenback has effectively raised the price of copper in non dollar currencies in big consuming countries, like Japan and Europe. The only way to adjust for this is for the traders to take down dollar prices, which the markets have been doing with a vengeance.

It is no coincidence that copper has been falling in almost perfect lockstep with the rest of the hard asset universe, including gold, silver, oil, natural gas, coal, all the ags and ag stocks, and the commodity producing currencies of the Australian (FXA) and Canadian (FXC) dollars. The world wants paper assets (stocks and bonds), and none of the stuff you can drop on your foot (thanks Dennis).

However, cheaper copper is ultimately great news for we copper consumers, as with everything else.

Watch Dr. Copper closely. At the first sign of any real bottom, you should load up on long dated calls for Freeport McMoRan (FCX), the world?s largest producer, which also has been similarly decimated. The leverage in the company is such that a 10% rise in the price of copper triggers a rapid 20% rise or more in (FCX) shares.

I can wax one here about major structural changes in the Chinese economy that are underway, as the real problem. As the Middle Kingdom shifts from an export driven economy to a domestic demand one, there is less need for the red metal and more need for silicon and brains. But this isn?t something you can trade off of today.

So what is copper really telling us? The longer-term charts show a prolonged bottoming process. If $2.90 fails, we could see a revisit to the five-year low at $2.50.

That?s your load the boat price. During the global synchronized economic recovery that is underway, you want to view every panic sell off in a single asset class like this as a gift.

There is one further hope for copper. The Shanghai stock market has been absolutely on fire this year, rocketing some 40% since June, even beating the heady US exchanges. When risk accumulation accelerates to this extent in the world?s largest copper consumer that is great news for copper.

The two asset classes are now wildly out of sync. Either Chinese stocks are ridiculously overpriced and soon have to crash to come back in line with the red metal. Or copper has to rise.

I vote for the latter. It could be your big New Year trade.

December 5, 2014/by Mad Hedge Fund Trader

Charts to Watch For an End to the Crisis

Newsletter

Bad China data?.Russia threatens the Ukraine?.more bad China data?.maneuvers at the Russia-Crimea border. The bull has been punched out with a market that was down every day last week, China and Russia both taking turns thrashing investors, like tag team wrestlers. When will it end?

The canaries in the coal mine will be found in the charts below. This is where you will first hear the all-clear signal, when it is safe to return with an aggressive ?RISK ON? posture.

As always, watch the bond market. If the current rally in the (TLT) fails anywhere short of $110, it?s a sign that traders are fleeing the safety of the Treasury bond market and are happy to return to riskier assets, like equities. That equates to a ten year Treasury bond yield of just over 2.50%. A breakout of prices above this, and yields below suggest that more trouble is coming.

Keep close tabs on the Chinese Yuan (CYB). After an unrelenting five-year appreciation, it started a swan dive two weeks ago. That is when a banking crises in the Middle Kingdom started picking up steam. This prompted currency traders to unload Chinese renminbi for more stable dollars. The collapse of copper mirrors this. New signs of life in the Yuan and copper will hint that trouble there is over for now.

The Japanese yen is another big one to monitor. Most hedge funds borrow yen and sell them to finance long positions around the world. This is why the yen has been perennially week for the past two years. But when they dump these positions and hide under their beds, the reverse happens.

They buy back their yen shorts, pushing it up. That?s why the latest round of jitters has the Japanese currency probing four-month highs. If the yen fails here, it?s because investors are going back into the market for other assets.

Of course, the Russian stock market (RSX) is a no brainer to watch. Thanks to the antics of Vladimir Putin, it is down 28% so far in 2014, making it the world?s worst performing market this year. Invading your neighbors and threatening to incite WWIII is not good for your equities. I doubt he cares, but emerging market investors do.

Gold (GLD) is certainly earning its pay as a flight to safety instrument. It has been flying like a bat out of hell all year and is now testing major resistance. If the barbarous relic suddenly loses its luster, the memo will go out to buy paper assets once more.

Finally, keep the chart for the Volatility Index (VIX) planted on the top of your screen. Recent tops have been around the $21 level, only $3 higher than the current level. When cooler heads prevail, the (VIX) will collapse once again. Puts on the (VXX) are the way to play this move.

The interesting thing about these charts is that they are all moving to the extreme edges of multi month ranges. So we could be one more flush away from the end of this move.

That?s unless Russia really does invade Crimea in force. Then all bets are off.

This a Sell Signal

March 17, 2014/by Mad Hedge Fund Trader

Why Copper is Crashing

Newsletter

When Dr. Copper (CU), the only commodity with a PhD in economics, suddenly collapses from a heart attack, risk takers everywhere have to sit up and take notice.

Since the 2011 top, the red metal has collapsed a shocking 38%. It has given back 10% just in the last two weeks. Will copper take down the rest of the financial markets with it?

I don?t think so.

So called because of its uncanny ability to predict the future of the global economy, copper is warning of dire things to come. The price drop suggests that the great Chinese economic miracle is coming to an end, or is at least facing a substantial slowdown, the government?s 7.5% GDP target for 2014 notwithstanding.

This gloomy view is further confirmed by the weakness in the Shanghai index ($SSEC), which has been trading like grim death all year. Will China permabear, Jim Chanos, finally get his dream come true?

It?s a little more complicated than that. Copper is no longer the metal it once was. Because of the lack of a consumer banking system in the Middle Kingdom, individuals are now hoarding 100 pound copper bars and posting them as collateral for loans.

China is, in effect, on a copper standard. Get any weakness of the kind we have seen this year, and lenders panic, dumping their collateral for cash, crushing spot prices.

The latest plunge has been fueled by rumors of an imminent Chinese banking crisis. The Middle Kingdom?s first corporate bond default in history, by a third tier solar company, further heightened fears. The implicit government guarantee that was believed to back this paper has suddenly gone missing in action.

The high frequency traders are now in the copper futures and spot markets in force, whipping around prices and creating unprecedented volatility. Notice how they seem to be running the movie on fast forward everywhere these days? Because of this, we could now be seeing an overshoot on the downside in copper.

The bottom line here is that copper is suffering from its own unique set of difficulties, which will have a negligible affect on other asset classes.

Watch Dr. Copper closely. At the first sign of any real bottom, you should load up on long dated calls for Freeport McMoRan (FCX), the world?s largest producer, which also has been similarly decimated. The gearing in the company is such that a 10% rise in the price of copper triggers a rapid 20% rise or more in (FCX).

I can wax one here about major structural changes in the Chinese economy that are underway, as the real problem. As the Middle Kingdom shifts from an export driven economy to a domestic demand one, there is less need for the red metal and more need for silicon and brains. But this isn?t something you can trade off of today.

So what is copper really to us? The longer-term charts show a prolonged bottoming process. If $2.90 fails, we could see a revisit to the five-year low at $2.50. That?s your load the boat price. During the global synchronized economic recovery that is underway, you want to view every panic sell off in a single asset class like this as a gift.

Now On Sale

March 12, 2014/by Mad Hedge Fund Trader

Posts

Commodities Are In Our Blood

The Big Trade War Victim

Looking for the Next Bull Market

This a Sell Signal

Now On Sale

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