Copper’s Warning Signal

by Addison Wiggin – February 7, 2011

  • Dr. Copper sees a healthy economic patient… or is it developing a fever?

  • Chris Mayer on the factors that could knock the wind out of emerging markets’ sails

  • S&P breaks decisively through 1,300… Where from here

  • Treasuries take a hit… Sarnoff on why this could be just the start

  • Virginia lawmaker urges preparations for an “alternative currency”

  • Ah, yes, it’s Monday… readers take us to task for encouraging polluters and taking the Lord’s name in vain… darn it…

The week begins with another record high for copper and the suggestion, from an unlikely source, that the Federal Reserve may be sowing the seeds of its own demise.

First, our friend “Dr. Copper,” as it’s sometimes known. The red metal is used in so many things — electrical wiring, plumbing, computers, air conditioning, refrigeration, defibrillation, horseless carriages, etc. — traders use its demand, and consequently its price, to “diagnose” the global economy.

At $4.59 a pound, the good doctor would seem to be saying the global economy is fit as a fiddle. Or… indicating the onset of fever. From its panic low around $1.25, the copper price has nearly quadrupled in just two years.

“Emerging market demand has been the big driver behind industrial metals,” our managing editor Chris Mayer discusses the more likely scenario in a recent MarketWatch article. Hence, “these metals would also seem the most susceptible to any slowdown.”

And what are the chances of that? Pretty significant. “The industrial metals as a group are unattractive simply because I believe that emerging market demand will slow,” Chris says. “There is too much hitting these countries too fast.”

Like oil. It’s back to $100 a barrel, using the yardstick of Brent Crude that’s becoming the new world standard.

And food. “All around the world, emerging markets have a big problem with rising food prices,” Chris wrote his Capital & Crisis readers last month. And that problem’s set to get worse, judging by this development.

The U.S. Grains Council forecasts China’s imports of corn are set to explode sevenfold in just a year — from 1.3 million metric tons in 2010-11 to 9 million in 2011-12.

Nine million tons would double the previous record of 4.3 million tons set 15 years ago after a disastrous crop. If true, the high numbers will be driven by three factors:

  • China was hit with drought last year

  • But the country’s growing middle class demands more meat… and most cattle and hogs are fed corn.

  • Worse, China has depleted its stockpiles. “We learned the government normally keeps stocks at 30%” of annual demand, says Terry Vinduska, U.S. Grains Council chairman, “but they are currently a little over 5%.”

“In China, people spend 50% of every incremental dollar on food,” Chris continues. “In India, it’s more like 70%. So the rising price of food is felt more keenly in these markets” than we feel it in the West.

Prices are rising faster in both of those markets. “In India, food prices are up 18% and at their highest level in a year. China has the same problem. Prices rose 5% in November alone.

“All around the world, emerging markets have a big problem with rising food prices. Indonesia’s president is trying to get people to grow their own chili peppers. And the South Korean government recently released emergency stores of cabbage, pork, mackerel, radish and other staples.

“The emerging markets boom is not going to go far when it faces a food crisis. And if China and India and the rest slow down, it’s going to have a huge impact on all those stocks and commodities most sensitive to emerging market growth.”

We’ll be watching both food prices and copper to see if and when this fever turns to chill.

Stocks are starting the week solidly in the green, the Dow breaking through 12,100. The S&P sits at 1,316 and is “on its way to 1,400,” according to Jonas Elmerraji, a leading researcher with our small-cap team.

“If stocks sustain a break above 1,300,” Jonas suggested in this space last week, “expect rally mode; if the S&P falls below 1,275, brace for selling.”

Here’s his update: “Despite some flirtations around support at 1,275 on Friday, the S&P 500 pushed definitively above 1,300 on Wednesday, clearing the last overhead barrier between the major index and its next important resistance level at 1,400.”

There are reasons to be skeptical; insider selling still overwhelms insider buying, and money is still fleeing domestic stock mutual funds. But “don’t fight the trend,” says Jonas.

The philosophy has worked out nicely for readers of our newest premium service. So far in 2011, the average play is up 9.5%… with a holding time of just 31 days. If you’d like to gain nearly 10% in a month as a matter of routine (and break all of Wall Street’s “rules” in the process)… give this presentation a look.

Just as AOL’s acquisition of Time Warner signaled the top of the Internet bubble, AOL’s newest deal may signal the top of the social media boomlet. In its biggest acquisition since Time Warner spun it off in 2009, AOL is buying Huffington Post for $315 million.

Arianna Huffington gets a new sandbox to play in, since she’ll now oversee AOL sites like Engadget and TechCruch, in addition to HuffPo. Other AOL sites like Politics Daily and DailyFinance will probably get folded into HuffPo.

We wonder — and we realize this is something of an apples-and-oranges question, but we still can’t help it: If HuffPo currently has 270 million users, and it’s valued at $315 million… how does Facebook, with roughly double the number of users, get valued at $50 billion?

For U.S. Treasuries, the new week begins with the same trend we saw all last week — rising yields. The 10-year note is up to 3.66% — levels last seen in early May of last year.

“Technically, a 4.5% yield is now in sight,” Steve Sarnoff wrote his Options Hotline readers over the weekend. “In a speech on economic outlook and macroeconomic policy, Fed Chairman Bernanke made it clear that he and his crew will keep sailing their QE2. The rest of the world should be happy to sell Ben all the bonds he wants to buy.

“Money moving out of bonds may find a home in stocks, but there is likely to come a point where rising rates attract funds back.

“It was my opinion, back in the fall of 2010, and it remains my opinion, that we have likely seen the end of the decades-long bull market in bonds and this market is likely to make a big move in its new direction (prices falling and interest rates rising).”

Already since October, the rate on the 10-year has jumped from 2.4% to 3.6% — a 50% increase.

The trend has delivered substantial gains for Options Hotline readers. One Treasury play is up 133% after five months… and another is up 56% in just two months. Steve has new recommendations most every Sunday. If you’d like to be on board for the next one, look here.

It is one thing for the International Monetary Fund (IMF) to discuss plans for an alternative to the U.S. dollar. But the Old Dominion?

Virginia can adopt an “alternative sound currency that the commonwealth’s government and citizens may employ without delay in the event of the destruction of the Federal Reserve System’s currency,” according to a bill in the Virginia legislature that would order up a study of the issue.

“The fact that the Federal Reserve has resorted to the printing presses,” says Delegate Robert Marshall, “these are the ingredients, the precursors to hyperinflation. We can’t predict when it will happen, but we should be prepared for it if we’re serious about being in public office.”

For the moment, the idea languishes in subcommittee.

Other than copper, there’s not much else going on with metals today. They’re starting the week more or less where they ended last week — gold at $1,349 and silver at $29.23.

High copper prices have indeed made copper thieves bolder; that much we know. But those thieves have nothing on this…

Thieves are poaching lead from the roofs of old buildings in England… especially churches, where lead roofing is commonplace among Church of England parishes.

About 8,000 churches have filed insurance claims over the last three years. It appears the thieves are using Google Earth to spot their targets from the sky.

“This is a crime that has to be taken seriously, says Tony Baldry, the Church of England’s estate commissioner. “Night after night, lead is being stolen from church roofs.”

One church has had its roof ripped off 14 times. Um, you think they might want to try to replace the stolen portions with a different material?

“Kindly get your ‘minimalist government’ head out of your ass,” a friendly reader opens up today’s mailbag. ”OSHA saves lives, rather than allow industry to add a few pennies to their bottom line through the collateral damage of the death or disability of workers.

“Sometimes it is off-track, so this needs to be fixed. Sometimes Congress — which gives us the best government money can buy — eviscerates the fines through industry lobbyists. So this needs to be remedied if at all possible. But once your own children work in a Massey coal mine or on the next BP drilling station, perhaps we may suddenly hear another tune.

“Surely, you people are smarter than your glib comments suggest.”

The 5: We wouldn’t be so sure.

“Regarding your disdain for EPA trying to force corrective behavior by business entities,” another agrees, ”you’d be chirping a different tune if you were getting your drinking water from a well where some industry was pissing in your groundwater.

“I’m all for business being able to do what they want as long as they don’t shovel their cost of production on those who aren’t buying their product. If you can’t make stuff without being able to incorporate the total cost of the item to the end consumer, go find something else to make, or better yet, innovate.”

The 5: For the record, while we may share it, it wasn’t originally our disdain.

“We depend on regulatory agencies in the U.S. to keep industries from polluting air, water and ground and OSHA to enforce workplace safety. Industry will not do it themselves.”

The 5: This debate calls to mind the archeologists in the Black Swan case.

Background: Our friends at Odyssey Marine have been trying to introduce a commercial model into the shipwreck salvage business. Among other roadblocks they face is the belief among entrenched and vested interests within the academic archeology community — and in government in the U.S., Great Britain and Spain — that a private “for profit” company can’t possibly practice good archeology.

What, we want to ask, makes removing the profit motive and handing over the responsibility of preservation of artifacts or the maintenance of clean water and air to bureaucratic institutions a good idea? Are people who work for nonprofits and governments somehow more pure and honest than business and industry leaders?

“If you can stand one more note on the EPA/regulation/who’s going to protect us from big bad BP debate, how about an observation for the reader who’s having problems fathoming stupidity.

“The BP disaster, on which Byron King kept us up-to-date with preternatural accuracy, was arguably the worst man-made environmental disaster ever. It was also probably one of the most amazing engineering feats ever.

“The entire alphabet soup of federal meddlers did nothing to prevent the disaster, and once it occurred, they did nothing to fix it, except to helpfully promise to keep their boots on the necks of the only people with the capacity to solve it. They were forced by the extreme urgency of the situation to do the only thing they could possibly do to help — stay out of the smart people’s way.

“Credible reports say the problem of plugging a pipe spewing millions of gallons of unwanted goo was evidently solved by… a plumber! He knew one of the academic eggheads involved, who sneaked the plumber’s proposal up through the chain of command. With the government no longer ‘protecting’ us, idea to engineering to fabrication to completion took about a month.

“Hold that thought.

“Almost simultaneously, my local paper (The State Journal-Register, Springfield, Ill., July 24, 2010) ran an article called ‘Flush With Resources.’ In Lake County, one of the Chicago collar counties, a forest preserve had just received permission to use rainwater collected in a cistern to flush some toilets. After four years. It took that long to work through all of the various bureaucracies. The actual work took a couple of weeks. Oh, and they’re required to treat the rainwater and dye it. So people can flush it down a urinal.

“Recap: With government standing down, it took a plumber one month to solve the greatest man-made environmental screw-up of all time. With government at full capacity, it takes four years for a plumber to hook up a few toilets with technology that was ancient when Jesus was born.

“Fathom that.”

“I really love reading the Forecast, but please don’t use “Christ” in a commentary as you did in replying to that incoherent correspondent — I know, I know, there are some whack jobs out there, and it is hard NOT to swear, but c’mon, guys, you are much better writers than that.”

“Mr. Wiggin, I didn’t know that you were so religious! To emphasize your point in yesterday’s last comments, you called upon Christ and then the Almighty to help make your secular point.

“I would be surprised if Christ or the Almighty lent any weight to your point. I just hope that he will help you use other words to make your points and treat those names with respect. Both those holy names are sacred for some of us.”

The 5: You’re probably right. But I will point out only the first use of His name in vain was our own. We’ll do our best to be more respectful.


Addison Wiggin

The 5 Min. Forecast

P.S.: Ensco Intl., a respected builder and operator of offshore oil rigs, reported today they’ll buy out a competitor, Pride Intl., in a cash-and-stock deal valued at $7 billion.

“I’m biased against such big acquisitions in general,” says Chris Mayer. “They rarely ever work out well for the acquirer’s shareholders who, most of the time, would’ve been better off without the deal.

“Ensco is not the same company we bought,” Chris concluded. And, as such, told readers of Capital & Crisis to sell this morning… for 130% gains in two years.

We bring this up for another reason. This is Chris’ third sell of 2011. The other two were for gains of 42% and 55%. And that’s added on to his 2010 track record — nine new recommendations that gained an average 39%.

Gains like that will offer ample protection against what Chris calls “the biggest scam in American history.” Details on how the scam works… and how you can protect yourself… in this presentation.


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