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How Much to Run for Copper?
During my misspent youth, I spent a lot of time riding freight trains. I didn’t set out to do this. But when I was hitchhiking from Vancouver to Montreal to get a job at Expo 67, I got as far as Saskatchewan, and found they had no cars. So I headed over the Canadian National freight yard in Winnipeg and started riding the rails, as my grandpa did during the Great Depression.
It wasn’t hard. One rail, two directions and I headed east. There is no better way to travel than in a box car with open doors, the winds blowing through your hair, the scenery devoid of billboards. One time the engineer spotted me, stopped the train, and waved to me to join him in the engine where he let me drive. How good is that!
A hobo taught me the trick of jumping on a moving train. You run the same speed as the train, latch on to something, and swing your way in. Do it wrong and you get pulled under and become road kill.
Today, I’m contemplating jumping on a moving train of another sort, the financial kind. There is no ignoring copper, which punched through to an all time high to $4.50 a pound last week. I have been in and out of the red metal since it bottomed at 85 cents a pound dearly a decade ago, much to the delight of my investors. Ditto with Freeport McMorRan (FCX), which you will find in my model portfolio, and which I have ridden from $25 to $120.
Today, Federal detention centers in the San Francisco Bay area are slowly filling up with a new type of criminals. Illegal immigrants and petty drug dealers are being joined by a rising tide of copper thieves raiding abandoned government facilities for their heavy gauge copper electrical wire. At current prices a decent night’s haul can net crooks up to $30,000 at recycling centers.
Long known as “Dr. Copper”, because it is the only commodity with a PhD in economics, the red metal has long been an excellent forecaster of economic activity around the world. Hedge fund managers have been impressed by copper’s ability to hold up, and even advance in the face of “double dip” threats from the US economy. While demand for American home construction remains in the basement, this weakness is more than offset by surging demand from China, whose own construction industry remains on a tear.
It also helps that they’re not making copper anymore. Some of the world’s largest mines are reaching the end of their useful lives, with increasing amounts of capital being poured into ripping a declining grade of ore from the earth. Global production has fallen 12% during the first half of this year. This is a problem because the opening of a new mine can take as long as 15 years, once the time required for government approvals, infrastructure, water supplies, transportation, and yes, bribes, is added in. What’s in the pipeline is all there is for the next five years.
Copper is also benefiting from its accelerating “monetization.” International investors, disgusted with the choices available in global stock and bond markets, are increasingly diversifying into the red metal, as well as other “hard” assets like gold, silver, coal, oil, nickel, iron ore, and others. This is one reason why the big metals exchanges are finding their inventories at a low ebb. It’s anyone’s guess, but perhaps half of the current $4.40/pound in the copper price is accounted for by investor, as opposed to end user demand.
I have some hedge fund friends who have discretely stashed thousands of copper bars in warehouses around the country, expecting the red metal to hit $6/pound within the next three years. If this doesn’t work out, I guess they can always eat their inventory by pursuing a new career as an electricians. Hey, a good union, a steady $70/hour paycheck, and a health care plan that covers Viagra, what’s so bad about that?
The obvious plays here are in the dedicated copper ETN (JJC), and the base metal ETF (DBB). Another candidate is Chile’s ETF (ECH), which has tacked on a blistering 44% since I recommended it in August (click here for “Chile is Hot” at http://www.madhedgefundtrader.com/august-2-2010.html ). And you can look at Freeport McMoran (FCX), the world’s largest publicly listed copper producer. And yes, you can even buy .999 fine copper bullion bars at Amazon.
My favorite of the lot is the First Trust ISE Global Copper ETF (CU), which closed yesterday at $42.55. This will not be my favorite trade of the year, as jumping on a moving train carries some risks. If you do get involved, make sure you keep a stop at $36 in case things go horribly wrong, or you too will end up as road kill.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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just got back from china. end consumers not buying copper. copper all over the place there. piled up. most of my consumers there have stops at 4.20. now they go on vacation for three weeks.
Yo, about the union electrician job, keep it on the downlow, we dont need everybody screwing the pooch becoming an electrician, the herd would gleefully push wages down to $10/hour.
"Dr. Copper ?"
Of course. The character played by Richard Dysart in John Carpenter's, "The Thing." Unfortunately, it didn't end all too well for the good doctor. A face born of the frustration of buying at the top:
http://www.celluloiddreams.co.uk/images/thething2.jpg
Now you are just fucking with us, blatantly.
Winnipeg is in Manitoba,not Saskatchewan.
I hope you aren't suggesting the bullion bars on Amazon as a good investment.
When Chinas empty cities really come to light,and their bubble pops, $1,500.00/ton will be the going rate.
I think going long Charmin is a good bet, the runs this will cause will make you a killing.
dn't another post on zh say it was just about to turn?! hahaha
keep selling your made up stats on your newsletter where you win 100% of the time
I happen to like MHF trader's posts. So, lets hear something constructive from YOU, Beer Goggles. What is your recommendation..or what possible investment angle have you uncovered in your latest research?
Or are you just an asswipe with some kind of 'wanna be first to post,' agenda. It's easy to criticize and I'll be the first to apologize for the 'asswipe' comment as soon as you post a constructive investment insight. Pitch us....what'cha got? SLB? RIG? CSCO? BIDU? HL? Give me something besides insults and bullshit. I'm sure there are lots of forums where your brand of shout down is appropriate (yahoo message Boards, comes to mind). I would think zerohedge conforms to a higher standard. If you have nothing constructive to say, the STFU. Tell my why you don't like copper. Refute the premise. Try to say something intelligent that we might benefit from.
A child could have matched the rhetoric you were compelled to share. Well.....?
Look. he's back.
Yes, I believe it said copper to peak this month if it has not already and then fall to around 2.55 lb during the rest of the year; then rise greatly in 2012 and crash bigtime after that. btw...the math on the captcha was wrong this time. The right answer was not accepted. The wrong answer allowed me to proceed. lol
interesting info.
http://covert2.wordpress.com