Tuesday, March 30, 2010
Copper, Freeport & the Devil's Triple-6
It is 5:56 AM. The coffee pot is crying for company, let's give her a visit. I thought we'd look in the rear view mirror today to see what may be up ahead. That's a damn fool way to drive a truck but in the markets it's sometimes a good idea. Before we take a peek, there is some interesting news on the wire about lithium and South Korean steel maker POSCO (20% investor in our Mt. Hope). If you haven't been following the Nevada lithium story checkout Western Lithium, Gold, Silver, Copper & Oil for starters.
Western Lithium Announces Formation of Advisory Committee and Resignation of Director (Press release WLC, 3/29/2010)
And here's some competition from up north:
Quebec lithium mine could ramp up to 25 000 t/y (Mining Weekly, 3/29/2010)
I've been wondering why POSCO (PKX) has been in the doldrums lately. Kim Jung-wook at Hana Daetoo Securities observes that concerns over raw material costs may be the culprit, especially rising high iron ore prices. Here are his thoughts:
"It's fine if Posco successfully passes on the increased cost to its customers by raising prices of its steel products. But there are still uncertainties over a timing for hikes in Posco's steel prices ... as the global economy hasn't recovered fully to levels before the financial crisis."
Nothing to lose sleep over, just another pebble in the road. This is a problem facing all steelmakers not just POSCO in 2010. Billionaire investor Warren Buffet loves POSCO and that's good enough for the ole Colonel.
Rear View Mirror
Yesterday we recalled that scary time when the economy, stocks and commodities all fell down the mineshaft with the collapse of Lehman Brothers in September 2008 (Copper Breaks $3.50, Moly Pops, Miners Rock). The metals & miners have had a good run ever since and the question becomes "how much longer can they rally." In the Report we slice and dice this question daily with the ebb and flow of domestic and global recovery; today let's checkout a little market history. Below is a 3-year chart of the S&P 500 (GSPC) and copper price. I prefer to look at the S&P instead of the DOW to understand the broader markets because it is an index of 500 companies instead of 30.
The very center of this chart is two days after Lehman Brothers declared Chapter 11 bankruptcy and the beginning of a long descent for the S&P and copper. A "bull" becomes a "bear" market when there is a more than 20% drop from the market high. On October, 9, 2007 the S&P closed at a high of 1,565.15 so the threshold by this definition for a bear market is 1,252 (i.e. 20% down). Before Lehman, the S$P dipped below this threshold and recovered several times; after Lehman, the S&P remained underwater dropping to a death-defying 666.79 on March 9, 2009. This so-called "Devil's Triple-6" marked an all time low for this bear market (on an intraday basis) and we've been struggling to swim to the surface ever since.
Yesterday the S&P closed at 1173.22, now only 7% from bull country. Can we pass through the range gate into the bull's pasture? Pessimists will point out that we've already come up a jaw-dropping 76% from the March bottom, that the market's overheated and a major correction awaits. They support their argument by reminding us that the rally from "Black Tuesday" of the 1929 crash was only 40% or so up before plummeting again to an 89% drop from the high of 9/3/1929. It took 25 years to reach that lofty benchmark again in November 1954.
Nuts to that! I think copper tells a far more optimistic tale for our future; the Colonel will believe the metals any day over the talking head naysayers. Copper hit a low of roughly $1.30/lb in December of 2008 following the Lehman collapse falling from something near today's price range of $3.00-$3.50/lb. Benchmark miner Freeport-McMoRan (FCX) followed copper to a record low of $15.7/share although its average price for December was $22.5. Both copper and FCX started climbing out of the mineshaft helped by China's demand for metals and their effective stimulus program. Importantly, both kept trending higher during the darkest days of March 2009. By the "Triple-6", Freeport closed at $32.32, 105% above its December low! Copper was trading around $1.70 (up 31%) and heading higher also.
So what's your point with all this dad-blamed number crunching Colonel? Markets notoriously over-shoot and under-shoot fundamentals because humans emotions are involved in their rise and descent. I believe a "rational" (i.e. fundamentally based) low for the S&P may have occurred with copper in December 2008. The average S&P for that month was approximately 880. If we use this as a basis, yesterday's S&P close is only 33% up from the bottom, not 76%. That number is more consistent with the 1929 rally which says we have some more to go before topping out. 40% up from the "Colonel's Low" of 880 is 1232, just shy of the bull pasture.
On March 19, I made two market predictions for the S&P 500 (Still Fearless in 2010, the Colonel's Market Prediction):
The S&P will break 1,193 before Memorial Day 2010
The S&P will break 1,251 before Christmas 2010
Hopefully you now understand some of my logic behind these predictions. If we can break and stay above 1,251 this year we may be running with the bulls again my friend!
Enough talk, let's walk the walk:
4-WD is OFF - the VIX or "fear index" is below 25, smoother broader markets are still in the cards; metals & miners are good with FCX remaining comfortably above $74; the benchmark 10-year T-Note remains below 4% (what is this?)
The YELLOW light is switched back on our fuel gauge with oil above $80
An ORANGE light is ON for possible adverse regulation/legislation: Miner's claim fee, Miner taxation, Cortez Hills & mercury emissions
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
NYMEX/COMEX: Oil is up $0.12 in early trading to $82.29 (May contract, most active); Gold is up $2.4 to $1107.2 (April contract, most active); Silver is up $0.022 to $17.365 (May contract); Copper is up $0.0200 to $3.5555 (May contract); Western Molybdenum Oxide remains at $17.11
The DOW is up 64.39 points to 10905.60; the S&P 500 is up 6.86 to 1172.59. The miners are mixed:
Barrick (ABX) $37.46 down 0.92%
Newmont (NEM) $50.37 unchanged
US Gold UXG) $2.73 down 0.29%
General Moly (Eureka Moly, LLC) (GMO) $3.43 down 0.87%
Thompson Creek (TC) $13.40 down 1.07%
Freeport-McMoRan (FCX) $83.26 up 0.46% (a bellwether mining stock spanning copper, gols & molybdenum)
The Steels are down, (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $43.61 down 2.59% - global steel producer
POSCO (PKX) $117.26 down 2.20% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is down 0.86% to $1,350,268.39 (what's this?).
Headline photograph by Mariana Titus