Copper Disconnect ~ market folly

Wednesday, July 2, 2008

Copper Disconnect

Today, we saw a disconnect between the price of Copper and one of the world's leading copper producers Freeport McMoran (FCX). Copper futures have been rising steadily the past few days and are approaching overhead resistance, looking to breakout. Yet, during this rise in copper prices, you will notice that the copper producer FCX got beat down in the market. So, we seem to have a disconnect here. Take a look at copper futures and you'll notice an area of strong overhead resistance. If it breaks this to the upside, copper could really take off. We're talking about a multi-year ascending triangle building here.Then, compare this with FCX and you see a tale of two charts. FCX is now bordering on its 200 day moving average and I like it down here. Technically, the stock has been in a long uptrend and are a direct beneficiary of high copper prices and growing copper demand. And, to top it off, FCX has the added bonus of exposure to molybdenum, a metal hardly anyone knows about. Also, I would be remiss if I didn't mention that Atticus Capital has a large stake in FCX. Atticus is the 13th largest hedge fund in the world based on assets as recently catalogued by Alpha, which I posted about here. And, you can read more about Atticus Capital's portfolio holdings in the 13F analysis I did here.

Even if the selloff in FCX continues, I'm buying here because 1.) copper prices are high and look to go even higher, 2.) FCX is one of the best copper producers out there and benefits from higher prices, 3.) they have exposure to molybdenum, 4.) it is cheap on valuation as it trades at only 13.1 times trailing and 8.6 times forward earnings, 5.) they still are cranking out operating margins of 42% and a return on equity of 20.4%, AND 6.) each time the stochastics have reached oversold levels, FCX has presented us with a buying opportunity. And, that's exactly what is about to take place. If you look at the chart of FCX below, you will see the green circles on the main chart highlight the buyable dips. On the bottom of the chart, you will notice those buying opportunities coinciding with oversold stochastic levels.So, the action we saw today was very puzzling to say the least. There was a clear disconnect between the price of copper and the copper producer FCX. I believe this is due to the fact that we have reached the stage in the market sell-off when even the market leaders get taken behind the woodshed and beaten. All the weaker sectors have already sold off and now it is time for the strong sectors to be taken down. After all, we're in bear territory. We saw this same scenario play out a few months ago when energy, commodities and the like all saw massive selling. And, after massive run-ups, we're back to the rinsing cycle of the rinse and repeat strategy. Watch FCX as it should provide a solid entry for a longer term investment. We may see continued selling due to the fact that hedge funds and the like are seeing redemptions and have to scrounge up cash to give back to their investors who want out. And, when you're short on cash, you have to sell your winners, which is exactly what they're doing.

Copper prices are rising and are close to really breaking out. Although Freeport McMoran Copper & Gold Inc has the word 'gold' in it, don't let that fool you. Copper is their game. Toss in the fact that they have exposure to molybdenum (think steel alloys) and this miner truly has exposure to some booming industries. Take advantage of the disconnect here between FCX and copper prices. FCX benefits from these higher prices and yet hedge funds and the like are forced to sell their winners due to redemptions. Their loss is our gain.


3 comments:

TraderMark said...

Thats sorta why I bought DUG instead of buying an instrument that shorts the commodity. All you need to go correct with a DUG or FCX (on short side) is market to sell off very hard. With the commodity you actually need it to go in the right direction (copper or oil)

That said FCX just looks the same as any other metal stock - I wouldnt look too much into it. How about that SID! Thank gosh for stop losses. That stuff is finally looking interesting. Would love to get MTL at a print that starts with a $3, but $40 will do.

VT Castle said...

Nice write up. The schism between commodity prices and their respective stocks all across the board today was rather disheartening.

While I couldn't agree more about FCX's role as a molybdenum producer and it's need in high strength steel, I'm curious if market sentiment will continue to pressure FCX throughout the summer if global inflation continues to be a thorn in our collective sides.

But hey... maybe Vale (RIO) will pay a nice premium for FCX since they're sitting on lots of newly printed cash.

J. (marketfolly) said...

mark yea haha no joke. the entire steel sector is the perfect example of why you need to have stops in place. i got stopped out so fast last week it wasn't even funny. i can only imagine the flurry of stops that got taken out today. or, for that matter stops that the stocks blew right by today with the elevator drop. steel and metals in general should get interesting here in a little while as well you're right.

vt, thanks. yea the schism was very apparent and i think it will continue for a little bit longer. while RIO keeps denying things, there's always hope. Atticus continues to hold this name when originally they bought massive stake in phelps dodge, who got acquired by fcx and their shares got converted over. now if fcx gets acquired, atticus will have made one of the most successful investments in a looong time... 2 buyouts hah