Published: June 15, 2010
During the past week, we got very strong indications
that strong hands see value in the market:
- Robert Doll, chief investment officer at investment
giant BlackRock Inc. (NYSE: BLK), wrote a well-argued
bullish position for U.S. stocks in The Wall Street Journal.
- U.S. Federal Reserve Chairman Ben S. Bernanke attempted to
reassure investors that there would be no double-dip recession.
- China posted red-hot economic numbers.
These developments - and others - are bullish for stocks. If we
include the fact that the market has been way oversold, the
market seems to be telling us that it is time to look for
That's why it's time to play copper, which carries the
"metal-of-the-economists" moniker for a very good reason -
copper prices are a very good barometer of global economic
activity. Since the metal is used widely in construction,
automotive, electronics and a myriad of industries, copper has
served as a fairly reliable barometer.
I make that statement with a bit of caution, since there has
been a very pronounced sell-off in copper prices in the market
since the April peak. This was coincident with the European debt
crisis. But the sell-off has been dramatic.
Now, however, it appears that the expectations of a global crash
are decidedly diminished. Central bankers and governments around
the globe have taken dramatic measures and continue to work
feverishly in order to ensure that global growth remains on
track. Sure, there are differences, but the general objective is
the same for everybody: maximize growth. The constraints in
emerging markets are inflationary pressures, and in European
countries there are fiscal and debt level issues. So let's
The U.S. economy is strengthening further. We learned last week
from Bernanke that the impact from the European debt situation
will be muted and that the Fed remains vigilant to counter its
effects in the U.S. economy. As a result, the U.S. economy will
be consolidating its gains in growth and unemployment will be
hard to cut from here, but we will not go into recession again.
China and the rest of Asia remain very strong. China's
numbers reveal that it is still in risk of overheating its
economy, despite the measures it has taken to avoid this. Very
strong trade surpluses, despite the recent financial turmoil and
European distress, strongly point to the fact that China needs
to do a lot more to "flexibilize" its currency and let it
appreciate. A more-flexible approach would be beneficial, since
it would achieve a more balanced growth, relying less on exports
and increasingly in the purchasing power of its own consumers.
As an example, the trade deficit excluding oil for the U.S.
economy narrowed with every country except for China.
Now, should China gradually make the currency changes that I
expect - as Brazil and Mexico have done for a long time - the
Asian giant would benefit from an immediate easing of its
internal inflationary pressures, while at the same time
increasing the purchasing power of China's consumers.
This, in turn, would help support the global economy, balancing
China's growth, and stoking its demand. The global commodity and
exporting sectors would benefit from that heightened demand.
India's economy is set to accelerate into the second half of the
year and beyond, and is stimulating lending. And Brazil's
economy has been - and will continue to be - able to post
accelerated rates of growth this year. It will grow at a 7.5%
pace this year, with the rate moderating to 5% next year.
We'll also have an extended period of 0% interest rates in the
U.S. economy stretching into at least the first quarter of 2011,
with Europe likely to remain extremely lax in monetary policy to
compensate for the renewed fiscal discipline. Japan is also
likely to keep an easy monetary policy.
This environment is the ideal scenario for commodities.
Yet, we saw the sell-off over exaggerated fears about a global
Since markets exaggerate to the downside and to the upside
before reaching an inflection point, they create great
opportunities at the extremes. And when markets sell-off to the
downside, they tend to do so much more aggressively and over a
shorter period of time.
In addition, the fact that the Bush administration tax cuts
expire at the end of this year is forcing many investors and
speculators to take profits now, leading them to establish a
new, higher cost basis. This could have been a strong factor
helping the recent sell-off be more pronounced than it should
have been, were it based solely on fundamentals. But this just
creates new entry opportunities that we must seize.
That brings us to the publicly traded king of copper:
Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX).
Copper prices sold off 25%, from $3.65 on April 12 to a recent
low of $2.73. And this occurred in an environment where gold,
which acts as a safe haven from both inflation and financial
meltdowns, was rallying. In this environment, it is no surprise
that Freeport's stock sold off 33% from almost $88 to $57. It
closed Friday at $64.93.
Indeed, a chart of copper and the chart for FCX reveal the
expected almost identical movements for both.
The sell-off in Freeport's stock occurred independently of the
fact that the company's reported earnings-per-share (EPS) of
$2.00 in its April release was ahead of expectations, and the
fact that the firm recently doubled its dividend from 60 cents
to $1.20 per share. FCX actually has accumulated a huge amount
of cash already ($2.7 billion) and is generating some $1 billion
per quarter. So some market players have been speculating about
the possibility of the company paying a special dividend. We are
not going to count on this, however, and will just go on the
company's prospects from here - as well as the current $1.20
dividend, which gives us a 2% dividend yield.
By accounting for roughly 12% of the total output of copper in
the world, Freeport is the largest publicly traded copper
producer on the planet. The industry has seen a tripling of
copper prices in the last few years and this strong pricing is
likely to keep increasing.
Cheaper copper - accessible in open-pit mines - will run out in
the next decade. At the same time, however, the demand keeps
increasing with the "wealth effect" that is creating hundreds of
millions of new members of the global
middle-class/consumer-class in China and in other emerging
markets around the world. We're also seeing huge urbanization
trends occurring in those countries. As we discussed, global
growth should actually accelerate into 2011.
Freeport, by virtue of the high quality of its properties, its
expertise and its economies of scale, shines bright. It
continues to enjoy a very high profitability from its Grasberg
property in Indonesia, which, given its very-high-quality ore,
is one of the most competitive mines in the world.
The company does have some political risk in the Democratic
Republic of Congo, which has recently raised taxes even without
going through Congress. This follows a joint study between the
Organization of Economic Co-operation and Development (OECD) and
the African Development Bank, which concluded that many African
states should do the same in order to ensure that they get an
adequate return from their mineral wealth. Tax increases are not
expected to be a significant dent in Freeport's profitability.
FCX's stock was strongly oversold and has rebounded decidedly on
good global macro news, and an apparent abatement of near-term
European-debt-default fears. I see a continuation of all the
trends that I've described, which I believe grants us a very
attractive entry opportunity into FCX. The stock is trading at a
Price/Earnings (P/E) ratio of less than 9.0, while the Standard
& Poor's 500 Index is trading at 15 times earnings.
This is a gift. I foresee in coming months a strong rebound in
copper prices and a possible 50% upside for Freeport - sending
it to new highs.
-- Horacio D. Marquez
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