Copper and Resources Lead to Portfolio Outperformance

At the end of trading on Friday, March 20, 2009, the Best Portfolio is ahead of the benchmark S&P500 by 4.05% after only seven weeks of comparison. That is largely because our strategy of capturing option premiums as well as some dividends has boosted our performance in a tough market. We also got the benefit of the last two weeks’ surge in resource stocks, especially FCX and Quadra Mining, a couple of copper names with a gold kicker. We have nice gains in AMAT, WFR, BRCM and SVM, a Canadian silver producer. All the rest of the Portfolio is either around even, down somewhat, or a resource stock.

Our decision to add to HL is paying off, as the stock recovered nicely from a February bear raid. We re-bought at $1.77 and now, with both silver and gold rising steadily, HL has climbed back to $2.19. The news is not so good for the STEI repurchase, but we are very confident that this name will soon rise from the dead and add vigor to our Portfolio. We added more STEI at $2.85 after a huge plunge prompted by a scare and rumor campaign that the Trusts would implode along with the cratering market – but STEI has a solid business, and we are sanguine on stocks in general, so we recommend buying more at the present $2.47 price – a steal.

The performance in FCX has been quite strong, but not really unexpected. In retrospect, we should have made this a larger initial position, but we also had big holdings in QUA (Quadra Mining) as well as several other mining names like ANR, BTU, CLF and RIO. There was a concern that the Portfolio might be top-heavy in mining names, so for the sake of staying balanced we chose some medical and tech to round things out.

FCX is a fine company that was severely punished due to its industry classification, not its performance. In fact, I daresay FCX is the best of the miners, with an ace CEO who seems to understand mining, as well as prudent hedging and how to read a balance sheet. FCX saw what was happening in November, and promptly shut down some mines, deferred capex and/or expansion plans at other properties, and axed its dividend. It will be around, and in strong position, when other mining outfits are being picked over by the liquidators and the vulture investors. Our covered calls were written against the stock on 2/6/09, just days after the Portfolio was first published, and have now been assigned, meaning that we lose the shares.

The stark dearth of competent executive talent in the mining industry is probably testament to the insanely misguided mission of the B-Schools, that churn out more gamblers and financial tricksters than capable CEOs who actually want to run a company, and are also qualified to do so. FCX is lucky to have Richard Adkerson at the helm, and it’s doubly nice to see a CEO actually EARN his paycheck – a very rare sight in corporate America these days (or for the last twenty years).

We are also very glad to have stayed off the “financials” roller coaster, which seems utterly unpredictable and likely to remain so. The crazy swings in bank stocks that are clearly busted if current accounting rules are enforced is fun to watch, but could be hazardous to your wealth. We await developments as to whether FASB will cater to the screaming mob, or defend its ground despite the market turmoil caused by MTM’s unintended consequences.

Back to the copper story – the red metal has leaped 24% on the April contract (Nymex) in just one month, based on increased Chinese buying, global demand that seems steadier than the doom & gloom crowd had forecasted, and a general sense that stocks have been pounded down so far that the worst is over, and a large upswing is ready to emerge. Last week, we had a couple of strong market advances, and tomorrow Herr Geithner once again is on the line to show us something, anything that looks like a plan to address the credit crisis and restore confidence in the “system”, whatever that is. Frankly, I would call what went on over the past few years more of an organized crime experiment, and a RICO investigation waiting to happen – but for now, the Big Boys in Washington D.C. are still sticking with “financial system” as a way to describe the daily events on Wall Street, London, and trading desks around the world.

I plan to file an update on the Best Portfolio at the end of Q1, i.e. the March 31st close. I will figure the dividends that the SP500 would have received over the first two months of the Portfolio, and factor those in to the comparison. I also may make a few changes in composition, especially if the current low prices for MLPs are still at these levels in ten days. There are also a few tempting retail turnaround plays that I am personally invested in, and will likely feature in coming weeks. We will need to replace FCX next week, and I will likely add a retailer, a coal name, and/or an MLP depending on price. The next installment will show the new positions.

The current Portfolio at 3-20-09 is displayed below:

click to enlarge images

Note that all of the other March call options written have now expired, so we were called away (or assigned) only on FCX – but we got to keep the premium on all the other covered calls. We added the April AMAT $11 Calls (ANQDM) on 3/13/09 at 50 cents apiece, the only new Calls since the last update. The Portfolio has adjusted the FCX position (which closed on 3-20-09 at $39.00, up 55% from 2-3-09) to reflect the fact that we wrote the calls back in February with a $30 strike, so we now must sell the shares at $30, and lose the phenomenal surge that FCX recently enjoyed as copper bounced back toward $1.80 (and higher in the future, we believe). We did however capture a 48% move in QUA and will continue to hold this Vancouver-based copper/gold miner, as we think the selloff was wildly overdone, and that QUA still has plenty of upside from here.

The volatility over the past month has been breathtaking, and the end-of-the-world crowd is claiming this vol as a sign that the market is ready to break to the downside again, for a monumental washout of stunning proportions. Frankly, I believe that is absurd, and that we have a lot of daylight ahead, once we deal with the banks and reform the market oversight systems that were essentially sabotaged over the past decade. So stay tuned, buckle up, buy the obvious bargains that abound, and look for the next Best Portfolio episode shortly after 3/31/09. Until then, enjoy the ride to the UPside!

Comments

[Mad Hedge F...:]

Copper is the way to go! Traders looking for the Next Big Play are keeping a laser like focus on two key commodities. Chinese stockpiling prompted copper to break out of its recent trading range to the upside to $1.70, taking lead producer Freeport McMoran (FCX) up 30% on the week. Crude rose 15% to a high of $46. These impressive moves happened during a week when global equity markets were in complete freefall. This suggests that the bulk of the world’s growth will be in emerging economies, and that the next round of commodity buying will be even more ferocious than the last. Since I believe that the future is all about the ascent of hard assets over paper ones, this is music to my ears.

Mar 23 11:23 AM

[Conan the B...:]

Hey Mad, last I saw $54 crude was bubbling...

Mobius was on Late nite, emerging markets, hard assets, oil, ag...best in Breed, China and Brazil.

Believes we will be basing for a while but are in early stages of New Bull Market, Basic Materials buy, buy, buy.

Have bought, bought, bought.

I figure, the DOW stalls just above 8,000 and the S&P around 850. 30% gains in just a few weeks are unsustainable.

Besides, MS earnings are due out on Friday, they have been conspicuously absent on the "We are making Money Front". IMO

Mar 23 03:55 PM

[Stone Fox C...:]

GFA and MELI in Brazil should be big runners in the next bull market.

Mar 23 11:03 PM

[Albert Meyer:]

Great article. What's your take on Southern Copper?

Mar 24 09:03 AM

[Tim Plaehn:]

MELI is based in Argentina.

Mar 24 09:03 AM

[Gravity404:]

Yes. great article. FCX has been one of my favs, but what about PCU? Looks like it has had a nice run thru March along with Copper.

And if China is stockpiling, then will that create a demand issue down the road?

Mar 24 09:48 AM

[Bill Herbert:]

Hi Albert,

PCU is a stock that has been good to me in the past – but I haven’t followed it closely over the last year. I bought some in the teens and sold in the high thirties a couple of years ago, but held onto FCX and some others at that time. PCU has actually been less volatile than FCX, for whatever good that is in terms of portfolio stability.

The risky things about PCU are its ownership/control by Grupo Mexico, and the geographic risk. All the mines are in Mexico and Peru – both mining-friendly, for sure. But Mexico has been melting down economically for some time, and I believe there is a lot of political/confiscation risk there. I know that Cantarell, the huge oil field in the southern Gulf that has bankrolled the Mexican economy for over twenty years is in serious decline, and lower oil prices are a big hit to their revenues. I believe that Mexico may have to impose new taxes or royalties on mining properties – which are numerous - and since a lot of the PCU stock is American-owned, they can say it’s for the good of Mexico and who really cares about the Americanos, anyway?

Also, I don’t want to be at the whim of a large conglomerate (Grupo Mex) that may capriciously sell assets, do an unfavorable capital raise, or declare a large dividend to itself, as many have done in the past. I don’t have the time to monitor their honesty or capability, so I will pass even though they may generate great returns for investors. Note that in 2005, PCU did a $900 MM secondary, in which both the Pritzker family and Phelps Dodge (run by Adkerson) sold shares. Maybe that doesn’t mean anything, but they opted out of the PCU play, only to expand and develop other copper resources.

There are safer ways to play the copper upside – and FCX also has a huge gold resource, which I like. On the negative, they may have an expensive boondoggle in Tenke, so they are by no means perfect. In general though, FCX has very solid management, and it took a ridiculous plunge to under $17 from its (overvalued) peak of $120. So it had fallen farther, and had more upside, IMO. Also, it has better access to capital, one would think, if it decides to get acquisitive. There are numerous properties out there just begging to be picked off by the majors – and some of them are in FCX’s back yard in AZ so they get economies of scale with existing infrastructure. I know they have mothballed some development lately, but longer term, it may be in their interest to lock up valuable resources at fire sale prices.

Having said all that, I think that perhaps the best resource-based investments right now are selections from the MLP space in U.S. energy infrastructure. I hope to find the time to cover some of those names in a future update.



On Mar 24 09:03 AM Albert Meyer wrote:

> Great article. What's your take on Southern Copper?

Mar 24 11:20 AM

[Albert Meyer:]

Hi Bill,

Great reply. Yes, Tenke is a risky proposition, but manageable. Both companies earn enough revenue from by-products to cut net copper production cost to the $0.60 to $1.00 per pound price range. PCU doesn't have stock options. CEO basic salary $600K per annum. PCU distributes most of its profits. FCX has super-sized compensation packages. FCX's gold and molybdenum reserves are attractive. I'd own both companies. PCU has better margins. PCU did not cancel its dividend. FCX used the fourth quarter of 2008 to write down its assets purchased from PD - ridiculous big-bath charge to boost future earnings. I frown on that, but the market punished the stock and it will be a good investment going forward.



On Mar 24 11:20 AM Bill Herbert wrote:

> Hi Albert,
>
> PCU is a stock that has been good to me in the past – but I haven’t
> followed it closely over the last year. I bought some in the teens
> and sold in the high thirties a couple of years ago, but held onto
> FCX and some others at that time. PCU has actually been less volatile
> than FCX, for whatever good that is in terms of portfolio stability.
>
>
> The risky things about PCU are its ownership/control by Grupo Mexico,
> and the geographic risk. All the mines are in Mexico and Peru – both
> mining-friendly, for sure. But Mexico has been melting down economically
> for some time, and I believe there is a lot of political/confiscation
> risk there. I know that Cantarell, the huge oil field in the southern
> Gulf that has bankrolled the Mexican economy for over twenty years
> is in serious decline, and lower oil prices are a big hit to their
> revenues. I believe that Mexico may have to impose new taxes or royalties
> on mining properties – which are numerous - and since a lot of the
> PCU stock is American-owned, they can say it’s for the good of Mexico
> and who really cares about the Americanos, anyway?
>
> Also, I don’t want to be at the whim of a large conglomerate (Grupo
> Mex) that may capriciously sell assets, do an unfavorable capital
> raise, or declare a large dividend to itself, as many have done in
> the past. I don’t have the time to monitor their honesty or capability,
> so I will pass even though they may generate great returns for investors.
> Note that in 2005, PCU did a $900 MM secondary, in which both the
> Pritzker family and Phelps Dodge (run by Adkerson) sold shares. Maybe
> that doesn’t mean anything, but they opted out of the PCU play, only
> to expand and develop other copper resources.
>
> There are safer ways to play the copper upside – and FCX also has
> a huge gold resource, which I like. On the negative, they may have
> an expensive boondoggle in Tenke, so they are by no means perfect.
> In general though, FCX has very solid management, and it took a ridiculous
> plunge to under $17 from its (overvalued) peak of $120. So it had
> fallen farther, and had more upside, IMO. Also, it has better access
> to capital, one would think, if it decides to get acquisitive. There
> are numerous properties out there just begging to be picked off by
> the majors – and some of them are in FCX’s back yard in AZ so they
> get economies of scale with existing infrastructure. I know they
> have mothballed some development lately, but longer term, it may
> be in their interest to lock up valuable resources at fire sale prices.
>
>
> Having said all that, I think that perhaps the best resource-based
> investments right now are selections from the MLP space in U.S. energy
> infrastructure. I hope to find the time to cover some of those names
> in a future update.
>

Mar 24 03:59 PM

[j_remington:]

Stockpiling by China was artificial pressure. Now there is no more buying of copper by China. China probably sold PUT options on copper and needed to inflate the price so they would not be hit with a loss.

Mar 25 12:07 PM

[bassmaster17:]

I doubt Obama's cap and trade will pan out...too many democrats are being influenced by lobbyists...if Buffett thought O could pull this of, I doubt he would have taken a 27%stake in BNI.

Mar 26 10:03 AM

[anarchist:]

let me see here, we come to this blog to read about copper mine prices and we get a leftist diatribe implying that Obama and buffett don't have enough on their plate so they are involved in Copper price speculation-hey, it's Bill Clinton's fault-whatever it is!!


On Mar 26 10:03 AM bassmaster17 wrote:

> I doubt Obama's cap and trade will pan out...too many democrats are
> being influenced by lobbyists...if Buffett thought O could pull this
> of, I doubt he would have taken a 27%stake in BNI.

Mar 27 04:16 PM

[anarchist:]

scuse me, meant t o say right wing diatribe, not leftist, they are not interested in Obama conspiring to corner copper.

Mar 27 04:18 PM