Freeport McMoRan, For Copper's Comeback

One of the most well defined trends out there is the downmove in the U.S. dollar. If you look at the chart of the Powershares U.S. Dollar Index Fund (UUP), it’s been steadily skidding for months.

Honestly, that is not my favorite scenario longer term–a strong economy usually needs a stable currency. (It doesn’t have to be rising, just holding its value compared to both other currencies and hard assets.) However, right now, the decline in the dollar is helping some U.S. multinational companies, as well as boosting the value of commodities, which were decapitated during last year’s market panic.

Let’s not forget, oil prices fell from $148 to $35 before rebounding, copper fell from $4 per pound to $1.25, and the broad CRB commodity index fell from 474 to 200. All of these measures have rebounded in recent months but remain miles from their old peaks. I think they have room to run, which will boost commodity stocks.

I’ve already mentioned gold stocks in my recent Cabot Wealth Advisories–gold bullion has broken out of an 18-month base, and gold stocks are following along. Agnico-Eagle Mines (AEM) and Buenaventura (BVN) are two of my favorites.

Outside of gold, a top name you should consider is Freeport McMoRan (FCX). The company has its hands in a few metals, but copper is the real driving force, making up more than three quarters of its revenue. And on that front, FCX could see earnings fly through the roof in the quarters to come.

As it turns out, worldwide copper inventories at this year’s trough in demand were an incredible 70% less than the inventory total at the last cyclical demand trough (back in 2002). And now demand is accelerating in a big way as the global economy gets back on track, especially in China. Moreover, the growth in supply is likely to be muted, as voluntarily idled capacity is small compared to the overall market.

All of this is the reason copper has rallied from its low of $1.25 to $3 in August. It’s now around $2.85, and has been consolidating for the past few weeks. If prices head materially higher, Freeport’s earnings are likely to crush expectations going forward–already, analysts have hiked their 2010 earnings estimate from $3.77 (90 days ago) to $4.53 (60 days ago) to $5.88 currently. Who knows how high it might go?

What’s the fly in the ointment here? My main apprehension is that EVERYONE is talking about the weak U.S. dollar here … and when everyone knows about a trend, it’s likely that it’s near an end (as the saying goes). If the U.S. dollar is going to embark on a countertrend bounce for a few weeks or months, it’s a safe bet that many commodities and commodity stocks will sag.

However, FCX itself is in fine shape. First, you should know that the stock is extremely well traded (it averages 14.6 million shares per day) and has terrific sponsorship. Second, the stock notched nine weeks up in a row starting in early July, and included in that run were five weeks of tight trading action–both signs of powerful support.

And third, during the market’s recent eight-day retreat, FCX dipped to its 50-day moving average … and then forcefully bounced off it to new recovery highs. With the 50-day line down near 68, we think FCX is buyable around here, or on normal weakness into the 70 to 73 range.

Comments

[MarkGillCPA:]

Michael,
I've been hearing that the move from $1.25/lb to 2.85 was due to Chinese stocking up on copper while it was cheap. How much has China accumulated? Will they keep buying? Maybe the chinese see this a an alternative to buying U.S. treasuries.

On a longer term basis, Barclays (the ex-Lehman analyst actually) has done some interesting research on the idea that there is a long term shortage in copper developing due to existing mines depleating faster than new mines can come online. New projects are often out in the middle of nowhere and take upwards of 5-10 years to develop. Any thoughts on this?

Oct 20 10:22 AM

[waldipup:]

I disagree.

Prices are not cheap , and in fact quite high on this stock , and about to test longer term resistance above.

I'd wait for a more substantial drop , or look for cheaper companies in the sector.

Oct 20 04:27 PM

[Tuaj:]

I second MarkGill's questions. Does anyone have insight into the true reason for the rise in Cu prices? Is it all re-stocking?

Residential construction, auto, and electronic production have all been low so can anyone explain a rise in copper?

Oct 25 10:28 PM

[Mad Hedge F...:]

knu d Last February, I told you I would kill myself if you didn’t buy the world’s largest copper producer, Freeport McMoRan (FCX) (click here for the call at www.madhedgefundtrader... ). OK, I exaggerate. I said I would throw myself in front of a train. Who knows, I might have survived the train. Since you all followed my advice, you are all now as rich as Croesus, as the stock has since gone parabolic, from $15 to $85, up 560%. Providing the rocket fuel for this move was copper’s leap from $1.25 to $3.00. Now that we have broken out through the $3 level in the red metal, the next leg may be in progress. CEO Richard Adkerson is the kind of burly, no nonsense kind of guy you might expect to find in an afterhours bar near one of the many open pits the company works around the world. Although Q3 revenues fell from $4.6 billion to $4.1 billion YOY, FCX has reinstated its dividend, and is clearly back in the catbird seat. China is importing record amounts of copper both for stockpiling and consumption by it explosively growing auto, consumer, infrastructure, and power industries. Record gold prices, which FCX also mines, are giving a further boost. Projects mothballed last year are back on track, and idle equipment is going back to work. When I was at Morgan Stanley during the eighties, any association with the red metal was considered career death, as it was in the grips of a 20 year bear market, trading as low as 60 cents.. The guy who covered our big client in the sector, Anaconda, was nice enough, but people avoided his table in the company cafeteria in the GM building like he had AIDS. I have to pinch myself when I see copper’s performance today. I wonder where that guy is now?

Oct 26 06:20 PM

[Fibozachi:]

Appreciate your bullish argument on behalf of FCX Michael, but personally believe that even if FCX does rebound for one more run into the open range interface of 85 - 88 in an attempt to close the exceedingly bearish point of recognition wave three-of-three breakaway gap, that it will fail miserably. The ultimate question at hand is whether FCX is an inflationary goldmine or deflationary pyrite.

After detailing what the end of Primary wave 2 will look like on the $DXY and VIX last Thursday morning, accurately diagnosing bearish candlestick patterns across the SPY, SSEC, IYT, XBD, GS, USO, RIMM, DOW, BBH and CELG last Friday evening and highlighting the fifth-of-a-fifth ending diagonal inflection point in BIDU ahead of its earnings call Monday afternoon, we at Fibozachi thought it is as good a time as ever to turn our attention back towards the hedge fund hot potato that is Freeport-McMoRan (FCX). Unfortunately, for longs, the technical picture appears to be resoundingly bearish ...

full article with detailed charts at:
fibozachi.com/technici...

Oct 28 01:36 PM