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The Impressive Dr. Copper

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Posted by Mad Hedge Fund Trader

on Tuesday, 18 December 2012 18:16

Is Copper the New Red Gold?

12-18-12-tmhft-7-1-resize-380x300Federal detention centers in the San Francisco Bay area are slowly filling up with a new type of criminal. Thousands of illegal immigrants and petty drug dealers are being joined by a rising tide of copper thieves raiding abandoned government facilities for their heavy gauge copper electrical wire. At current prices a decent night’s haul can net crooks up to $20,000 at black market recycling centers.

Long known as “Dr. Copper”, because it is the only commodity with a PhD in economics, the red metal has been an excellent forecaster of economic activity around the world. Hedge fund managers have been impressed by copper’s ability to hold up, and even advance in the face of the “fiscal cliff”.

Demand for American home construction is slowly crawling out of the basement, and demand from China is starting to turn around as well. On Friday, we received further confirmation of this reversal when the Middle Kingdom announced its Purchasing Managers’ Index was at 50.9, a 14 month high, and its third month over the boom/bust level of 50.

It helps that they’re not making copper anymore. Some of the world’s largest mines are reaching the end of their useful lives, with increasing amounts of capital being poured into ripping a declining grade of ore from the earth. This is a problem, because the opening of a new mine can take as long as 15 years when the time required for government approvals, infrastructure, water supplies, transportation, and yes, bribes, is added in. What’s in the pipeline is all there is for the next five years.

Copper is also benefiting from its accelerating “monetization.” International investors, disgusted with the choices available in global stock and bond markets, are increasingly diversifying into the red metal, as well as other “hard” assets like gold, silver, coal, oil, nickel, iron ore, and others. This is one reason why the big metals exchanges are finding their inventories at a low ebb. It’s anyone’s guess, but perhaps half of the current $4.40/pound in the copper price is accounted for by investor, as opposed to, end user demand.

12-18-12-tmhft-6-1The obvious plays here are in the dedicated copper ETN (JJC), and the base metal ETF (DBB). Another candidate is Chile’s ETF (ECH), the world’s largest copper producer. And you can look at Freeport McMoRan (FCX), the world’s biggest publicly listed copper producer (click here for Time to Get Back Into Copper?). And yes, you can even buy .999 fine copper bullion bars at Amazon by clicking here.

I have some hedge fund friends who have discretely stashed thousands of copper bars in warehouses around the country, expecting the red metal to hit $6/pound within the next three years. If it doesn’t work out, I guess they can always eat their inventory by pursuing a new career as electricians. Hey, a good union and a steady $70/hour paycheck, what’s so bad about that?

12-18-12-tmhft-1-JJC

12-18-12-tmhft-2-ECH

12-18-12-tmhft-5-COPX

 

 

From the Diary of a Mad Hedge Fund Trader.

John Thomas writes the Diary of a Mad Hedge Fund TraderThe Mad Hedge Fund Trader



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Energy & Commodities

Why Now's the Time to Consider Canadian Energy Stocks

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Posted by Minyanville

on Friday, 14 December 2012 08:13

spindletop bgCanada's energy sector is still home to promising growth stocks and a large number of dividend-paying securities that offer elevated yields.

On October 31, 2006, Canada's Finance Minister Jim Flaherty announced that his government would start taxing royalty trusts as corporations on January 1, 2011. A frantic sell-off ensued, wiping out about $35 billion worth of market value by the end of the next trading session.

The timing of Flaherty’s announcement and the severity of the subsequent plunge led market-watchers to dub the event the Halloween Massacre.

In the years leading up to the announcement, Canadian royalty trusts had become increasingly popular among income-seeking investors. Free from corporate-level taxation in Canada, these pass-through entities disbursed much of their cash flow to shareholders in quarterly or monthly distributions. Even better, the Internal Revenue Service classified these distributions as qualified dividends, ensuring that US investors paid a tax of only 15% on this income.

Memories of the infamous Halloween Massacre prompted many investors to swear off Canadian equities, a shortsighted move that overlooks the 48% total return posted by the S&P/TSX Income Trust Index from November 1, 2006, to December 31, 2010. In comparison, the S&P 500 generated a loss of 11.2% over this holding period.

Although most royalty trusts converted to corporations, Canada’s energy sector is still home to promising growth stocks and a large number of dividend-paying securities that offer elevated yields.

The country boasts some of the world’s largest oil reserves, from Alberta’s vast oil sands to emerging shale basins and a series of heavy-oil plays across western Canada. Our favorite upstream operators have the wherewithal to grow oil production significantly in coming years, while the surge in drilling activity and output has created opportunities in the midstream and oilfield-services segments.

And US investors shouldn’t overlook the benefits of exposure to the Canadian dollar. The nation’s financial system avoided the excesses that characterized the US credit bubble and emerged from the Great Recession in solid shape. Canada’s strong economy and fiscal strength should support the value of its currency relative to the US dollar and the euro—an appealing prospect for many of our readers.

Before we highlight one of our top Canadian energy stocks, here’s a quick review of the basic tax implications associated with equities that trade on the Toronto Stock Exchange: Investors in the US can claim the 15% withholding tax levied by Canada as a credit against their domestic tax liability. Even better, Canadian equities held in a tax-advantaged account such as an IRA or 401(k) aren’t subject to this 15% withholding tax.

......read page 2 HERE



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Energy & Commodities

"Table Pounding Buy Levels"

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Posted by Josef Schachter: Schachter Asset Mgmt.

on Thursday, 13 December 2012 12:39

We continue to watch for “at the margin problems” in the world economy that would highlight an upcoming synchronized slowdown and problematic period. These are some of the recent events that are weakening the underpinnings of the current positive consensus view and may indicate that many parts of the world will face a pronounced slowdown and possible recession in 2013.

Watch for a breach of US$84.05/b (now $85.84) to signal that OPEC has not made the appropriate cut in production and that weaker economic conditions worldwide are depressing oil prices.

For the S&P/TSX Energy Index, our forecast remains that we should hit another new low. Our target remains in the 200 area.

Screen Shot 2012-12-13 at 10.26.33 AM

 



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Energy & Commodities

Fed Gooses Oil & Gold

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Posted by Arabian Money

on Thursday, 13 December 2012 03:32

Fed Ups its Money Printing for 2013, Good for oil, gold and silver prices....

benbernankenoThe Federal Reserve chairman Ben Bernanke yesterday moved his money printing into a higher gear with an additional $45 billion in asset purchases a month on top of the existing $40 billion program and set a target of 6.5 per cent unemployment before he would start to reverse this monetary stimulus.

The unemployment target replaces the commitment to keep interest rates low until mid-2015 with a more open-ended approach. Oil, gold and silver prices jumped on the news though they later fell back.

Hard assets to gain

However, this is a very positive policy stance for oil, gold and silver in 2013. The Fed is no longer targeting inflation. Instead it is looking first to unemployment for a signal that the economy is getting better.

Therefore the US economy will now tolerate higher levels of inflation than previously expected. Hard assets like oil, gold and silver are the classic hedges against such inflation and will gain as investors reallocate their money to protect it against the coming inflation.

Interestingly a flash poll on Yahoo! Finance showed 64 per cent of respondents think the Fed should abandon all monetary easing now and let the economy reset. Not everybody is a winner in this. Savers are condemned to low returns on their deposits and those on fixed income like pensioners are suffering. There is a net transfer of wealth to the holders of oil, gold and silver.

There is also a growing appreciation that fixing the bond markets in this way is very dangerous. Already the Fed is having to buy 90 per cent of its own bond issues. The US T-bond has become the biggest Ponzi scheme of all-time and if it was to collapse the consequences would be incalculable.

Safe haven assets

That’s another reason why smart investors are going into hard assets as the last refuge from the money printers. All the central banks of the world are following the Fed’s lead even though many of them fear this is going to end very badly.

If bond markets crash then the price of gold and silver will soar against other assets in a flight to the only true money. This has actually happened many times in history, usually in revolutionary periods or when empires are in decline, and it is happening again right now.

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Energy & Commodities

The Internet Is a Dud

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Posted by Bill Bonner - The Daily Reckoning

on Wednesday, 12 December 2012 08:18

technology 4-150x180The world today looks almost identical to the world of the 1960s because there have been very few important innovations since then. But you will leap to reply — the internet! Alas, electronic technology does not seem to noticeably increase output of stuff. The Internet affects our quality of life in many ways, but not our standard of living.

The Internet was more or less fully built out in the US in the year 2000. All of a sudden, knowledge from all over the world…and from all of history…was available. Information could be accessed and questions could be answered at the speed of light. People could collaborate on a global scale, across borders and time zones, innovating, creating, critiquing, and elaborating new ideas of breathtaking scope.

In the 1990s, many people believed that this electronic hyperactivity would eliminate the “speed limits” on growth. Analysts advised investors that they could pay almost an infinite price for start-up Internet companies. Growth would be fast. And it would not require capital inputs, they said.

And certainly, there are many Mercedes 500 automobiles on California highways that owe their existence to the Internet. Many entrepreneurs, software developers and “app” creators have gotten very rich. But based on growth rates, wages and household incomes, the Internet does not seem to have led to a general uptick in prosperity. Since 2000, household income in the US has actually fallen. So have wages. And stripping out government expenses and redistributed income shows negligible real growth in the private sector economy over that period. GDP minus government spending was $9.314 trillion in 2001 and only $9.721 trillion in 2010. At that rate, it would take 167 years for the GDP to double. By comparison, GDP doubled twice between 1929 and 1988.

Over the last 20 years, the top 10% of earners are the only ones to have added to their wealth. Everyone else is even…or worse. At the bottom, among the lowest quarter of the population, people are poorer now than they were 20 years ago.

What went wrong? Why didn’t the Internet make us richer?

According to The Financial Times the world spends 300 million minutes a day on a single computer game: Angry Birds. Millions more are spent looking at videos of puppies or kittens. People spend 700 billion minutes per month on Facebook. The typical user spends 15 hours and 33 minutes on the site each month. The YouTube viewer spends 2.9 billion hours per month on the site.

You get the idea. You don’t need the government to waste time; you can do it yourself!

Even when you’re not using the Internet to waste time, you’re rarely using it to add to GDP. Instead of going out to shop, you can shop on the worldwide web. You will find much greater selection at generally lower prices. You save the time and energy of going shopping at a mall. Likewise, entertainment is much easier and more convenient. Instead of going to a strip club, you can watch as much pornography as you want in the comfort of your own home.

In industry too, the Internet is primarily a cost-cutting, efficiency-enhancing technology. It permits better fleet management for trucking companies. It helps retailers avoid unnecessary inventories. It allows you to save time and energy in countless ways, such as checking in for flights on-line…reading widely without going to the library…sending massive files, graphics and reports with the press of a button. These things make life more fluid, and perhaps more easy and agreeable, but they do not add significantly to GDP.

The Internet cannot create GDP growth.

Growth is what you get when you use more energy, or use the energy you have better. Growth — more GDP…more jobs…more revenue…more people — is also what every government in the developed world desperately needs. Without it, their deficit spending (all are running in the red) leads to growing debt and eventual disaster.

Not only is the rate of growth in the developed world declining, so is the speed of recoveries. Here’s Harvard professor Clayton M. Christensen:

In the seven recoveries from recession between 1948 and 1981, according to the McKinsey Global Institute, the economy returned to its prerecession employment peak in about six months, like clockwork — as if a spray of economic WD-40 had reset the balance on the three types of innovation, prompting a recovery.

In the last three recoveries, however, America’s economic engine has emitted sounds we’d never heard before. The 1990 recovery took 15 months, not the typical six, to reach the prerecession peaks of economic performance. After the 2001 recession, it took 39 months to get out of the valley. And now our machine has been grinding for 60 months, trying to hit its prerecession levels — and it’s not clear whether, when or how we’re going to get there. The economic machine is out of balance and losing its horsepower. But why?

Why? The obvious reason: we’ve reached the point of diminishing returns on energy inputs. I use the word ‘energy’ in a broad sense — to include our intellectual energy, and our time and attention, as well the energy you get from fossil fuels. Returns on investment have gone down to marginal levels.

In 2012, the Congressional Budget Office helpfully looked ahead and saw an on-coming train. If federal spending remains on its present course, the US would add another $10 trillion in debt over the next 10 years. Congress, reacting to the emergency, passed a law which, if left unchanged, would reduce the additional debt to $8.7 trillion. The downside train kept coming.

But the train is far bigger and more powerful than the CBO thinks. The real federal deficit for 2012 is not $1.1 trillion as widely reported. Include unfunded Medicare and Social Security obligations and it is more than $7 trillion. GDP increased during the same period by about $320 billion. In other words, debt is going up 21 times faster than the economy that supports it. Already, if you reported the liabilities of the US government correctly, according to GAAP rules, such as every corporation is required to do, it would show a hole $86 trillion deep. And at the rate deficits accumulate, it will get twice as deep in the next ten years — to more than $150 trillion, or nearly 10 times the size of the economy.

Another way to look at this is to think again about how modern democracies finance themselves. Since the days of Bismarck, they take in money from citizens and pay much of it back, in the form of various social spending programs. The successful politician allows spending to outstrip revenues as much as possible, but not so much that he appears irresponsible. The more benefits he can plausibly promise to the voters, the more likely he is to gain power…and the more resources he can also shift to favored groups.

Growth over the last hundred years — in population, GDP, wages, prices — made it possible to expand government spending greatly, anticipating larger, richer generations that would support their smaller, poorer parents.

The mathematics of this system held up fairly well — until recently. Now, population growth rates are falling everywhere in the developed world — including the US, with a huge bulge of baby boomers preparing to retire and voting themselves the most lavish benefits in history. Without growth, this system of public financing is doomed to spectacular failure. More spending will not be better; it will be calamitous. The more dry debt tinder on the ground, the bigger the blaze.

Regards,

Bill Bonner
for The Daily Reckoning


Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.

Special Report: Wait until you see what could happen in America next… An unbelievable phenomenon is set to sweep the nation... The railroad, steel, and technology age - this phenomenon triggered them all. And now it’s taking shape again! Watch this special, time-sensitive presentation now for full details on how it could affect your job… your lifestyle… and your wallet. Here’s How…

 



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