“What Are The Markets Telling Us?” From The Copper Journal
As history has shown us time and again, when an economic
problem has been identified, and significant resources are brought to bear to
spark a recovery, inexplicable natural forces are already working to resolve
the issues.
There are certain phrases that stand the test of time. The newspaper headlines in October 1975, after President Ford denied Federal assistance to New York City when it was in danger of bankruptcy, “Ford to City: Drop Dead.” Several years later in 1992, when Bill Clinton was campaigning for president, our economy was listing under the leadership of President Bush. The turning point hinged on “It’s the economy, stupid.” Gaining fewer headlines, but having no less impact upon the copper industry, in September 1984, then President Reagan rejected a request by U.S. copper producers that he impose quotas or tariffs to protect them from imports.
The common dominator among these events that became apparent only after the fact, was they all represented a turning point toward recovery. More recently, the “Time to Change” message resonated enough with voters that president-elect Barack Obama will be sworn into office very shortly to begin carrying out his plans for the future. Hopefully, this too will represent a turning point for our economy and indeed the global market as well. Ultimately, it is the state of the economy that rivets people’s attention, particularly when they are out of work, and have no income. This is where we are today.
Last year, our economy lost some 2.6 million jobs, the largest such decline since 1945, thereby pushing the December unemployment rate up to a 16-year high of 7.2%. Housing starts, a key barometer of our economy fell to a new low of 625,000 homes on an annualized basis during November, down 1.65 million, or 73% from the 2.27 million high set in January 2006. The automotive industry has seen production and sales fall 40% and 37% respectively from the year ago period, with the viability of the ‘Big Three’ seeming to be contingent now upon help from the federal government. It necessarily follows, given the serious downturn in these critical sectors of the economy, coupled with the structural flaws that have been reveled over the past several months that our level of confidence has fallen as well.
Nevertheless, we remain optimistic. Downturns and setbacks, as deep and painful as they may be are temporary. The City of New York regained its vibrancy not only in the 1970s, but again following the aftermath of September 11, 2001. Our economy rebounded smartly during the 1990s under President Clinton, although one might argue that it came after the seeds of recovery were already planted by the Bush administration. As for the copper industry, once it became apparent that support would not be coming from Washington, it reinvented itself from the ground up in order to be competitive in the global market and reaped enormous benefits from those efforts.
It is a tenet of market psychology that during a bear market, sentiment is focused acutely on bad news with expectations of worse to come, while any positive developments are virtually ignored. Bull markets, of course, reflect the exact opposite, as good times will only get better, while any bad news is shrugged off as an aberration. The current state of the economy certainly bears this out, as one has to look long and hard to see something positive in the wreckage. It is as if we have gotten to the point where it can only get better from here, or perhaps the other way of saying it is, there is nowhere else to go but up - despite warnings from some that we are headed for a repeat performance of the 1930s.
At the risk of repetition, fiscal and monetary policy is geared toward recovery on a global basis. Just as important, energy prices which were a major contributing factor to the downturn have fallen at record rates, thereby putting more money in consumer’s pockets and bringing us back to levels consistent with growth rather than contraction. Also, the process is underway to eliminate toxic financial instruments from the system that should never have existed in the first place.
Could it be that forward looking markets are already signaling a turn? Although it is too premature to draw a conclusion, the evidence should not be ignored. After hitting new lows in November equity markets throughout the world have turned higher. Not just those of major industrial economies, but emerging markets as well. As relates to metals, although inventories have been rising, and undoubtedly more excess metal will find its way into warehouses, prices nevertheless have been also been rising. Whether these moves are simply a correction, or change in trend remains to be seen, but they too warrant our attention.
And finally, from a contrarian point of view, history has shown time and again, that when an economic problem has been identified, and significant resources are brought to bear to spark a recovery, inexplicable natural forces are already working to resolve the issues.
Spot
copper averaged $1.3880 on Comex during December off 29.70¢, or 17.6% from
$1.6850 during November, and was down $1.6337, or 54.1% from $3.0217 last
December. The 2008 annual average came in at $3.1336, down 8.70¢, or 2.7% from
$3.2206 during 2007.
Inventories held in Comex and LME warehouses rose 63,977 MT, or 20.8% during
December to 370,850 MT, and were up 159,344 MT, or 75.3% from 211,506 MT at the
end of 2007.
The
Base Metals Barometer fell to 135.5 during December, off 15.9% from November,
and is down 51.5% from last December. This was the lowest reading since June
2004.
Despite rising inventories, severe weakness in the global economy, and bearish
sentiment to match, the base metals complex nevertheless moved higher across the
board as the New Year got underway. Through January 9th, copper is up 11%;
aluminum +5%; lead +25%; tin +10%; nickel +5%; and zinc +9%.
The Technical Corner: After being beaten down to a
four and one half year low, at $1.2260 on December 26, 2008, Spot copper
steadied itself in what appears to be the beginning of a technical correction.
Over the past two weeks, the market has rebounded 32¢ from that low, enroute to
test its first level of resistance at $1.60.
Clearly, neither the fundamentals, nor sentiment would suggest a serious move higher, but from a purely technical point of view, copper has the potential to advance further. On a very macro basis, we saw the market fall $2.75 from July to December, in a near vertical freefall. A 50% correction of that drop targets a move to $2.60. Without question, however, copper will encounter strong headwinds along the way, assuming it gets past the $1.60 level first. If that line of resistance is surpassed, $1.70 will be the next challenge, and at just about every 10¢ increment thereafter.
Notice on the weekly chart that $2.37 was the pivotal point in 2007. From where we sit, the market could hit this level and still be in nothing more than a technical correction. Conversely, if copper fails to move beyond $1.60, we would expect to see a retracement back to the low, with the real test of whether that level holds. As odd as all of this sounds, the technical aspects of the market can not be ignored, as small moves have a way of becoming the base upon which larger moves are made.
There are certain phrases that stand the test of time. The newspaper headlines in October 1975, after President Ford denied Federal assistance to New York City when it was in danger of bankruptcy, “Ford to City: Drop Dead.” Several years later in 1992, when Bill Clinton was campaigning for president, our economy was listing under the leadership of President Bush. The turning point hinged on “It’s the economy, stupid.” Gaining fewer headlines, but having no less impact upon the copper industry, in September 1984, then President Reagan rejected a request by U.S. copper producers that he impose quotas or tariffs to protect them from imports.
The common dominator among these events that became apparent only after the fact, was they all represented a turning point toward recovery. More recently, the “Time to Change” message resonated enough with voters that president-elect Barack Obama will be sworn into office very shortly to begin carrying out his plans for the future. Hopefully, this too will represent a turning point for our economy and indeed the global market as well. Ultimately, it is the state of the economy that rivets people’s attention, particularly when they are out of work, and have no income. This is where we are today.
Last year, our economy lost some 2.6 million jobs, the largest such decline since 1945, thereby pushing the December unemployment rate up to a 16-year high of 7.2%. Housing starts, a key barometer of our economy fell to a new low of 625,000 homes on an annualized basis during November, down 1.65 million, or 73% from the 2.27 million high set in January 2006. The automotive industry has seen production and sales fall 40% and 37% respectively from the year ago period, with the viability of the ‘Big Three’ seeming to be contingent now upon help from the federal government. It necessarily follows, given the serious downturn in these critical sectors of the economy, coupled with the structural flaws that have been reveled over the past several months that our level of confidence has fallen as well.
Nevertheless, we remain optimistic. Downturns and setbacks, as deep and painful as they may be are temporary. The City of New York regained its vibrancy not only in the 1970s, but again following the aftermath of September 11, 2001. Our economy rebounded smartly during the 1990s under President Clinton, although one might argue that it came after the seeds of recovery were already planted by the Bush administration. As for the copper industry, once it became apparent that support would not be coming from Washington, it reinvented itself from the ground up in order to be competitive in the global market and reaped enormous benefits from those efforts.
It is a tenet of market psychology that during a bear market, sentiment is focused acutely on bad news with expectations of worse to come, while any positive developments are virtually ignored. Bull markets, of course, reflect the exact opposite, as good times will only get better, while any bad news is shrugged off as an aberration. The current state of the economy certainly bears this out, as one has to look long and hard to see something positive in the wreckage. It is as if we have gotten to the point where it can only get better from here, or perhaps the other way of saying it is, there is nowhere else to go but up - despite warnings from some that we are headed for a repeat performance of the 1930s.
At the risk of repetition, fiscal and monetary policy is geared toward recovery on a global basis. Just as important, energy prices which were a major contributing factor to the downturn have fallen at record rates, thereby putting more money in consumer’s pockets and bringing us back to levels consistent with growth rather than contraction. Also, the process is underway to eliminate toxic financial instruments from the system that should never have existed in the first place.
Could it be that forward looking markets are already signaling a turn? Although it is too premature to draw a conclusion, the evidence should not be ignored. After hitting new lows in November equity markets throughout the world have turned higher. Not just those of major industrial economies, but emerging markets as well. As relates to metals, although inventories have been rising, and undoubtedly more excess metal will find its way into warehouses, prices nevertheless have been also been rising. Whether these moves are simply a correction, or change in trend remains to be seen, but they too warrant our attention.
And finally, from a contrarian point of view, history has shown time and again, that when an economic problem has been identified, and significant resources are brought to bear to spark a recovery, inexplicable natural forces are already working to resolve the issues.
Where Do We Stand Now?
Clearly, neither the fundamentals, nor sentiment would suggest a serious move higher, but from a purely technical point of view, copper has the potential to advance further. On a very macro basis, we saw the market fall $2.75 from July to December, in a near vertical freefall. A 50% correction of that drop targets a move to $2.60. Without question, however, copper will encounter strong headwinds along the way, assuming it gets past the $1.60 level first. If that line of resistance is surpassed, $1.70 will be the next challenge, and at just about every 10¢ increment thereafter.
Notice on the weekly chart that $2.37 was the pivotal point in 2007. From where we sit, the market could hit this level and still be in nothing more than a technical correction. Conversely, if copper fails to move beyond $1.60, we would expect to see a retracement back to the low, with the real test of whether that level holds. As odd as all of this sounds, the technical aspects of the market can not be ignored, as small moves have a way of becoming the base upon which larger moves are made.
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