Dr. Copper Says....
Research for Online Investors

by John Dalt

3/19/10

China’s Deputy Commerce Minister Zhong Shan is going to visit the U.S. the end of next week.  He plans to meet with administration officials to discuss “Sino-U.S. trade balance and trade frictions.”  This is in response to the request from 130 legislators asking the Treasury department to label China as a “currency manipulator.”

China’s state backed metals group Chinalco has signed a deal with Rio Tinto (RTP) to buy into the Simandou project in Guinea.  Chinalco will pay $1.3 billion for 47% of the mining project.  It is believed to contain one of the world’s largest undeveloped iron ore deposits.  Four Rio Tinto employees go on trial for bribery and commercial spying next Monday in China.  They were arrested last June while negotiating iron ore pricing.

Last May, Rio Tinto turned their back on China’s investment of $19.5 billion in the company when a BHP Billiton deal was more attractive.  Are the cancelled deals, arrests, and new deal all related?  Maybe we should ask the four employees going on trial next week behind closed doors in China.

A year ago many commodities tanked over concern the world economy was grinding to a halt.  One of the leading commodities that investors watch is copper.  Many traders refer to the metal as “Dr. Copper” because its price is responsive to changing economic conditions.  The price can move up and down dramatically and quickly over small changes in expected demand.

Copper is up over 106% in the last year. Copper is used in almost everything manufactured, from electronics to kitchen utensils. China has been a big purchaser of copper, gobbling it up at cheap prices to fuel their export economy. We showed you a picture of the South China Mall yesterday, seven million square ft of almost empty retail space, built in anticipation of the customers that would come.

China’s industrial policy is the same as their mall policy, buy it and build it, they will come.  But what if they don’t?  What if the shoppers don’t come, what if the economy doesn’t pick up to use all the copper the government has bought?

We have reported that may observers believe China may be building a bubble economy as their stimulus spending has spurred the economy and maintained employment. What happens if exports of widgets don’t replace the stimulus spending?

The copper market has been building inventories for the last year.  Stockpiles of copper in London Metal Exchange (LME) monitored warehouses were reported at 525,575 tons on March 17, 2010  This was down slightly from last month, but bookings for removal were down in the past week by 24%.

China is the world’s second largest user of copper, after the U.S. The price is sensitive to currency exchange rates. We do not have an etf that tracks the price of copper, but we do have FreePort McMoRan (FCX), a miner of copper and gold. FCX is held in Galt’s Long Term Portfolio. FCX hit a low of $15.70 on December 5, 2008 FCX’s stock price low preceded the low on the major indices by three months.

FCX hit its 52-week high of $90.55 on Jan. 11 then went on a wild roller coaster ride for the last two months.  Some of this volatility followed the general market, but we wonder if pricing in FCX may be predicting problems in the copper market, currencies and the world economy.  FCX has been down for the last three days.

Our recommendation is to watch ‘Dr. Copper’ for indications of recovery.  FCX reflects economic news and currency valuations on a daily basis.

The health care debate in Washington appears near its climax, with the bill available on line and a vote scheduled for Sunday or as soon thereafter when the House leadership can count enough votes for passage.  My prediction for defeat may prove to be wrong.  I am guilty of under estimating the importance a lowly democratic congressman places on his or her vote.

I knew as a father to young children that I could influence them with a promise of a trip to the zoo or some other enticement.  Some things don’t change.  Dennis Kucinich (D-OH) took a ride on Air Force One…and changed his vote.

Ok kids, everyone sit down so we can go for a ride.

"Elderly Americans must learn to accept the inconveniences of old age."—Sen. Harry Reid

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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