Thursday, February 6, 2014

Doctor Copper Delivers a Warning to the World

The market is up sharply today, and I hate to be the one to pee in the punchbowl. However ...

There’s no metal better at predicting global economic health than copper. They call the metal “Doctor Copper because it takes the temperature of the global economy. And right now, Doctor Copper is closing the door, sitting us down, and delivering some bad news: A serious warning.

Doctor Copper thinks global economic health is taking a turn for the worse.

Here’s the doctor’s diagnosis chart …

(Updated chart)

Looking at the chart, we can see that copper failed in its most recent attempt to break out to higher prices. Then it turned back around and has been sliding ever since. In fact, it just slid right through support from an uptrend dating back to June of last year. That’s a prescription for even lower prices.

Why is that bad? See, copper is used in everything – cars, computers, energy production, new homes, you name it. No offense to gold and silver, but copper is probably the most useful metal in the world.

The collapse in copper prices is a warning sign that manufacturing activity in the global economy is slowing.

The doctor’s warning comes on top of other worrying indicators. For example …
  • Copper isn't the only metal that is tumbling. Iron recently hit a 7-month low. Zinc recently was on its longest losing streak in 25 years. These are also industrial metals.
  • Factories in the U.S. expanded in January at the weakest pace in eight months, and a measure of orders declined by the most since December 1980, according to data from the Institute for Supply Management.
  • Motor vehicle sales in the U.S. slowed to an annualized rate of 15.16 million, the weakest in three months, according to data from Ward’s Automotive Group.
  • In Great Britain, manufacturing grew at a slower pace than economists projected.
  • China’s purchasing managers’ index fell to a six-month low last month as output. Orders slowed so much, they’re now in contraction. Remember, one month doesn’t make a trend. But China’s industrial profit growth slowed, too.
  • Russia reported its 2013 economic growth rate was the lowest since 2009!
  • Copper stockpiles are surging. Copper stockpiles monitored by the Shanghai Futures Exchange jumped 18% last month, the first increase since October.  Copper demand is falling, and this is putting more pressure on prices.
  • And the Baltic Dry Index has collapsed 50% from the start of the year. 

The BDI tracks the change in cost to ship raw materials by sea. Basically, it’s a composite of rental rates for different freighters. When the BDI plunges like this, the rental rates for those freighters is going down. That means there is either a surplus of new ships or less demand for their services. And less stuff being shipped around the world is usually a sign of a slowing economy.

On their own, any of these indicators isn’t a big deal. But together, they add more evidence to back up Doctor Copper’s diagnosis.

To be sure, China is the world’s biggest copper consumer, accounting for 40% of copper use. So, you might want to blame this on that country going on a holiday for the start of Chinese New Year. And maybe there is some of that. But copper prices have been in a slump for months.  It can’t ALL be holiday-related.

That’s Doctor Copper’s warning. Unfortunately, the good doctor isn’t telling us whether the global economy is just going to be under the weather for a little bit, or if we’re on a trip to the Emergency Room!

What You Can Do

There is no reason to panic.  But you might examine your investments and see which ones you’d be comfortable holding through a market correction.

Do you want to be more proactive? Look at stocks and investments that do well when the global economy takes a turn for the worse.

I’m still bullish on the market longer-term. But a quarter or two of global economic under-performance would not surprise me at all. However, I sincerely hope Doctor Copper is wrong in his diagnosis.

And remember; the doctor can always change his mind. New evidence – new economic activity – could come along that could give Doctor Copper a very different diagnosis.

Finally, remember that Doctor Copper may not have the last word.  Janet Yellin and her team at the Federal Reserve may have plenty of tricks in their ol' black medical bag.

1 comment:

  1. Yeah or maybe copper, iron and large ships are seeing a problem of oversupply.