February 4, 2009

Global Market Comments for February 4, 2009
Featured Trades: (FCX), (CAT), ($BDI), ($BVSP), (EWC), (EWZ), (EWA)

1) There is a rare anomaly in the markets now, where mining stocks are trading at huge discounts to the metals they mine. Usually they trade at substantial premiums. This is the result of the credit crisis, as well as a global multiple compression that is punishing good and bad equities alike. Take a look at one of my favorite stocks, Freeport McMoran (FCX), one of the world's largest copper and gold producers, which just announced a record Q4 loss of $14 billion. The stock cratered from $122 to $15 after June, while copper dove from $4.10 to $1.25, and gold dropped from $1,050 to $700. CEO Richard Adkerson says that he is cutting costs by chopping capital spending from a record $2.8 billion in 2008, to $1.3 billion in 2009 and $1 billion in 2010. He is delaying projects in high cost countries like the U.S. That is why Caterpillar (CAT) stock has been getting killed. This and other measures are cutting FCX's break even cost for copper from $1.16/pound to 71 cents. Gold is now being sold for $900/ounce versus an industry break even cost of $500/ounce. While the Phelps Dodge takeover in March, 2007 now looks rich, you couldn't do that deal today because of a lack of financing. So many new projects are now being frozen, that when demand recovers, the next price spike could be worse than the last one. If you aren't buying FCX and CAT right here I am going to lay down on the nearest train tracks until a train runs over me. If you can't buy stocks at these insanely low prices, then you should be in the business.

Copper-1.png picture by sbronte

2) Here is another early, nascent sign of global economic recovery. The Baltic Dry Index ($BDI) of international shipping rates was one of the markets worst hit by the seizing up of international trade, vaporizing 95% from 12,000 to only 600. It has since clawed its way back up to 1,200 from the November bottom. It lead the commodity collapse in June by a good month. Could it now be signaling a recovery? At least things are not getting worse, and we may see a period of bottom bouncing before a sustainable up trend develops.

Baltic.png picture by sbronte

3) The online research firm Zillow.com says that the US real estate market has lost $6.1 trillion since the top, including $3.3 trillion last year alone. One in six American homeowners is now underwater on their mortgages, the equivalent of 11 million homes. These unhappy home owners are not trading up, down or sideways anytime soon. Only prices in Fayetteville, NC, Yakima, WA, and Utica-Rome, NY went up. I won't bore you with how much Las Vegas, Phoenix, Miami, and San Francisco have gone down. Expect more frightening tidal waves of foreclosures, which will cap residential real estate for years to come.

4) Take a look at the recent performance of Brazil's Bovespa stock index, which fell 47% since June. It has jumped a healthy 48% since the November low and gives credence to my theory that when global stock markets recover, emerging markets will rise twice as fast as developed ones. The best recovery the Dow could mount was 30%, and that is looking wobbly. There is really only one global stock market now moving in the same direction. Only volatility varies country to country, and when conditions improve you want to own the most volatile one. Look at the ETF for Brazil (EWZ). Also on your shopping list should be the ETF's of other young natural resource exporting countries like Canada (EWC), Australia (EWA). You might go long term currency and bond markets too.

Brazil.png picture by sbronte


'You are never are as good as they say you are at the top, nor as bad as they say you are at the bottom,' said Gerry Levin, the former fired CEO of Time Warner, who is now operating a day spa in Santa Monica, California.