-
-
Global Market Comments
May 13, 2021
Fiat LuxFeatured Trade:
-
(LEVERAGING UP WITH THE “COPPER SHOCK”)
(FCX), ($COPPER)
-
Tag Archive for: ($COPPER)
If you’re wondering what to buy on this dip, take a very hard look at Freeport McMoRan (FCX) LEAPS.
We are getting to the point where great equity trades with potentially huge returns are becoming few and far between. At the very least, they are only a fraction of the opportunities we saw a year ago, which was a once-in-a-century event.
So, when your trade of the century runs out, what do you do?
You find another trade of the century!
It just so happens I have another such animal.
You are all well aware of the cyclical bull market in base commodities and the coming “copper shock.”
How would you like to make a ton of money on this, a lot more, like three times more?
I have been dealing in the front-month options so far and managed to catch a 10X move in the shares of Freeport McMoRan (FCX). I think (FCX) shares could double from here. Here is how to maximize your profits.
Simply extend your maturities and lower your strike prices through LEAPS, or Long-Term Equity Anticipation Securities.
I’ll show you how to do that, first with a conservative position, and then a much more aggressive one. Better yet, an excellent entry point for both positions is close.
The case for higher copper prices is overwhelming.
Sounds like a great long to me.
Currently, LEAPS are listed for the (FCX) all the way out until January 20, 2023.
However, the further expiration dates will have far less liquidity than near-month options, so they are not a great short-term trading vehicle. That is why entering limit orders in LEAPS only, as opposed to market orders, is crucial.
These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, or IRA.
Because of the long maturities, premiums can be enormous. However, there is more than one way to skin a cat, and the profit opportunities here can be astronomical.
Like all options contracts, LEAPS gives its owner the right to "exercise" the option to buy or sell 100 shares of stock at a set price for a given time.
LEAPS have been around since 1990, and trade on the Chicago Board Options Exchange (CBOE).
To participate, you need an options account with a brokerage house, an easy process that mainly involves acknowledging the risk disclosures that no one ever reads.
If LEAPS expires "out-of-the-money" by the expiration date, you can lose all the money you spent on the premium to buy it. There's no toughing it out waiting for a recovery, as with actual shares of stock. Poof, and your money is gone.
Note that a LEAPS owner does not vote proxies or receive dividends because the underlying stock is owned by the seller, or "writer," of the LEAPS contract until the LEAPS owner exercises.
Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.
They offer vastly more margin and more efficient use of capital than traditional broker margin accounts. And you don’t have to pay the usurious interest rates that margin accounts usually charge.
And for a moderate increase in risk, they present hugely outsized profit opportunities.
For the right investor they are the ideal instrument.
So, let’s get on with my specific examples for the (TLT) to discover their inner beauty.
By now, you should all know what vertical bull call debit spreads are. If you don’t, then please click here for my quickie video tutorial (you must be logged in to your account).
Warning: I have aged since I made this video.
Today, the (FCX) is trading at $42.86
The cautious investor should buy the (FCX) January 2022 $45-$50 vertical bull call debit spread for $1.65. Some 60 contracts get you a $10,000 exposure. This is a bet that (FCX) will rise above $50 in eight months. Sounds like a total no-brainer, doesn’t it?
expiration date: January 21, 2022
Portfolio weighting: 10%
Number of Contracts = 60 contracts
Here are the specific trades you need to execute this position:
Buy 60 January 2022 (FCX) $45 calls at………….………$7.00
Sell short 60 January 2022 (FCX) $50 calls at……….…$5.40
Net Cost:………………………….………..………….…..............$1.60
Potential Profit: $5.00 - $1.60 = $3.40
(60 X 100 X $3.40) = $20,400 or 104% in eight months. In other words, your $10,000 investment turned into $20,400 with an almost sure thing bet.
This is a bet that the (FCX) will stay above $50 by the January 21 option expiration in eight months.
Let’s say that you’re so convinced that exploding copper prices will cause the (FCX) to crash again that you’re willing to take on more risk and place a bigger bet.
Here is your dream trade:
Buy the (FCX) January 2023 $55-$60 vertical bull call debit spread for $1.00. Some 100 contracts get you a $10,000 exposure. This is a bet that (FCX) will rise above $60 in 20 months.
That’s what you would expect to see during a normal economic recovery. This is the greatest economic recovery of all time.
expiration date: January 20, 2023
Portfolio weighting: 10%
Number of Contracts = 100 contracts
Here are the specific trades you need to execute this position:
Buy 100 January 2023 (FCX) $55 calls at…………...………$7.50
Sell short 100 January 2023 (FCX) $60 calls at…..………$6.50
Net Cost:………………………….………..………….…................$1.00
Potential Profit: $5.00 - $1.00 = $4.00
(100 X 100 X $4.00) = $40,000 or 50.00% in 20 months. In other words, your $10,000 investment turned into $40,000 with an almost sure thing bet.
This is a bet that the (FCX) will stay above $60.00 by the January 20, 2023 options expiration in 20 months.
Why do a call spread instead of just buying the $50 calls outright?
You need a much bigger upside move to make money on this trade. By paying only $1.60 instead of $6.00 for a position you can quadruple your size, from 15 to 60 contracts for a $10,000 commitment. That quadruples your upside leverage on the most probable move in the (FCX), the one from $45 to $50.
That’s what real hedge funds do all day long, find the most likely profit and leverage up on it like crazy.
Let’s do the math on the two positions. If you buy the (FCX) January 2022 $45-$50 vertical bull credit spread for $1.60, you reach a maximum value of $5.00 on expiration day at $50.
If you buy the (FCX) January 2022 $50 calls outright, at $50 on expiration day your position is worth zero, nada, bupkiss. It gets worse. To make the same amount of profit as the spread the (FCX), or $20,400, it has to rise all the way to $53 to break even. Below that, you make more money than the spread, but at a quarter the rate.
How could this trade go wrong?
There is only one thing. We get a new variant on Covid-19 that overcomes the existing vaccines and brings a fourth wave in the pandemic.
In this case the (FCX) doesn’t rocket to $60 but collapses to $20 or more. We go back into recession. Both of the above positions go to zero. But if we get a fourth wave, you are going to have much bigger problems that your options positions.
So there it is. You pay you money and take your chances. That why the potential returns on these simple trades are so incredibly high.
Enjoy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
And She’s Still on Her Learner’s Permit
Global Market Comments
April 20, 2021
Fiat Lux
Featured Trade:
(WATCH OUT FOR THE COMING COPPER SHOCK)
(FCX), ($COPPER)
Global Market Comments
December 16, 2020
Fiat Lux
FEATURED TRADE:
(WHAT TO BUY AT MARKET TOPS?),
(CAT), ($COPPER), (FCX), (BHP), (RIO),
(EUROPEAN STYLE HOMELAND SECURITY),
(TESTIMONIAL)
I will start today’s letter by listing six more data points showing how overbought stocks have become.
1) While the number of outstanding shares in the US has remained unchanged since 2006, thanks to M&A, buybacks, bankruptcies, and privatizations, the average weighted share price has more than doubled from $50.15 to $137.00.
2) The Volatility Index (VIX) has just collapsed from a high of $41 in November to $20 today.
3) The Mad Hedge Market Timing Index has just soared from a record low of 2 eight months ago to 76 today, deep into “SELL” territory.
4) 2000 forward stock earnings growth has collapsed from 26% a year ago, to 0% in a few months.
5) Almost every investor now bullish once more, now that their stocks are going up.
6) The stock market has had its best month since 1987. Grizzled, long in the tooth readers can’t be more cautious right now.
This all leads to the urgent question of the day, WHICH stocks do you buy as we approach market tops? The answer is very simple. You buy cheap ones. And what are the cheapest stocks out there?
Commodity stocks.
My friend, Jim Umpleby, said that we are just entering a ten-year super cycle in commodities.
Jim should know. He is the CEO of Caterpillar (CAT), a company I have been following for 45 years. I even have one of their cool worn yellow baseball caps from years past.
Thanks to the 2017 tax bill, companies can now buy Caterpillar’s bulldozers, backhoes, and heavy trucks, and expense 100% of the investment in the first year. (Last year, I bought a new $162,500 Tesla Model X using the same break). That makes a purchase of (CAT)’s products one of the best tax breaks ever.
Needless to say, this has created a stampede to buy the companies heavy machinery because they fear this tax windfall will be reversed by the next administration. This is equipment with a 30-year life or longer.
Industrial commodities are in fact the perfect sector to buy right now. Take a look at the long-term chart for copper prices, which are a great bellwether for the entire industry. They are imminently poised to make a long-term upside breakout.
Copper last peaked at the beginning of 2011, when the Chinese infrastructure build-out suddenly outdrew to a juddering halt. Prices cratered from $4.60 a pound to a lowly $1.90. Mines were sold off, mothballed, or permanently closed at a record rate.
Copper prices fell so low that the US Mint finally started making a profit on pennies they struck.
Then a funny thing happened.
Copper bottomed, assisted by the global synchronized economic recovery I have been writing about for years. Then at the beginning of this year, investors smelled a recovery in a severely oversold, bargain basement, lagging sector. Copper prices jumped from $2.60 to $3.6, up 42% since June.
The share prices of copper and other major commodity producers went ballistic. Freeport McMoRan (FCX), the world’s largest copper producer, (whose management is a long-time reader of this letter) has just seen its stock jump six-fold from a near $4.00 a share to $24.00. If this sounds rich, recall that the peak during the last cycle was at $51.
Other big commodity producers did as well. Australia’s BHP Billiton (BHP) leaped 41% in a month!
You may think that it’s too late to get into the commodities space, but you’d be wrong. Having covered the sector for nearly a half-century there is one thing you learn quickly. While you can shut down a mine in weeks, it can take years to bring them back on line.
As for developing a new mine from scratch, that can take a decade by the time you get the design, permits, infrastructure, equipment, and labor in place.
My Australian readers tell me that (BHP) is flying young skilled workers from Brisbane an incredible 2,000 miles to work in Northwest mines in a six week on, six week off work schedule and paying them $200,000 a year to do it. And they’re making a profit doing this!
The bottom line here is that a short squeeze has developed for industrial commodities which will last for years.
Oh, and that global economic recovery? It is on vacation until the pandemic ends. That could happen in a few months, and no more than a year.
At least you have something to buy now besides more technology stocks. As much as we here at the Mad Hedge Fund Trader all love them for the long term, they are extremely overbought for the short term. Up 50% in a month? I’ll pass.
Commodities Are In Our Blood
Global Market Comments
December 11, 2019
Fiat Lux
Featured Trade:
(WHAT TO BUY AT MARKET TOPS?),
(CAT), ($COPPER), (FCX), (BHP), (RIO),
(EUROPEAN STYLE HOMELAND SECURITY),
(TESTIMONIAL)
Global Market Comments
February 7, 2019
Fiat Lux
Featured Trade:
(WHAT TO BUY AT MARKET TOPS?),
(CAT), ($COPPER), (FCX), (BHP), (RIO),
(EUROPEAN STYLE HOMELAND SECURITY),
(TESTIMONIAL)
Global Market Comments
August 22, 2018
Fiat Lux
Featured Trade:
(WHY DOCTOR COPPER IS WAVING A RED FLAG),
($COPPER), (FCX), (USO),
(HANGING OUT WITH THE WOZ),
(AAPL)
One of my responsibilities as a global strategist is to talk about how cheap stocks are at market bottoms, and how expensive they are at market tops. In all honesty I have to tell you that 9 ½ years into a bull market, we are now much closer to a top than a bottom.
If Dr. Copper has anything to say about it the global economy is already in a recession. Since the June peak, trade wars have taken the red metal down a gut-punching 22.7%. The world’s largest copper producer Freeport-McMoRan (FCX), a Carl Icahn favorite, is off an eye-popping 30.6% during the same period.
Should we be running around with our hair on fire? Is it time to throw up on our shoes? I don’t think so…not yet anyway.
Dr. Copper achieved its vaunted status as a leading indicator of economic cycles for the simple reason that everyone uses copper. Building and construction took up 43% of the supply in 2017, followed by electronics (19%) and transportation equipment (17%).
China is far and away the world’s largest consumer of copper. In 2017, it bought 48% of total world output. However, red flags there are flying everywhere.
Back in the 2000s, when China was building a “Rome a Day,” demand for copper seemed limitless. Since then, Chinese construction has fallen to a low ebb as the greatest infrastructure build-out in history came to completion.
China has steadily moved from an export-oriented to a services-driven economy, further eroding the need for copper. I warned investors of this seven years ago. That is why the Mad Hedge Fund Trader has issued virtually NO commodities-based Trade Alerts since then.
Before the last financial crisis Chinese banks accepted copper ingots as collateral for business loans. That practice is now banned.
In the second quarter, nonperforming loans at Chinese banks notched their biggest rise in more than a decade, according to research from Capital Economics. Corporate bond defaults are on the rise, and earlier this week, official reports showed Chinese investment growth, which has long been a driver of the economy, fell to its lowest level since the late 1990s.
The pressure on the Chinese economy is beginning to take its toll in other places, too. China’s currency, the renminbi, has fallen more than 9% against the dollar in the past six months, and China’s CSI 300 index of blue chip stocks is off 19% this year.
The net effect of all of this has been to dilute the predictive power of copper. Copper may no longer deserve its PhD in economics, perhaps only a master’s degree or an associate of arts.
Copper is not alone in predicting imminent economic disaster. Oil (USO) has also been shouting the same. Texas tea has fallen by 15.8% since copper began its swan dive two months ago.
For sure, oil has been falling for its own reasons. Iran has sidestepped American sanctions by selling its oil directly to China, and there is nothing the U.S. can do about it. Every year, global GDP growth needs less oil to grow than before thanks to alternative energy sources and conservation. A recent bout of OPEC quota cheating hasn’t helped either.
As any market strategist will tell you, falling copper and oil prices are not what sustainable bull markets in stocks are made of. I’m not saying a crash will happen tomorrow.
Personally, I believe that the bull market should spill into 2019. But when corporate earnings growth downshifts from 26% to 5% YOY, as it will in Q1 2019, watch out below!
The Big Trade War Victim
Boy, did we have a great run in emerging markets during the 2000s!
A global commodity boom caused many of these markets to rise tenfold or more.
Go back to the earliest newsletters published by the Diary of a Mad Hedge Fund Trader in 2008, and you will find them chock full of recommendations to buy hard assets, emerging market ETFs, debt, and currencies.
As former colonies, many of these countries still base their economies on production of the precious and base metals, energy, and foodstuffs they once supplied the motherland.
And as a former correspondent for The Economist magazine covering this territory, I knew them well.
Then in 2011, the party abruptly ended, and a vicious five-year bear market ensued.
Oil peaked first, eventually nosediving some 82.5%, from $149 to $26.
Remember Dr. Copper, the only commodity with a PhD in economics? He gave up 57.9%.
And gold, that ultimate store of value for Armageddonists and conspiracy theorists everywhere? It plunged by 48.2%.
There are still a lot of unhappy American gold eagles sitting in bank deposit boxes around the country gathering dust, thanks to those ridiculous theories.
It didn?t help that a raging bull market in developed market government bonds sucked even more money out of these beleaguered countries.
The Emerging market debt ETF (ELD), collapsed by 32%. The emerging market currency ETF (CEW) dropped by 35.5%.
My long-term subscribers can already see where this is going.
The wonderful thing about all of these cross asset class declines is that they have a leveraged effect on each other.
So while the ishares MSCI Emerging Market ETF (EEM) fell by 38.9%, in dollar terms it declined by more than half.
Then a funny thing happened during the second week of January 2016.
Gold took off like a rocket.
It was closely followed by silver, oil copper, palladium, platinum, and iron ore. Only the ags failed to participate.
The bull market was back!
Portfolio managers were given a simple choice.
Should they chase developed market assets trading at all time highs with yields approaching zero. Or should they load up on emerging assets at decade lows with yields approaching 12%?
Yields that high can cover up a lot of mistakes and preserve principal.
If you voted for the latter, you deserve a brass ring.
Here we are some eight months later, and the emerging bull market is alive and well. In fact, it is about to take another substantial new leg upwards.
My money is on emerging market handily beating the major US stock indexes for the rest of 2016.
The reasons for this are many and complex.
For a start, the iShares MSCI Emerging Market ETF (EEM) is still cheap.
It has to rise by 21.6% just to get back up to its 2011 highs. As a laggard play, it is beyond reproach.
In emerging market debt, the positive carry is enormous.
The Wisdom Tree Emerging Market Local Debt Fund (ELD) is yielding 5.46%, some 390 basis points high than the ten year Treasury bond (TLT).
And if you want to go with individual rifle shots in single countries, you can earn as much as 11.90% in Brazil.
The ?lower for longer? philosophy of the Fed just shines a giant great spotlight on this paper.
And guess what happened while you weren?t looking?
Emerging market debt has ?emerged.?
Five years of balance sheet repair means their credit quality has improved.
Local credit markets have grown up too.
Once dominated by huge inflows and outflows from foreign investors, markets are now much more in balance, thanks to the rise of? local institutional investors and pension funds.
The fundamentals of these countries have been steadily improving.
Falling currencies gave them a competitive advantage that allowed? trade surpluses to dramatically improve.
Political stability is improving. During my journalist days, you used to be able to count on one good coup d??tat or revolution in the area a year. No more.
Many business friendly, pro trade governments have come into power, such as in Argentina, India and Peru.
Emerging market GDP growth rates are still double those found in developed markets.
Markets themselves are improving. Spreads for stocks and bonds are now much tighter in emerging markets and liquidity has improved. They are ?roach motel? markets no more, where you can check in, but you can?t check out.
Get this one right, and the cross asset class hockey stick effect we saw on the downside will work just as well on the upside.
In short, there is a lot more to the emerging market dollar than there used to be. It is just a matter of time before financial markets figure this out.
