Will We Hold It Wednesday – Copper $3.80 Edition

Can copper keep above $3.80?

They call it "Doctor Copper" because copper pricing is a pretty good indicator of economic health.  It's more of a demand metal than gold or silver and hard to fake and there aren't any silly ETFs stockpiling it although China has socked away a full-year's supply, which has given copper a very false sense of demand while our masters hoarded the World's substantial excess capacity at an average of less than $2.50 per pound.  China is up 52% on their investment, not bad considering they're holding 300,000 tons of it.  

We went short on copper at the $3.90 line in the futures and we took a huge win yesterday so now the question is, will that $3.80 line hold up?  MT reported a 21% DROP in Q3 earnings and said "Steel demand was well below pre-recession levels as the construction and automobile sectors continued to struggle."  Chief Financial Officer Aditya Mittal said demand in China fell as the country tried to slow its economy.   AK Steel Holding Corp., based in West Chester, Ohio, said on Tuesday that it lost $59.2 million during the third quarter as iron ore prices soared, nearly doubling. AK Steel said the higher ore prices added $76 million to its operating loss.

While these reports are not necessarily dire (we'll see how the Durable goods numbers look before we run for the fallout shelter) they certainly do raise the kind of red flags that one would think would give global markets pause on the way to 20% gains since July (as I noted in Monday's Chart Art post) even with the 14% decline in the dollar goosing the results.  Kelly Evens points out in the WSJ that orporate earnings aren't quite as impressive as the headlines suggest. Much of the overall growth has come from the financial sector, helped by its weak performance a year ago.  

Exclude financials, and year-on-year earnings growth falls below 21%. The average "surprise" margin, by which earnings beat estimates, falls from 9% to 6.5%. Meanwhile, for the fourth quarter, expected earnings growth drops from 32% to just 11% if financials are excluded. Revenues for that period are seen up just 6.3%. 

David Rosenberg points out that we should keep in mind that with the U.S. dollar heading down to 15-year lows, this equity market “rally” in the U.S. has been far less than impressive for a global investor (a good take on this in the “Short View” on page 15 of today’s FT).  While September existing home sales in the U.S. rose 10.0% to 4.53M, which far surpassed consensus forecasts, median house prices fell 3.3% MoM, the steepest monthly drop since January 2010 and the third decline in as many months (all regions were down too).Over that three-month span, resale home prices have tumbled at a 22.5% annualized rate — the largest drop on this basis since February 2009 when the economy was in the abyss.  Rosenberg continues:

One of the most comprehensive measures of the economy is the Chicago Fed National Activity Index and for all the talk of how the economy has turned around, this broad barometer weakened to -0.58% in September (versus -0.3% expected).This was the second negative reading in a row. The key three-month moving average metric dipped to -0.33%, from -0.32% and has been negative now for four months in a row, signalling below-potential growth. We ran some regressions and found that the Chicago Fed index is pointing to sub 1% real GDP growth in Q4.That is not a contraction but it is too close for comfort.

Did I tell you so?  Of course I did!  Another thing I've been going on and on about is the money supply and the VELOCITY of money and I want to thank Dr. John Hussman for putting it all in a nice, straightforward article that explains the issue so well.  PLEASE read the whole article but this chart pretty much says it all, increasing our money supply by 10% a year is TOTALLY INEFFECTIVE when the base velocity of that entire 100% (110%) supply is declining by 6% a year.  Conversely, when and if the RATE of money picks up, all the tightening in the World will not be enough to put this genie back in the bottle:

Hussman points out that real economic growth has no observable correlation with growth in the monetary base (the correlation is actually slightly negative but insignificant). Rather, economic growth is the result of hundreds of millions of individual decision-makers, each acting in their best interests to shift their consumption plans, saving, and investment in response to desirable opportunities that they face. Their behavior cannot simply be induced by changes in the money supply or in interest rates, absent those desirable opportunities.

 

Simply put, monetary policy is far less effective in affecting real (or even nominal) economic activity than investors seem to believe. The main effect of a change in the monetary base is to change monetary velocity and short term interest rates. Once short term interest rates drop to zero, further expansions in base money simply induce a proportional collapse in velocity.

8:30 Update:  We got the worst possible Durable Goods report with a MASSIVE headline beat of 3.3% vs 1% expected by economists, who can be off 230% in their predictions yet still have the nerve to show up next month and make more predictions.  The last report was revised down 50% to -1.5% but the MSM generally ignores last month, which is real and refined, and focuses on the current month, which is inaccurate and subject to change.  Anyway, 3.3% is BAD because it's good and good news is bad for QE fans.  Not only does the Durable Goods Report look good (and Fernando would be proud) but it does not feel good, as the ex-Transportation number is off a cliff at -0.8%, down from UP 1.7% in August.  How do we fall 150% in a single month?  Perhaps we weren't all that strong to begin with.  Ask MT and AKS – they already told us things weren't so good, didn't they?

Asia had a rough morning despite New Zealand locking in as the location for the $500M production of "The Hobbit" and even despite AAPL's launch of the Chinese version of the App Store.  With the elections and the Fed decision looming next week, markets are now getting worried that QE2 may not be as big as expected ($100Bn a month).  Hong Kong dropped 1.9% and the Shanghai fell 1.5% and the BSE dropped 1% but the Nikkei held flat as the dollar's strength encouraged exporters.  

China is still in a quandary as they are being heavily pressured to float their currency to the dollar but they sure don't want to cut the strings while the dollar is bouncing back because retail food prices jumped 10-13% in October  as soybeans traded in Chicago are at their highest price in 14 months – largely on the strength of Chinese demand. Palm oil on the Malaysia Derivatives Exchange breached a 27-month peak this week. Thai rice prices are nearing a six-month high.  Food is close to 60% of the cost of living for the average Chinese family.  10% in a month is a problem – 20% is a crisis because, at 30%, people begin to die. 

EU markets were disturbingly weak into yesterday's close and did not better this morning with the FTSE dropping 0.75% in a big gap down at the open and the DAX is down 0.3%, failing to hold 6,600 while the CAC is down a quarter-point at 3,842 and needs to get those 8 points back or they start looking weak as well.  Greece is the word once again as 10-year bonds fell for the 3rd consecutive day as yields jumped 58 bpts to 10.34%.  The revised projections on the Greek budget show a deficit of over 15% of the GDP – pretty much in the default zone – AGAIN.

Of course Greece is considered the place to be – if you are Turkish!  Things are so bad in Turkey that the EU has agreed to send a rapid-response border force to help Greece patrol its land frontier with Turkey, as local Greek law enforcement has been overwhelmed by an influx of thousands of illegal immigrants.  Perhaps we can send Sharon Angle over to help supervise troop deployments…  Romania is somewhere around there and their government has been overwhelmed by protesters and facing a "no confidence" vote so lots of cool chaos in Europe this week.  

Meanwhile, France jammed through the retirement changes despite national protests there and consumers all over the EU are reeling from sugar prices hitting 30-year highs and even potatoes are up 15% in October at 135 Euros per ton, up from 64 Euros a ton last year.  NOW does MCD look a little high to you?  

Now did you read the news today
They say the danger's gone away
But I can see the fire's still alight
There burning into the night

Oh, Superman where are you now
When everything's gone wrong somehow?
The men of steel, the men of power
Are losing control by the hour – Genesis