Another Look at Dr. Copper

An update from an article back in March…

“Davidson” submits:

It is useful at this time to review “Dr. Copper” and the Baltic Dry Index which many believe offer insight to global economic activity. As I review the multitude of current forecasts there are many which state that the market has over-reached economic reality, others state that while there has been an economic up-tick it will quickly deteriorate to a second dip-the so-called “W”-Shaped recession and a very few see a so-called “V”-Shaped Recovery. Many forecasters point to the short term movements in Comex Copper prices and the Baltic Dry Index to anchor predictions. The net result is a series of “UP” forecasts with up movements in the indices and “DOWN” forecasts with the dips. In some weeks the Baltic Dry Index and Comex Copper are not in alignment and the forecasts are mixed.

My suggestion is to apply Ockham’s Razor and focus on the 3mo trends to smooth out the weekly volatility. Net/net, both of these economic indicators appear to be in up trends.

In my experience there will always be analysts that find a reason to discount market movement. In the current instance their advice is to ignore the trends of Comex Copper and the Baltic Dry Index as being caused by China’s restocking of inventories and that this does not reflect a true increase in economic activity. I disagree! I interpret China’s activity as looking forward to potential needs and making a timely use of excess $US to buy cheaply priced commodities with the marginal cost of production of oil reported in the $70bbl-$80bbl range and for copper the marginal cost of production is reported to be in the $1.50lb-$1.80lb range.

I believe we should view Comex Copper and the Baltic Dry Index in the context of US car and truck sales. US sales turned up months before “Cars for Clunkers” program began and were coupled with anecdotal stories of workers being brought back to factories to replenish inventories. Add to this increased manufacturing activity a story of BYD(the Buffett Chinese electric car company) on August 22, 2009 in which BYD announced its plans to bring its electric cars to the US market in 2010. This is much earlier than previously anticipated.

It seems to me that economic activity is accelerating and that Comex Copper and the Baltic Dry Index are a reflection of this activity. Certainly the activity observed to date does not mean that it will not suddenly stop. But, history supports the notion that once economies begin to turn more positive they generally continue in the same direction even if it appears that government stimulation was involved.

I view this information as positive for investment in stocks and bonds.

Disclosure (“none” means no position):