Dr. Copper – Jeff Saut

Dr. Copper – Jeff Saut
Dr. Copper

 Dr. Copper by Jeff Saut of Raymond James (March 12th 2014)

I have received numerous questions about the base metal copper given the fact it looks like it is getting ready to break below $3.00 a pound given the futures market 2.7% price decline yesterday. Iron ore also chimed in with a 10%+ shellacking since last week. As stated, “ Dr. Copper is market lingo for the base metal copper that is reputed to have a Ph.D. in economics because of its ability to predict turning points in the global economy since Dr. copper has widespread applications in most sectors of the economy.” Dr. Copper has also been in great demand by China for various reasons, that is until recently.

Clearly worries about a Chinese economic slowdown have exacerbated copper’s price decline. Most recently, China’s import/export report showed exports dropping by a large 18.1% in February (YoY), bringing on increased worries China’s economy is collapsing. While one economic report does not make a trend, it remains evident China’s economy is slowing. However, I do not believe it is on the verge of a collapse. One of the reasons for China’s “export exhale” has to do with capital flows, and here the news is not all that bad. If you were to take the 18.1% export decline at face value, it would suggest the rest of the world (not China) is collapsing; and, that is just not the case! One also needs to remember these are year-over-year (YoY) figures and that on a month-over-month basis the export decline was about 9%. Moreover, the “imports” data from that same Import/Export report leaped by 10.1%, demonstrating demand in China is still decent.

Also remember, China’s currency (the renminbi) is not readily convertible into another currency. Therefore, if you want to get money into, or out of, China, it is done by “over or under invoicing” various products (I would write more on this if I had more space). Hence, I would not place much importance on the recent Import/Export report, or last week’s default by Chaori Solar Energy Science & Technology, and/or rumors that another Chinese electric company is in jeopardy of a similar default.

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In the past few sessions, however, our equity markets have placed some concerns on such events with the S&P 500 (SPX/1867.63) surrendering roughly 11 points since Friday’s closing bell. The pullback has brought the SPX close to a support level that exists between 1860 and 1865. The near-term “Maginot Line” continues to reside at the March 3rd closing low of 1845.73. If that level is breached, it will cause me to re-evaluate my bullish tilt. Until then, the price objectives on my trading models remain above 1900 on the SPX before another downside test. While traders may wish to trade that event, I am disinclined do so. This morning, the futures are lower again on Chinese growth concerns, but the Shanghai stock market is stable on monetary stimulus rumors.

Jeffrey Saut is Chief Investment Strategist and Managing Director of Equity Research at Raymond James & Associates. Mr. Saut began his career on a trading desk in New York City. In 1973, he joined E.F . Hutton, where he began following equities and writing research. He subsequently worked as a securities analyst for Wheat First Securities, and then Branch Cabell, where he ran the equity research group as director of research and acted as portfolio manager for the firm's affiliate, Exeter Capital Management. As director of research, he built the research and institutional sales departments for the regional brokerage firm Ferris, Baker and Watts, Inc. and subsequently Sterne, Agee & Leach, Inc. Mr. Saut is well known for his insightful and colorful commentary regarding the stock market, and he makes regular media appearances.
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