Special Report: 1.19.2010

Posted by Joe Salimando on Monday, January 18, 2010

AS GOES CHINA, SO GOES COPPER'S PRICE

(part one of two)

By Joe Salimando

Here's what you want to know: Where are copper prices going to go? They've been as high as $3.50/lb. in the past few months, which might have surprised you.

For a long time now, I've been the only bloviator who has been RIGHT about this topic. How is that? Well, I didn't predict a price (I'm not an economist, so I don't have to!). I have written -- for years now, here on TEDMAG -- that the price of copper depends on what happens in China.

That's been correct. IN the 2nd half of 2008, the Chinese leaders watched (in dismay, one images) as their economic growth didn't keep pace with the 1978-2007 period. Why? Customer #1, the United States, had an economic disease. The Chinese economy responded by dipping slightly under its trends. This isn't good for a country where people are flocking to the cities from the farms.

For those of us in the electrical industry, it meant that 2008 saw the price of copper plummet -- in a matter of months -- from a late-spring high of nearly $4 per pound on down to $1.25 in December.

In 2009, the Chinese put BOTH FEET on the gas pedal. Where $600 billion had been loaned internally by Chinese banks in all of 2008, $1 trillion was disbursed in just 2009's first half. There are plenty of rumors about where that money has actually gone, but let's leave it alone. Some of it went to buy copper and -- voila! -- the red metal's price is now back around $3.30/lb.

That leaves those of us who want to see the shape of the future -- in advance -- with the question: What happens next in China? On that front, I have recently been slapped around by conflicting answers from two of my financial-industry heroes.

 

Jim vs. Jimmy

In one corner, there is Jimmy Rogers, a name you might know. In the other, we have James Chanos, who might be less familiar. Both are billionaires. And both remain heroes of mine, of sorts -- yes, financial-industry heroes, still . . . despite what has happened.

If you've watched financial TV (CNBC, Fox, or Bloomberg) you've seen Jimmy Rogers talk. He's very smart, often funny. A bit of history: He was the partner, initially, of George Soros, in the Quantum Fund. You can read books written by Rogers; I especially liked Investment Biker, which covered his tour of emerging nations via motorbike. For more, see his Wikipedia entry.

The recent relevant stuff: Rogers thinks China has such a great future that he's having his young daughter raised in two languages: English (so he can speak with her, one imagines!) . . . and Mandarin! He remains bullish on China's prospects, although he hasn't ruled out a correction in the markets there

If you invest, you can find funds with Rogers' name on them. These funds, generally speaking, are about Commodities. I have been invested in one Rogers fund for some years now.

AND IN THE OTHER CORNER: There's Chanos. See his Wikipedia entry, which is considerably less wordy -- something you'd imagine when thinking about a guy who sells stock (and who knows what else) SHORT for a living. He's as plain spoken as Rogers, but he doesn't speak in public quite as often. I'm unaware of any book by this man; I have not invested with a Chanos-run fund.

But I know this: Chanos has been RIGHT with big bets (and big calls) on specific stocks -- HUGELY right. Consider Enron: At the same time that Fortune magazine was anointing Enron as the 7th-most-admired corporation, Chanos was not just shorting Enron, but telling everyone that Enron needed to be shorted. He was right, big-time right -- and was rewarded with the ultimate victory of any short-seller. Enron stock went to zero.

What does Chanos say right now? He says China is going to blow up!

 

Place Your Bets?

Maybe you are the type who can make big money both ways. It is possible one of these guys is going to be right, and right BIG. So maybe you can both go "long" copper futures and "short" copper futures -- right now -- and make so much money on one of the bets that you overcome your loss on the other.

Good luck with that.

Another two ways of thinking:

1 -- As an electrical distributor, you are already "short" copper. Whatever you do in the future, you're going to have buy a lot of stuff that has a high copper content, right? So maybe you want to run out and - to protect yourself - go "long" copper futures.

2 -- As an electrical distributor, you can also be said to be permanently and structurally "long" copper. After all, as copper's price increases, so does the price of much of the stuff that you sell. So maybe you want to run into the futures market and go "short" copper futures, selling them to protect your "long" permanent position?

Yes, such thinking can give one a headache. On the other hand, think about the genius who, in the summer of 2008, went short 25,000 pounds of copper (which is what just one futures contract specifies). If he sold for January 2009 delivery, perhaps the price was $3.50 per pound. But copper descended to $1.25 per pound by December 2008 -- so perhaps that fellow "covered" his short at $1.50. That's $2.00 per pound of pure profit x 25,000 pounds . . . for as little as $5,000 invested. In six months or less! How does THAT sound?

Perhaps this is worth a little more consideration. Let's evaluate what Jim and Jimmy have to say, and speculate on where China may be going in 2010 and beyond . . . taking copper's per-pound price right along with it.

Next time: More on Chanos, China, Copper, and Rogers.