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“Dr. Copper is telling us that while the U.S. equity markets are being priced by such frivolous things as U.S. holiday retail sales, the global economy is experiencing a deceleration in growth [that will become evident] in the first half of next year.”
-Jason Schenker,  chief economist at Prestige Economics.

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Those of you who believe that markets provide more insights than economists, strategists and pundits — and there is lots of just cause for holding those views — may want to take a closer look at what is coming out of copper market.

For the most part, it is negative economic expectations:

“Despite a raft of good news—rising employment in the U.S., stronger growth in the euro zone and monetary easing in China—”Dr. Copper” believes the global economy is in poorer health than many think.

Among hedge funds and other money managers, bets that copper prices will fall have outpaced positions that would profit from a rise for 11 consecutive weeks. That is known as a “net short” position, and traders said its persistence in the futures market is reminiscent of a similar move that occurred in August 2008 ahead of the financial crisis.

The belief that prices will continue to fall—futures are down 4.6% since late September and have lost 20% year to date—points to expectations for lower demand for copper. The metal’s widespread applications in manufacturing and construction have earned it the moniker Dr. Copper because changes in price tend to augur changes in the economic cycle.”

Note that S&P500 is up since October, while Copper (December delivery)is down 0.6% over the same period . . .

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Source:
Copper Bets Flash a Warning
TATYANA SHUMSKY
WSJ, DECEMBER 8, 2011
http://online.wsj.com/article/SB10001424052970204319004577084682908714066.html

Category: Commodities, Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “Dr. Copper Flashes a Warning”

  1. T_S says:

    Hey BR–do you personally weigh the net short position among traders? Or are you paying more attention to the price action in the commodity? Reason I ask is that there seems to be a hierarchy among those we might follow. Retail crowd on stocks, no way. Bond traders, “usually smarter than stock guys” we hear all the time.
    What about institutional commodity traders? Smart, worth following, or contrarian?

    geez too many questions in my comment.

    see ya

    T

  2. Grego says:

    “Among hedge funds and other money managers, bets that copper prices will fall have outpaced positions that would profit from a rise for 11 consecutive weeks.” So, just for clarity– “markets” means guys who spend their lives trading financial instruments, many of which are a few levels removed from actual goods and services, yes? I’ll go with Krugman, thanks. Of course, he’s even gloomier.

  3. dead hobo says:

    http://futures.quote.com/quotes/quote.aspx?qmdirect=1&symbol=%2fHG%3aCMX

    I watch copper daily and I see no warning. The price looks stable and supported. The price appeared to fall recently, corresponding to a possible break in an asset bubble of some kind but has firmed up nicely with historical levels and appears to be drifting upwards.

    Also, copper is not the prognosticator it once was. From what I understand, hoarding has distorted the price significantly. Rumors in the news stated the recent sell off from the highs were associated with a change in Chinese hoarding patterns. Also, not being familiar with the delivered copper markets, I can’t help but wonder if price has been distorted by London Metal Exchange rules and how they allow warehouse stockpiles that limit distribution. GS is said to be a big player in aluminum warehousing, which has driven the price upwards in the past. Is copper pricing also subject to manipulation now?

  4. PeterR says:

    Slightly OT maybe, but how did Corzine and MF Global lose over a billion dollars, which they can’t find?

    http://www.marketwatch.com/story/corzine-i-dont-know-where-missing-funds-are-2011-12-08?dist=beforebell

    If the corporate books are THIS poorly kept in other companies, then the market SHOULD (and is, copper-wise?) be very concerned about the stability of The House of Cards.

    What a tangled web we weave.

  5. lars1nyc says:

    BR: in the past you have posted NDR charts, not sure if you subscribe but there are some good pieces about this subject from them and the copper/gold ratio

  6. dead hobo says:

    BR observed:

    Note that S&P500 is up since October, while Copper (December delivery)is down 0.6% over the same period . . .

    reply:
    ———–
    This is great. It is a sign that equity markets and commodity markets are losing correlation. Consistently seeing both equities and commodities rising and falling at the same time is a sign of a broken market. In a broken market, if cash flows into commodity related ETFs and causes the price of the ETF to rise, so does the price of the underlying commodity, and so do stock prices in general. There should be an inverse relationship between equity and commodity prices (unless the equity is also a commodity producer) in markets that are not broken.

  7. rootless says:

    dead hobo, you wrote:

    There should be an inverse relationship between equity and commodity prices (unless the equity is also a commodity producer) in markets that are not broken.

    I don’t understand this. Why should the prices of commodities and equities be inversely correlated in a market that is not broken? Why does a positive correlation indicate a broken market?

  8. dougc says:

    dead hobo I am confused….A strong economy uses less commodities?

  9. mathman says:

    coupla things:

    Dylan Ratigan
    http://www.businessinsider.com/leverage-the-dynamite-strapped-to-our-markets-2011-12

    and

    this, is like a postcard from Durban to the US:
    Greetings from Mother Nature (and she’s pissed!)
    Hell-oooo, it’s time to wake up!

    http://news.yahoo.com/billion-dollar-weather-disasters-smash-us-record-171523725.html
    “WASHINGTON (AP) — America smashed the record for billion-dollar weather disasters this year with a deadly dozen, and counting.

    With an almost biblical onslaught of twisters, floods, snow, drought, heat and wildfire, the U.S. in 2011 has seen more weather catastrophes that caused at least $1 billion in damage than it did in all of the 1980s, even after the dollar figures from back then are adjusted for inflation.

    The National Oceanic and Atmospheric Administration added two disasters to the list Wednesday, bringing the total to 12. The two are wildfires in Texas, New Mexico and Arizona and the mid-June tornadoes and severe weather.

    NOAA uses $1 billion as a benchmark for the worst weather disasters.

    Extreme weather in America this year has killed more than 1,000 people, according to National Weather Service Director Jack Hayes. The dozen billion-dollar disasters alone add up to $52 billion.

    The old record for $1 billion disasters was nine, in 2008.

    Hayes, a meteorologist since 1970, said he has never seen a year for extreme weather like this, calling it “the deadly, destructive and relentless 2011.”

    (read the rest)

    Guess we’ll have to start “pricing-in” total collapse to some extent . . .

  10. Petey Wheatstraw says:

    Eric Clapton said that cocaine don’t lie. Maybe he meant copper.

  11. rollsroyss says:

    while it’s true that in the past dr copper has often forecasted the direction of PMIs (… Chinese) and risk assets (here equities), it has been observed as of recently that the PMIs lead copper. As well, LME stocks have been drawn down since end of Sept. That may be the result of a beginning restocking cycle in China (even though Chinese consumers experience their own liquidity issues).
    Then again, Copper skew tells me that the downside risk for the metal is seen as more likely than a rally.

  12. dead hobo says:

    rootless Says:
    December 8th, 2011 at 9:18 am

    I don’t understand this. Why should the prices of commodities and equities be inversely correlated in a market that is not broken? Why does a positive correlation indicate a broken market?

    reply:
    ————
    As commodity prices rise, direct costs to business rise, causing profits to fall. As profits fall, stock prices should fall. There’s nothing magical about commodity prices. If labor costs rise then profits decline. If commodity costs rise, profits decline.

    If profits don’t decline, it’s only because of cost-push inflation. In other words, you pay more at the pump or in the store, all because commodity prices rose and the seller had pricing power. However, this takes money out of your pocket and gives you less to spend on other things, such as XMAS retail, vacations, new cars, new clothes, etc. Thus, rising commodity prices are a tax on growth and inhibit growth. Rising commodity price do not cause growth … that’s idiot thinking.

    Tell me, do higher gas prices make you want to drive MORE and spend more on other things, or do they sap you ability to live the kind of life you want? Somewhere along the line, people lost the ability to notice that hitting yourself in the head with a hammer is a cause of pain and unhelpful to your personal growth.

    The opposite is true for commodity developers, such as oil companies. Their profits rise as the prices of the commodities they sell rises.

  13. rootless says:

    mathman, you wrote:

    Guess we’ll have to start “pricing-in” total collapse to some extent . . .

    Total collapse due to climate change? Very unlikely for the near future. Actually, that’s the problem. The existential threat to human civilization, which is there with non-negligible probability, that comes from climate change is too far away in the future to be relevant for today’s markets, except for the insurance market, I guess.

  14. rootless says:

    dead hobo, you wrote:

    As commodity prices rise, direct costs to business rise, causing profits to fall. As profits fall, stock prices should fall.

    This is one possible causal relationship. However, you argue as if this was the only possible one. The economy goes through a business cycle. When economic activity expands, both profit margins improve and demand for commodities increases, putting upward pressure on commodity prices. During a recession/depression there is downward pressure both on equities and commodity prices due to shrinking demand. Here we would have a positive correlation between equity and commodity prices due to a common cause. And I don’t see what this would have to do anything with a “broken” market. What does this mean anyway that the market was “broken”?

  15. AHodge says:

    yes
    copper and the other industrial commods the best single global indicator
    clearly showed in july aug 2008 that the mild recession had moved to a global maxi
    Europe now moves into mild recession even if they fixed their finance today
    markets have seen the euro financial mess
    and said
    hey the US can still muddle through
    they havent seen the lagged outright euro recession yet

  16. VerticalSpread says:

    Shouldn’t the “bets” on rising prices equal the “bets” on falling prices? For everyone buying a bullish contract there is someone selling them said contract; that seller must have the exact opposite risk profile as the buyer. In futures/options markets the shorts must always equal the longs, no? Are we not really looking at contracts here or am I missing something?

  17. Disinfectant says:

    I know that the Dr. Copper story is really popular, but can someone point me to a rigorous backtest that shows this signal actually works?

  18. AHodge says:

    good Q dis
    and these prices have been pushed around by other things,
    inflation, investor demand
    the latter was spiking all commod up to an early-late july peak in 2008 in spite of early mild global recession
    but big moves down when not obviously explained by something else are unmatched
    and you could go back as far as the 1928 commodity collapse prefiguring the Big One to get confirmation.
    its completely global and the most timely possible

  19. Disinfectant says:

    Followed an Abnormal Returns link to get to this post on the Copper/Stocks relationship: http://sentimentrader.com/blog/archives/18

    Conclusion: There probably is no relationship.

  20. AlexM says:

    The simplistic analogy of rising commodity prices automatically indicates lower profits, lower stock prices is wrong and does not address the fact that price increases are passed along and some demand for many commodities is inelastic as there is no good substitute for them in the market place.

    i.e., the price of oil and it’s effect on the stock market. Rising oil prices indicate rising demand, rising economic activity, and the price of oil increases. Careful conservation can only go so far in reducing demand. Adding to the mix these days are speculators, hoarding, ETF accumulation which has nothing to do with actual demand for oil, and the time honored practice of manipulating supply by the producers.

    So the world is not so simple as the 1970′s simplistic economic theories would have you believe.