One of the most well defined trends out there is the downmove in the U.S. dollar. If you look at the chart of the Powershares U.S. Dollar Index Fund (symbol UUP), it’s been steadily skidding for months.
Honestly, that is not my favorite scenario longer term–a strong economy usually needs a stable currency. (It doesn’t have to be rising, just holding its value compared to both other currencies and hard assets.) However, right now, the decline in the dollar is helping some U.S. multinational companies, as well as boosting the value of commodities, which were decapitated during last year’s market panic.
Let’s not forget, oil prices fell from $148 to $35 before rebounding, copper fell from $4 per pound to $1.25, and the broad CRB commodity index fell from 474 to 200. All of these measures have rebounded in recent months but remain miles from their old peaks. I think they have room to run, which will boost commodity stocks.
I’ve already mentioned gold stocks in my recent Cabot Wealth Advisories–gold bullion has broken out of an 18-month base, and gold stocks are following along. Agnico-Eagle Mines (AEM) and Buenaventura (BVN) are two of my favorites.
Outside of gold, a top name you should consider is Freeport McMoRan (FCX). The company has its hands in a few metals, but copper is the real driving force, making up more than three quarters of its revenue. And on that front, FCX could see earnings fly through the roof in the quarters to come.
As it turns out, worldwide copper inventories at this year’s trough in demand were an incredible 70% less than the inventory total at the last cyclical demand trough (back in 2002). And now demand is accelerating in a big way as the global economy gets back on track, especially in China. Moreover, the growth in supply is likely to be muted, as voluntarily idled capacity is small compared to the overall market.
All of this is the reason copper has rallied from its low of $1.25 to $3 in August. It’s now around $2.85, and has been consolidating for the past few weeks. If prices head materially higher, Freeport’s earnings are likely to crush expectations going forward–already, analysts have hiked their 2010 earnings estimate from $3.77 (90 days ago) to $4.53 (60 days ago) to $5.88 currently. Who knows how high it might go?
What’s the fly in the ointment here? My main apprehension is that EVERYONE is talking about the weak U.S. dollar here … and when everyone knows about a trend, it’s likely that it’s near an end (as the saying goes). If the U.S. dollar is going to embark on a countertrend bounce for a few weeks or months, it’s a safe bet that many commodities and commodity stocks will sag.
However, FCX itself is in fine shape. First, you should know that the stock is extremely well traded (it averages 14.6 million shares per day) and has terrific sponsorship. Second, the stock notched nine weeks up in a row starting in early July, and included in that run were five weeks of tight trading action–both signs of powerful support.
And third, during the market’s recent eight-day retreat, FCX dipped to its 50-day moving average … and then forcefully bounced off it to new recovery highs. With the 50-day line down near 68, we think FCX is buyable around here, or on normal weakness into the 70 to 73 range.