Copper Selloff Copper Selloff: Blowoff!
by Eric J. Fry
The Rude Awakening
Wall Street, New York
Thursday, April 20, 2006 Eric Fry discusses the signs that indicate the time may be coming for a copper selloff. ------------------------- - The lovechild of wanton speculation and fast money –
what to do with this freakish metal,
- Avoiding the price orgy and protecting your commodity
investments,
- Lights, camera, action – Eric on Fox, the markets so
far this week and much more...
------------------------- [Joel's Note: Two rather interesting mentions for you before we tuck into
another E.J. Fry insight today. You may remember a while
back when we dispatched our Rude head, Eric Fry, to the
French Riviera to meet with the good Doctor Richebacher. We
had been banging on about the housing market, consumer
credit and interest rates for a while and wanted to know
what the world's leading economist had to say about it all.
Begrudgingly, Eric agreed to "take on for the team" and
spend a few days on one of the most picturesque coastlines
in the world. (Luckily, I got to stay in Baltimore) The result of this dutiful jaunt was better than we had
hoped for. Always ready to lend an insight or three, Dr.
Richebacher must have been feeling particularly magnanimous
– or particularly concerned – this day. He issued three
shocking warnings for 2006, a couple of ways to safely
invest in this tumultuous economic climate and one FREE
year of access to the most elite circle of investors in the
world. I encourage you to read this report but be
forewarned, it is not for the fainthearted of economically
delusional. The Good Doctors Diagnosis
http://www.isecureonline.com/Reports/RCH/ERCHG420 Secondly, don't forget to set your tivo this Friday as Eric
will be making an appearance on Forbes on Fox. Of course,
you don't have to wait until then to get his commodity
insights...just read on below...
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-------------------------
Blowoff!
By Eric J. Fry The $3.00 copper price is a freak. It is the love-child of
commodity fund money and wonton speculation. There is just something about this creature that isn't
quite right. 16 out of the last 20 trading days, the copper
price has advanced, gaining 30% in the process...This just
doesn't feel right, especially when the U.S. housing market
is slowing noticeably. Therefore, as the frothiest of the frothy commodity
markets, copper seems the most vulnerable to a sudden and
painful reversal of fortunes. We still love commodities –
copper included – for the next five years, but we love them
somewhat less (We never say "hate") for the next five
weeks. The price action in most commodity pits is way too frothy,
and the fundamental connection between price and demand is
way too tenuous. As the chart below illustrates, parabolic
price spikes in the commodity markets are as numerous as
stalagmites in Carlsbad Caverns. The base metals have been
conspicuously strong. 
Copper Selloff: Fear of Falling Prices As long-time commodity bulls, we certainly don't object to
rising prices. But we do object to falling prices, which is
what we fear we might be seeing very soon. Asset prices
have an uncanny way of falling very sharply – and very
suddenly – immediately after they have been rising
parabolically. In other words, we are delighted, but terrified. This
delicious combination of emotions may be appropriate in a
roller-coaster car...or maybe even in a bedroom, but not
while sitting in front of a quote screen. 
No market terrifies us more than the copper market. At
$3.06 a pound its price is double that of one year ago. Maybe the price spike is warranted, but we doubt it. China's economy may be booming, as the copper bulls never
tire of mentioning, but the housing markets in the Western
world are slowing noticeably. As the chart below
illustrates, the supply of homes for sale in the U.S. has
been climbing for months. Not surprisingly, therefore, new
home starts are slowing. These data alone do not sound the
death knell for copper, but they might sound the selloff
knell. 
That's because U.S. construction industries consume about
10% of the world's annual mined supply of copper. At the
margin, therefore, a slowdown in U.S. residential
construction could influence the copper price. And if a
slowing housing market is indicative of broader economic
weakness, the copper price could fall dramatically. Copper Selloff: The Influence of Commodity Funds But fundamental influences like these seem as irrelevant to
the copper market as prime-time TV to an earthworm. The
copper market is doing what it is doing, mostly because
rivers of speculative money are pouring into the market.
Commodity funds are wielding a greater influence over the
copper price, for now, than either American homebuilders or
Chinese industrialists. The Marketvane survey reports that 96% of commodity
advisors are bullish on copper. Obviously, that's the
highest bullish reading ever, and a terrifying sign of
irrational exuberance. As we have pointed out on several prior occasions,
commodity fund money is flooding into all corners of the
commodity world. And as it sloshes around in these markets,
it sometimes creates freakish prices. $3.06 copper is one
of those freaks. To repeat: The upside blowoff in copper is the lovechild of
fast money and wanton speculation. We don't wish to preach
to the market, but neither do we wish to engage in its
orgy. [Joel's Note: A long-term bull with short-term trepidation.
A short-term bear with long-term confidence. It's difficult
to know exactly where to invest in such a confusing
commodity market. Sure, we know the market is rallying as a
whole, but what about the crucial timing required to make
the serious money with options calls and puts right now?
Don't stand by scratching your head or lamenting the trade
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