INDUSTRIAL METALS EXTENDED

Industrial Metals Extended (click image to enlarge)

On December 28, I posted the above chart showing that either bonds are very cheap or industrial metals are over-extended. My timing was good and lucky. The next day, the non-ferrous metals group was the worst performing group-- down better than 5% for the day.

In a couple of aggressive accounts last week, we sold Phelps Dodge short. (We borrowed shares of PD and must return them later). Phelps Dodge has been a strong stock for several years and the company has solid earnings. The price earnings ratio is low. The key question is the future price of metals--primarily copper and gold.

On December 1, 2004, Bear Stearns took the stock off its recommended list citing concerns about metals prices. South American stock markets have been out-performing for several years while the US Dollar declined. My guess is that the long run is over. PD has met strong resistance near $100 per share. The increase in short US interest rates and the slow down in the growth of China seem to be affecting the market. One report indicates that China expects to actually be a net exporter of steel this year!

Selling stocks short is an aggressive action. Most investors should avoid the practice. An aggressive investor who holds positions on margin should fully understand the ramifications before using short positions as a hedge. The ultra conservative investor should appreciate that the above chart shows metals as very expensive in relation to bonds. It is entirely possible that bonds will appreciate more in value than metals will fall in value.