Monday, November 07, 2005


Phelps Dodge posts 25% profit jump - Mining and Metals - Natural Resources - Earnings

Phelps Dodge is showing all the classic signs of having made a top. The first indication is that reported profits were extra strong. It always seems counter intuitive but you want to buy a cyclical stock when its profits are extra ordinarily low. You want to sell when the profits are extra ordinarily high.

The company is currently promising to return a billion dollars to share holders in the form of stock buy backs and dividends in 2006. Well buying back shares does not put any money in the hands of owners unless you are one of the sellers.

Investors should note that the price of copper has turned. Copper and all commodities do not go up and up and up. Indeed, over the long-term they go down when adjusted for inflation. Copper has been on a multiyear run, however, there are even signs that demand from China has slowed.

The markets are clearly going through a classical rotation. The economic cycle is clearly ready to go from recovery to expansion. With each expansion in each industry, the supply goes up. Margins shrink when supply goes up faster than demand. Businesses leaders are smart; they try not to increase capacity too rapidly. However, if you are going to expand, you want to do so before your competitors.

Some are good at playing the jaw bone game. For example, we all know how Saudi Arabia talks about infinite reserves every time prices get high in order to discourage new drilling for oil.

The bottom line is that folks should be moving their portfolios toward the "second half" stocks. These will include defensive issues that make about the same margins in good times and bad. The sellers of tooth paste, under-wear, soft drinks, beer, tolet paper, etc. Grocery stores versus restaurants.

Don't take me wrong, when the market takes off, most stocks are going to go along for at least the early part of the ride. Furthermore, transportation stocks have historically lead the early bull market moves and the relative strength of the transports right now is very strong.

Techology and much more will do well in the coming weeks. However, folks should use the upcoming major rally to reduce holdings in energy, materials, heavy machinery and the like and add to the defensive areas. PFE and WMT are two of the big names that have "worn investors out". However, these companies will make large profits over the next five years at a time when interest sensitive and economically sensitive stocks will suffer.

The chart of the day web site (subscription required) posted a chart today that showed REIT's offering very low yields. This is another sign of the time for the turn. Another sign is that the S&P is showing relative strength to the Russel 2000. Large cap, safe stocks, are starting to do better than the small growth company or the developing nation stock.