The Second “Last Five Minutes” Play from Peter Krauth

Sniffing out another Real Asset Returns teaser -- "The outlook for copper is doubly hot"

By Travis Johnson, Stock Gumshoe, September 20, 2012

As promised, we’re taking another day to have a look at the “last five minutes” pitch that so many of you have been asking about.

If you missed our first installment, you can go here to see that note — and get the background on that “last five minutes” means. In short, it’s a spiel that’s based on the fact that exponential consumption growth of commodities is going to lead to a dramatic spike in their prices. The other tease was for an agriculture-related commodity, potash (that’s a fertilizer component), today’s is for a more widely-traded industrial metal … here’s a taste of the pitch:

“URGENT ‘FIVE-MINUTE EFFECT’ PLAY #2

“Did you know that there’s over a mile of copper wire in every car built?

“You’ll know it soon by the metal’s price.

“… three billion more people are joining the middle-class ranks over just the next 18 years…

“And there’s copper in everything important to their lives. The pipes that carry their water, the wiring in their cars, homes, offices, schools, hospitals, and more.

“Whenever growth is in the picture, copper’s hot.

“And with population, development and consumption exploding globally…

“The outlook for copper is doubly hot in these ‘last five minutes’ of cheap resources.”

So that’s the big picture: buy copper. He also talked quite a bit about the “golden cross” in this ad, and copper, like several other commodities, is at least close to a golden cross on their chart — the 20 day moving average has almost hit the 200 day moving average for the ETN that tracks copper and for the major index of copper mining stocks, though I didn’t check the actual futures trading charts. That’s almost, thanks to the recent spike up in prices during the last two weeks, when copper has moved up about 10%, but not quite — and part of the reason that it’s called a golden cross is that the cross has to happen, otherwise the 200 day moving average acts like a resistance ceiling.

Or at least, that’s how the technicians describe it to me. I don’t think the Chinese factory managers who are deciding how much copper to order are basing it on the 200 day moving average, so I have a hard time taking the charts very seriously as a fundamental investor — but yes, they do have some power to describe the trading behavior of human beings, and sometimes they have predictive power … I just take it with a grain of salt.

So anyway, that’s the basic copper story — it’s called the “metal with a PhD in economics” (that’s why you’ll sometimes hear the “Dr. Copper” term) because of its importance to the global economy … movements in the copper price are a good indicator for the economy is doing, though over the long term (decades) the metal tends to stay pretty close to other broad indicators of global economic performance, like the S&P 500 index. Copper is more complicated now than it might have been a decade ago, partly because the Chinese are the major consumers of copper for their factories and their infrasctucture buildout — and their inventories are not as transparent as the inventories of the big futures or commodities trading houses. China imported record amounts of copper earlier this year, but many investors were convinced that they were just hoarding it, which might depress their future demand for imports.

I am not a commodities expert, to be clear, that’s just the basic spiel that I hear over and over. So let’s move on to see what Krauth thinks is the best “last five minutes” play for copper … what’s he specifically teasing? Clues in this brief excerpt from the ad:

“There are lots of ways to play this vital industrial metal…

“But the BEST way I know of to play it right now is this American firm. They’ve got under-the-radar stranglehold on some the world’s largest copper deposits.

“They’ve also corned impressive quantities of zinc, moly, and lead into the bargain.

“With projected copper demand over the next 25 years estimated to surpass all of history to this point…

“Companies with the biggest in-ground reserves will fare the best. Especially from a profit-margin standpoint.

“And this company produces copper at less than 10% of today’s market price!

“That leaves 90% in profits for acquisitions, development of new resource deals, equipment and infrastructure. Not to mention handsome dividends to shareholders.

“With fundamentals like these, it’s no wonder that shares have gone up 208% since Q4 of 2008…

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“That’s right: They’ve more than tripled in value DURING the worst domestic and global financial malaise of our lifetimes.

“But this is a drop in the bucket compared to what this company’s in position to do.

“Of all the commodities-related investments on my radar for the Real Asset Returns model portfolio right now…

“This one has the potential to go the farthest.

“In my opinion, it could beat the 3,977% gains Thompson Creek pulled down for investors in 2005 to 2007.

“But you must get in now if you want a shot at this caliber of returns. These metals-focused stocks can move lightning fast….”

Well … pretty much all copper producers bottomed out in the fourth quarter of 2008, so being up 208% since then is not so remarkable. Most of the big ones have not yet recovered to where their share price was five years ago, since, as we see so often, rebuilding a stock’s valuation takes quite a bit longer than crushing it. So which copper company is he teasing?

The two biggest US copper companies are the massive one you’ve almost certainly heard of, Freeport McMoran (FCX), with their massi