February 8, 2011

Dr. Copper: Market Prophet

Since copper is used in so many industrial applications and is economically sensitive, investors often refer to it as, "Dr. Copper." This moniker playfully suggests that copper, "holds a Ph.D. in economics because of its ability to help predict economic trends," according to MarketWatch.

How accurate of an indicator has "Dr. Copper" been the last few years?

In July 2008, copper prices on the Nymex were riding high at about $4.00 per pound. But, over the next five months, prices plunged more than 68% to about $1.25 per pound by late December 2008, according to The Wall Street Journal. This plunge in copper prices preceded the bear market low in stocks, which was not reached until March 9, 2009, according to BusinessWeek. Score one for copper presaging the major market decline that occurred in late 2008 and early 2009.

From the low of about $1.25 per pound in December 2008, copper prices then shot up to $1.62 per pound on March 13, 2009, according to Reuters as reported by The Australian. Looking back, that 30% increase between late December 2008 and mid-March 2009 (when the stock market hit its low) nicely foreshadowed that the world was not coming to an end and that the economy might pull through. Score two for copper's forecasting ability.

Last week, copper prices closed at an all-time high of $4.58 per pound, according to The Wall Street Journal. So, from the low of about $1.25 per pound in December 2008 to last week's close, copper prices rose about 266%. By comparison, the S&P 500 rose about 94% from its March 2009 low to its close last week. Over this longer period, copper prices continued to rise -- as did the stock market -- so make that three checks for "Dr. Copper" and its forecasting ability.

History is nice to know, but what is copper telling us now about the future? Well, as we always say, past performance is no guarantee of future results. Given that caveat, copper's all-time high price last week may suggest that the chances of a near-term economic collapse are rather small.

Data as of 2/4/11 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor's 500 (Domestic Stocks) 2.71% 4.2% 23.0% -1.7% 0.7% -0.3%
DJ Global ex US (Foreign Stocks) 1.4 2.2 19.5 -3.8 1.9 3.9
10-year Treasury Note (Yield Only) 3.7 N/A 3.6 3.6 4.6 5.2
Gold (per ounce) 2.7 -3.9 25.1 14.9 18.9 17.7
DJ-UBS Commodity Index 1.7 1.0 27.8 -5.1 -0.8 3.8
DJ Equity All REIT TR Index 1.0 3.2 42.3 1.3 2.6 11.2

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.

World Food Prices

World food prices hit a record high in January as measured by the United Nation's Food and Agricultural Organization Index. This index measures world food prices using a worldwide basket of basic food supplies such as sugar, cereals, dairy, oils and fats, and meat.

The New York Times said prices rose "as a jittery market reacted to unpredictable weather and tight supplies." The Times also cited other reasons for the rise including higher demand, smaller yields, and crops diverted to biofuels. Some folks would also argue that governmental stimulus programs enacted by various countries have created a flood of "cheap" money that is finding its way into commodities and pushing up prices.

How could this rise in food prices affect you?

A sustained rise in food prices could have negative consequences. Obviously, if it continues, it could hit all of us in the pocketbook. But, globally speaking, it could hurt other countries worse. For example, CNN said, "Rising commodities costs are one of the major factors behind a growing wave of civil unrest across the Middle East and North Africa."

While we don't anticipate any riots or major protests in the U.S. regarding food prices, it's appropriate to monitor what's happening globally. As we all know, the world is so connected that riots in one part of the world could end up affecting us here.

Weekly Focus - Think About It

"Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man." --Ronald Reagan

Best regards,

Sean M. Dowling, CFP, EA

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* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* This newsletter was prepared by Peak Advisor Alliance.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.