Out With Copper, in With Aluminum
Broad market volatility spilled over into some of the precious and industrial metal markets this week, including copper. The red metal was unfortunately a victim of Wednesday’s Fed-related whipsaw, which knocked us out of our conservative trading position in our favorite copper-tracking ETF, the United States Copper Index Fund (CPER).
What to Do Now
As a result of the recent market gyrations, we’re now out of CPER and I recommend that we avoid copper for now until this industry group shows signs of having decisively firmed up. SOLD
Not all areas of the metals arena are weak, however. Aluminum futures have been hanging around $2,600 per ton lately, thanks to low inventories and better demand from China. (Government-imposed production cuts for curbing pollution ahead of next year’s Olympic Winter games are the reason for the potential demand improvement.)
Moreover, domestic Chinese demand is said to be improving in the wake of the relaxed energy consumption curbs imposed by the government earlier this year. Those curbs cut around 7% of domestic annual aluminum capacity this year, according to a report from consultancy Wood Mackenzie.
LME warehouse inventories of aluminum, meanwhile, are very close to a major low of 882,800 tons that was last seen 14 years ago, which should help make the case for higher aluminum prices in the months ahead.
The stand-out relative strength leader among the actively U.S.-traded aluminum stocks is Alcoa (AA), which has not only outperformed the industry but also the broad equity market as reflected in the benchmark S&P 500 Index.
From an earnings standpoint, Alcoa set a record for quarterly net income in Q3, prompting management to initiate a quarterly cash dividend (10 cents per common share). Revenue was up by a solid 32% from a year ago and well ahead of Wall Street’s estimates, driven by higher aluminum prices and higher premiums for value-added products.
Liquidity isn’t an issue, either, as Alcoa had a cash balance of nearly $1.5 billion at quarter’s end, with no substantial debt maturities until 2027. Moreover, the company just launched a half-billion-dollar stock buyback plan.
What to Do Now
Participants can buy a conservative position in AA here, using a level slightly under 45 as an initial protective stop. BUY A HALF