ETF Trader

We recently wrote that we saw that many commodity prices are no longer headed straight down. DRAM prices seem to have bottomed. Gold prices have spiked upward recently. Copper, aluminum, and oil prices seem to have stabilized. Taken together, these signs indicate that the Fed is providing the economy with enough liquidity.

David Malpass, global economist, believes that the challenge to growth in the near term is strong. Malpass notes weak nominal growth (expecting 2001-02 to be the slowest two-year nominal U.S. growth since 1946), weak global growth (expecting a 1.9% contraction excluding the U.S.), a weak labor outlook (with the Chicago Purchasing Managers report showing a 23 reading in interest in hiring — the lowest since WWII), and a weak pricing environment (with the Chicago Purchasing Managers report showing a drop in prices paid to 40 from 47). We think that it makes sense to take a look at some of the commodity-oriented stocks that should continue to benefit from the Fed’s reflation without necessarily facing the challenges to growth.

Anthony Rizzuto and Michael Dudas, metals and mining analysts, recently wrote favorably on Phelps Dodge (PD-34), Newmont Mining (NEM-25), as well as other potential metals and mining plays. Regarding Phelps Dodge, Rizzuto wrote, "We believe that Phelps is the top vehicle for investors looking to gain exposure to the favorable intermediate-term prospects for copper. PD remains extremely leveraged to the copper price, as a $0.01-per-lb change in the underlying copper price, held constant for one year, affects Phelps Dodge’s EPS by about $0.15-$0.20. In our view, the major beneficiary of the predicted rise in copper prices in the next 12-18 months should be Phelps Dodge."

While gold prices have been climbing, and Newmont has been favored by Michael Dudas for some time, recently he wrote, "Newmont remains our top precious metals pick, as the new company will provide by far the greatest leverage to rising gold prices with a low-cost, quality profile of operations and a deep management pool."

For investors looking to maintain exposure to steel, while Rizzuto does not recommend purchasing the integrated domestic producers at this time, he does suggest Reliance Steel & Aluminum§ (RS-26), which has demonstrated discipline and structure in showing positive earnings during the recent depression among metals customers. With a high inventory turnover rate, the company is able to maintain margins by quickly passing along any price volatility.

Further, Rizzuto believes that the aluminum industry offers investors excellent long-term investment potential, due to the highly consolidated nature of the industry, prospects for technological innovation, and current power-related supply constraints. Supply growth over the next two to three years is modest, and he expects lower Russian exports, due to a pick up in domestic demand. However, premature restarts in Brazil and the Pacific Northwest could cause some indigestion in the near term. Rizzuto is encouraged by the long-term prospects for demand, as aluminum provides unique and attractive qualities, particularly in reference to the transportation sector. His top large-cap equity names are Alcoa (AA-33; Buy) and Alcan (AL-37; Buy). Rizzuto recommends accumulation of Alcoa and Alcan on pullbacks, as he feels that at levels over $35, these stocks are ahead of themselves.

However, he sees Alcoa and Alcan as core, long-term investment vehicles. Investors may wish to consider the S&P Basic Industrials SPDR (XLB-21) as well as the Dow Jones Basic Materials (IYM-37) as possible beneficiaries of Fed reflation.

The information provided herein is based on data we consider reliable but which we do not represent to be accurate or complete. Any recommendation contained in this report may not be suitable for all investors. Past performance is not indicative of future performance results.

Capital Performance Partners

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