Diary of a Financier

Chart Updates: Copper and the Consumer

In Capital Markets on Wed 4 Apr 2012 at 22:23

Some quick updates on the charts of Copper (HG/) and the Consumer sectors. I’ll tie this all together in the end…

Copper’s daily chart shows a short-term symmetrical triangle, which is ultimately eclipsed by a longer-term Head & Shoulders. HG closed around $3.79 tonight. With neckline support in the $3.40-3.20 range, the H&S pattern will ensure a bearish breakout of an otherwise ambiguous triangle. The weekly fractal confirms this bearish bias, and I find the monthly chart fragilely teetering on the brink of bearish reversal:

HG- daily symmetrical triangle within broader Head n Shoulders; weekly confirms bearish bias; monthly is fragile & on the brink of bearish reversal.

That’s a loud call for Copper to roll-over to the downside–something that usually precedes an equity correction. However, when I look to the changing landscape of the global economy, I find evidence to suggest that Copper won’t correlate as strongly with equities (and the economy) today as it has over the past 20 years. That’s largely attributable to China’s secular shift from fixed investment to consumption.

Since the Commodity Super Cycle accelerated into its blowoff top circa 2008, Copper has proven more of a bellweather for Chinese markets than American. The correlation of HG relative to the China ETF (FXI) is persistantly stronger than that of HG relative to the S&P 500 ETF (SPY):

HG v FXI- correlation (0.82) significant with China

The Chinese were stockpiling raw materials, which they converted to production & fixed investment. This juiced the Investment (I) and Export (NX) components of their GDP (C+I+G+NX). The continual repetition of this growth formula led the Chinese economy to [nearly] overheat. A breaking point arrived when China reached a maximum debt-load at the outward bound of its sustainable growth rate. (Of course, the debt financed continued acceleration in China’s growth rate once aggregate demand couldn’t finance such growth organically. China’s surplus production was exported–mostly crammed down the throats of US consumers–until foreigners reached their own maximum debt loads.)

Supply increasingly exceeded demand until the whole economy started to collapse under the weight of overcapacity. Over time, the Chinese now need to draw down this excess aggregate supply via organic, endogenous demand (i.e. Consumption). Fixed Investment had contributed CNY30.2 trillion to GDP in 2011, as opposed to only CNY16.3 trillion from Private Consumption. The latter grew at an unprecedented clip last year, 22% vs. a normal rate in the low-teens throughout last decade. So, it’s conceivable that the Chinese consumer can displace losses in Fixed Investment, but it’s unlikely in the immediate term.

China and America have entangled themselves in some kind of symbiotic relationship. Like I said last week, the Chinese migration toward Consumption is manifest in the underperformance of US resource sectors (XLB/XLE) relative to surging consumer (XLP/XLY):

XLP v SPY- outperformance of Consumer Staples is the new normal given US leverage to the Chinese consumer.

XLY v SPY- outperformance of Consumer Discretionary too.

If you ask a handful of American CEOs or just listen to their conference calls, you’ll notice that American conglomerates are heavily allocating to China. They all consider it a new frontier in their long-term growth plans. 1.35 billion Chinese are a force–as the commodity super-cycle can attest. This isn’t the marginal growth potential Intel (INTC) offers when rolling out a new Pentium Processor. This is an unsaturated consumer base. If they want McDonalds (MCD), Starbucks (SBUX), iPhones (AAPL), Guess Jeans (GES), or Coach bags (COH), they’ll get them. The healthy multiple granted these revenues is part of why US consumer stocks have fared well in the face of European contraction and domestic stagnation. US brands can average double-digit revenue growth during such a secular wave. On the other hand, resource-intensive economies (read Australia) will suffer an identity crisis.

–Romeo

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  1. […] to followup on my April 4th Copper (HG/) comments: Copper’s daily chart shows a short-term symmetrical triangle, which is ultimately eclipsed by a […]

  2. […] rests. This support happens to be the neckline of a long-term Head & Shoulders I’ve been tracking since April. However, longer-term technical indicators (weekly fractal in particular) aid my […]

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