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Adam Sarhan Quoted in Why copper’s rout may be a red flag for investors

Market WatchPublished: Jan 14, 2015 11:44 a.m. ET

Some argue that it is no longer the market indicator it once was


Is copper the latest warning that markets are about to face hard times?

MADRID (MarketWatch) — Economists are bullish on growth, but copper’s big plunge on Wednesday appeared to be suggesting that they’re wrong. For investors, the crucial question is ‘Who is right?’
An ugly 24-hour period drove copper HGH5, -4.54%  to mid-2009 lows onWednesday—it fell 5% to $2.1590 a ton. In New York on Tuesday, copper fell 8 cents, but the big crack came later in that day when it crashed through key support at $6,000 a ton on the London Metal Exchange. That drop was followed by heavy falls in Shanghai on Wednesday, said Ole Hansen, Saxo Bank’s head of commodity strategy.
Known as Dr Copper, the commodity is a chief building and manufacturing material and to some a harbinger of the global economy. So when investors start to bail on it, some say that is a sign of the proverbial canary in the coal mine is starting to keel over.
A nail in the deflation coffin: Some blamed copper’s losses on the World Bank, which cut its global-growth outlook, including for China, a country that is a big global buyer of copper.
Investors inured to oil serving as the whipping boy for the market’s global-growth worries, were taken aback by yet another commodity caving. Copper falling alone would be less of a worry for Adam Sarhan, chief executive officer of Sarhan Capital.
A range of commodities, hard and soft, have joined oil lower: gasoline, corn, sugar, to name a few, Sarhan said. A combination of this pressure “supports that notion that deflation is getting stronger not weaker and if that is the case then that bodes poorly for both main street and Wall Street,” he said.
For its part, oil has lost nearly 60% of its value since peaking in June. On Wednesday, West Texas Intermediate crude-oil futures for February delivery CLG5, +5.75% were ticking higher by 14 cents, or up 0.3%, to about $46, while February Brent North Sea crude oil LCOG5, +4.51%   slipped 55 cents, or about 1.2%, to $47.26.
Equally concerned was Keith McCullough, CEO of Hedgeye Risk Management, who says he has been telling his clients to short copper for months. “Oil, copper, etc.—they are all legacy carry trades associated with the simple expectation that the Fed could perpetually inflate asset prices,” he said.
“Now deflation is dominating expectations, and all of those who underestimated how nasty the deleveraging associated with deflation can be,” said McCullough.
It is all about China: Saxo Bank’s Hansen said U.S. investors have their own strong economy to fall back on, making copper less of a worry, given its ties to China. While the World Bank raised its outlook for U.S. growth for 2015, it also said the global-growth downgrade was linked to the fear U.S. growth can’t compensate for eurozone and emerging markets woes.
Julian Jessop, chief global economist with Capital Economics, wrote in a note Wednesday that copper’s move doesn’t really break with trend, given most industrial metals prices have been weakening for several years. He said investor panic and speculative selling more than anything likely took hold as copper breached that key $6,000-an-ounce level.
“That said, we would undoubtedly feel more comfortable about the global economic outlook if the price of copper—and indeed oil—started to stabilize soon,” he said in a note.
But how much of an indicator is copper anymore? Not much, said Andrew Thatcher, investment analyst at Financial Enhancement Group, who laid out that argument ina blog post from December.
“I don’t believe we should be looking at the copper market to for signals in economic growth or market direction,” he said in emailed comments.
“While the commodity doesn’t trade in a vacuum by itself, I don’t believe it holds the same level of value as an indicator it once did.”