Copper finally breaking out of this 2 year consolidation range that I noted in my last post. Today copper finally broke through that $3.75-$3.80 top it’s been hitting and tapping $3.86 as I write. Folks are saying the commodities run, thus copper included I presume, is a bet on the dollar falling further on the next Fed rate cut. Either way, the commodities supply is still tight, we are still in a multi-year commodities bull cycle, and supply should continue to be tight as miners had under invested in developing mines (which takes years to evaluate, design, and begin operations in new mines).  Copper’s at all time highs and miners like PCU is some 25% below it’s all time highs.  Even if Copper just hangs here for a while, the miners have a lot of catch-up to do.  Sure, there’s operational risks with the miners that you don’t get with the metal itself, but having owned PCU before, the only operational risk I’ve experienced was with the elections 2 yrs ago, and the stock only took a small dip before resuming its uptrend.  Therefore, I have every reason to jump back into copper miners (& thus weak dollar plays) like PCU and FCX. Gold’s had the run copper hasn’t had, so I’m going with PCU as I noted earlier. After a 2 year breather, copper’s resuming its uptrend.

**Disclosure: Author is long PCU and FCX as of this post**

North American increase is predicted for only 1.5%

By Tom Stundza — Purchasing, 2/20/2008 9:39:00 AM

World steel production is projected to increase 5.7% this year to 1.42 billion metric tons from a preliminary 1.344 billion metric tons last year, forecasts MEPS (International) of Sheffield, England. The steel consultancy says the increase will be driven mainly by an expected increase in China’s output to 533 million metric tons from 489 million metric tons in 2007, a gain of 9%.

Russia and Eastern Europe, the area known in Europe as the Commonwealth of Independent States, or CIS, also is expected to show growth in production to 131million metric tons from 124 million metric tons in 2007, a 5.6% gain, the MEPS study suggests. MEPS also forecasts a marginal increase in the European Union (EU-27) output to 215 million metric tons from 210 million metric tons in 2007.

In the NAFTA region (Mexico, Canada and the U.S.), a small 1.5% improvement is forecast for this year to 134.8 million metric tons from 132.8 million in 2007—due mostly to reduced imports because of the weakness in the U.S. dollar that have created higher-priced markets elsewhere. Steel production in South America will rise to 52 million metric tons in 2008 from 48 million in 2007, mainly because of rising local demand.

~from Purchasing.com: World steel production will rise almost 6%

Maybe not much for the short term trader here (except Pickens’ call to short oil and natural gas here as he expects a pullback in both during the 2nd quarter.) However, I found his comments on the longterm outlook of energy, energy sources, and viable vs. fairy-tale alternative energy to be extremely useful for investing long term as energy will only become more scarce.

vid 1: Boone Pickens on $100 Oil (http://www.cnbc.com/id/15840232?video=658910248)

vid 2: Boone Pickens, BP Capital CEO discusses energy and the economy.
(http://www.cnbc.com/id/15840232?video=658914274)

After going to some 60% cash in early January, I’ve taken a seat high up in the bleachers to just watch the action and try not to get too involved.  As I keep hearing, and have been trying to do, patience is your best trading skill in a market like this.  If you’re not a great swing trader (I guess I’m ok, but its not gonna be how I make my name), then its probably best to take it slow and not throw everything at the momentum names like Apple (AAPL) last year.  I’m not particularly a big fan of Warren Buffet, but yes, maybe it is time to go to Buffet style this year as we meander around and frustrate short term players.  Even the fact that Warren himself has come out to play, getting involved with the bond insurers and becoming the biggest share holder in Kraft.

I do not believe the worst is over.  Even as the banks’ writedowns keep coming in, I’m still waiting for the Armageddons that’s the $2 Trillion aggregate damages related to mortgages and CDOs Annaly (NLY) CEO Mike Farrell has estimated.  With under about $200 Billion in writedowns and borrowings from the Fed’s TAFy auctions, we still have a ways to go as you can see.  Having said that, these go-nowhere days are great for doing homework.  I’m going to pick at some of my long-term investments on today’s rather bullish action so far (bullish because I would’ve expected us to be down much more on the inflation data in the CPI and the breakdown of another private equity deal between 3COM and Bain Capital).

1. MO - building up this position to be the largest holding in the portfolio head of the breakup of the domestic and Philip Morris International businesses and the opportunities that comes with, including increased buybacks, dividends, and realization of extraneous assets such as Altria’s 28.6% stake in SAB Miller.  No question in my mind that the Fed’s excessive rate hikes have put the U.S. into a recession, which makes defensive names like Altria great right now.

The Fed raised rates to knock down inflation, which has been caused by international growth not U.S. growth.  I guess the Fed is finally finding out that it’s “broad hammer” tool of interest rates hammers the U.S. much harder than the rest of the world.  So, global growth continues, commodities continues to rise, and the U.S. has to deal with stagflation where inflation continues because the rest of the world keeps growing and Americans have less money to buy the inflated goods because the economy’s weak, their houses are worth less, and their retirement funds have shrunk.

2. PCU - So, I’ve taken a starter position in PCU with the intention of building up a larger position.  U.S. home construction has been nonexistent and thus a non-factor in copper prices.  Manufacturing activity has fallen off quite a bit in the U.S., yet copper prices are again trying to take out that $375 mark (as pointed out by Helene Meisler on RealMoney.com today).  Also, China’s determination to keep Rio Tinto out of BHP’s hands tells me commodities are still in short supply, or so says those in charge of the country…who I’d say are much much smarter than me.

3.  POT - Same here.  Higher commodities are here to stay.  If you saw how the CEO was salivating bullishness on Fast Money last week, you’d want into this stock too.  I’m taking a starter position and hoping this thing pulls back, although it’s just tapped another all-time high and got legs to go higher.  The interesting point that the CEO made was, once the rising middle class tries meat as a source of protein, they never go back.  But as I learned in h.s. biology, it more energy efficient to have a vegetarian diet than to feed those crops to livestock.  In other words, higher demand for meat requires a lot more crops, and thereby requiring a lot more fertilizers as well as farmland (bodes well for Deere still).

4.  PCP - Boosted this position to a meaningful size as orders for the 787 Dreamliner as well as smaller planes keep coming in.  I thought we could see another big drop in 787-related names, but I’m not so sure now so I want to at least have a good stack of PCP.  Boeing’s nearly finished with another 787 for testing purposes, and have 2 more on the way, so demand for PCP’s products aren’t going to fall off as sharply as if the whole production was on hold.  Also, China building a power plant every 2 weeks certainly helps the demand for high-performance metals.

5.  UNP - Coal on fire? (no pun intended)  Got to move the coal to the coast somehow so they can be shipped to China.  Same with the ag story and moving fertilizers to the coasts.  See how nice the world starting from the U.S. coast and beyond looks?  Already had a position. Building it up.

*Disclosure: Author owns AAPL, MO, PCU, POT, PCP, and UNP as of this post *