Freeport-McMoRan: An Even Stronger Buy on the Fed
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Earlier this week, I referred to Freeport-McMoRan Copper & Gold (NYSE: FCX) as a double-barreled buy based on the apparent strength in both the copper and gold markets. Now that the Federal Reserve and “Helicopter Ben” – no more doubting where that nickname came from – have fired both of those barrels squarely into the U.S. economy, skipping QE3 in favor of QE4-Ever, the stock has only gotten more attractive.
While the bulk of the near-term reaction is likely to be on the gold side of the equation, Freeport’s diversified exposure make it an insightful holding for those searching for the refined version of gold-fever – a.k.a. “oh my god at $40 billion a month, a gallon of milk is going to cost $15 so I had better buy gold.” Irreverence aside, this critical move by the Fed has made Freeport an even more important core holding.
Unlimited Quantitative Easing
While earlier rounds of quantitative easing involved large amounts - $1.7 trillion and $500 billion respectively – those rounds were capped. Furthermore, the goal of these rounds was general economic stimulus. The critical language from the last FOMC meeting show how critically different this round should prove to be:
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
The two important takeaways from the above language are that this round is being directly tied to the labor market and that there is no upper limit on how long this round will take or how much may be spent in total. These concepts diverge in critical ways from the more conservative stance that has been taken in the past. For many investors and political pundits, the move was a shock ahead of the election; most market participants expecteded very measured behavior until Election Day. As such, it is hard to see the move as not at least somewhat politically motivated.
The Implications for Freeport
As things currently stand, Freeport is poised to benefit from positive trends in both copper and gold. Trends for copper have improved, driven largely by developments in China and Europe. The Chinese approval of $156 billion in infrastructure spending should help boost demand from the world’s largest copper consumer. Likewise, the bond-buying program initiated by the ECB is expected to loosen credit and spur construction spending – a key demand driver for copper. Southern Copper (NYSE: SCCO) is also benefitting from these developments but lacks the boost afforded Freeport from its gold element.
Gold prices had already begun to rise on the expectation of more quantitative easing and other positive developments on the global macroeconomic stage. Barrick Gold (NYSE: ABX) was up 5.5% and Goldcorp (NYSE: GG) was up 5.64% on the Fed announcement, while Freeport climbed by 4.2%. Clearly the gold market is positive on the news, accelerating gains for gold-based stocks based on the very aggressive Fed action.
While there may be some stimulative impact in the immediate-term, at some point inflation will become a serious factor in the economy. This is bolstered by the fact that the FOMC also made clear its intention to keep rates low until at least mid-2015, an extension of the previous 2014 target. Inflationary pressures are positive for commodities, particularly the precious metals that are seen as safe havens. You should keep in mind that inflation expectations are usually more critical than actual inflation in moving the market.
This policy initiative seems to take a stance that of the Fed’s dual mandate between employment and inflation, employment will be the driver for the foreseeable future. As long as this remains the case, commodity-based investments will remain a critical part of your core portfolio. Because Freeport gives you both base and precious metal exposure, it should balance some of the volatility that either metal experiences alone. As such Freeport is an absolute must for your core portfolio at current levels.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.