Sunday, June 19, 2016

Sentiments of a fundamentals investor [FCX]

Seeking Alpha has a recent article by someone who has obviously been whipsawed by the price of Freeport Mcmoran shares (FCX).  In it the writer shows his obvious emotional tie to the notion that he thinks he understands what the fundamentals are which move the share price:

Okay, My Bad
I'll admit that I was apparently wrong on FCX tracking the underlying commodities. I thought investors would care about things like EBITDA and operating cash flows. My entire thesis on how to value the company relied upon the value of the commodities being important. In this case it appears Freeport-McMoRan could see relatively flat sales, flat earnings, flat operating cash flows (major cash inflows are from selling ownership in assets) and still rise 80% in price.

Implications for Investors
The dramatic separation of Freeport-McMoRan from the underlying assets should be a warning to investors that if they are using FCX in their portfolio as a proxy for exposure to natural resources (like copper and oil), their exposure became completely detached from the commodities they were initially tracking.
I'm concerned about the share price of Freeport-McMoRan because it no longer tracks any reasonable estimation of the earnings or free cash flows the company will produce. The investment case for buying at these levels can no longer be made on the premise of valuing future cash flows. That'll make the work of every analyst much harder, unless they are content to simply flip a coin. 

Yes, dear misguided author, your bad indeed.  Commodities trade based on their own wave counts and while the FCX waves is sometimes in synch with them, sometimes it is not.  So you simply cannot count on commodity "fundamentals" when trying to trade FCX or any other mining company.  And the reason for this is not all that difficult to understand!  FCX mines and processes commodities based on a huge debt load!  The selling in FCX was because of fear of default and bankruptcy which would wipe out the leveraged gamblers completely in a deflationary crash.  The company would remain but the owners (including shareholders) would suddenly change.  The panic/survival instinct in the herd is strong and fundamental analysis in no way addresses the movement of the herd based on emotions.  Only the Elliott wave principle is capable of even coming close to predicting herd movements.

If you are frustrated about the movements of miners like FCX, subscribe to my paid website for an outlandishly cheap $39.95 per month relative to the number of charts provided and to the value received.  In doing so you will receive odds based clarity which is easily understandable using well documented Elliott wave rules and guidelines (as opposed to gut feel or the opinions of clueless TV personalities like Jim Cramer).  My latest post on FCX is already up there and it could make you a ton of money very quickly if only you knew what the model is predicting. 

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