Thursday, April 16, 2009

Trader Dennis Gartman Says Watch Base Metals (Copper) As Leading Economic Indicators

We just wanted to post up a quick update in regards to Dennis Gartman’s latest ideas and positions. Dennis Gartman says he has survived this mess because he is a hedger. We track him on the blog because he is long something, and short something against it (or vice versa). We run our portfolio in a similar manner and believe that if you’re going to try to run a hedge fund-esque portfolio, you truly need to be hedged. So many funds these days have employed leverage and have ran such concentrated portfolios with ‘all-in’ bets that they have deviated from the original defintion of a hedge fund. We hope to highlight what a hedge fund should be in the true sense of the word. (Like Steinhardt, we like to keep it old school). Gartman is a noted trader and publishes the Gartman Letter. To get a better idea as to his style, view his rules of trading as well.

Back in March, we noted that Gartman was long cheap retail and short malls. He has recently been out listing his preferred positions for spring time. Over various media appearances we have noticed a few recurring messages. Gartman wants to be long: copper & Alcoa (AA). Gartman wants to be short: the Japanese Yen (forex or FXY).

In terms of copper, Gartman uses this base metal as an economic leading indicator. We’ve written in the past that Gartman likes to use the Baltic Dry Index and the Transports as signs we are recovering economically. When these indexes start to shoot higher, it is most likely a positive sign. (And, the Baltic Dry Index had shot up, only to recently taper off). Not to mention, the transports have seen some bullish action the past few days with a steady uptrend and now some consolidation into an ascending triangle. This pattern typically likes to breakout to the upside. But, as always, be nimble and play a break of the trend in either direction. Our man Stewie posted up this chart last night:

He treats copper in this same regard and thinks that a rise in base metals signals to him that economic growth could be making a comeback. Gartman notes that after a long period of decline, Copper has been increasing. As an indicator, he likes to think of Copper as a Master’s degree in Economics. He also goes on to say that you can monitor all base metals as a collective whole for the PhD in Economics. Gartman prefers these commodity indicators to raw economic data, citing that these metals moved downwards long before the data signaled weakness in the global economy. This makes perfect sense, as these metals are used for the construction of physical objects that are often used in infrastructure and other global growth sectors. The metals are definitely leading indicators, while often raw data (such as unemployment figures) are lagging indicators. As you can see below, Copper has definitely been moving much higher the past two months:

Turning his focus to the Japanese Yen, Gartman has focused on being specifically long the Canadian Dollar (forex or FXC), the Australian Dollar (forex or FXA) and short the Japanese Yen (forex or FXY). He is in these positions under the notion that commodity prices will get stronger and he wants to own the currencies that will benefit from this (due to commodity exports). He dislikes the Yen because of Japan’s large status as a commodity importer. Interestingly enough, Gartman has also stated in the recent past that he sees Gold becoming the world’s second reserve currency. Time will tell if drastic change such as this is necessary.