Is Ben Bernanke Just What The Doctor Ordered?

If Ben Bernanke is going to be Superman on Friday, he needs to prescribe some medicine for the good doctor. Dr. Copper that is. Strong copper is the lifeblood of a strong economy, there is no doubt about that. Copper is used in industrial production, and the higher copper prices are, generally the stronger the economy. At least, so goes conventional thinking. As recently as the beginning of July, we saw copper firmly above $4 per pound, and the chart was breaking out to new highs. Then the U.S. government decided to play chicken with the debt ceiling and the possibility of a default. That set off a domino effect around the world and threw markets into turmoil. The problems in Europe further escalated and received more attention, equity markets plunged on growth concerns, and copper broke its uptrend, as evidenced by this chart . Starting towards the end of July, copper had a huge red candle, sending prices below $4, where it currently sits. Friday is the start of the Federal Reserve's annual economic symposium in Jackson Hole, Wyoming. Last year, Bernanke hinted at additional quantitative easing, and stocks, commodities, and virtually all asset classes soared. In November, the Fed announced it would be buying an additional $600 billion in U.S. Treasuries, otherwise known as QE2. Traders are hoping for something similar this year (QE3), although it is not 100% certain if Bernanke will announce something. It is clear that something needs to be done in the short term to prevent the economy from going back into recession. There is virtually no appetite from the U.S. government to spend, so the "fourth arm of the government" as it is sometimes known, will have to do something. Many are speculating that the Fed will launch a version of Operation Twist, which was done in the 1960s. Whatever the Fed does or does not do, traders will see a reaction in copper. PIMCO's Bill Gross tweeted back in June that the Fed is likely to do something at Jackson Hole on Friday. He mentioned they likely hint at a third round of quantitative easing, as well as interest rate caps. “The important news this week will obviously be Bernanke's speech in Jackson Hole,” said Andrey Kryuchenkov, an analyst at VTB Capital in London in comments to Bloomberg. “That's what people are waiting for.” Last night, we saw data out of China that indicates a potential soft landing, which is beneficial to copper. HSBC Holdings and Markit Economics showed a preliminary reading for August PMI at 49.8. This is slightly higher than the final reading of 49.3 for July. “The fact that demand in China is relatively robust is also shown by yesterday's import figures,” Commerzbank analyst Daniel Briesemann said in a report obtained by Bloomberg. If Bernanke does indeed announce either QE3, or something else to stimulate the economy out of the summer doldrums, it will be off to the races for copper. As such, the related equities and ETFs would move with it. Names like Freeport-McMoRan Copper & Gold FCX, and the iPath Dow Jones-UBS Copper Subindex Total Return ETN JJC would be names that would benefit from rising copper prices. Other names to consider in this group are Southern Copper SCCO, and Vale VALE, which are also large copper miners. Exposure to Vale gives you exposure to other metals, while Southern Copper and Freeport are pure plays on copper. Bernanke and the rest of the Federal Reserve may need to give the U.S. economy a healthy dose ($1 trillion or more?) of easy money to get the U.S. economy going. That might be precisely what the Dr. ordered. ACTION ITEMS:

Bullish:
Traders who believe that copper is likely to continue to move higher might want to consider the following trades:

• Going long copper futures at these levels could prove profitable once we cross the $4.00 per pound mark.

• Going long the copper ETF gives traders direct exposure to the good Doctor, but it allows traders not comfortable with trading the underlying issue direct exposure.

• Lastly, traders can also go long the related equities, such as Freeport (FCX) or Southern Copper (SCCO).

Bearish:
Traders who believe that Ben Bernanke is not going to offer help on Friday may consider alternate positions:

• Going long the U.S. dollar, perhaps by buying the dollar ETF UUP could prove profitable, as the dollar and copper tend to move inversely of each other.

• Shorting the above mentioned names or buying puts in the option markets on these names could be profitable should copper come down hard here.
  
  

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