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(B)(N) FCX Freeport-McMoRan Copper & Gold

December 6, 2012

Deal Book. The stock price for Freeport-McMoRan dropped 16% or $6 TODAY because a lot of investors were running for the exit at the same time. We have to ask, How is it that tens of thousands of active investors and hundreds of “professional” portfolio managers of hundreds of millions of “professionally managed” pension, trust and endowment funds can be SURPRISED like that, running, and fleeing, and dropping about $5.8 billion of the “smart money” at “fire sale” prices on the way? The answer is that they just didn’t know and one wonders what else they don’t know or, more cogently, what do they know and how is what they do not a gamble? Please see our Post, The Active Investor (DOA), November 2012, for an overview.

In contrast, we know that we haven’t owned Freeport in a Perpetual Bond™ since $51 in mid-year 2011, more than a year ago, and our mandatory stop/loss at minus ($4) or, effectively, $47 at the time, simply sold us out long before the stock tanked at $30 six months later. Please see Exhibit 1 below and recall that a stock is in the Perpetual Bond™ or (B) if and only if  the ambient stock price Stock Price (SP) (Red Line and a step-function) is above the Risk Price (SF) (Black Line and also a step-function). Alternatively, it’s easy enough to protect the price (at $51) with a bought put partially financed with an opportunistic call on our long portfolio if we want more time and space to “think” and plan our exit, so to speak (please see our Post, The Wall Street Put, August 2012, for more information and there are many examples in these Posts).

Nor are we buying the stock now (at these “low” prices) although no doubt some investors are else the low prices could still be a lot lower (Reuters, December 5, 2012, Freeport makes $9 billion energy bet Wall Street pans deal).

It’s also evident from the Risk Price Chart (please see Exhibit 1 below) that the stock price has been tending to drift lower, on balance and absent opportunistic and essentially unpredictable volatility (that’s what volatility is – unpredictable), whereas the Risk Price (SF) has been rising steadily from $35 two years ago to the current $47. Stock prices above the Risk Price (SF) are an “economic free good” and need to be earned else they will evaporate (please see our Post, The Price of Risk, August 2012) whereas stock prices below the price of risk are indicative of “volatility zone pricing” (which we call (N)) in which investors, on balance and in aggregate, do not “like” the stock well enough that they should have some steadfast confidence in obtaining the fundamental goals of any investment – that our capital is provably safe and that we should have a hopeful return above the rate of inflation.

The aforementioned “deal” is to buy a third company, Plains Exploration & Production Company, and McMoRan Exploration Company for $9 billion in a bold bid to diversify into the U.S. energy sector as copper’s prospects wane.   Freeport-McMoRan Copper & Gold has a current market value of $36 billion and pays about $1.2 billion per year in stock dividends (approximately a 4% yield). On the other hand, it also has total assets of about $35 billion, net worth or shareholders equity of about $17 billion and total liabilities of a similar amount ($17 billion) that are about to increase by more than 50%.

We’re perplexed too but can afford to wait it out. We’ve also found that investors can diversify quite effectively for themselves by simply holding suitable portfolios of stocks in the broad markets such as the S&P 500 which is up +11% this year or the NASDAQ 100 which is up +18% this year and also pay dividends in the range of 2%-3% and are not waning quite so much. And, of course, please see any of our Posts on The Perpetual Bond™ before diving for the next exit.

Exhibit 1: (B)(N) FCX Freeport-McMoRan Copper & Gold – Risk Price Chart

(B)(N) FCX Freeport-McMoRan Copper & Gold

Freeport-McMoRan Copper & Gold is an international mining company in copper, gold and molybdenum.

(Please Click on Chart to make it larger if required.)

Freeport-McMoRan Copper & Gold and the company now known as McMoRan Exploration Company were spun off in the 1980s and 1990s from the former Freeport-McMoRan Incorporated.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of  investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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