Play Molycorp If You Expect Fed Policy to Change

NEW YORK (TheStreet) -- While Molycorp (MCP) suffers along with its brethren miners of copper, silver, gold, and just about any other commodity but oil, help is most likely on the way from the Federal Reserve.

Analysis forwarded about the impact of the recent World Trade Organization ruling against China regarding its hoarding of rare earths elements at the expense of Europe, the U.S., Japan, S. Korea and other industrial countries won't affect the way China does business in this space, as chemistry veteran Jack Lifton of Technology Metals Research points out to Chemistry World.

However, it serves as a sideshow to the real firepower behind Molycorp's potential for a rising stock price, in our opinion -- future Fed monetary policy. We believe that a coming surprise change in Fed policy is the proverbial elephant in the room that will greatly affect not only Molycorp but all miners of commodities this year.

Though Fed monetary policy has always influenced the behavior of market participants since its inception of 1913, we strongly believe the Fed has been the increasingly insidious primary driver behind the concurrent rise in some asset markets and the fall of others since Fed chief Paul Volker.

The role the Fed now plays during the post-2008 crash no longer can be considered as one of a handful of factors influencing decisions of business, investors and households. It has become the predominant factor in how capital is allocated and who wins and loses in the game of today's neo-Keynesian dogma.

Since the market crash of 2008, the fear of a global deflationary collapse cratered equities, commodities, precious metals, bond yields, housing prices and global GDP growth estimates. We all know the extraordinary response that nearly all central banks deployed to buoy asset prices and restore a modicum of confidence back to investors and consumers that the world wasn't coming to an abrupt end.

More than five years later from the collapse of Lehman Brothers, the effects of Federal Open Market Committee policy of "quantitative easing" "QE," "tapering" of QE and permanent open market operations to support equities prices, lift bond prices and contain commodities prices have enriched every stockholder save mining investors.

And as the Wall Street Journal surmises in an article entitled Tallying Winners, Losers in 'QE' Era, households were the big losers by the Fed's extraordinary exercise in its experimental zero interest rate policy as well.

That conclusion from the WSJ can easily be supported by the ongoing dismal retail sales environment, declining labor force participation rate, declining hours worked, declining quality of jobs, record food-stamps recipients, declining mortgage originations, flat job-creating capital expenditures by industry, declining small business formations, and the overwhelming dominance of consumers originating zero-percent auto and government-backed student loans.

In our opinion, there has been no meaningful and corroborating evidence of a "Main Street" recovery.

We believe that the storyline of a economic recovery from the Fed is just that -- a storyline. At some point this year, probably by the fall, the Fed will reluctantly have to reverse its tapering policy in some manner to again cushion further drops in consumer sentiment and key economic indicators.

Commodities prices, including rare earth elemets, will soar once again, inducing U.S. investors seeking leverage to higher rare earth element prices back into the only domestic miner of size in the United States, Molycorp.

If our expectations of a reversal in Fed monetary policy is realized, we expect commodities prices to resume the bull market that began in the 2000-2002 time period. Stocks such as Molycorp and others in the mining space, from major copper to precious metals producers, will become in favor again as investors hopes of a recovering U.S. dollar against commodities prices will dash.

Instead, we believe the resumption of the U.S. dollar against 'things' will restart in earnest at sometime this year.

Our thesis of a Molycorp recovery from the rising commodities prices later in the year appears to also be on the mind of 50-year market veteran and Director of Floor Operations at UBS Financial Services, Art Cashin, who suggests that the new Fed chair, Janet Yellen, will be "tested," just as all Fed chairs have been tested in the past. Cashin has repeatedly warned investors to "stay nimble" for any sign of an equities market reversal. You can read more about his thinking in his interview of December 2013 with Eric King of King World News.


A turnaround in Fed policy will put severe pressure on the U.S. dollar. Investors seeking safety from the market-driven debasement of the world's primary reserve currency is expected to include capital flight into mining shares.

We believe that Molycorp especially should begin to receive a strong bid from investors due to the explosive nature of rare earth elements when compared with its distant cousins, the precious metals.

From the chart (comparison between rare earth elements and silver), a comparison between the most explosive of precious metals, silver, and the more explosive rare earth elements shows the potential moves higher in the price of rare earth elements that can result from a flight from the U.S. dollar.

This current so-called correction could really be evidence of the beginning of an asset-class rotation out of equities and into tangibles, such as commodities and metals. In that environment, Molycorp could stand to benefit greatly, especially taking into account the eventual need of investors to cover nearly half of the company's float sold short, as well as the history of a rapidly rising stock price along with the price rises of rare earth elements.

 At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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