Also, welcome back 6,000. Won’t you stay awhile this time? There were quite a few new 52-week highs set last week, including BHP Billiton, Coal and Allied, Oil Search, Fleix Resources, Macarthur Coal, Australian Worldwide Exploration, Western Areas, and Steamships Trading Company.

Do you notice a trend there?

The All Ordinaries finished last week at 6,006. That’s a 16% rally from the March 18th lowly low of 5,163. It erases most of the 20% year-to-date deficit. But it’s still down 12% from last year’s all-time high at 6,835 (on November 1st) and 6.46% for the year.

Does the index even matter? If you own a share portfolio that passively tracks the performance of the All Ords, we suppose it does. But you have to wonder if the All Ords are doomed to indirection, like Siamese twins trying to run in opposite directions at the same time. For investors, maybe the smartest thing to do is cut them apart and let them go their own way.

By “them” we mean the resource, energy, and basic material stocks in the one camp, and the consumer discretionary, listed property trusts, and financial stocks in the other camp. The energy sector is up on the year by nearly 20%. Materials are up about 14%. Meanwhile, consumer discretionary stocks are down by 26%, financials down by 17.4%, and listed property trusts (now called A-REITS) down 19.4%. Industrials are down 17.3% as well.

You don’t need to be DaVinci to decode this performance do you? Resource and energy producers are up with higher oil and bulk commodity prices (and probably some hot foreign money). Financials are down as investors wonder how banks will grow earnings in 2008. The consumer discretionary sector is the market shrieking in horror at the effect of all the interest rate rises on the Aussie consumer (not to mention food and fuel inflation).

The two sectors with the most questions are the A-REITS and industrials. Bottom-fishing contrarians would be attracted by the dismal performance of each. But let’s not forget the two big issues that hover over the property market: valuations and leverage. If property prices slump or simply grow less fast, this hurts the A-REITs. And leverage? You’ve seen what happens when it works in reverse.

The industrials—more than any other sector—show us the effects of rising energy costs in the real economy. These companies are unable to pass on the rising costs to customers. Margins are crunched. A fall in the oil price that lasted for a quarter or so might lead to a nice recovery in these stocks—or at least a tradeable move.

“Hey Gabriel?”

“Oui?”

“If you had to make one long and one short trade on ASX sectors today, what would they be?”

“May I have a moment to look at the charts?”

“Bien sur.”

After a few moments, he replied.

“ LONG on the Industrials sector. The Index has lost 32% between November and March, found a good support and rebounded on the previous low that was posted before the strong rise between August and November 2007. Here’s the chart:

“The decrease of 32% occurred in a bearish channel. The price action cleared this channel on the upside recently, which argues for a further momentum up. The 14-day RSI is well-oriented, therefore more upside to come before a potential overbought situation. 5,650 pts then 6,000 pts the next targets (23.6% and 38.2% retracement levels).

And short?

“The Utilities sector. The Index has rebounded 23% in 2 months, now the momentum is slowing and a few indicators argue for a shift in the price action in the near-term. Look at the chart.”

–Hold everything. How about a reality check?

–”Brazil’s plan to become one of the world’s biggest oil exporters hinges on exploiting crude 6 miles below the ocean surface in deposits so hot they can melt the metal used to carry uranium to nuclear plants,” reports Joe Carroll in Bloomberg this morning. It gets better (or worse, depending on your perspective).

–”Tapping what may be the biggest oil finds in the Western Hemisphere in three decades will require equipment that can withstand 18,000 pounds per square inch of pressure, enough to crush a pickup truck, pipes that can carry oil at temperatures above 500 degrees Fahrenheit (260 Celsius) and drill bits that can penetrate layers of salt more than one mile thick.”

–The oil industry is becoming metals-intensive. And not just any metals. Our friends at Diggers and Drillers call them ’super metals,’ which sounds about right. It takes a special kind of metal to withstand the heat and temperatures you find in off-shore, deep-sea oil operations. That’s probably the better investment angle than, say, buying Petrobras (NYSE:PBR).

–Think about this for a second. To produce oil from Carioca, Brazil will have to drill to a depth of 10,000 metres (32,000 feet). That is twice as far down as the world’s deepest current production hole. It’s also deeper in the ocean than Mt. Everest is high in the sky. It may as well be Mars or Venus or the moon for as otherworldly as the conditions are.

–The oil industry sure has come a long way from when Colonel Edwin Drake drilled his first well in Titusville, Pennsylvania in 1859. Drillers are going to places they’ve never gone before, and it’s not cheap. For example, Exxon had to develop special pipes for its Sakhalin II project in Siberia because steel pipes were shattering at the temperatures engineers encountered. Bloomberg reports that Chevron destroyed more than a dozen drill bits costing US$50,000 each in a $4.7 billion oil project in Tahiti.

–Where do you even buy $50,000 drill bits?

–Incidentally, did you know that Howard Hughes made his money in drill bits? We didn’t know it either until we researched the subject this morning. Cemented carbide cutting tools, or tools made of tungsten and diamond, are in great demand these days. But in the oil business, it was Howard Robard Hughes Sr. who introduced rotating steel cones to the wildcatters in East Texas in the first two decades of the twentieth century.

–Hughes held the patent on the first rotating tricone bit for 17 years, between 1934 and 1951. This was the peak of exploring and drilling in the Continental U.S. It made Hughes and his more famous and eccentric son Howard very rich. You can afford to be weird when you reach a certain level of wealth. It doesn’t make it right, though. If you want to see a picture of the Hughes drill bit, check this out.

–Resources Minister Martin Ferguson told the ABC that contrary to reports in The Australian last week, the Federal Government has not told Chinese companies to “back off” in their pursuit of their Australian quarry.

–Right. You don’t imagine the Federal Government could come right out and tell China to get lost. It doesn’t want that to happen. But in an interesting coincidence, Stephen Wyatt reports in yesterday’s Financial Review that the, “Chinese may relent in iron-ore negotiations.” This refers to the reluctance of Chinese steel producers to pay a ‘freight premium’ for Australian iron ore (over and above what China pays for Brazilian ore).

–We called the Foreign Investment Review Board (FIRB) ourselves yesterday to see if they publish any information on foreign companies seeking to acquire $100 million or more of an Australian publicly listed company.

–”No we do not,” we were told.

–Fair enough. Here’s what we know. In early April the FIRB shot down a bid by the Shougang Group (China’s sixth largest steel maker) for Mount Gibson Iron Ore (ASX:MGX). We know that Shenzhen Zhongjin Lingnan Nonfemet Co Ltd has a joint bid with and Indonesian firm Herald Resources Ltd (ASX:HER). We also know that China’s state-owned MCC Mining has bid A$400 million one Cape Lambert Iron Ore’s Ltd (ASX:CFE) iron ore projects.

–There are other deals in the works. China Shenhua Group, China Coal Energy, and Yanzhou Coal Mining Co Ltd (listed in Hong Kong and China’s third biggest coal producer by market cap) are all interested in Australian coal. And Chinese iron ore trader Haoning Group would like to buy a stake in iron ore producer Brockman Resources Ltd (ASX:BRM).

–That’s what we know. What we don’t know is what Australia and China are saying to each other behind closed doors. And we don’t know what other Aussie companies might be on Chinese watch lists.

–If the FIRB isn’t going to tell us, there are other ways of prospecting around. Gabriel has been working on some technical and fundamental stock screens that produce at least ten new trading ideas each day (five momentum up, five momentum down).

–We’re experimenting with the variables, but this morning we asked him if a stock with symbol UMC had shown up on any of his screens. “Yes, yesterday it did. On the momentum up screen.”

–The stock came up on our computer screen last night when we were reading up on news from the bauxite market. UMC is the United Minerals Corporation (ASX:UMC). Please read this next note. We are not tipping it and have done no diligence on the stock at all.

–We do note, however, that the company is chasing both iron ore and bauxite in the Pilbara. That got our attention. We aren’t tipping it, but we wanted to know more.

Meanwhile, listed financials have gone from shaky to shaken.

That’s no coincidence. The fear surrounding banks sparked a stampede of financial capital. A lot of it has charged into the commodities sector. The tide of money flowing out of financials is gushing your way.

There are Always Good Resource Stocks…

But tangible assets…and resource companies…are a truly diverse bunch. They come in a variety of shapes, sizes, weights and uses. That diversity ensures there will always be something making gains. Commodity buyers always want more of something than there is available. That’s the beauty of resource investing. You have access to a constant stream of good investment ideas. It’s like a whole separate investment universe.

Unconvinced?

Well, the market was flat for all of February. But Alumina (ASX:AWC) was up 23% because Chinese aluminium demand sprouted wings. In the first half of March, the market was down 4.5%. But iron ore junior Midwest (ASX:MIS) had an explosive 20% gain thanks to a takeover offer.

Tangible assets are in a long-term bull market. Even when the whole share market is floundering… somebody, somewhere is making money in the resource sector. But in their haste for obvious profits, speculators can miss good opportunities.

There are two specific opportunities in particular we’re looking at. These come from two sectors of the Australian resource market that speculators haven’t blown up. Separately, they’re great companies. But together they combine two of the most profitable aspects of the resource boom, with synergies to boot.

We don’t expect this opportunity to stay at the price it is today, though. Money moves towards quality, and this pick is of a high standard. With that in mind, let’s quickly recap the exodus from financials to resources.

Funds Look for Inflation Safety in Commodities

Apart from the fact that resource stocks are in a historic bull-market, a lot of this buying motivation comes from inflation. Commodities tend to outperform other asset classes in an inflationary environment. Speculators are using the resource market as a shield against rising prices.

This is evident in Exchange Traded Funds (ETFs), which track the prices of the commodities they hold.

The Goldman Sachs Oil ETF has added around 22% since last year’s calendar came off the wall. The PowerShares DB Agricultural Fund is up 18%. StreetTRACKS gold ETF (NYSE:GLD) is up 16%.

Here’s an interesting one… the Powershares DB Base Metal Fund (AMEX:DBB). It’s up 13% over the last three months, despite most metals taking a breather.

These high commodity prices are pulling headline companies up with them. Global miner Xstrata (LON:XTA), for example, is up 7% for the year in London, despite the London market being down 13%.

Speculators have definitely moved into the hard asset market. But now that they’re here… what will they do next?

The Factors of Speculation

Different speculators hold different positions on the market’s direction. You could easily identify dozens of difference factors, all of which have the potential to drive the price of oil, wheat, or copper up and down. That leads to a lot of uncertainty, and a lot of people buying and selling.

But there are a few factors that matter more than the others. Here’s a short list of what the speculators are looking at, and what they mean for commodities in general.

1. Profit-taking from commodity gains

This one is unavoidable. Given that commodities are in an uptrend, every now and then speculators will choose to realise their gains. It will mean tangible assets occasionally take a break from the main uptrend.

2. Gloomy economic news from the US

A global recession would certainly cause demand for commodities to fall somewhat. It’s one reason traders have to sell commodities. We don’t agree that it will kill the boom. But there will be times when some commodity holders lose their nerve and sell.

3. Investors’ continuing need for an inflation shield

Given that the Federal Reserve slashed both headline rates by 75 points less than two weeks ago, there’s still plenty of reason to think people will buy commodities to protect themselves from inflating prices. Low interest rates mean cheaper credit. An easy money supply always leads to inflation in the long term. And you can bet that central banks will continue to heave money at falling financial markets to slow the rot. That’s inflationary.

4. Direction of the US dollar

The US dollar will probably head downwards in the long-term, but at the moment it could move either way. The dollar was so depressed before the Fed cut rates that it actually rebounded. This, we feel, is a temporary break against the norm. And when the dollar moves down, commodities quoted in dollars become more valuable nominally. Traders will buy commodities as a hedge against a falling dollar.

5. All types of market participants are willing to bet on the long-term commodity trend

Not just traders and investors, but consumers of commodities – like Chinese steel mills – will be keen to jump into the market and pile on inventories while piling is cheap. When commodity prices fall, there will be dip-buyers keen to make a thrifty purchase.

Looking at that list, it’s not hard to see why the price of grain futures or an oil ETF could fluctuate. Traders and hedge funds have a lot to think about. Those factors won’t all take precedence at the same time, of course. This adds to commodity volatility.

Predicting exactly when each will be most prominent is impossible. Don’t bother trying. Instead, read on. There are two corners of the resource market that have excellent potential for gains… and speculators haven’t taken advantage of them yet.