“I don’t know if I will live to see it,” said Brazil’s president Luiz (Lula) da Silva a couple weeks ago. “But Brazil has to transform itself into a big power in the 21st century. We have everything to make it happen. We are not talking about a little country here.”

No, indeed. Brazil is not “a little country” anymore. Any prudent investor has to consider how to hitch a ride on the Brazil growth story. Brazil is transforming into one of the world’s great powers in this century. It’s important to follow the news from Brazil. At the same time, you have to know where to look, and how to read between the lines.

By official count — what the Brazilian government will confirm — the rocks of Brazil hold nearly 20 billion barrels of proven reserves. That number is on par with the total for U.S. oil reserves, including Alaska and the Gulf of Mexico.

It’s an impressive number, but then there’s also the unofficial Brazilian reserve count. How much oil is “really” down there under Brazilian jurisdiction? It depends with whom you talk. Some Brazilian officials will smile and say the country has 50 billion barrels of resources. If the Brazilians can tap into this treasure, it adds up to more than twice the total reserves of the U.S., including Alaska.

Other knowledgeable — VERY knowledgeable — Brazilians give much larger estimates. I’ve seen estimates that place the resource number at “over 100 billion barrels.” This puts Brazil in with the largest of the large oil nations, such as Iraq, Iran and Saudi Arabia.

These massive oil resources offshore Brazil lie beneath deep water and thick layers of salt. And since it’s all within Brazilian waters, the government of Brazil is increasing its control over offshore development. This way, Brazil will have its own oilmen keeping an eye out for the overall national interest — and making big money for the Brazilian treasury.

The new level of Brazil’s state control over oil development is a strategic decision. Brazil is counting on the hydrocarbon resources to help propel it forward as one of the world’s major powers. And the development in Brazil will control the destiny of a good number of players in the OI portfolio.

Many companies whose fate is tied to the wheel of the Brazilian ship of state are in that portfolio. All of them have operations that span the globe. They’re not a pure play on Brazilian energy development. Just the same, it’s nice to know that they’ll be pulling down a big chunk of business in one booming region over the next couple of decades. As I see it, these firms are long-term core holdings for any diversified energy portfolio.

Gold on the Move

This week, the price of gold touched $1,040 per ounce. Silver also took the elevator to higher floors, to now over $17 per ounce. It’s been good news for all of the gold and silver miners in the OI portfolio.

We’re way up on many of the miners I’ve added this year to the OI portfolio. Some of the beaten-down guys are also showing us their inner Lazarus as precious metals prices soar.

What’s with the Rising Tide?

I just love it when the stocks in the OI portfolio are going up. It beats the heck out of what we experienced last October with the meltdown, that’s for sure. And it makes it easier to be the editor of a financial newsletter that focuses on precious metals, energy and other natural resources.

What’s going on? What’s with the rising tide? I believe we’re seeing some short covering in the precious metals arena. It has always amazed me in the past couple of years that there were people out there shorting gold. Huh? It’s like that scene from the movie The Deer Hunter in which Robert De Niro is playing Russian roulette with a pistol holding bullets in the chambers. You don’t have to be crazy to short gold, but it helps.

I may not have the same eyesight today as back when I flew Navy jets. But how close do you have to look to see that the U.S. dollar is in trouble? Yet people still want to bet on the dollar and against gold? Hey, it’s a free country. And I’ve spent the past few years feeling pretty lonely at times as I described my vision of monetary gloom and doom.

So now the dollar is dropping due to bad news on many fronts. The U.S. economy is NOT “recovering,” contrary to the propaganda from Washington. Unemployment is up, and it’ll stay up for a long time. There’s a structural readjustment going on within the U.S. economy, and it’ll take years (maybe decades) to play out. Meanwhile, U.S. tax policy, energy policy and the overall political process are a train wreck in living color. Can anyone explain to me how this has a happy ending?

The world, of course, is noticing. Now we read about a group of nations (the usual suspects, but add in modern allies Japan and France) trying to figure out how to ditch the dollar and use some other medium of exchange to trade oil. It’s not exactly a new rumor, but now it’s getting traction. And like people smelling smoke in a crowded theater, dollar holders are looking for the exit signs.

Is anyone surprised at this? How much fiscal and monetary abuse can the greenback stand? Hence, the precious metals prices are levitating.

We’ll probably see a pullback in precious metals prices, but that’s just going to be profit taking and the market working its magic. Long term, the metals are still going up.

It’s part of the long-term thesis of Outstanding Investments. Go with precious metals. Go with energy plays. Go with solid resource plays.

Until we meet again,
Byron King

Source: Energy, Brazil, Gold: What More Could You Want?

Back in the 1960s and 1970s, a few major companies took out oil exploration concessions there from the government of South Africa. In 1974, Shell (NYSE: RDS.A / RDS.B) discovered a gas field off the southwest coast with the Kudu project. Early estimates were 1 trillion cubic feet of reserves, but current estimates range up to 10 trillion. Kudu was big, but nobody much cared about natural gas back then. Gas was too cheap, and southern Africa was too far away.

There was hardly any development around Kudu for the next 20 years. South Africa was under international sanctions due to its apartheid regime, so oil companies and other outside investment stayed away. Almost nothing happened with energy development until Namibia became independent in 1990.

By the early 1990s, the gas field at Kudu intrigued foreign oil companies. Kudu showed a large hydrocarbon resource. Clearly, there was significant potential. But nobody really understood the offshore geology. Plus, back then, it was tough to drill in water more than about 1,500 feet deep. Namibia didn’t make for an investment magnet.

But with the recent success of offshore Brazil, the energy exploration expectations of the world have been fundamentally altered. The same brilliant researchers and scientists that discovered the potential of Brazil’s Tupi field are now doing extensive research in offshore West Africa, in particular offshore Namibia. One researcher I’ve been following very closely believes the offshore areas of Namibia are ‘geologic analogues’ to Brazil.

Source: The Next Great Oil Frontier

Brazil had clearly become the new “must-play” market for investors.

And then they had to go and spoil it all.

As promising a market as Brazil had become, it was the discovery of the massive Tupi oil field off of the country’s east coast – that really transformed Brazil into an investor’s dream. The oil and natural-gas reserves are located beneath heavy salt beds in deep offshore water. These reserves are 23,000 feet to 26,000 feet down, a depth that wasn’t even accessible until recently.

These Tupi reserves appear to contain at least 60 billion barrels of oil, worth $4 trillion at today’s prices. Tupi oil is expected to start hitting the market in 2011 or 2012. When that happens, it will revolutionize Brazil’s economy and its shift its balance of payments.

The exploration of the Tupi oil fields had been carried out by the Brazilian oil company Petroleo Brasileiro SA (NYSE ADR: PBR) – more commonly referred to as Petrobras – in partnership with some of the international majors. The contracts call for the Brazilian government to receive royalties on any oil found.

Brazil is now one of only three top oil-producing countries to not assert state ownership of its oil reserves. Canada and the United States are the others.

This was very reassuring for the international oil majors. They’re used to dealing with fruitcake kleptocratic regimes in Venezuela, Angola, Nigeria and most of the Middle East. As a result, the Tupi deposits generated real excitement both among oil companies and among international investors in general. The feeling was that Brazil was about to end its two centuries of failed economic hopes. Fueled by oil revenue and additional economic activity, Brazil appeared ready to claim its true destiny as a wealthy country.

Unfortunately, it wasn’t to be.

Although there are several reasons for this, a key culprit is the election scheduled for next year. Incumbent Brazilian President Luis Inacio “Lula” da Silva can’t run again. But he’d very much like to choose his successor. The most likely candidate: current Chief of Staff Dilma Rousseff.

Rousseff was put in charge of devising a scheme to capture more of the Tupi oil revenues for the Brazilian government and, nominally, the Brazilian people. Tales were spun of how the new revenue would finally eliminate Brazilian inequality, and bring its poorest citizens up to Western living standards.

The new system announced this month reflects this aspiration. A new state oil company, Petrosal, would be created to manage the reserves. Petrobras – aided by outside investor capital – would carry out production. And Petrosal and the outside investors would share the output.

This plan will imbue Petrosal with a lot of power. The company would control half the votes on the operating consortium. And it would have veto rights over production and capital expenditures.

The revenue would be managed by a new state fund. The fund would devote this new cash to poverty relief, education and infrastructure.

In the meantime, the existing royalty system would remain in place. Under this system, outside investors would pay both royalties and a production share. In one acknowledgement of marketplace realities, concessions already granted would not be torn up.

There are two major problems with this system. First, it makes life much more difficult and less profitable for oil companies wanting to invest in the Tupi oil field. Had Brazil torn up existing contracts, I believe the oil majors would have left. In the past two years, the world’s Big Oil firms already saw existing agreements torn up in Nigeria and Venezuela. There’s just no point investing large amounts of money under such risky conditions.

As it is, the new Brazil agreement applies only to new contracts. So I believe the oil companies will probably put up with this new system – at least as long as oil prices remain high. It’s not as if these firms have a lot of alternatives right now.

However, given how expensive it will be to extract this oil, if market prices drop, it may end up being difficult to attract Big Oil players.

The more dangerous problem is this fund, which is little more than a huge pool of money that politicians can play with.

As I mentioned, Brazil’s economy has been one of the world’s best performers. This year, in the face of a worldwide recession, Brazil’s gross domestic product (GDP) is expected to decline only 1%, according to the forecasting panel of The Economist magazine.

Inflation is 5% and the budget deficit is only 2.8% of GDP – both excellent figures in this difficult year. Brazil’s monetary policy is an example to the world, with short-term interest rates still at 8.65%, well above the inflation rate.

But this money pool plan puts that performance at risk.

Brazilian public spending is already 35% of GDP, very high for such a poor country. State bureaucrats have feather-bedded contracts guaranteed to them under the 1988 constitution. So this “slush fund” will just fuel Brazilian corruption, diverting still more of that country’s economy into the pockets of politicians, their friends and favoured interest groups.

It’s no use for Brazilian spin-doctors to point out that Norway and Alaska have funds of this nature. Norway and Alaska have small populations and relatively un-corrupt political cultures. This fund must inevitably represent at least 3%-5% of Brazilian GDP. And it will be mostly wasted, spent without the market having any say as to its use or destination.

I’ve been watching Brazil for more than 30 years; since I began travelling there for the merchant bank Hill Samuel [now part of Lloyd's Banking Group PLC (NYSE ADR: LYG)] in the late 1970s. It’s a maddening country: Just when you think the Brazilian authorities have finally got their act together, and that the country is ready to achieve the enormous economic growth predicted for it since at least 1900, something unexpected and foolish goes wrong.

This appears to have happened again. And that’s a real pity – for Brazil’s citizens, and for global investors.

Source: The World’s Most Exciting Market – Until They Spoiled it

Good day… And a Happy Friday to one and all! The end of the week… It’s been a tough week for yours truly, as I’ve hobble around in pain all week. But, as I recall, I promised 2 years ago that I would not complain about these things in the future… So! I carry on!

Well… Front and center this morning… The currencies are trading near levels they were when I signed off yesterday morning. They did have a brief rally, after the U.S. Retail Sales data showed some real rot on the “recover is here” vine… But that rally was snuffed out, as the risk aversion campers came back to the markets…

Overnight, the Reserve Bank of Australia’s (RBA) Gov. Stevens, game his semi-annual report on the Australian economy to Parliament, and he was quite upbeat… And not just about the Australian economy. Stevens was quite upbeat about most of Asia, including Australia’s largest export country… Japan. I bet you thought I was going to say China! I thought that Stevens did a fantastic job of putting his thoughts out there for all to hear. Like, talking about how future quarters could show softer growth as the RBA removes “fiscal candy”… Good Show!

One thing is clear, at least to me, from this upbeat report, and that is I believe we can look for the RBA to hike rates aggressively in the first QTR of next year… And, if the future quarters are stronger than Stevens now forecasts, we could very well see a rate hike before we turn the calendar page on 2009!

Speaking of future rate hikes… Since Norway’s Norges Bank moved to a tightening bias on Wednesday morning the Norwegian krone has gained 3.2%! Go krone, Go krone… I’m dancing in my seat. Carlos Santana is playing, dance, sister dance on the radio… It’s all good… OK, I’m sure that’s a sight you didn’t want flashing before your eyes!

OK… So… Here in the U.S. we saw Retail Sales for July, which I told you yesterday was expected to be stronger because of the Gov’t’s cash for clunkers program… U.S. retail sales unexpectedly fell -.1% in July despite the debut of the government’s “cash for clunkers” program meant to jump-start the auto business and help turn around the economy. So… Here we go again… The Gov’t promises something, and it falls short of expectations… Looks like “cash for clunkers” is a Clunker!

That Retail Sales shocker yesterday really makes one stop to think about all the euphoria being exhibited about the end of the recession… So… When Retail Sales printed, you can understand the return of the risk aversion campers, eh? I wonder how this report fits into the Fed’s view that the economy is “leveling”?

Today, we’ll see the stupid CPI report… Just what we need on a Friday! A reminder of how the Gov’t cheats those that are on fixed payments, and those that buy TIPS… Don’t know what I’m talking about here? That’s OK… You must be new to class! No worries! You see the Gov’t began making changes to the way we calculate consumer inflation back in the mid 90’s, and it’s been a huge mess ever since! I’ll just say this… Consumer inflation in this country has been grossly understated for 15 years… It was all done as part of a plan to allow interest rates to remain low, so that housing would become affordable for everyone… Now, that plan sure worked out well, eh? NOT!

So, enough of that! Let’s talk about Brazil! Before I get into this, I must make this perfectly clear… Brazil is an emerging market, and with that moniker, they should be viewed as a speculation investment only, that is unless it’s got principal protection like our BRIC MarketSafe CD! WOW, did you see how I segued right into that? Man… I are so smart!

OK, back to Brazil… I was reading a story on the Bloomie this morning about how a currency strategist at Standard Chartered Bank in New York, has forecast a level of 1.80 for the real by the end of this year, and 155 by the end of 2010… WOW! That would mean that on top of this year’s already top performance of +27%, the real would add another 15% next year… That’s all nice and sweet… But it is just a forecast by someone I’ve never hear of, so take that with how ever many grains of salt you wish!

Now that I have you all pumped up… OK, for a second there the old Hans and Franz Saturday Night skit, “were going to pump you up” flashed before my eyes… OK, were was I? Oh, now that you’re all pumped up, I will remind you of what I said on Wednesday of this week… And that is, that I’m becoming very scared of this stock market run, and if it runs out of steam, the resulting sell off of stocks could adversely affect the currencies, since these two asset classes are being hog tied together, along with commodities!

Oh, and this just in this morning… Brazilian Retail Sales rose 1.7% in June beating the forecasts of a 1.2% gain. You would have to think that given the strength of this report that Brazilian domestic demand is growing and will contribute further to the thoughts that the Brazilian economy is going to rebound faster than most other countries. And when you have some of the highest yields in the world, and an economy rebounding faster than others, you get a ton of foreign investment into the country, which… Will drive up the value of a currency, which in this case is the real!

It’s been a while since I last talked about Gold & Silver… And then I was reading a report written Sean Hyman about Gold, and decided to share with you some of Sean’s thoughts… Sean believes that we’ll see $1,300 Gold by the end of this year, and $2,500 Gold in 2010… He bases this on a number of things, but mostly on the fact that the IMF announced sales of Gold made earlier this year, is being completely offset by Chinese buying. With all the demand for Gold, having this huge IMF selling of Gold offset by the Chinese if HUGE! So… I thank Sean for his thoughts here…

Sean is a regular contributor to the FX University Daily newsletter that the Sovereign Society publishes… I’m a part of FX University, along with Sean. Speaking of FX University… Many of you know how the FX University did what we called “currency tours” last year, visiting 8 different cities to hold one-day classes on Foreign Exchange (FX)… That format is going to change… In February 2010, we’ll hold a 3-day event in Scottsdale Arizona… So… The number of people able to attend these classes will be greatly reduced! I suggest that you visit http://www.worldcurrencywatchfxu.com/main/

OK… Thanks for all the positive notes about abolishing the Fed yesterday… I did receive a few that thought I had lost my marbles, and didn’t have any problem telling me so! But that’s OK… I didn’t think it was going to be met with 100% approval / participation! Quite a few told me to join Ron Paul’s bandwagon… I’ve been on his bandwagon for some time now! But for those skeptics to my call to abolish the cartel, I mean the Fed, I simply suggest you read the book: The Creature From Jekyll Island… But for an appetizer, I suggest you first read William Fleckenstein’s book, The Age of Ignorance at the Fed, Greenspan’s Bubbles…

And… Let me make something perfectly clear… This letter is Chuck’s letter… And therefore it is Chuck’s opinions, not those of the Bank! While I’m sure that I’m loved by one and all at EverBank, they do not influence my opinions, this is all me, folks… Just imagine what my poor beautiful bride has had to put up with for 33 years!

OK… We had some housecleaning to do this morning, I sorry about that, but just some things to get off my chest and out the door…

Before I head to the Big Finish, I wanted to talk a bit about Canada… While the U.S. was posting an increase in their Trade Deficit, Canada printed a narrowing Trade Deficit! Rising exports and falling imports resulted in a HUGE narrowing in Canada’s trade deficit in June which came in at C$55 million, which was much smaller than May’s revised C$1.1 billion trade shortfall… This is a nice piece of data for Canada, and I would love to see this deficit narrow further next month, and get back to the days of surpluses in Canada!

One would think this data to be a feather in the loonies’ cap!

Currencies today 8/14/09: A$ .8435, kiwi .6820, C$ .9205, euro 1.4290, sterling 1.6565, Swiss .9360, rand 8.0550, krone 6.0250, SEK 7.1250, forint 188.50, zloty 2.8875, koruna 18.51, yen 95, sing 1.4425, HKD 7.7505, INR 48.25, China 6.8344, pesos 12.84, BRL 1.8230, dollar index 78.35, Oil $70.75, 10-yr 3.60%, Silver $15.10, and Gold… $958.70

That’s it for today… hope you have a Happy Friday!

Chuck Butler

Source: Cash for Clunkers Is a Clunker!

But given the economy’s strong performance following the financial meltdown that crushed economies the world over, it looks like Brazil’s time is now.

Brazil’s gross domestic product (GDP) contracted 0.8% year-over-year in the first quarter and 0.8% from the fourth quarter. That beat analysts’ expectations but wasn’t enough to keep the country from sliding into its first recession since 2003. However, the economy is already showing signs of recovery and many economists believe Brazil is already on the rebound and poised for a strong second half.

Brazil’s GDP likely grew 2.2% in the second quarter compared with the previous quarter, according to a report by Bank of America Corp. (NYSE: BAC).

Nelson Barbosa, Brazil’s economic policies minister, optimistically told the Rio de Janeiro-based O Globo newspaper that Brazil’s economy will grow by 4-5% this year.

That kind of optimism in July helped Brazil’s benchmark Bovespa stock index book its best monthly gain since 1998.  The index jumped 2.3% to 55,997.81 – its highest level in 11 months. It’s up about 50% this year, outpacing even the red-hot MSCI Emerging Markets Index. The Dow Jones Industrial Average and S&P 500 Index are up just 5.8% and 11% respectively.

Analysts that were skeptical of Brazil’s economic growth in the heady years leading up to the financial crisis pointed to the country’s supposed reliance on high commodities prices and exports.

No doubt, the country benefited a great deal from the commodities boom that drove up prices for Brazilian exports like iron ore, steel, and soybeans. But in eviscerating commodities prices and ravaging the market for exports, the financial crisis demonstrated that Brazil is more than a one-trick pony.

Sublime political stewardship leading up to and during the crisis kept Brazil’s economy well intact when global economy seemed to be falling apart. Stringent financial regulation shielded Brazil from the worst of the financial crisis, while government tax cuts and a growing middle class buoyed the country’s economy as exports dried up.

Back to the Future: Brazil’s Troubled Past Preserves its Present

Indeed, the very financial crises that had Brazilians believing their country would never find its place among the world’s elite economies endowed the nation’s policymakers with a streak of caution as they entered the 21st century.

“We are used to dealing with challenging environments, for our institutions and our regulations,” Alexandre Tombini, director for regulation at Brazil’s central bank, told the Financial Times. “Everything we have done since the mid-1990s has tended to take a more cautious approach.”

For instance, banks in Brazil are required to keep capital reserves that equate to at least 11% of their total assets. That’s high by most international standards, but many banks maintain capital ratios of 16% or more.

Banks are also required to keep 30% of all deposits at the central bank. That makes borrowing more expensive, but it also made it possible for Brazil’s central bank to dole out $51.4 billion (100 billion reals) overnight to ensure banks were adequately funded.

Brazil’s high interest rates are another reminder of the hyperinflation that overwhelmed the economy in the 1990s. But those rates also kept lenders from getting carried away, and now that the crisis has subsided, inflation has been crushed and rates are plunging.

Brazil’s official IPCA consumer price index advanced 0.24% in July after posting a 0.36% gain in June, according to the Brazilian Census Bureau (IBGE). The rolling 12-month rate sank to 4.5%, down from 4.8% in the 12 months through June.

Brazil’s central bank has lowered its primary interest rate, the Selic-base rate, six times this year, with the most recent a 0.5% cut after the bank’s July 21-22 meeting. The benchmark rate currently stands at a record low of 8.75%.

With inflation subdued, most analysts believe the rate will be kept at its historically low level until at least 2010.

“With inflation under control, I believe it will permit the Selic to be maintained at this low level until at least the middle of 2010.”Alex Agostini, chief economist at local ratings agency Austin, told The Wall Street Journal. “I don’t seen any inflationary pressures on the radar. The inflation scenario is so well behaved that it could give the central bank room to make another rate cut at the next meeting, even though the signals coming from the central bank have indicated there will be a pause.”

And while U.S. regulators are only now looking into the inconsistencies and manipulations wrought by irresponsible futures trading, Brazil has long held the reins tight on such activity. Short selling – selling shares you do not own – is allowed, but naked short selling – selling shares that you don’t have – is kept under wraps by fines for traders who can’t to deliver shares they have sold within three days.

Additionally, brokers in Brazil are obligated to provide information by every client. That means a Ponzi scheme like the one orchestrated by Bernie Madoff would never have worked in Brazil.

Retail Remains Resilient

Just as Brazil’s regulators have taken their cues from past mistakes, Brazil’s growing middle class – which now encompasses more than half the country’s population – has been hardened by tough times and proven resilient throughout the current crisis.

May retail sales advanced at an annual pace of 4% and June sales are expected to have increased by 6.5% year-over-year. Furthermore, an IBGE survey showed that nine out of 10 retail sectors showed month-on-month sales increases.

“Brazil has had so many crises over the years, people got used to them,” David Neeleman, the founder of JetBlue (Nasdaq: JBLU), who last December started a low-cost Brazilian airline called Azul told BusinessWeek. “I don’t think they’re at all fazed by this crisis-everyone seems to be focused on buying their first car, getting their first credit card.”

Credit card purchases have grown by 22% a year over the past decade, BusinessWeek reported.

However, Brazilian consumers also got a helping hand from the government, which cut income taxes and reduced levies on a wide range of durable goods.

In April, the government cut taxes on construction materials, cars, and household appliances. The end result was a 5.7% rise in spending on construction materials in May and an 8% surge in auto sales.  Rejuvenated auto sales hit a record-high 300,000 in June.

And increased sales led to increased production. Industrial output rose for the six straight month in June, climbing 0.2% on a monthly basis.

“Brazil has proved it can govern itself and keep the economy on track in very difficult times,” Riordan Roett, a professor at Johns Hopkins University’s School of Advanced International Studies, told BusinessWeek.

Buying Into Brazil

Brazil has also proven that it has a strong consumer base of its own ready and able to fuel economic growth, even as exports falter. In fact, exports account for a mere 12% of Brazil’s $1.5 trillion economy.

From 2001 to 2007, the poorest 10% of the population enjoyed a 49% increase in real income, Brazilian economist Marcelo Neri told the Miami Herald, describing what he called “Chinese-like growth.”

Roughly 27.8 million Brazilians – out of a population of nearly 200 million – joined the consumer economy from October 2003 to October 2008, according to Neri.

About  8 million jobs have been created in that time, while the minimum wage has increased 45%

That makes Brazil a very attractive destination for investment.

In an April Buy/Sell/Hold column, Money Morning contributing editor and emerging markets specialist, Horacio Marquez, recommended Petroleo Brasileiro (NYSE ADR: PBR) for several reasons – the rising prices of oil in the next few years, the discoveries of large oil fields off Brazil’s shore, and increase local demand from the country’s growing population and income levels.

Another commodity play is Vale S.A. (NYSE ADR: VALE), the world’s largest iron ore exporter and a key supplier to China’s exuberant infrastructure expansion. Vale will benefit not only from increase in demand when global economies (and trade with them) recover, but also the rebound of commodity prices across the board.

Martin Hutchinson, another Money Morning contributor, recommends Companhia de Saneamento Basico, orSabesp (ADR: SBS), which operates the water-and-sewage system for Brazil’s Sao Paulo region. Sabesp currently has a P/E ratio of 6.92.

“Now that’s a growth business, and one that’s not dependent on commodity prices,” he said.

Finally, the iShares MSCI Brazil Index ETF (NYSE: EWZ) has been recommended by both Marquez and Hutchinson. The ETF aims to measure the performance of the Brazilian equity market. It has net assets of $8.58 billion, a Price/Earnings (P/E) ratio of 12.75, and a dividend yield of 3.66%.

Source: With One of the Hottest Economies on the Planet Brazil is Finally Living Up to Its Promise

Good day… And a Happy Friday to one and all! I’m going to go out on a limb and say it will be a Fantastico Friday! This has been a long week for yours truly, coming off a week of relaxation, and getting right back in the saddle… But… It’s Friday… YAHOO!

OK… There are a few things to discuss this morning, but none so important as the Jobs Jamboree that will happen in a couple of hours from now. I told you yesterday that the economists surveyed believe that the jobs lost number will make a big move downward from 476,000 in June to 325,000 in July… That’s a HUGE jump folks! Ty Keough responded to that note in the Pfennig yesterday by saying, “That’s because there are no more jobs to cut!” Now, that’s one way of looking at it… We have to hope that it’s not that, but instead be a reflection of jobs being added… Come on! We can hope!

Yesterday, the Weekly Initial Jobless Claims printed, what I think is a worse than expected number… The media however, looked at it differently… Here’s the skinny… The Claims filed last week hit 550,000, and were expected to be as bad as 580,000, which is why the media began firing off headlines about Jobless Claims falling… And that’s fine… But the thing that caught my eye was the rot on the Continuing Claims part of the data… This is the number of people who are unemployed and are currently receiving unemployment benefits, and that number jumped to 6,310,000… That’s over 6 million people that are still receiving unemployment benefits, it does not count those that have had their benefits expire… It’s not a pretty picture, folks…

And… This might give you an idea of the total unemployed… The number of Americans receiving food stamps pushed to a new record-high in May… 34.4 million people, or one in nine Americans received food stamps, and this was the 6th consecutive month on increases, so we have June and July to catch up with here… UGH!

OK… Enough of that labor talk! The currencies once again traded in a tight range yesterday, but this time the bias was to buy dollars, for the first time this week. But like I said, the trading range was tight… The euro, for instance, popped up to 1.4425, then down to 1.4335, then back to 1.44, only to spend the rest of the day in the 1.43 handle.

Pound Sterling was knocked off its perch as the star performer currency yesterday when the Bank of England (BOE) decided to EXPAND their bond buying. Recall, I had told you earlier this week that the recent stronger economic data had the market participants thinking the BOE would call off the bond buying / Quantitative Easing (QE)… But the BOE had other plans! And the currency got taken to the woodshed, and rightly so! QE is bad… Say that out loud… QE is bad… And more QE is even worse!

In the overnight market I noticed something that I’m sure most people will not even take the time to read… Here’s the skinny… I’ll give you the headline, and then you try to figure out how this plays well with what I’ve been writing about… “Australia to Resume Sales of Inflation-Indexed Bonds”

OK… If you said… Australian officials must see inflation pressures in the future, which plays well with what Chuck told us earlier this week about how the Reserve Bank of Australia (RBA) raised their bias for interest rates from accommodating to neutral. If you said that, then you get a Gold Star today! You’ve been paying attention in class! To the Head of the Class you go!

Seriously though… This is the first time in 6 years that Australia will issue inflation-indexed bonds… That’s a warning signal we just heard folks…

Did you happen to see the BIG BOSS, Frank Trotter on CNBC yesterday? Our PR people sent out a note last week and asked both Frank and myself if we wanted to do a shot on CNBC… Having been ambushed there twice in the past two years, I pleaded with Frank to do it, and he graciously accepted the mission. And he executed the mission to a “T”! He told people that they needed to diversify with currencies, and talked about Norway and Australia as key components of a diversified portfolio, and then added in Brazil for those with a speculative axe to grind. He even mentioned our new 100% principal protected MarketSafe BRIC CD! Way to go Boss! As it turns out, I should have done the piece, as no ambush took place, but who knew?

Speaking of Brazil… Our newest guy on the desk, Aaron, sent me a note yesterday afternoon, with Martin Weiss’s latest letter… It seems that even Martin Weiss believes that Brazil will be one of the first countries to recover from the global recession, and that it is a good place to invest… At least that’s what I got from the letter… When someone as well read and respected as Martin Weiss talks about Brazil, then we should take notice, eh?

In the Eurozone this morning, German industrial orders increased for the second consecutive month, rising 4.5% in June. The forecasts were for a 1% gain, so this move was unexpected to say the least! The data is old though, and did not give the euro any reason to move higher…

And the Swiss franc continues to move higher despite warning and warning about these moves by the Central Bank… I find this to be funny… Like funny , HA, HA… The Swiss Central Bank began warning the markets to not take the franc higher and for 5 consecutive weeks the franc has moved higher VS the dollar… You see, if the Central Bank doesn’t make the money talk, then their verbal warnings don’t amount to a hill of beans! My dad used to tell me… Money talks… B.S. walks… I think that plays well here in Switzerland!

Hmmm… Did you see the retailers’ sales data yesterday? The ICSC Chain Store Sales for July fell 5%… I guess the real problems for retailers will come this month, for if they are unable to push higher with the back-to-school sales, then I think the pundits and economists that are calling for an end of the recession now, will have to go back to their drawing boards!

And… You knew I would eventually get around to this… But the Cash for Clunkers or CARS program got $2 Billion more yesterday… This is being hailed as a great program to get Americans buying more fuel efficient cars, while euthanizing their old cars, and stimulating the economy… Apparently, dealers are running out of inventory… That sure seems to be strange to me… Here’s what I think is going on… People trade in cars for new cars all the time… According to Edmunds.com, Americans would have traded in about 200,000 clunker-type vehicles in a typical three-month period. So… Have we just taken that 3-month period and crammed it into two weeks to take advantage of the CARS program? For an industry that was expecting to sell about 10 million cars and trucks this year, that’s a 0.5 percent sales boost. I don’t see the euphoria… But then I’m not trading in a car right now!

Hey! Did you know that my friends, Addison Wiggin, and Bill Bonner have new books out? They have done updates to the best sellers, Financial Reckoning Day, and Empire of Debt. Addison sent me a note the other day to let me know that these brand spanking new updates are now available at Barnes & Noble, and Amazon… Financial Reckoning Day was a real eye-opening book, I can’t wait to get my hands on the 2nd edition! And Empire of Debt, is the book that spurred the I.O.U.S.A. movie and book… If you haven’t read the originals yet, here’s your chance to do that and get the 2nd edition at the same time! Everyone knows how to get books at Amazon… So what are you waiting for?

Currencies today 8/7/09: A$ .8360, kiwi .6725, C$ .9225, euro 1.4355, sterling 1.6740, Swiss .9390, rand 8.1420, krone 6.0750, SEK 7.1750, forint 190.10, zloty 2.90, koruna 18.06, yen 95.20, sing 1.4370, HKD 7.75, INR 47.90, China 6.8318, pesos 13.06, BRL 1.8415, dollar index 78.06, Oil $71.35, 10-yr 3.74%, Silver $14.68, and Gold… $961.55

That’s it for today…enjoy your weekend!

Chuck Butler

Source: A Jobs Jamboree Friday!

The problem with the oil offshore Brazil is that the hydrocarbons are far out — up to 200 miles into the open ocean. They’re under one-two miles of seawater, and then buried under three-four miles of rock and salt. It won’t be easy to define the resource, or to extract it. Still, the investment opportunities are there.

One of the strongest investment sectors of the next 20 or 30 years will be drilling for oil and natural gas offshore, in the deep water of the world. Offshore Brazil is right on the cusp of a monumental oil boom. That deep-water offshore boom will eventually migrate to offshore West Africa, even more than the relatively near-shore development of the past 30 years. Eventually, the deep-water development will move into the Arctic Ocean.

Source: The Next Saudi Arabia

Much of Brazil’s South Atlantic development will require drilling wells in waters up to two miles deep, through four-five miles of rock beneath the seabed. The prize at the end will be oil deposits with reserves estimated in the tens of billions of barrels. With access to this offshore bounty, Brazil expects to take its place among the first ranks of energy-producing nations in the world.

Brazil’s state-controlled national oil company (NOC), Petroleo Brasileiro SA (NYSE:PBR) plans to spend over $175 billion in the next five years just on offshore development. The immense investment involves buying and building dozens of new drill ships and seagoing platforms, along with many dozens more support and servicing vessels. Petrobras will lay thousands of miles of pipelines on the seafloor, connecting massive complexes of subsea equipment that will sit atop hundreds of oil wells.

To finance much of this development, Brazil has turned to China. With the active support of the Chinese government, many Chinese banks are lining up to extend loans to Brazil’s energy sector. Right now, there is an agreement for a Chinese consortium to lend Petrobras $10 billion. In exchange, Petrobras will eventually ship 200,000 barrels of oil per day to Chinese refineries. There are more such long-term finance supply deals in the works.

The Chinese government has established strategic guidelines for its national firms. That is, the Chinese government has set goals for Chinese firms to supply China’s long-term needs for energy and other natural resources. The Chinese are looking well ahead into the rest of this century, and even into the 22nd century. They want to ensure their future access to a diverse global supply chain, as well as win entrée into resource-rich regions of the world for Chinese industries and support firms.

Why are the Chinese receiving such a warm welcome in Brazil? According to Sergio Gabrielli, CEO of Petrobras, “The U.S. has a problem. There isn’t someone in the U.S. government that we can sit down with and have the kinds of discussions we’re having with the Chinese.”

In other words, there is a new geopolitics of oil at work. In the olden days, it would have been large international oil companies (IOCs) like Exxon Mobil (NYSE:XOM), Shell (NYSE:RDS.A / RDS.B) and BP walking into a room to meet with the Brazilians. The IOCs were the only game in town. They controlled the financing and the technology for large developments.

But today, the biggest deals begin with a political understanding at the top, hammered out between the highest levels of the respective governments. This top-down political deal making cuts out the IOCs, except where they have technical expertise that can be hired on a contract basis.

In essence, we are witnessing the end of the post-World War II economic construct of the world’s financial system. That construct always had a Western bias. But the 2008 crash of the Western business and financial model has changed everything. It has left a barren worldwide financial landscape for large development projects. Most traditional Western financing is simply not available for large projects. And as French author Francois Rabelais (1494-1553) once noted, “Nature abhors a vacuum.”

Thus has the Western financial crisis handed well-capitalized, government-backed Chinese banks and industrial firms an unmatched competitive advantage. With the traditional credit markets dry, Chinese banks have transformed into key lenders for the resource developments that will fuel the next generation of humanity. Indeed, for now, the Chinese are the world’s ONLY lenders for large resource development projects. See Brazil, Exhibit 1.

China’s Rare Earths Monopoly – All But Insurmountable

China’s support for Brazilian energy development is not the only angle that the Chinese government is pursuing for its future gain. China’s large reserves of foreign exchange, as well as its national strategic focus, has enabled incomparable – even insurmountable – progress for the Middle Kingdom to corner the world supply of substances called rare earths. Here’s the production chart for the past half century. Obviously, something is going on here.

Now that we’ve seen this chart, the questions arise: What are rare earths? And why are they important?

Rare earths are the 15 elements within the lanthanide series of the periodic table, plus the elements yttrium and scandium. The best known are lanthanum, cerium, neodymium, praseodymium, gadolinium, europium and samarium.

Here’s why rare earths are important. They’re used in a wide range of industrial and electronic applications. For many years, large amounts of lanthanum and cerium have been used in petroleum refining, with the result of increasing yields from each barrel of oil by about 10% while extending the life of other expensive catalysts like platinum. And rare earths find their way into myriad other applications, from aerospace super-alloys to rechargeable cell phone batteries.

More recently, large volumes of rare earths (especially neodymium) have gone into magnets. In fact, rare earths are a key component in strong, permanent magnets. It’s not those cute little refrigerator magnets; your computer contains a number of tiny magnets in its hard drive. If there are no permanent magnets, there are no computers. Or DVDs or DVRs or iPods, etc. Say farewell to your wired way of life.

And then there are the giant 1-ton magnets used in large windmill assemblies. Each windmill magnet is about the size of a car engine and uses 560 pounds of neodymium. The implication is that if the U.S. wants to erect windmills to generate electricity, the nation is making a long-term commitment to buy and use unprecedented amounts of neodymium. And there are NO substitutes. For just this one “clean energy” application, large amounts of rare earths – and the ores and mines to produce them – are essential.

There are many other clean-energy applications for rare earths as well, particularly in the now forming electric car industry. Neodymium magnets are key components in electric motors and regenerative braking systems used in hybrid vehicles. Without these magnets, no electric cars will ever roll off an assembly line, let alone whiz down an American highway.

Another significant demand for rare earths will come from large rechargeable batteries for electric cars. Nickel-metal hydride (NiMH) rechargeable batteries, for example, contain cerium and lanthanum in a form called “mischmetal.” And right now, NiMH batteries are the battery of choice for many hybrid vehicles. Overall, a typical hybrid electric vehicle can use about 50 pounds of rare earths – between the rechargeable battery pack, the permanent magnet motor and regenerative braking system. (Plus other tiny magnets for the sound system, power windows, power seats, windshield wipers, etc.)

So clearly, demand for rare earths is set to skyrocket. Just clean energy applications will drive unheralded demand for metals of which most investors – let alone consumers – have never heard.

It’s also important to keep in mind that almost none of the rare earths used in large power systems (like windmills) or electric vehicles (such as with NiMH batteries) are currently being recycled. The long lifetimes of the magnets and batteries, coupled with the lack of recycling technologies and dedicated facilities, means that any increase in supply can only come from new mining.

Another factor is that there appears to be an official Chinese policy to slow down export of rare earths. Chinese exports have decreased by 8% or so each of the past three years. Chinese suppliers have placed foreign customers on allocation, at reduced quantities from years past. The Chinese explain that they have closed mines for environmental reasons. Yet the Chinese also promise adequate supplies of rare earths if foreign users will move their industrial facilities into China.

According to Yoichi Sato, head of the Rare Earths Department of Japan’s Mitsui Industries, China is displaying its long-term strategy toward these critical elements. Mr. Sato believes that China is playing a complex game with the world’s rare earth consumers.

First, China is restricting rare earths exports, to provide its own high-tech industries with the chance to flourish and gain a competitive edge over rivals in Asia, Europe and the U.S. And second, it will force many foreign firms to move their high-tech factories and research centers to China to circumvent quotas. China, to be sure, has a small army of highly capable scientists and engineers who focus on rare earths applications – over 15,000 Ph.D.-level individuals, by one count.

Mitsui’s Mr. Sato believes that China will use its existing monopoly status in rare earths production to crush any competition that emerges. While about 42% of worldwide rare earths resources are outside China, there are NO non-Chinese sites with any significant processing or refining capacity. In the game of rare earths, China holds almost all of the cards.

Mr. Sato has stated, “Many people are looking at establishing alternative refineries and sources outside China, but the investment is not necessarily a sound one because of the threat of price revenge by China. If new projects emerge, as they have recently in Malaysia and Australia, China could just drop its prices and force rivals out of business.”

And as if on cue, in April 2009, Chinese firms used their financial muscle to buy large stakes in potential foreign rivals in Malaysia and Australia.

I hope that you now understand the importance of rare earths to the 21st-century economy of the West, particularly to the energy future of the U.S. I’m following this situation very closely. There ARE some potential investment opportunities in rare earths, but only in very small, thinly capitalized firms.

Until we meet again,
Byron King

Source: Brazil’s National Commitment to Energy – Bankrolled by China

One day I told my lovely wife to get her passport ready because we were going to Moscow.  She was quite excited because Moscow is a shopping mecca with many historical sites to see.  But, I assure you—I was there for business.

We traveled to Russia in December of last year and I saw firsthand how the country operates.  I observed that the Russians are a hard working and productive people that just want the best for their families.  Russians are striving for a better quality of life just like anyone else.  I knew right away that the country offers investor’s high profit potential.

I assure you that Russia is still a super power and their society is quite advanced.  The energy sector in Russia is still a powerful force in the world.  Plus, Russia is one of the biggest producers of palladium, platinum, diamonds, nickel and gold.  Russia is a natural resource power house and should do great as commodity prices skyrocket.

When I got back to America I watched the Russian markets for some time and waited for the right moment to tell you to invest.

Then on 04/09/09 in this column, I wrote:

“the Russian market is way oversold and now is a good time to be a contrarian investor and invest when no one else will.”

I told you to buy the Market Vectors Russia ETF (RSX).  This Exchange Traded Fund holds a basket of Russian stocks and seeks to mirror the Russian stock market as measured by the DAX Global Russia+ Index.

I hope you took the advice.  If so, you’re sitting on a 39% gain in just 53 days.  And that’s not the only profitable advice you’ve received for free in these pages…

In fact, just this year I sent you lots of big winners including:

7% SPDR Gold Shares (GLD)
21% iShares Silver Trust (SLV)
85% Freeport-McMoRan Copper & Gold Inc. (FCX)
45% Plum Creek Timber (PCL)
13% PowerShares DB Agriculture ETF (DBA)
26% iShares MSCI Brazil Index (EWZ)
39% Market Vectors Russia ETF (RSX)
29% PowerShares India ETF (PIN)
18% iShares FTSE/Xinhua China 25 Index ETF (FXI)
13% The Coca-Cola Company (KO)
11% Market Vectors Agribusiness ETF (MOO)

If you missed this opportunity to get into any of the above positions, it’s not too late.  Each one of these picks has the potential to run much higher.

I’m sure you are happy we deliver these great ideas for FREE in this Investor’s Daily Edge daily newsletter.  Our staff here at Investor’s Daily Edge strives to give you information that can help you accumulate wealth and enhance your financial well-being.

Now I have an important favor to ask of you.  I need you to tell your friends and family to sign up for our free daily newsletter.  Simply just tell them to go to http://www.investorsdailyedge.com/ and sign up.  Or forward this email to everyone in your address book.

We currently have over 300,000 elite members like you getting Investor’s Daily Edge on a daily basis.  Our goal is to get to one million subscribers.

Tell your friends and family that can benefit from independent and profitable financial insight.

Thank You,

Ted Peroulakis

Source: The Russia Pick I Recommended to You Is Up 39 in 53 Days

Whoa… this is eerie! Following the great crash of ’07-’09 cometh the rebound. Hesitant, cautious at first…

Then, people begin to believe it. They begin to see the “green shoots” of a revival. Stock prices rise. The green shoots sink deeper roots and flower. Pretty soon, people think they are in knee-high clover.

Confidence is rising. Consumers, house-holders, investors – all think the worst is over. And if the worst is over, better times must be coming. If better times are coming, prices should be rising. And investors should be making money. And businesses should be expanding.

It’s all happening as forecast. Except that businesses aren’t expanding. The underlying economy is not really getting better. It’s actually getting weaker. But we’ll talk about that another day.

Today… we issue a warning: watch out, the greenback is going into the toaster oven…

Yesterday, the dollar held steady at $1.36. Meanwhile, the Dow gave up 29 points… after a strong day yesterday. Oil rose over $60. And gold gained $5 to 926.

First, here’s what Nouriel Roubini had to say in the New York Times:

“We may now be entering the Asian century, dominated by a rising China and its currency,” Roubini contends. “This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades, America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable.”

Yes, it could take more than a decade. But investors could take a big loss any day. All it would take is a sudden move by China… or a shocking inflation figure in the US… or a Treasury bond auction that didn’t go as planned.

Everyone is watching the US… carefully. And foreigners hold trillions’ worth of dollar-based assets outside the US. These are dollars that people hold, not to pay their bills or buy gasoline, but as a speculation. They’re speculating the greenback will hold its value as well or better than the other things they might do with their money.

Europeans hedge their bets against the euro – with dollars. Asians hedge their bets against falling stock prices. Russians hedge their bets against the rouble… Latin Americans hedge their bets against their own pesos, bolivars and cordobas.

Everybody likes dollars, because they are the most trusted money in the world. For the last 50 years, nothing could compete with the dollar. (Even though the dollar lost value against a number of other currencies over long periods of time).

These foreign holders are already nervous. They’ve seen the mess the US has gotten itself into. They read the headlines. They watch the news. They know that the US is running a budget deficit this year equal to 4 times the biggest budget deficit ever – a record set just last year. It is as if a runner broke the record in the 100-yard dash and then ran the course 4 times faster a year later. This is not progress. This is spooky.

The Chinese already let the US know they were worried. “We trust you to protect the value of our assets,” they said to the American Treasury secretary.

And as long as they trust the US to keep its promises and protect its money, they’ll continue to hold US dollar investments – notably, US Treasury bonds. But just wait until the US loses their trust. In a matter of minutes, they could dump enough US dollars to set off alarms all over the world. All of a sudden dollar holders would rush for the exits – each one trying to get out before the others. In minutes, the dollar market could collapse… taking down US Treasury bonds with it.

Our Pittsburgh correspondent thinks he sees this happening soon.

‘Bye-’Bye US Dollar!!!” writes Byron King. “We’ll go to bed one night and wake up the next morning and the dollar will be toast…

“Wow, have we in the US screwed ourselves or what? The rest of the world has to be watching us and laughing up its sleeve. Big, muscle-bound superpower with a declining industrial base, sitting around navel-gazing about how much more of our industry we’ll dismantle; how much of our energy production we’ll curtail. Meet the future… ”

More news:

Manraaj Singh sees the dollar as a “dead man walking”. And he has some ideas on China’s plans for the currency.

“So far though, the dollar has continued to defy gravity. So our investment has been off to a slow start though. But that may be set to change. You see, the mainstream press has suddenly caught-on to the looming end of US dollar hegemony.

“China is very clear about its plans to replace the dollar as the world’s reserve currency. China’s central bank governor, Zhou Xiaochuan, has posted an article on the banks website saying that their goal is to create a reserve currency “that is disconnected from individual nations.

“Well what is it going to be based on then? Gold.

“There are two very good reasons why I believe China will back its currency with gold. Firstly, it is an accepted store of value. So that would give the yuan a real and accepted value on international markets. China’s trading partners are going to be a lot more willing to hold the yuan as a reserve currency if they are convinced that it will hold its value over time. Secondly, China is the world’s biggest producer of gold. So it has ready access to the yellow metal.”

Editor’s note: Manraaj Singh is Chief Investment Strategist of Trend Investor. To read more about this service, and discover the unique opportunities he is recommending right now, click here.

And then… back to our thoughts…

*** Byron sent the following article from the Financial Times:

“Brazil and China eye plan to axe dollar,” the article begins. “Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president.

“The move follows recent Chinese challenges to the status of the dollar as the world’s leading international currency.

“Mr Lula da Silva, who is visiting Beijing this week, and Hu Jintao, China’s president, first discussed the idea of replacing the dollar with the renminbi and the real as trade currencies when they met at the G20 summit in London last month.

“An official at Brazil’s central bank stressed that talks were at an early stage. He also said that what was under discussion was not a currency swap of the kind China recently agreed with Argentina and which the US had agreed with several countries, including Brazil.

“Currency swaps are not necessarily trade related,” the official said. “The funds can be drawn down for any use. What we are talking about now is Brazil paying for Chinese goods with reals and China paying for Brazilian goods with renminbi.”

“Mr Zhou recently proposed replacing the US dollar as the world’s leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.

In an essay posted on the Peoples Bank of China’s website, Mr Zhou said the goal would be to create a reserve currency “that is disconnected from individual nations.”

Source: Hedging the Dollar as Stocks Rise