The dollar gave up most of its earlier gain against a basket of currencies, boosting the appeal of oil and commodities to investors. European stocks firmed and U.S. equity futures pointed to a higher opening.

“It’s making some progress back up, largely due to the dollar,” said Rob Montefusco of Sucden Financial. “At the same time, we haven’t seen demand pick up and we need that to draw strength back into this sector at the moment.”

U.S crude was up 8 cents to $66.10 a barrel by 1308 GMT, after earlier falling as far as $65.41. London Brentwas down 11 cents to $65.00.

Iran test-fired a type of missile on Monday which defence analysts have said could hit Israel and U.S. bases in the Gulf region, state television reported.

The drills coincide with increased tension in Iran’s nuclear dispute with the West, after last week’s disclosure by Tehran that it is building a second uranium enrichment plant.

Tensions over Tehran’s nuclear programme have supported oil prices in recent years. The country is the second-largest oil producer in the Middle East.

In late 2008, Iran threatened to block the Strait of Hormuz, through which about 40 percent of the world’s globally traded oil passes, when tensions rose in another row with the United States around the nuclear work.

Even so, sluggish oil demand, reinforced by some lacklustre economic data from the United States last week, continued to command investors’ attention.

“The Iranian situation is not having much influence. If it was, we’d be back towards $70 again,” said Christopher Bellew, a broker at Bache Commodities in London.

Oil prices posted their largest weekly decline in around 2-3 months last week, pressured by government data showing U.S. crude oil inventories had risen, suggesting demand remains weak.

U.S. durable goods orders dropped by the largest amount in seven months while a rise in new home sales was less than forecast, according to data from the U.S. Commerce Department on Friday.

Sept 28 (Reuters)

That means interest rates will remain at artificially low levels for some time to come.

And it also means the central bank’s policymaking arm, the Federal Open Market Committee (FOMC), has finally and firmly cemented its role as the Keynesian death panel for the savers of America.

The malign influence of the late economist John Maynard Keynes is nowhere more destructive than it is in the area of saving. After all, it was Keynes who proclaimed that his ideal economy would see “the euthanasia of the rentier” – an abolishment of the class of people who live off of income from savings.

We know that Keynes’ theories are still rampant in choosing U.S. fiscal policy, which has given us the largest peacetime budget deficit in history. Wednesday’s statement by the central bank’s policymaking Federal Open Market Committee (FOMC) shows that the monetary sector is enthralled by Keynes’ destructive views. As savers and investors, it’s about time we got a voice in this. After all, it’s entirely possible that we don’t want to be killed – not even mercifully – by the FOMC’s zero interest-rate policy and its erosion of our savings.

The current economic situation has the United States in an embryonic – but unmistakeable – recovery. Commodities prices are soaring and the U.S. stocks, as measured by the Standard & Poor’s 500 Index, are up 55% from their March 9 low.

If you were setting monetary policy for such a country, you’d surely make it only moderately stimulative, because the dangers of soaring commodities prices and what looks very much like a stock market bubble are considerable. With the “core” consumer price index (CPI) having risen 1.4% in the last 12 months, that would suggest a Federal Funds target of somewhere in the 2%-3% range. That would constitute a “real” short-term interest rate of 0.6%-1.6%, just below the neutral level of about 2%.

Needless to say, the Fed has a problem.

A No-Win Proposition for Savers

If it moved interest rates back to the appropriate rate quickly, it would cause a huge market panic: A move of 2% or more in the Federal Funds target would hit hard at the market’s confidence.

However, it could begin moving in that direction, perhaps by raising the target by a quarter percentage point – which would take it to a range of 0.25%-0.50%. That would not tighten policy much, but would indicate the Fed’s intention to tighten it in the future.

The market reaction would be considerable; if it knew higher interest rates were coming, the stock market would slow its ascent and commodity prices would stop soaring. The latter would be very good news, indeed, for the U.S. economy and for U.S. consumers generally.

By taking the opposite view, and nailing itself to the zero interest rate policy, the Fed has made it very difficult to raise interest rates when it needs to, which will be pretty soon.  However, there’s another effect – this one affecting savers – which will do even more long-term damage.

Commentators have for years been bemoaning the low U.S. savings rate, pointing out that it causes the U.S. balance-of-payments deficits, making us beholden to China, the Middle East and other places that may or may not be our friends. However, my question is, why the hell should anybody save if they don’t get paid to do so?

In this environment, savers get ripped off in three ways:

• First, they get almost nothing on their savings, except by taking lots of risk.

• Second, the value of their savings gets eaten away by inflation. That’s only 1.4% currently at the “core” level, which purposely excludes more-volatile food-and-energy prices (more on that in a moment). And that’s only if you believe the “official” figures, which I don’t entirely – they’ve been tweaked much too often. However, the rise in commodity prices, the weakness in the U.S. dollar and the beginnings of economic recovery suggest that inflation will be considerably higher in the months ahead. And that’s even if you don’t include the “volatile” food-and-energy prices, as the government doesn’t (Though it should: Real people can’t live their lives without consuming food and energy, and thusly suffer from “real” – and not “core” – inflation).

• Third, after they’re received very little on their money and had their money eaten away by inflation at rate that exceeds their savings return, those savers still have to pay income tax on interest and dividends, even when those returns don’t make up for the inflationary erosion of capital.

The Fed has been running a monetary policy that rips off savers since 1995. That means that the central bank has spent the last 14 years pushing up the money supply at a rate that greatly exceeds nominal gross domestic product (GDP).

So it’s not at all surprising that people don’t save much; they’re being paid not to do so. The Fed’s policy is very convenient for all those who borrow money – from the big banks and investment banks to the homeowners who took out too large a mortgage and can’t service it.

In other words, it’s become a very one-sided game.

Three Strategies for Savers

As savers, we can take several steps. We can agitate, like the “tea party” protesters. It’s about time U.S. Federal Reserve Chairman Ben S. Bernanke stopped basking in his approval by all the Keynesians and felt the anger of real people, whose savings he is destroying.

Apart from that, we can invest in a way that gets around Bernanke’s machinations. Three moves in particular make a lot of sense:

• First, we should save as much as possible tax-free, since the tax system discriminates against us. So max out IRA contributions, education funds, and any other investments that shield part of your holdings from the taxman’s bite.

• Second, we can put our money outside Bernanke’s reach – in foreign markets. The European Central Bank (ECB) at least mildly cares about savers, and has pursued a more careful policy than the Fed. Within the EU, Germany is recovering nicely, partly because it had very little fiscal stimulus, and has almost no inflation. Outside the EU, Japan and Korea are both recovering nicely, and so are worth looking at, as their policies are at least independent. (Japan, under the previous government, had a Bernanke-like determination to ignore the needs of its savers. But that may have changed under the new government).

• Finally, we savers can engage in the ultimate Bernanke protest, and buy gold, silver or the shares of mining companies. Once the Fed reverses its policy, these will be rotten investments. But it’s pretty clear that the Fed is not going to give savers an even deal soon. In that case, if the Fed doesn’t reward us, gold and silver will. The dollar will decline, and gold and silver prices will rise, until eventually the Fed is forced to act. But my bet is the Fed will move very slowly, so we’ll get plenty of warning.

We savers have rights, too. And we also have money.

It’s about time we invested it where its enemies can’t erode it.

Source: The New ‘Death Panel’ for Savers

China has used depressed commodities prices to stock up on long-term supplies of raw materials such as oil, copper, and iron.  And it’s used structural weakness in the U.S. financial system as justification for replacing the dollar as the world’s main reserve currency.

Now, the Red Dragon is looking to make headway on the highway by winning global market share in the automotive market while U.S. heavyweights spin out.

“We aren’t afraid of the financial crisis,” Zhou Fuquan, vice president of Geely Automobile Holdings Ltd. (PINK: GELYF), told Bloomberg News. “On the contrary, we hope it will penetrate even further as it has provided us with some opportunities.”

Geely is China’s biggest private automaker, but that isn’t exactly saying much. The company’s annual output is just 300,000 units, and its market share in China is a meager 3%. Still, Hangzhou- based Geely is determined to become a global player in the auto industry. It has ambitions to sell 2 million cars a year, including 1.3 million overseas – even though right now the company generates just 5% of its sales from abroad.

Of course, that’s why the financial crisis has been more of a financial opportunity for Geely. In March, Geely bought key assets from bankrupt Australian gearbox maker Drivetrain Systems International – the world’s second-largest maker of automatic transmissions.

“The economic downturn provides us with very good overseas acquisition opportunities,” Daniel Dai, vice president for international business at Geely, told China Daily. “We get the best technology with the best price.”

Geely has also set up a joint venture with Manganese Bronze Holdings PLC (MBH) to produce the TX4 London Taxi in Shanghai. MBH supplies taxis to Saudi Arabia, Turkey, and Spain as well, boosting Geely’s global presence.

For months, analysts have speculated that Geely will continue to its overseas expansion by launching a bid for Ford Motor Co.’s (NYSE: F) Volvo unit. Ford, which is the only “Big Three” auto company to not receive government aid, last December started looking to offload the Swedish car brand in an effort to pay off the debt it accrued when the company borrowed $23.5 billion in 2006.

Geely said on Sept. 9 that it might partner with a state-owned investment company to bid for Volvo. And earlier this week, the company announced that it would raise $334 million in funds from Goldman Sachs Group Inc. (NYSE: GS) through a convertible bond offering to “fund the capital expenditures of the group, potential acquisitions by the group and for general corporate purposes of the group.”

However, some analysts have pointed out that the Goldman capital falls well short of the roughly $2 billion Ford is asking for Volvo. They believe Geely instead will use the money to increase capacity and market the models it already has to buyers outside of its home market.

“The management is planning to expand its distribution channel to foreign countries,” Richard Li, research director at Celestial Asia Securities Holdings, told Forbes magazine. “This deal can provide this company enough funds so that the cash flow will be upgraded long term.”

And if nothing else, Goldman’s investment could be enough to instill investor confidence in the small Chinese carmaker.

Almost a year ago to the day Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) subsidiary MidAmerican Energy Holdings Co. agreed to pay roughly $230 million for a 9.89% stake in Chinese car and battery producer BYD Co. Ltd. Since then, BYD’s shares have jumped more than fivefold in that time.

“A big name investor certainly helps boost stock prices and brand recognition,” Li Lixi, a Northeast Securities Co. analyst in Shanghai, told Bloomberg. “Goldman’s investment in Geely may repeat the impact that [Warren] Buffett had on BYD.”

Geely’s Hong Kong shares yesterday (Wednesday) surged to their highest in more than nine years on the news of Goldman’s investment.

The Race to Build a Competitive Chinese Brand

Geely isn’t the only Chinese companies looking to use the financial crisis as an opportunity to broaden its global reach either. Other Chinese companies, including Beijing Automotive Industry Holdings Co. (BAIC), SAIC Motor Corp. Ltd., and Sichuan Tengzhong Heavy Industrial Machinery Co., are determined take the lead in what has become a race to be the first world-renowned Chinese automotive company.

“It takes decades to establish a recognized, renowned brand,” Jim Hossack, an industry analyst at researcher AutoPacific Inc., told Bloomberg. “China wants to do it much faster, perhaps within as little as five years.”

BAIC on Sept. 9 joined Koenigsegg Group in its bid for GM’s Saab division. Koenigsegg – backed by U.S. and Norwegian investors – in June agreed to buy Saab from GM, but struggled with financing the deal.

SAIC group, the parent of China’s largest automaker, had also considered coming to Koenigsegg’s aid in the Saab bid. But ultimately it was BAIC that came through with the $420 billion in financing needed to close the deal.

“This is a great opportunity for us to partner up with a brand like Saab that we believe has a great future with a new business plan and new ownership,” Wang Dazong, general manager of Beijing Auto, said in a statement posted on its Web site.

Koenigsegg and BAIC will form a joint venture to market Saab cars in China, where the brand has little-to-no presence. BAIC will also gain valuable technology from the Swedish car company.

“Chinese manufacturers are hoping to buy up technology that will help them catch up to world standards on both the product and the development side more quickly than they would on their own,” Christoph Stuermer, automotive analyst at IHS Global Insight Inc., told the Financial Times.

However, not every Chinese endeavor has been greeted with success. Shanghai-based SAIC in 2004 paid $500 million for 49% of Ssangyong Motor Co. just to watch the South Korean carmaker go into receivership in February. And Sichuan Tengzhong Heavy Industrial Machinery’s attempted takeover of GM’s Hummer brand is still being stalled by China’s central government.

“It’s not in coordination with our nation’s industrial policy,” Vice Minister of Commerce Chen Jian said after sending back Sichuan’s application to acquire the Hummer brand for $100 million.

Still, Chinese auto companies won’t be satisfied until they race ahead of their Western counterparts.

“I’m fighting for what’s in overseas automakers’ rice bowls,” Geely founder Li Shufu told Bloomberg. “I want to build Geely into a global first-tier automaker.”

Source: Financial Crisis Gives Chinese Car Companies a Chance to Get Up to Speed

China’s 470 million ton demand for steel is considerably lower than the country’s annual production capacity of 660 million tons, and to that effect, China announced a three-year ban on new mills The New York Times reported.

“Disorderly competition” has pushed up iron ore prices, caused a glut of production capacity and resulted in “serious losses,” said China’s Information Minister Li Yizhong. “My ministry will not approve any expansion-related projects in the iron and steel industry. I would like to call on the whole industry, all iron and steel producers, not to construct any new projects within three years.”

China is using its clout as the world’s largest steel producer to negotiate lower iron ore prices with some of the larger ore producers, but six weeks after the last agreements expired at the end of June talks are still deadlocked.

Beijing is showing it can and will shop around for the best prices it can find, inking an iron ore deal Monday with Fortescue Metals Group Ltd. that gives the Red Dragon prices 3% below a benchmark set by Rio Tinto with Japanese, Korean and Taiwanese steelmakers.

Still, the Fortescue contract covers only 18 million metric tons of ore, compared to the tens of millions of metric tons Rio Tinto and BHP Billiton Ltd. (NYSE ADR: BHP) have earmarked for the second half of this year.

“The price Fortescue is getting should not be taken as indicative of what Rio and BHP will get,” H3 Global Advisors Director of Commodities Funds Manager Mathew Kaleel told Reuters. “In terms of volume there’s no comparison”

Rio Tinto agreed with Japanese and South Korean steel mills to cut prices by 33%, but negotiations with China stalled when the China Iron & Steel Association demanded a deeper price cut. China is still receiving iron ore on long-term contracts with provisional pricing terms based on the 33% cut, Rio Tinto Chief Executive Officer Tom Albanese said yesterday in a conference call.

It may be difficult for Rio Tinto to bend too far on pricing, as the company saw its profit drop to $2.5 billion in the first half. Operating income at Rio’s iron ore division, its biggest profit generator, fell to $1.9 billion in the first six months of the year.

Chinese iron ore imports rose to their highest level ever as prices swooned in July.

Source: China Turning the Screws on Rio Tinto in Iron Ore Negotiations

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

With the market very near critical support levels, critical earnings reports on the docket, and inflation and employment data set for release, it was more prudent last week to keep the powder dry. But the market surprised to the upside, as key companies reported better than expectations.

Participation in fixed income issuance and trading, gave investment banks buoyancy.  But JP Morgan Chase & Co. (NYSE: JPM) actuallyconfirmed two of the three fears that I outlined last Monday:  A bleak commercial real estate outlook – which will have little consequence for the bank given its limited exposure in this area – and a spike in credit card delinquencies.

The third fear I had, the rise in residential foreclosures, was confirmed by a report from RealtyTrac that said foreclosure filings in the United States jumped to a record 1.9 million in the first half of 2009.

Of course, there are some indications that the consumer problem loan and unemployment metrics might be in the process of peaking.

Headline unemployment numbers were much better than expected because of the methodology used for seasonal adjustment, which anticipates maintenance-related layoffs at automakers during this time of the year.  The difference this year is that the layoffs occurred much earlier as General Motors Corp. (NYSE: GRM) and Chrysler Group LLC restructured.  Therefore, the regular seasonal adjustment performed on the number over-corrected for these layoffs that occur at this time.

If unemployment is peaking, we may see end to the consumer malaise in the months ahead.

Still, the earnings season has just begun. The technology sector has also seen positive surprises, not just in bottom lines but sales growth in some cases – especially semiconductors.  This is very important, since semiconductors typically lead the tech up-cycle.  In this sector, the market has correctly anticipated the good news and rallied.

So, even though the U.S. Federal Reserve has assured the market, and the world, that it will bring an appropriate end to quantitative easing, there remains a possibility that the reduction in monetary stimuli won’t come in time to prevent inflation. Both the Producer Price Index (PPI) and the Consumer Price Index (CPI) came in higher than expected last week, with the main areas of price increases focused on food, energy and at the beginning of the production chain.

The June headline CPI rose 0.7%, while core CPI, which excludes food and energy, rose 0.2%.  This was preceded by a hot PPI, which increased 1.8% from May, the largest monthly increase since November 2007. Once more, the main culprits were food and energy, since core PPI, which excludes these two sectors, was up 0.5% for the month. Still, on a year-over-year basis, core producer prices of finished goods remain 3.4% above those of the previous year.

Hence, the general strength in the price of oil and energy, some agricultural products and industrial metals, along with a pick up in retail sales and a possible peaking of unemployment offers some hope that the “reflation” policies of the Fed and the U.S. Treasury are having an impact.

This is the typical behavior of inflation in the early part of the cycle.  What we do not know is what proportion of these price increases is the result of China’s extraordinary accumulation of oil, copper, iron ore and other resources, and how much is attributable to the standard surge in prices at the beginning of a recovery.

In any case, I expect continued firmness in these prices in the second half of the year.  After the initial profit-taking and consolidation takes place, the weakness in the U.S. dollar, the expected acceleration in the deployment of the fiscal stimulus, and the traditional seasonal strength of the economy– spurred by back to school and later by the Christmas season – will provide us with as much as 2% growth in gross domestic product (GDP) in the third quarter of and a similar, or maybe even higher number, in the fourth quarter.

That’s why we are going to concentrate on the sector that I expect will gain the most momentum this summer: Public construction.

The global deployment of fiscal stimulus should translate into an unexpected surge in demand for steel.  China’s stimulus is running at full steam, with that economy posting 7.9% growth in GDP in the second quarter – up from 6.1% in the first three months of the year.

Remember that China needs its economy to grow by at least 8% in order to employ the 18 million workers that join their labor force each year.  With deflation still affecting some sectors of the economy, I do not expect Beijing to be quick in removing any stimulus and to only start doing so early next year. China’s public and private construction will remain robust and expand further, providing support for global steel prices.

Since this is a sector call, rather than a company call, and I want to minimize the exposure to a possible mishap in execution from any one company, I recommend buying Market Vectors Steel (NYSE: SLX)exchange traded fund (ETF).

The ETF surged more than 135 last week and is still well below recent highs. It seems to be ready to break resistance and will show very strong price appreciation should this occur.

Recommendation: Average into the Market Vectors Steel (NYSE:SLX) ETF over the next month (**).

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in the Market Vectors Steel ETF.

Source: Buy, Sell or Hold: Capitalize on Resurgent Commodities Prices with the Market Vectors Steel (NYSE: SLX) ]]> http://www.contrarianprofits.com/articles/buy-sell-or-hold-capitalize-on-resurgent-commodities-prices-with-the-market-vectors-steel-nyse-slx/19242/feed 0 http://www.contrarianprofits.com/articles/with-inflation-on-the-horizon-gold-prices-are-ready-to-rally/19207 http://www.contrarianprofits.com/articles/with-inflation-on-the-horizon-gold-prices-are-ready-to-rally/19207#comments Fri, 17 Jul 2009 19:22:08 +0000 Jason Simpkins http://www.contrarianprofits.com/?p=19207 With the global economy on the mend, could gold be gearing up for another record-setting run? It sure looks that way. 

After peaking north of the $1,000 per ounce price level last year, gold hit a stumbling block when deflationary fears in the world’s largest economy sucked the air out of commodities prices and sent hoards of investors stampeding into the safe-haven of U.S. Treasuries, and helped spawn a rebound in the U.S. dollar.

Since that time, the global economic outlook – especially beyond U.S. borders – has improved, and gold prices have stabilized.

The next step – many gold bulls say – is for the yellow metal to make a run for new highs.

Whipsaw Trading Patterns

Gold started 2009 at about $870 an ounce…

This chart blew us away. Stock prices are supposed to move at random. So how do we explain such a seemingly orderly pattern? To answer this question you have to also consider the cyclical movements of commodities prices. Take a look at the chart below. It shows the trend in commodity prices between 1982 and 2000 – an 18-year upswing in equity prices.

As you can see, commodities entered a secular bear market just as equities entered a secular bull market. And vice versa.

The reason for this is actually relatively simple. As costs for raw materials increases corporate profits decrease. Eventually, the decrease in profits causes demand to fall for commodities… and prices fall.

This fall off in prices then reduces investment in the acquirement and production of raw materials, which in turn reduces supply. As supply gets tighter prices begin to rise again. Investment in commodities becomes once again profitable, and the cycle completes itself.

This story gets really interesting when you consider that during the vicious sell off in commodities last year prices bottomed far higher than in previous recessions.

According to Rosenberg:

In the 2001 recession, the oil price bottomed at $19.33/bbl; in 1990, it bottomed at $16.81/bbl; in 1982 at $28.48/bbl; and in 1975 at $10.11/bbl. We bottomed this cycle at levels that were peaks in prior cycles. The same holds true for copper – it hit its trough at $1.39/pound this time around versus $0.630 in 2001 and $1.00 in 1992. Ditto for the ‘softs’ – soybeans bottomed at $8.48/bushel this time, compared with $4.15 in 2001, $5.42 in the recession of the early 1990s and $5.32 in the early 1980s downturn.

What does this mean for your investments? Put simply, this implies that “the floor is in” for commodities. Consider adjusting your portfolios accordingly.

We have been raking in huge profits in all our cyclical and aggressive plays since we called the turnaround in Brazil last October 27:  Petroleo Brasileiro (NYSE: PBR) — known as Petrobras – Vale (NYSE: VALE), Apple Inc. (Nasdaq: AAPL), BHP Billiton Ltd. (NYSE: BHP), Research in Motion Ltd. (Nasdaq: RIMM), IBM (NYSE: IBM), Amazon.com Inc. (Nasdaq: AMZN),  Diamond Offshore Drilling Inc. (NYSE: DO), and Ciena Corp. (Nasdaq: CIEN) have all done splendid.

And over the longer term, all of these companies are going to continue delivering, with some obvious profit-taking bouts along the way.

One of such profit-taking episode could be starting right now.  And it could be driven by Standard & Poor’s recent downgrade of United Kingdom’s sovereign debt rating.  This was in turn followed by the comments coming out from PIMCO that suggest the United States’ debt rating could be in jeopardy.  Even though S&P minimized that possibility, when Bill Gross speaks, the bond markets listen.

General Mills met earnings expectations in March and raised its earnings outlook.  It has been benefiting from the drop in commodities prices, especially agricultural. In addition, the firm, like many in the consumer business, has suffered from a strong U.S. Dollar, which reduced the value of the profits abroad.  The nice thing about consumer staples is that, since people have to eat in good and bad times, these companies are not cyclicals, but rather suffer very little in downturns.

That has been the case for General Mills, which in the last report showed a 4% sales increase from the same quarter in the prior year.  And this sales increase was achieved despite a 6% drop in the sales of food service and bakery products, where the firm nonetheless managed to increase pricing.  But this sector is being de-emphasized with some divestment.

Just think about the solid brands that allow General Mills to dependably keep chugging along every quarter, increasing sales as the population grows. General Mills also boasts well established and new brands that keep increasing its market penetration around the world.   Since then, the dollar has corrected in value and the commodities prices have dropped. That will show up in next month’s earnings report and the stock should perform nicely.

The company is dominant with its Pillsbury brand, which has more than two-thirds of the market.  Cheerios, which has come under some scrutiny for health claims by the FDA, is the top cereal franchise in the ready-to-eat segment.  In addition, we are going to see hundreds of new products being launched soon.

The global story is only beginning for this company, even though they are already in China, and many other fast-growing emerging markets.  This international presence, which right now accounts for only 20% of the company’s total sales, is likely to grow much faster in the near future.  This will be achieved with joint ventures and by leveraging the brands that have the highest international penetration, like Nature valley and Haagen Dazs.

The stock is trading with a price-earnings ratio of only 16 times and an attractive dividend yield of 3.3%. But looking at the company’s growth, it is trading at only 13 times future earnings.  This is a low-risk proposition, as both the company earnings and the dividend appear to be very safe. In addition, the stock has a small short ratio that should diminish if we see profit-taking in the cyclical.

Last but not least, in addition to the short-term technical turning bullish at the end of April, as the stock crossed its 13-day and 50-day exponential averages to the upside, the long-term technicals have also turned bullish and the stock is still way oversold.

Recommendation: Buy General Mills Inc. (GIS) at the market and accumulate more if you see weakness (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest General Mills Inc.

Source: Buy, Sell or Hold: General Mills Inc. (NYSE: GIS) is a Wholesome Company with Profit Coming Down the Pipeline

Money Morning first reported in January, that China was building stakes in some of the world’s largest natural-resource companies, which have been made vulnerable by depressed commodities prices, tumbling profits and falling stock prices. In the scant few weeks since that Money Morning report was published, Aluminum Corp. of China Ltd. (ADR: ACH), or Chinalco, has invested $19.5 billion in Australian/British mining giant Rio Tinto PLC (ADR: RTP), and China Minmetals Corp. acquired Australian zinc miner Oz Minerals Ltd.

China Development Bank has been particularly active. Earlier this week, the bank lent $15 billion to OAO Rosneft Oil Co., Russia’s state-owned oil company, and $10 billion to the Russian state pipeline monopoly Transneft (PINK: TRNFF). In return for the needed financing, Russia agreed to supply China with 15 million tons of oil annually for 20 years.

China Development Bank struck a similar deal with Petrobras Friday, agreeing to loan the Latin American energy giant $10 billion to help finance deepwater oil exploration off the coast of Brazil.

Oil exploration will be carried out with the participation of Sinopec (ADR: SHI), the Chinese state oil company, the Macauhub reported.

The contract will be finalized within the next two months so it can be signed when Brazilian President Luiz Inácio Lula da Silva visits China in May, according to Petrobras Chief Executive Officer Sergio Gabrielli.

In addition to the exploration partnership, the deal signed between Petrobras and Sinopec includes the supply of 60,000 to 100,000 barrels of oil per day in the current year. Petrobras also signed a memorandum of understanding with state company China National Petroleum Corporation (CNPC) for the supply of 40,000 to 60,000 barrels per day.

Brazil is necessarily the country that comes to mind when taking inventory of the world’s top oil producers. It currently has about 12 billion barrels of proven reserves, but that figure could grow substantially now that a number of very rich deposits have been found off Brazil’s shores.

Petrobras happened across the second-largest oil find in two decades last year when it found between 5 billion and 8 billion barrels of untapped light oil in the Tupi basin. Even more impressive are the unofficial figures from a new reservoir, known as Carioca. That field could hold 33 billion barrels of oil and gas, which would make it the world’s largest discovery in at least 32 years.

With discoveries like these Brazil, currently ranked 13th on the list of the world’s top oil producers could, could easily move into the top ten.

The only problem with the Tupi and Caricoa oil fields is production costs. The Carioca discovery, for instance, is located 170 miles offshore, more than 6,000 feet under the surface of the water, and is trapped beneath a shelf of salt 500 miles long and 125 miles wide.

Developing oil fields such as these will be very costly and with crude oil trading below $40 a barrel financing is imperative. In that sense China couldn’t have timed its investment in Petrobras any better.

Petrobras said it plans to invest $174.4 billion from 2009 through 2013, compared with the $112.4 billion planned for investment for 2008-12. The company will invest $28.6 billion in 2009 alone.

In 2008, trade between China and Brazil totaled $36 billion making China Brazil’s second largest trading partner.

Source: China Continues its Commodities Binge with Brazilian Oil Deal