However, its overdependence on developed markets and a sluggish U.S. consumer are currently holding the company back.

Emerging markets are where growth is today. It’s clear that Heinz understands that, because emerging markets now account for about 14% of the company’s sales.  But the rate of Heinz’s emerging market sales growth is still disappointing.

Heinz has been growing this category, but only at a rate of about 1% to 2% of its total sales per year – even with the company’s brand acquisitions. And to make matters worse Heinz was hit with currency losses in its most recent quarter, and these currency dynamics will likely persist.

Heinz’s emphasis on China, Russia, India, as well as other emerging markets like Poland and the Middle East is encouraging.  But it is disappointing to see a lack of emphasis on Brazil.

In addition to the challenges Heinz faces in penetrating new markets, the company is up against strong headwinds at home. Heinz’s vulnerability to upswings in commodity prices poses a risk to margins.  And while Heinz has been confident enough in the strength of its brands to increase prices, more cash-strapped consumers are switching to generic brands to increase savings.  The result has been a 4% drop in volumes.  Consumer habits do not change easily, so this trend will be difficult to reverse.

Looking forward, the consumers in the United States and other advanced economies will remain weak.  American consumers, in particular, continue to struggle with high levels of debt, surging unemployment, and depleted nest eggs.  In fact, the wealth effect of seeing an average 15% drop in the value of their homes – which comprises some 70% of the equity of a typical U.S. household – and the huge drop in the equity markets – which represents another 20% of the wealth of households – has prompted consumers to increase their savings rate for the first time in decades.

The personal savings rateis near 5%, and it could exceed 8%.  This means that consumption will remain depressed and consumers will remain focused on cost savings for the foreseeable future.  Therefore, the shift at supermarkets to generic labels will continue.

This trend also will have a negative impact on Heinz’s food-service segment, which comprises almost 15% of its sales.   Food-service sales will suffer disproportionately as people stay more at home instead of dining out.

Longer term, as the U.S. and other advanced economies recover, and Heinz achieves stronger market penetrations in fast-growing markets, I believe it will indeed be able to produce above-average returns.  But in the meantime, very strong cashflows from its existing brands will support Heinz stock and allow the company to return an attractive dividend.

And right now, the 4.2% dividend yield that Heinz’s stock offers is very appetizing.  So long term holders should keep holding the stock.

However, the current headwinds for the company and challenges in the U.S. market, foreign exchange, commodity costs and other costs involved in penetrating new markets will keep limiting the stock’s appeal — even as a defensive play in down market periods.

The stock’s Price/Earnings to Growth (PEG) ratio, which is above 2, is a strong warning sign.  It says that buying at these levels is paying too high a premium for the Heinz’s earnings growth rate.  That is symptomatic of the headwinds in earnings that I mentioned previously.  Thus, it is not advisable to go into this stock right now.

I would stick with our many defensive stock recommendations, likeCampbell Soup Co. (NYSE: CPB), The Coca-Cola Co. (NYSE: KO)and Goldman Sachs Group Inc. (NYSE: GS), which have outperformed and are executing strongly in emerging economies.

Recommendation: Hold H.J. Heinz Co. (NYSE: HNZ) long term.  Short term-oriented buyers should abstain for the moment (**).

Source: H.J. Heinz Co. (NYSE: HNZ) Is a Long-Term Keeper, but Will Struggle in the Months Ahead

Leaders of the Group of 20 meet on Thursday and Friday in Pittsburgh and U.S. President Barack Obama said on Sunday he would push world leaders for a reshaping of the global economy in response to the crisis.

World stocks, measured by MSCI have risen over 26 percent this year, recouping more than half of last year’s losses, underpinned by repeated pledges by G20 policymakers to keep emergency support for the economy in place.

“The market might look slightly overbought near term, but the economy is definitely improving, corporate profits are definitely improving, interest rates are staying low, valuations aren’t expensive,” said Nick Nelson, European equity strategist at UBS. MSCI world equity index <.MIWD00000PUS> fell 0.7 percent, while the FTSEurofirst 300 index <.FTEU3> lost 0.6 percent.

Emerging stocks <.MSCIEF> also dropped 0.6 percent.

U.S. stock futures were down around 0.5 percent , paring losses after Dell said it would acquire Perot Systemsfor $3.9 billion. Perot System’s shares surged 66 percent in pre-market trading.

EXIT STRATEGY

The Fed is expected to keep its benchmark Fed Funds rate unchanged at 0.25 percent on Wednesday, and investors are looking for signs of how quickly it might remove its extraordinary programmes to revive lending and hiring.

While any signal that the Fed might start unwinding its loose monetary policy shows the central bank is acknowledging the recovery, it could be negative for risky assets as it could fan speculation of an interest rate hike.

The Fed has pledged to buy up to $1.45 trillion of mortgage-backed securities and debt issued by government sponsored Fannie Mae and Freddie Mac by end-2009.

Concerns about weak fuel demand pushed U.S. crude oil down 2.4 percent to $70.25 a barrel after Asia’s No.1 refiner Sinopec said that diesel China continued to lag economic recovery with fuel sales so far this year still below the rates seen a year ago.

The September bund future was steady, unable to take advantage of falling equities and investors grew concerned about the prospect of euro zone and U.S. debt supply.

The dollar <.DXY> rose 0.6 percent against a basket of major currencies, after hitting a one-year low last week, while the U.S. currency rose 1 percent to 92.21 yen .

“The yen may end up being the biggest winner against the dollar. It has yet to significantly overshoot against the dollar, unlike every other G10 currency. Real yields are moving in its favour and nominal yields versus the U.S. are negligible,” Deutsche Bank said in a note to clients.

“Dollar/yen will likely break below last year’s low of 87 and could even reach 80 over the next 3-6 months.”

Sterling fell to a five-month low of 90.79 pence per euro after the Bank of England said the British currency’s long-run sustainable exchange rate may have fallen due to an increased focus on Britain’s economic imbalances following the global credit crisis.

(Reuters Sept. 21)

Energy shares led the decline after the sharp drop in China’s main stock index increased worries about a potential rebound in global energy demand and oil slipped below $70 a barrel.

Shares of Chevron Corp tumbled 1.2 percent to $69.81 and Exxon Mobil dropped 0.8 percent to $69.56. The S&P Energy index <.GSPE> was down 1.8 percent.

The Shanghai Composite index <.SSEC> fell nearly 7 percent to a three-month low on fears that China’s government is trying to moderate economic growth and choke off some speculation in its stock market by tightening bank lending.

“China’s decline is just scaring people,” said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York.

“The world is partially relying on China’s economic growth to bring us out of this recession, and given the decline in China, there have to be concerns.”

Stocks in China have risen steadily, up 91 percent for the year at one point, despite the global recession. Commodity prices often got a boost from an increased demand from China.

The Dow Jones industrial average <.DJI> was down 68.17 points, or 0.71 percent, at 9,476.03. The Standard & Poor’s 500 Index <.SPX> fell 9.81 points, or 0.95 percent, to 1,019.12. The Nasdaq Composite Index <.IXIC> dropped 23.54 points, or 1.16 percent, to 2,005.23.

The Bank of New York Mellon index of leading Asian ADRs <.BKAS> fell 1.5 percent to 119.98 while U.S.-listed shares of China Finance Online sank 2.1 percent to $9.40.

Financial stocks, which enjoyed a strong rally last week, changed their course after a number of bearish notes from analysts.

Rochdale Securities analyst Richard Bove wrote that in the short term, “a reaction to the recent move up in the stocks may develop.”

In addition, Barron’s recommended profit-taking in Citigroup and said American International Group shares were overpriced after gaining more than 50 percent last week.

Citi was down 3.8 percent at $5.03 while AIG dropped 10.7 percent to $44.88.

The weakness in energy and financial stocks overshadowed the news of two large mergers on Monday.

Walt Disney Co agreed to buy Marvel Entertainment for $4 billion, while Baker Hughes Inc said it would buy BJ Services Co for $5.5 billion.

Marvel shares soared 25.4 percent to $48.46, while BJ Services’ stock was up 4.6 percent at $16.15.

Also on Monday, the Institute for Supply Management-Chicago’s business barometer rose to 50.0 in August. The level was higher than expected, and was on the dividing line between growth and contraction in the sector.

Aug 31 (Reuters)

The U.S. dollar gained, retracing the week’s losses, as the durables goods report for July eroded risk appetite and prompted investors to seek shelter in the safe-haven greenback.

Orders for long-lasting manufactured goods registered the biggest advance since July 2007, but excluding transportation goods, orders for durables were slightly below expectations.

Slippage among global stocks that climbed to 10-month highs this week boosted money flows into less risky assets, such as European government bonds, which also gained from some modest month-end buying, traders said.

Economic data in Europe showed further signs of recovery, as did a report showing U.S. new home sales jumped in July to their fastest pace in 10 months.

But a key measure of U.S. business demand — nondefense capital goods, excluding aircraft — fell, reminding investors that the U.S. economy still faces huge challenges as it tries to emerge from deep recession.

Investors in equity markets took profits on a recent run-up in prices, and key commodity prices, such as copper, fell as the U.S. data cast doubt over the speed of economic recovery.

For example, the MSCI all-country world index rose for six straight session through Tuesday, gaining 5.3 percent over the stretch. The index was down 0.5 percent on Wednesday, but still up about 4 percent in August.

“The market has come a long way, and the economics are still supportive,” said Georgina Taylor, an equity strategist at Legal & General Investment Management.

“We’re just seeing a little profit taking. Nothing has been derailed. Housing data is improving. The only area of concern is consumer spending.”

In Britain, retreating mining and oil stocks outweighed modest gains from defensive pharmaceuticals, while energy shares were the biggest drag on a leading European index.

The pan-European FTSEurofirst 300 <.FTEU3> index of top shares fell 0.5 percent to close at 973.92. The index is still up more than 50 percent from its lifetime low of March 9.

U.S. stocks seesawed after market sell-offs on Monday and Tuesday led investors to turn skittish.

“Given how extended we are, and relatively overbought, sentiment is going to drive the market’s direction much more than any economic news, at least in the short term,” said Michael James, senior trader at Wedbush Morgan in Los Angeles.

Shortly after 1 p.m., the Dow Jones industrial average <.DJI> was down 4.24 points, or 0.04 percent, at 9,535.05. The Standard & Poor’s 500 Index <.SPX> was down 1.74 points, or 0.17 percent, at 1,026.26. The Nasdaq Composite Index <.IXIC> was down 6.60 points, or 0.33 percent, at 2,017.63.

Oil pared early gains to drop to almost $71 a barrel, extending losses from the previous session, on the rise in U.S. stockpiles of crude.

The U.S. Energy Information Administration (EIA), the statistical arm of the Department of Energy, reported on Wednesday that crude stocks in the world’s largest energy consumer rose by 200,000 barrels last week.

U.S. crude for October was down $1.00 at $71.05 a barrel, after falling $2.32 on Tuesday.

Brent crude fell 61 cents to $71.21 a barrel after losing $2.44 the previous day.

U.S. government debt prices fell. The benchmark 10-year note was down 4/32 in price to yield 3.45 percent.

Gold eased as the dollar recovered losses against the euro.

U.S. gold futures for December delivery in New York were down $1.00 at $945 an ounce.

The ICE Futures’ dollar index <.DXY> rose 0.6 percent to 78.723. The euro fell about 0.4 percent to $1.4235 .

Japan’s Nikkei share average closed up 1.4 percent <.N225> to a fresh 10-month high, while the MSCI index of Asia Pacific stocks traded outside Japan rose 0.3 percent.

Aug 26 (Reuters)

It all started back in 1991, when J. Aron & Co., Goldman’s commodities-trading division, recommended that a large institutional client invest about $100 million in commodities.  The vehicle “du-jour” was Goldman’s own investment vehicle, the Goldman Sachs Commodity Index (now the S&P GSCI Commodity Index).

The GSCI is a 24-commodity dollar-weighted index, comprised of 70% energy (oil and natural gas), 8% industrial metals (aluminum, copper, lead, nickel and zinc), 3% precious metals (gold and silver), 14% agriculture (wheat, corn, soybeans, cotton, sugar, coffee and cocoa) and 4% livestock (cattle and hogs).

Goldman was to take the other side of the bet, meaning that should the index rise, Goldman would have to pay equivalent returns to the investor.  In order to hedge, J. Aron needed to institute similar positions in the futures markets for those commodities.

But the plan had one wrinkle in it.  At the time, the U.S. Commodity Futures Trading Commission (CFTC) – the agency that regulated the commodities sector – placed position limits on certain agricultural commodities, like wheat, corn and soybeans.  Other commodities weren’t subject to these same limits.  Yet it was necessary to hedge all the commodities concerned in order for this investment arrangement to work.

So with a large chunk of new business at stake, J. Aron asked the CFTC to grant it an exemption.  Goldman contended that it was not a speculator, but was instead a true “hedger.”

The upshot: In October 1991, J. Aron was granted the sought-after exemption.

Inspired by J. Aron’s success, other members of the commodities-trading oligopoly followed suit, and soon had similar exemptions in hand.

The Global Commodities Boom

In the 18 years that followed the exemption grants, the commodities sector was all in all a pretty orderly place. Between 1990 and 2002, in fact, commodities prices essentially traded sideways.

Unfortunately, that stability wasn’t to last. Like a greyhound that sets out after the hare after having been penned up for too long a stretch, commodity prices started to surge – and ended up doubling over the next six years, albeit in a relatively orderly fashion.

Finally, last year, a market that had been simmering for far too long finally came to a full-fledge boil – and last summer boiled over. Food prices soared, intensifying inflationary fears here in the United States while prompting the leader of the United Nation’s World Food Programme to warn that a “silent tsunami” of hunger was threatening to span the globe.

It seems, though, that the actual boiling point was reached last summer when oil went into a near-vertical climb, surging 63% in just five months, and hitting an all-time high of $147 a barrel last July. Given that oil is in many ways the most relevant commodity to the general public (think fuel for transportation and heating), the new record price touched off a media feeding and prompted projections that crude oil could be headed for $500 a barrel.

As commodity prices were shooting skyward, however, U.S. stock prices saw their already-steep descent turn into a nearly vertical plunge – thank to a worsening of the deepest financial crisis since the Great Depression.

As a result of that crisis, the world’s largest banks, insurance firms and brokerages have been forced to take nearly $1.5 trillion in writedowns, Bloomberg News reported. Because of that and some other related problems, U.S. Treasury Secretary Timothy F. Geithner is pressing Congress to somehow restrain the $600 trillion worldwide derivatives market.

And that has set the stage for a showdown that pits the regulators against the speculators.

What Gensler Wants …

As the spotlight has increasingly been focused on Goldman in the last couple of years for its trading prowess, it’s been suggested on many occasions that the investment bank must be benefiting from some sort of a “special” relationship with the federal government.

The suggestion is understandable on several levels.

Only a month ago, for instance, when Goldman reported its financial results for the second quarter, the investment bank’s trading results helped it record all-time-record profits of $3.44 billion – a good 50% above what experts had been forecasting for what had been expected to be a “blowout” quarter for Goldman.

The stunning profit results once again reminded observers that Goldman Sachs alumnae seem to have a “knack” for landing in positions of high influence.
Former U.S. Treasury Secretary Henry M. “Hank” Paulson Jr., who held that position under former U.S. President George W. Bush – where he was widely viewed as the mastermind behind many of the bank bailout programs conceived last fall – was once the chairman and CEO of Goldman Sachs.

While he was serving as Treasury secretary, Paulson’s office calendar says he called Goldman Sachs Chairman Lloyd C. Blankfein roughly 24 times the week that the federal government opted to bailout out busted insurance giant American International Group Inc. (NYSE: AIG). Remember, had AIG been allowed to collapse, Goldman would have been left holding the biggest of all bags, because of the oversized bets they’d made on AIG’s financial insurance.  Paulson, it seems, would have none of that.

The “Six Degrees of Goldman Sachs” doesn’t end there, either, as the many connections show. Geithner, the current Treasury secretary, was mentored by Goldman alumnus John Thain [the last chairman and CEO of Merrill Lynch before it merged with Bank of America Corp. (NYSE: BAC)].  Plus, Geithner just chose Mark Patterson, formerly a lobbyist for Goldman, as his top aide.

And don’t forget about Gary Gensler, the newly installed head of the CFTC whose resume includes a 20-year stint at Goldman Sachs. But interestingly – perhaps even ironically – Gensler’s new job pits him directly against Goldman, as the CFTC looks to rein in what some consider to excessive speculation.

During hearings held in July and August, attended by representatives from both Goldman Sachs and JPMorgan Chase & Co. (NYSE: JPM), Gensler commented that the CFTC “must seriously consider setting strict position limits in the energy market.” He also indicated that his staff had been instructed to determine “every authority available to the agency” to guard the interests of the public as well as the markets.

What Goldman Should Get

In its defense, Goldman has argued that setting position limits on trading commodities is likely to prove harmful, as restricting access could affect liquidity.  (Highly liquid markets, or “deep” markets with large volume, are considered to be more fairly priced).

Steven Strongin, a managing director at Goldman, recently told a Senate hearing committee that “attempts to regulate volatility have rarely – if ever – succeeded.  Yet they often have unintended and significant consequences.”

Although commodities trading accounts for a considerable part of Goldman’s revenue – some estimates place it at about 8% to 9% – making it a target for would-be reformers, Strongin’s cautionary words should serve as a warning to back off for one simple reason.

He’s right.

Because of the exemption granted to the trading houses, institutional investors have been better able to provide commodity diversification to their portfolios, thereby minimizing some asset and inflation risks.
United States Oil Fund LP (NYSE: USO) and the United States Natural Gas Fund LP (NYSE: UNG) – two ETFs that are among the largest such products in the world.

Though very popular, such exchange-traded funds (ETFs) as the United States Oil Fund LP (NYSE: USO) and the United States Natural Gas Fund LP (NYSE: UNG) could also be affected.  They currently boast large volumes in the 12 million and 40 million units traded/day, respectively. That means that a limitation on futures positions – let alone an outright prohibition – would work against the best interests of individual investors.

Even producers and refiners of petroleum products could end up being squeezed, as well. These oil-sector players sometimes hedge risks by calling on the large commodities traders who can provide them with custom trades on demand.  The dealer then turns around and wisely hedges its own risk.  Now, doubt is being cast on the ability to perform these transactions.
So we know that Goldman, along with JPMorgan Chase) and others – as the largest owners of derivatives – have a lot to defend.
But there’s actually an even-bigger-picture view that argues against regulation – of any kind.

Who Needs Rules?

Government oversight, intervention, and insurance schemes usually lead to problems – often really big problems.

A simple example should be enough to make my point.

Just think back to what happened last year to mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).  It doesn’t take an accounting degree to figure out that, by having their loans government guaranteed, management had no incentive to follow cautious lending practices.

After all, why should they?  When a base salary is certain, a bonus is tied to sales or growth, and there are no consequences for bad results, why not take on more risk and just shoot for the moon?  If you hit it out of the park, your bonus swells.  If you strike out – even so badly that you even make “Mighty Casey” look like Henry Aaron – and you lose really badly and your company loses big, even to the point of bankruptcy or outright collapse, you still get your base salary.

Where’s the incentive to manage your risks?

In the case of a bank, there’s no incentive to be careful with depositor assets when the Federal Deposit Insurance Corp. (FDIC) is your bottomless backstop.

Clearly, the government does not always know better.

And that brings us back to Goldman Sachs.

Goldman Sachs: Unplugged, Unfettered, Unregulated

In the debate about regulating the commodities markets, I come down on the side of Goldman, reasoning that a free market – left unfettered – knows best, since the forces of supply and demand will ultimately price things fairly.

Inside an economic system as highly developed as that of the United States, everything operates at a level of complexity that no single person – let alone a government bureaucracy – can operate, or even fine tune. And as soon as anyone begins to tinker with it, there are always going to be unintended consequences.  Which leads us back to the question of regulation.

According to Prof. Kent Moors, a noted global oil consultant, only a small portion of a commodity’s price, at any given point in time, can be attributed to speculators.  He believes that speculators they are necessary to provide liquidity and that, in the end, the benefits speculators provide cancel out any of the negatives often ascribed to their marketplace activities.

If regulations with real “teeth” – in this case, position limits on energy futures – are actually put in place, U.S. financial leaders will end up playing the economic equivalent of Whac-A-Mole – an unwinnable game, and a dangerous one, at that.

While the final result is difficult – if not impossible – to picture, here’s my best guess: The financially lucrative, economically prestigious and strategically important commodities-trading business won’t fold up and disappear – it will just move to another country, where it’s better treated, and even nurtured.
Perhaps it will end up in Asia, as has been the case with so many other important businesses during the past couple of decades.  And that, once again, will end up costing America jobs – these jobs high-paying and prestigious – at the worst possible juncture.

According to commodities guru Jim Rogers – who is frequently quoted here in Money Morning – “the three commodity exchanges in China are booming.  Dalian trades more soybean contracts than Chicago does already, and that’s with a blocked currency [and] a closed market.  Can you imagine what’s going to happen if and when they open that market up to foreigners?  It’s going to explode.”

So as you think about “big bad trading firms” such as Goldman Sachs, and commodities speculators, remember the necessary role they play.  And realize that restrictive regulations will end up being bad for consumers, investors, and the same free markets we should be defending.

Source: How Over-Regulating Goldman Sachs Will Lead to Higher Oil and Commodity Prices

Coca-Cola beat earnings, increased guidance, increased dividends and reinstated its stock buyback program.  The company plans to repurchase $1 billion in shares of stock in the second half of 2009.  What more do we need?  The answer is: Consistent performance.

As I tracked the developments in Coca Cola and their global markets, I ascertained that my original view remains unchanged and Coca Cola should keep growing profits consistently, which should keep propelling its stock up.

Remember, on March 9, a few of weeks after our Coca Cola recommendation, I called the U.S. market turn by recommending a pro-cyclical energy play with Diamond Offshore Drilling Co. (NYSE: DO).  That call coincided with the turn on Diamond Offshore stock as well, which has since soared about 67%.

Earlier, on October 27, I had called for the turn on iShares MSCI Brazil Index (NYSE: EWZ), which has since soared more than 90%.

The point is that emerging markets, as was my thesis, are going to turn around much faster and come back much stronger than developed economies.

Prudent emerging economies – like Brazil and Chile – having enjoyed a few years of exponential growth in commodity prices did not over-extended themselves. Instead, they captured a sizable portion of those huge price increases and turned them into huge national savings, improving their fiscal positions.  They kept their banks clean and disciplined and became net creditors to the world.

So, while the advanced economies are saddled with debt, many emerging economies are the exact opposite.  Their fiscal positions are strong; their social security systems are not in peril, and their population growth means strong economic growth.

So, my initial thesis was predicated primarily on the fact that strong growth in emerging markets would lead to success for major international players.

While it’s true that Coca-Cola’s soft drinks are consumer staples, which are very resilient in economic downturns, the company’s biggest advantage is that a full 75% of its income is generated abroad.

Additionally, Coca-Cola is the most widely recognized brand name in the world.  With a distribution network that covers more than 200 countries and a 50% of the global market for carbonated drinks, Coca-Cola is the poster-child of a multinational.

What’s more, having kept its rival PepsiCo Inc. (NYSE: PEP) at bay by beating them in the market, their price wars are not an issue any more.  This is crucial because pricing power has returned.

The strong U.S. dollar shaved 14% off of operating income during the quarter, but this is a temporary phenomenon, since the dollar is likely to remain week in the months to come.

Meanwhile, Coca-Cola continues to excel in emerging markets, just as we anticipated.  While overall volume growth was 4%, up from 2% in the first quarter, emerging markets took the prize: China was up 14%, India 33% and Brazil up 5%.

India, for example, has a high birth rate and 1 billion people with an average age of 25 years, and going lower.  This is a very receptive crowd for carbonated, sugary drinks, especially as their income soars.

Hence, with the strong recovery in China, India, Brazil and Russia, and many more emerging markets, plus the renewed weakness in the U.S. dollar, Coca-Cola should continue to perform in the second half and beyond.

Coca-Cola stock closed Friday up 17 cents, or 0.34%, at $49.84 a share.

Recommendation: Buy The Coca-Cola Co. (NYSE: KO) at market(**).

(**)  Special Note of Disclosure: Horacio Marquez holds no interest inThe Coca-Cola Co. (NYSE: KO).

Source: Buy, Sell or Hold: The Coca-Cola Company (NYSE: KO) Continues to Deliver Knockout Profits

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.

Markets briefly cut losses after data showed the service sector contracted at a slower pace in June, blunting some pessimism over the economy after a last week’s much worse-than-expected jobs report.

“Overall the data looks like a positive, although it may not be enough in the near term to overcome last week’s disappointing jobs report,” said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

Oil touched a five-week low and fell to around $64 a barrel, sending Exxon Mobil Corp down 2.1 percent at $67.05, and Chevron Corp fell 2.1 percent to $63.09. The two companies were the biggest weights on the Dow Jones industrial average.

Although the weaker oil prices bode well for recession-weary consumers, strong commodity prices have been viewed as a signal the global economy is stabilizing.

The Dow Jones industrial average <.DJI> fell 63.86 points, or 0.77 percent, to 8,216.88. The Standard & Poor’s 500 Index <.SPX> lost 8.45 points, or 0.94 percent, to 887.97. The Nasdaq Composite Index <.IXIC> gave up 24.56 points, or 1.37 percent, at 1,771.96.

NEW YORK, July 6 (Reuters)

U.S. crude pricesraced above $71 a barrel, extending a 2 percent gain the day before, after rebel attacks on Nigerian oil facilities disrupted supply. Firmer oil prices supported metal prices, with gold edging above $940 to a one-week high.

Global equities were also in demand, with the MSCI world equity index advancing 0.9 percent and the pan-European FTSEurofirst 300 up 0.2 percent.

The MSCI world equity index is up more than 21 percent this quarter, on track for the biggest quarterly gain in its 20-year history.

“It is clear that the rebound in global equity markets has lost some steam,” Barclays Wealth said in a note.

“It appears to us that stocks are now broadly fairly valued, having erased their previous undervaluation faster than expected. Further share price gains may well relate more closely to the rate of underlying profit growth and the economic cycle.”

U.S. stock index futures were down between 0.2 and 0.3 percent, indicating a softer open on Wall Street.

Tokyo’s Nikkei average added 0.8 percent, shrugging off a record 1.1 percent fall in consumer prices in the year to May — another sign falling demand is pushing the economy deep into its second spell of deflation this decade.

“Most people will agree now that we won’t revisit the low point that we have seen this year any time soon,” said Luc Van Hecka, chief economist at KBC Securities.

“But there are still some problems to be resolved in the financial sector and as long as that is not out of the way in a convincing manner, we could still have intermediate corrections.”

UBS , the world’s largest wealth manager, said it planned to raise about 3.8 billion Swiss francs ($3.46 billion) by selling stock and expected to post a second-quarter net loss. The likelihood of a long road to global economic recovery remained a challenge to companies. Boeing Co , the world’s No. 2 plane-maker, suffered another heavy blow to its Dreamliner project when a major customer, Australia’s Qantas Airways , scrapped and deferred orders for 30 new planes.

DOLLAR SLIPS

The dollar fell against a basket of currencies, extending losses made the previous day after the U.S. Federal Reserve gave no hint of an imminent exit from low interest rates and other bold measures to stoke growth.

The euro was up 0.6 percent against the dollar at $1.4085, while the greenback fell 0.5 percent to the yen.

“Risk sentiment is back in full force,” said Christian Lawrence, currency strategist at RBC Capital Markets. “The dollar is being sold across the board.”

Yields on the benchmark 10-year U.S. Treasury added 2 basis points, while the 10-year euro zone benchmarkbund yield was unchanged at 3.428 percent.

In one measure of how investor sentiment has improved, the CBOE Volatility Index, a gauge of investor anxiety, on Thursday closed at its lowest level since just before Lehman Brothers filed for bankruptcy protection last September.

LONDON, June 26 (Reuters)