Caterpillar Inc , down 2.5 percent, was among the top drags after the maker of bulldozers, excavators and other products said worldwide August sales of machinery to dealerships fell.

Crude oil futures shed 3.5 percent to $69.48 a barrel and spot gold prices dropped below $1,000 an ounce. The S&P materials <.GSPM> index fell nearly 2 percent.

Shares of Exxon Mobil Corp declined 1 percent to $69.26, while gold miner Newmont Mining Corp shed 3.1 percent to $43.55.

The Dow Jones industrial average <.DJI> lost 55.85 points, or 0.57 percent, to 9,764.35. The Standard & Poor’s 500 Index <.SPX> declined 6.64 points, or 0.62 percent, to 1,061.66. The Nasdaq Composite Index <.IXIC> dipped 6.77 points, or 0.32 percent, to 2,126.09.

The Nasdaq’s losses were curbed by a rise in shares of biotechnology companies after a brokerage raised its rating on Celgene Corp , up 3.6 percent at $54.46.

Through Friday, the benchmark S&P 500 <.SPX> had risen 58 percent since hitting a 12-year closing low in early March, partly because of strong second-quarter earnings and optimism that an economic recovery is gaining traction.

That optimism is beginning to come under some strain, however, as investors seek more clarity about the 2010 profit outlook and await hints of how strong results will be for the rest of this year.

Computer maker Dell Inc announced a $3.9 billion proposed takeover of Perot Systems Corp . Perot Systems shares jumped 65.4 percent to $29.64, while Dell shares dipped 3.2 percent to $16.15.

Any benefit from that announcement, however, was tempered by the rising U.S. dollar. The dollar index, which measures the greenback against a basket of major currencies, rose 0.7 percent.

Reports that China intends to curb excessive investment in a range of industries “hurts the strong global growth outlook and is one of the things moving the dollar today,” said Chuck Butler, president of Everbank World Markets in St. Louis.

Investors tend to buy the dollar and yen as safe havens or unwind trades in higher-yielding assets financed with the U.S. and Japanese currencies when recovery optimism fades.

Two reports offered some encouragement about the health of the U.S. economy. A rise of 9.6 percent in new homes sales in July was the fastest pace in nearly a year.

U.S. durable goods orders also rose in July, but a key measure of business demand — non-defense capital goods, excluding aircraft — fell, reminding investors the economy still faces huge challenges.

Analysts also said traders were using the mixed signals global growth signals to lock in profits booked earlier this week as foreign currencies rose against the dollar.

The euro was last down 0.5 percent at $1.4230 and 0.4 percent at 134.12 yen .

The dollar edged up 0.1 percent to 94.19 yen . Sterling fell to a six-week low against the dollar and was last off 0.8 percent to $1.6215 . The euro hit a 2-1/2-month high against the pound above 88 pence .

High-yielding and commodity-linked currencies such as the Australian dollar also fell after European equities snapped four straight sessions of gains led by commodity stocks.

Some analysts said the recent trend that’s seen the dollar weaken on good economic news may be starting to fade.

“The new home sales data was good, there’s no doubt about it. The question is, are signs that the U.S. economy is starting to bottom good for the U.S. dollar or for other currencies,” said David Watt, senior strategist at RBC Capital Markets in Toronto.

But he also said it will take more evidence that a U.S. recovery is on track to answer this question.

Earlier in the session, the euro got a brief boost after the Munich-based Ifo think-tank’s business climate index rose in July.

Andrew Wilkinson, market strategist at Interactive Brokers in Greenwich, Connecticut, argued that dollar weakness may be a “longer-run certainty,” but it does not seem to fit in the current environment when a global recovery remains shaky.

“We would not be surprised to see more investors throw in the towel on the euro in favor of a dollar that may yet push back below $1.40 before August is through,” he added.

Aug 26 (Reuters)

This from The Rude Awakening:

We have it comparatively easy in this, the crisis of 2008. We may have to make do with fewer Swatch watches and Coach handbags. We may have to pass on the latest iPod and make do with last year’s winter coat. These hardships are not important, except for people selling those goods. But the credit crisis is also affecting the world’s ability to produce one thing important to everyone: food.

It’s harder for farmers to get credit for next season’s crop, especially farmers overseas. They need fertilizer, seed, fuel and more. And most farmers need to borrow money to obtain these essential items. No credit; no crops.

Therefore, the global credit squeeze might reduce plantings of key grains, even as world inventories of these grains hover near historic lows. In Russia, for example, cash-starved banks have cut off funding for the industry. The head of the Russian Grain Union says, “Many farmers probably won’t be able to borrow money for the spring sowing.” This is important because Russia is no lightweight in the grain division. It produces 9% of the world’s wheat, for instance. No surprise that the United Nations considers Russia a critical component of the global food supply.

Ironically, Russia just had its best harvest ever. And still, global grain inventories remain low. Bloomberg reports that global inventories of corn, wheat and soybeans are the second lowest they’ve ever been since 1974.

A number of countries already fear what might happen next year. The Washington Post Foreign Service in Shanghai reports that China adopted a number of measures to protect itself from the worsening food crisis: “Among the most extreme measures [China] took was to impose new export taxes to keep critical supplies such as grains and fertilizers from leaving the country.”

These taxes are extremely high, on the order of 150%-185%. China worries that richer countries may outbid its own farmers for supplies and weaken China’s own food supply. One Chinese fertilizer company, which produces 150,000 tons per year, already said that the new taxes mean exporting is no longer profitable.
China was the biggest exporter of certain types of fertilizer. No longer. That’s a lot of supply off the market.

Fertilizers are absolutely critical in maintaining (and improving) crop yields. Without them, we’d produce far less per acre. As a result, in parts of Africa where people depend on Chinese fertilizers, the food supply problem is now more acute. China’s export taxes and bans follow those of other grain producers, including the Ukraine, India, Pakistan and Argentina.

Amazingly, despite these various maneuvers around the world to prevent grain exports, the prices for wheat, corn and soybeans are all half of their mid-summer highs. It seems the market believes a global recession will dampen demand. Maybe so, or maybe the market doesn’t know anything. The severe commodity selloff during the last few weeks might be saying a lot more about the desperation of hedge fund managers to raise cash than about the prospect that grain demand will fall – in which case, we could see another surge in prices next year.

Demand for grains is still very strong. In China, each wage-earner devotes about 40 cents of every dollar earned to buying food. In India, that number is a staggering 70 cents out of every dollar earned. In other words, the food budget in these countries is hardly a discretionary item. It will remain constant, or even rise, no matter what the global economy does.

Meanwhile, the people in these countries who have a couple of extra rupees to toss around are upping their consumption of meats, which increases the per capita demand for grains. As PotashCorp chief William Doyle recently pointed out: “The average daily protein intake in China has increased by 40% over a 20-year period, with the greatest percentage of that increase coming from meat consumption.” You can see it in the size of the people themselves: The average 6-year-old Chinese boy is 12 pounds heavier and 2 inches taller than 30 years ago. These people aren’t going back to the ways thing were. This is a long-term story, and these trends should continue.

Yet even if demand growth for grains slows, it’s not likely that those low global grain inventories will improve. Even if grain demand fell to 2% per year, we’d still need record production to keep grain inventories from falling further.

For all these reasons, I think the future is still bright for agriculture and all that it entails. I think the fertilizer companies look cheap again. We owned Agrium (NYSE:AGU) for nearly three years, and it more than tripled our money. The stock is now a good one-third below what we bought it for initially.
PotashCorp (NYSE:POT) and Mosaic (NYSE:MOS) are other names I’m looking at hard right now – both have been crushed in this troubled market.

Beyond that, irrigation companies have come way down, even after posting outstanding results. Lindsay (NYSE:LNN) and Valmont (NYSE: VMI) are two irrigation equipment makers, for example, both coming off great quarterly results.

Source: Meal Ticket