Nobel Prize winner: dollar reserve system is falling apart The Daily Crux

The calm before the financial storm The Daily Reckoning

How China is stealing our future Energy Tribune

The lie about high frequency trading liquidity The Market Ticker

Federal Reserve loses big lawsuit Zero Hedge

Insight: Do not fear falling bond prices FT

How big Swiss bank is protecting its clients against inflation Bloomberg

The prices are so cheap they’re stupid DailyWealth

Government claims that Goldman has stock manipulation software The American Prospect

There are a lot of uncertainties permeating the market right now, not the least of which is healthcare reform. Will that reform entail a public option that could add $1 trillion to the deficit?  How is reform going to be financed?  And is it going to mean higher costs for employers across the board, or just the healthcare insurers?

Investing is made infinitely more difficult when 18% of U.S. gross domestic product (GDP) is hanging in the balance.

And you still have to consider:

• That unemployment is likely to keep rising, perhaps over 10%.
• That the U.S. Federal Reserve’s policy of quantitative easing is slowing down.
• That there is almost certainly a second wave of home foreclosures on top of the current commercial real estate epidemic.
• And that retail sales are still a long way from recovery.

There is also reason to believe that the U.S. dollar will continue to be weak, though it probably won’t sell off precipitously.

The U.S. dollar has weekend against the Euro lately, having fallen 0.8% Friday.  Technically speaking the chart shows a traditional “cup and handle” formation that could lead to an acceleration of the dollar’s downward trend.  Gold prices, up about 13% Friday, confirm this trend and could soon break through the $1000/oz resistance.

Fundamentally, if the economy – encumbered by high unemployment and a relapse of the housing market – does not pick up the dollar could be further imperiled.

Weakness in the dollar will also be affected by the Fed’s withdrawal of liquidity, which is likely to proceed at a gradual pace.

Finally, diversification away from the dollar among the world’s central banks is taking place, albeit at a slower pace than many analysts have suggested, and that too, is weakening the dollar.

Let’s concede that there is no currency that could supplant the dollar as the world’s major reserve currency. So, it’s unlikely that the world’s central banks will simply abandon the dollar anytime soon. However, we must also acknowledge that a reduction in the weightings of the U.S. dollar within central bank reserves is already underway.

An Aug. 14 article by BNP Paribas currency strategist Ian Stannard in Euromoney recently described this gradual shift in currency reserves.  The article noted that only 62.5% of global currency reserves are in U.S. dollars, down from about 66% in 2005.

So I do not anticipate a sudden shift in central bank reserves, but rather a continuation of the measured restructuring we’ve seen so far. Thus, the slow weakening trend in the U.S. dollar is likely to continue.

So, in this very uncertain investment scenario, I prefer to go for more secure returns in bonds.  And we can achieve great diversification at a cheap cost with the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD).

For starters, its weighted average coupon of 6.26% offers a current yield slightly north of 6% at today’s prices.  Investors are assuming interest rate risk, which means that if interest rates climb, the value of the bond has to come down.  But in the short term, there is no immediate threat of inflation.

Looking at the major holdings of the fund – which has no single position that accounts for more than 1.26% of its total holdings – I see some names that have demonstrated continued stability and others that have shown recent signs of improvement, such as American Express Co. (NYSE: AXP).  So I do not expect any major credit spread hiccup here.  I certainly do not see any hiccup that a 6.26% coupon would not compensate for.

For an additional hedge against dollar weakness, I suggest you revisit my June 8 recommendation of the iShares SPDR Gold Trust ETF (NYSE: GLD). You may also consider buying a bit of the PowerShares DB US Dollar Index Bearish (NYSE: UDN) fund.  Do not go overboard. Err on being light, rather than heavy on hedging, since timing currency moves is very difficult.

Recommendation: buy iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD) at market.  Consider hedging part of the US dollar risk by buying the iShares SPDR Gold Trust ETF (NYSE: GLD) and PowerShares DB US Dollar Index Bearish (NYSE: UDN). Both funds should account for a fraction of your position.  Have a 5% stop loss on UDN (**).

Source: Buy, Sell or Hold: The iShares iBoxx $ Investment Grade Corporate Bond Fund

Let’s make some trades this morning. We asked Rick Rule, a living legend here in Vancouver, what’s the next bubble market?
“The Canadian market does not care about small oil and gas companies,” he told us yesterday. “Which means that small Canadian O&G companies are selling for 50-60% of net asset value. They are very, very, very cheap. They are unloved, with no finance options and no trading liquidity… and I love that. This value is free. There will be much money made in small-cap Canadian energy.

“But that will pale in comparison to alternative energy. This is what investors need to pay attention to. There is money to be made in solar, wind, even something as stupid as biofuels. Alt energy is now politically and socially correct. It has the full backing of the U.S. government.

“I would encourage you to look at small hydro and geothermal. The others have problems. Solar has one big problem — night. Wind doesn’t always blow either, and people don’t like to live places where the wind blows all the time. You might make money in solar and wind, because government likes it, but I don’t have the courage to buy a biz that’s success is determined by the Governator.

“Geothermal is always there. It is spectacular. So is hydro. In the short, medium and long term, you will all turn out to be happy. They are the uranium of this generation. I think we are on the verge of an incredible mania in alt energy.”

Which specific geo and hydro businesses? Rick has named company after company after company to our attendees at this year’s Investment Symposium. We’ve recorded nearly every second of his presentations and recommendations… you can hear them too with the Symposium CD/MP3 set.
“The world’s biggest energy player has thrown $600 million into a research partnership to study algae oil’s potential,” reports Greg Guenthner in a similar vein. Not coincidentally, we’ve heard several Symposium speakers mention this exact transaction. “Exxon Mobil and human genome researcher Craig Venter have teamed up in an attempt to make algae oil a viable fuel source.

“‘There has been so much hype and hope about the potential for algae that this announcement should act as a reality check for everyone,’ Venter told the Financial Times.

“Of course, this new partnership does not mean we will be filling our tanks with pond scum biodiesel just yet. Developers will still need to tackle genetic engineering and oil extraction issues…

”But Exxon Mobil’s leap into the algae oil market effectively legitimizes the industry.”

Want Greg’s microcap algae play? Check it out here, along with the rest of his Bulletin Board Elite portfolio.
Of course, alt energy is dead to Wall Street (all the more reason to buy). For the last two weeks, surprise blue chip earnings anouncements have led the market up, and today is no exception. Better-than-expected earnings from AT&T and 3M are in the spotlight today, and the S&P is up 2% as we write.
Hell, even The New York Times is making money again.The Old Gray Lady earned almost $40 million in the second quarter, the paper reported this morning. The NYT pulled it off by jettisoning staff and cutting opperating costs by 20%… and there was this little “favorable tax adjustment” that boosted earnings by $37 million.
Exisiting home sales rose for the third straight month in June, the National Association of Realtors says today, adding to the buying frenzy. Sales of previously owned homes inched up 3.6%.

“We have finally bottomed out,” PNC’s chief economist told Bloomberg. Heh, we’ve got a fine bridge to sell that fellow…

Best we can tell, the market-clearing process is still chugging along. Of all the sales in June, 31% were distressed. Prices are still plunging — the median price is down 15% from the same time last year, to $181,000. There is a still a historically high 9.4-month supply of exisiting homes on the market. Is that what a bottom looks like to you?
Not to mention, the job market still stinks. This morning, the government said there were 554,000 initial jobless claims last week. That’s off crisis highs of over 600,000, but obviously not by much. Continuing claims rang in around 6.2 million.
“Chicken sales will probably lead unemployment numbers as an economic indicator out of the recession,”writes our resource man Alan Knuckman, just back from annual National Chicken Council conference (sounds like a real hoot!). “Chicken growth has slowed with the toughening economic conditions, but still is three times that of beef. Restaurants and home consumers have seen a shift in protein demand and replacement with chicken or other chicken parts.

“These guys do volume because people love chicken to the tune of over 700 million pounds a week, with per capita consumption now at 86 pounds per year. In fact, consumption has quadrupled in the last 40 years and doubled in the last 20. BSBM — boneless, skinless breast meat — has paved the way for growth, but now dark meat is making a move as consumers cut food costs.

“Now, all this chicken talk is fun and interesting, but how does this make us money? BRIC consumers (Brazil, Russia, India and China) all have expanding middle-class populations that are now in the position to buy better food. Not fancy cars or electronics, but simply better protein to feed themselves and their families.

“Here in the United States, there is a 0.95 correlation between chicken consumption and income and personal consumption expenditures. More money to spend means more chicken bought. As others have their incomes rise worldwide, those citizens can add more meat to their diets.

“This growth will put tremendous upside pressure on the base inputs: commodities, which are used to feed, process and transport the protein of chicken, beef, pork and even farmed fish. Protein is what’s for dinner, and the U.S. is serving the rest of the world.

“The income growth in underdeveloped countries will continue to put our farmers in the leadership position to deliver. Plus, all along the way, we’ll be ready to profit here at Resource Trader Alert.”

If you want to trade this trend, you’ve got to check out Alan’s latest report on his “no-brainier” trading strategy.
The 2011 state budget crisis has already begun. You likely read the headlines last week, that state governments around the country were able to close $142 billion worth of budget gaps for the 2010 fiscal year. Well, according to the latest from the Center for Budget Policy and Priorites, 12 states and D.C. are already facing new budget gaps totalling $23 billion.
That’s not great for the ol’ U.S. dollar, nor is today’s stock rally. The dollar index is down to a fresh six-week low of 78.5.
What would be the best way to get money and yourself out of the country if there is a sudden collapse in the U.S. dollar? That question was posed last night to our Whiskey Bar panel — one of the highlights of the Symposium thus far. We managed to round up our most opinionated, venom-spitting editors for a panel discussion — Doug Casey, Chris Mayer, Eric Fry, Byron King, James Howard Kunstler, Gary Gibson, Patrick Cox and Barry Ritholtz. There’s no way to paraphrase a group like that, so here’s a snippet:

Casey: “It is still possible to send all the money you want out of the country… very possible to buy real estate. I bet in two years, it will be a problem to do both. I think the fuse is getting really short. Once you send it out of the country, buy something like real estate. My two favorites are Argentina and Thailand. I think Argentina is about to change radically, like New Zealand in the ’80s.”

King: “You need to start wrapping your brain around this. When I was in South Africa, I was told by this old Dutchman — and now I really don’t mean to offend anyone, this is just what he said — when the Jews leave, it’s time to leave. When the Portuguese leave, it’s too late.”

Ritholtz: “Keep your boat fully fueled and get ready to sail… pretty safe out there. I don’t think it’ll be an ongoing firestorm. You’ll just need a place to lay out for a week while the worst of it passes.”

Kunstler: “It’s important for those in business leadership to start thinking about defending your country and doing things that make this culture better. We have no time to be crybabies. Just too much to do to get this country back together again.” (Spontaneous applause.)

Gibson: “I’m looking to get work on Bill Bonner’s ranch.”

The event likely peaked when Doug Casey called everyone in the room “whipped dogs that roll over and wet themselves” whenever they’re scolded. Evidently, he was upset there was no gunpowder or tobacco allowed at an event sponsored by Whiskey & Gunpowder. Heh. For more from Doug, be sure to check out his presentation in the Symposium CD/MP3 set.
With that in mind, one last note — a genuine tragedy: The Brits are taxing one of their few national treasures into extinction:

As if the legnedary British watering hole didn’t have enough head winds — smoking ban, the recession, etc. — the Economist reports that recent tax hikes on booze are causing over 50 pubs to close every week. Taxes on a pint were around 8 pence 30 years ago… they are 38 pence today. Maybe it’s just the reminants of last night’s Whiskey Bar still in our bloodstream, but what a shame!
“Your reader who was looking at Florida real estate hit the nail on the head,” writes another reader. “My wife and I also went last year to Florida to look at ‘super’ deals and foreclosures and short sales. We concentrated in the Palm Coast area and learned that most banks had stopped foreclosing and were doing all things possible to help short sellers (except take less than what was owed by any great degree). The banks realized that if they foreclosed, THEY would now have to pay the taxes, upkeep, etc. on the properties, and, even in the case of condos, maintenance fees or dues!

“Most of the properties we looked at were in the $300,000-600,000 price range, and, as a result, had taxes of $6,000-7,000 and maintenance fees of nearly equal cost! Ouch! We too have decided to rent — unless you live there at least six months out of the year, it doesn’t pay to ‘own,’ and even then it may not.”

Source:  The Next Bubble, The Chicken Indicator, Surviving the Worst Case Scenario and More!

1. Set Aside Emergency Cash: Make sure you have six months worth of emergency cash that is liquid and accessible. Put it in a savings account where you can easily get to it if you need to. Yield is not as important as liquidity.

2. Build Cash Reserves: Everything from cars to houses has plummeted in value – and prices are likely to get even cheaper over the next six months. When you find that dream home, you want to be ready to pounce, so try to keep a stash of cash reserves on hand for big-ticket items.

3. Keep an Investment Watchlist: If you’ve got potential stock purchases in mind, be sure to keep a list of them on your radar. Stocks are also likely to get cheaper before the end of the year. I’ve said this for a while now, but once the market corrects some more, we may be looking at the investment opportunity of a lifetime, so you’ll want to ensure that your capital is ready for action when the time comes. Look for great ideas now.

4. Get Stock Advice: If you need a hand generating investment ideas and tips on where to invest your money in this tough climate, get some professional advice and let the experts do the work for you.

Another way people are beating this sour economy is by turning their hobbies into income generators. Some people are selling handmade scarves, others offloading their stamp collections.

Our friends at The Sovereign Society have discovered a new hobby that allows you to passively earn up to $70,000 a year. You could pick up this hobby in a matter of minutes. If you’re interested, click here to learn more.

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,”

Of course, Goldman isn’t the only group out there using high-frequency program trading. If Goldman’s code could manipulate the market, couldn’t other codes do the same? Of course they could. And here’s what the SEC had to say about it…

The Securities and Exchange Commission believes institutional money managers are “sophisticated” enough to trade against the machines without further regulation.

“We don’t want to curtail liquidity,” said Gene Gohlke, associate director for the SEC. Gohlke said it’s up to the managers themselves to make sure other traders aren’t manipulating their models.

The SEC, tasked with preventing market manipulation from destroying the retail investor, is turning a blind eye to what’s happening in the market in the name of “liquidity”.

What bastards.

During the entire market fall the SEC has given the appearance of actually caring about you and me. They banned short selling and are on the verge of reinstating the uptick rule.
But that’s not where the money is. The money is in program trading. Program trading alone could move the markets far more easily than a few short sales.

Of course, the members of the SEC don’t have you and I buying them box seats to the Yankees games or bottles of Dom just for being “nice”. The loyalty of the SEC has already been bought by those with money – institutions like Government Sachs.

Good day… And a Tub Thumpin’ Thursday to you! Yes, I know the currencies and commodities got whipsawed yesterday, and my Cardinals got spanked, but that’s no reason for us to not enjoy a Tub Thumpin’ Thursday! Every day is a gift, and it has nothing to do with stocks, bonds, currencies, and commodities!

OK… Not that I try to be philosophical, sometimes it just comes out that way! Besides, you don’t want to think that I’m just a smart *** all the time! HAHAHAHAHAHA!

Well, as I said in the open, the currencies and commodities got whipsawed yesterday, and the culprit was the FOMC minutes… You see, the Fed Reserve met to discuss rates, and other items. And what they said just blew away the bond vigilantes, and really ticked off the Hawks, but in the end, what they said, was really that things will remain status quo…

Their announcement of bond buying didn’t measure up to what the bond folks wanted to see, and their announcement that interest rates won’t be going up for some time, didn’t measure up to the inflation Hawks, who wanted a comment about fighting inflation. Instead, what they received was more Alfred E. Newman on inflation… “What, me worry?” That’s how ridiculous their statement was folks… The Fed still looks for inflation to “remain subdued for some time”… Although… Their outlook for the economy was slightly upbeat…

So… If your confused about what the Fed is thinking… Then join the rest of us! The markets spent the day trying to sort it out, and when it was all said and done, they couldn’t, so they sold risk assets… So… The 1.41 level the euro enjoyed yesterday morning when I signed off, is now 1.3945…

On top of all this, the Swiss National Bank (SNB) has issued a communiqué’ that talks about their “new aggressiveness” toward Swiss franc strength. Now, isn’t that just one of the most ridiculous things for a Central Bank to say about it’s currency! Would someone over there at the SNB, please think about what you’re saying!

Oh well… This is all I’ll say about the SNB… It’s hard to soar with the eagles when you have to work with a bunch of turkeys! OH! And it’s also reported that this “aggressiveness” showed up as intervention by the SNB yesterday… They sold francs in the markets… UGH!

OK, let’s get back to the Fed, and their bond purchase program / Quantitative Easing / monetizing the debt / money printing… It’s all the same… Oh, one more thing, it’s the road to ruins, but don’t let that get in the way of the Fed Party! You see, the Fed didn’t announce anything this time, because all the world was watching and waiting for them to announce a “mega-buying program”… I told you earlier in the week to NOT expect the Fed to announce any changes to their road to ruins at this meeting, but instead the August meeting, when during the dog days of summer, when almost every #1 trader on earth is on vacation…

So… The bond vigilantes who want bond yields low realize, with the amount of supply that the Treasury is issuing these days, that the only way to get those lower yields is to have the Gov’t buying bonds!

I came across something yesterday, that I yelled across the desk to make certain everyone knew… Recall at least a month or so ago, I told you how China had called for a new reserve currency, replacing the dollar with SDR’s (special drawing rights), which would be a basket of currencies. This news received a ton of publicity… But one thing that didn’t receive a ton of publicity was the fact that President Obama agreed at an economic summit in London that SDR’s should now be used to help stabilize the balance sheets of nations struggling to combat the current crisis.

Now… On the outside that looks harmless right? Just helping these struggling nations… But! Could this also be a baby step toward a global currency? Could this be a baby step toward a further devaluation of the dollar, and it’s signed off on by the President?

OK, now here’s the thing that really caught my eye… The IMF is going to issued $300 Billion worth of SDR’s. That’s 10 Times… That’s right, I said 10 Times the amount of SDR’s that CURRENTLY EXIST!

Could this be the facility for China to quietly exchange dollar reserves for SDR’s? Come on! Somebody has got to see this the same way I do!

I mean, it was just LAST WEEK, that the countries of Brazil, Russia, India and China (BRIC’s) called for a “more diversified international monetary system?” Why, yes, Chuck, it was… Just last week! And then this week, the IMF “just happens” to be issuing 10-TIMES the amount of SDR’s that CURRENTLY EXIST! Hmmmm…

I probably should stop there… I’ll be accusing people of all sorts of things if I continue on this path… But there’s some food for thought, eh? You won’t see this on TV… They have more important things to show you and talk about, like… The President killing a fly! That’s a really sad thing, to think that our news has come to that!

OK… New Home Sales for May dipped lower, but the inventory of homes for sales also dipped… And, we got the surprise of year when Durable Orders for May showed an unexpected and very strong gain of 1.8%… While I think this is wonderful news, I have to question it… I mean, with the automobile industry basically shut-down, one would think this number to be quite lower… However, I’m told… That non-defense aircraft orders more than offset the auto losses. OK, so, this is NOT a green-shoot folks… This is a One-and-done!

OH! And to follow up on yesterday report regarding Existing Home Sales… I totally forgot to mention that Foreclosure Sales are soaring, and thus a big part of the rise in Existing Home Sales… So, no green-shoot here either!

Today, we’ll see the Weekly Initial Jobless Claims, and… The Final print of 1st QTR GDP, which will remain at -5.7%…

So, once again, not much on the data watch for today.

Before I go to the Big Finish… I want to follow up on the news I wrote about yesterday regarding the European Central Bank’s (ECB) EUR 300 Billion injection of liquidity out 12-months… The total came in at a higher figure than that, at EUR 442 Billion… Still, much lower than the forecasts, which had seen some call for a number as high as EUR 1 Trillion! And… This morning, the Eurozone announced that Industrial Orders fell 1% in April… So that data isn’t helping the euro any either!

And then there was this from the NY Times this morning… “The U.S. House Oversight and Government Reform Committee will question Federal Reserve Chairman Ben Bernanke about his role in Bank of America’s acquisition of Merrill Lynch. While Republican lawmakers are launching an attack on Bernanke, who is Republican, Democrats are defending him.”

Man, is that all mixed up! But… A week ago or so, we were getting reports about the Bank of America (BOA) purchase of Merrill Lynch… And now, nothing, absolutely nothing, say it again! Any wonder why? Well, maybe it will come out in the U.S. House Oversight and Government Reform Committee questioning, although I doubt it…

And the State of California… The largest economy in the U.S. and in the top 7 economies of the world (used to be 7th, but with their recession, who knows?), announced that they were going to pay their bills with IOU’s… The state’s controller said. “Next Wednesday, we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression.”

And… The Fed believes the recession is easing? Hmmm… Maybe they are too far away from the California books and records!

I’m on a roll here, somebody stop me! OK, I’m stopped!

The Treasury will auction $27 Billion of 7-year Treasuries today… Just keep the supply spigot open must be the Treasury’s motto these days!

Currencies today 6/25/09: A$ .7955, kiwi .6360, C$ .8605, euro 1.3940, sterling 1.6280, Swiss .9095, rand 8.0775, krone 6.5170, SEK 7.9350, forint 199, zloty 3.24, koruna 18.72, yen 96.40, sing 1.4575, HKD 7.75, INR 48.65, China 6.8345, pesos 13.27, BRL 1.9705, dollar index 80.78, Oil $69.05, 10-year 3.69%, Silver $13.86, and Gold… $934.20

That’s it for today… Draggin’ the line today, late night with my little buddy Alex’s baseball game. A ringing double and single with two RBI for Alex last night, in his last game of the year. HEY! How about the U.S. National Team, beating Spain in soccer / football? WOW! It’s been a while since the U.S. beat a ranked national team. So good for them! No breakfast sandwiches today for the boys and girls, as out little Christine is on holiday… Yay for her! She normally picks them up and I buy, but I forgot to do both this morning! UGH! 11-0 spanking by the Mets last night, leaves the Cardinals only 1 game in front in their division… Well… I’m going to attempt to have a Tub Thumpin’ Thursday, I hope you do too!

Source: Increasing SDR Issuance

Overnight, the euro climbed as high as 1.4140, only to sit at the cusp of 1.41 as I begin to write this morning. Of course 1.41 certainly looks a lot different from the 1.35-1.40 range we’ve seen in recent days. But then, we’ve seen these probes above 1.40 before only end with the euro falling back to the 1.35-1.40 range again…

I would imagine that the thing weighing heavily on the euro to bring it back to 1.41 and now a little below that figure is the news that the European Central Bank (ECB) had allocated EURO 300 Billion in 12 month funds for liquidity… I think any sell off from this announcement is strictly a knee-jerk reaction to the announcement. But when the dust settles and the traders / investors realize that EU 300 Billion is far less than the numbers that were rumored (some as high as 1 Trillion euros), this knee-jerk reaction will slow…

One of these times it will shake the cobwebs off, and proceed to either move higher, or lower than the established range… For now, I would have to think that given the sentiment in the market that’s growing toward anger with the U.S. deficit spending tactics, the move would look to go higher… But, who knows? I can only look at things from a fundamentals viewpoint and from 17 years experience trading currencies…

Once the euro got going, or the Big Dog got off the porch, the other currencies (little dogs) were also on the rise VS the dollar… And Commodities, after spending Monday circling the bowl, came back with a vengeance! And we all know that when the Commodities rally, so do the Commodity currencies of Aussie, kiwi, Canada, Brazil, and South Africa!

Speaking of Brazil… Recall when I told you that this currency can give you whiplash? The volatile, wild swings in the currency are enough to make someone request oxygen! So, after a day (Monday) that saw the Brazilian real move back above “2″, it was posted the best performance of any currency on earth, on Tuesday!

Brazil’s real had its biggest gain in more than a month, as Commodities rallied, and… The currency also bounced back after investors “overreacted” yesterday to speculation the Central Bank will intervene to keep the real at “2″… The real gained 2.7 percent, the best performer in the world and its biggest gain since May 4, to 1.9794 per U.S. dollar.

The real has gained 17 percent this year, the best performance among the 16 most-traded currencies, as commodities rallied.

One thing that helped the Commodities rally yesterday was the fact that it finally “occurred” to traders and investors that the Fed’s FOMC meets today, and will probably signal that interest rates will be held to near zero in the U.S. for the rest of the year.

Now… Why would that be a feather in Commodities’ hat? Ahhh, grasshopper… You have to remember that the underlying fear in the markets is that the Fed will NOT be pro-active in removing their stimulus when inflation begins to knock at the door… And making a statement that interest rates will remain near zero for the rest of the year, simply makes those fears even stronger… And what will people flock to when inflation is racing toward double digits?… Commodities…

Of course, tomorrow will be a different story should the Fed not make an interest statement like that!

I listening to the radio, while I write… And the song that’s playing is Elton John’s “Friends”, which was the theme song of my senior prom! Now, that’s a really old song!

OK, I’m back now… See how my fat fingers decide to start typing things that pop into my mind?

So, the Fed’s FOMC is today… I just can’t see them doing anything but trying to calm the markets’ fears about inflation, while keeping rates Steady Eddie. You all know that I’m not a fan of the Fed… I just don’t see how a entity, who’s main job is to protect the value of our currency, could keep their job, given the fact that the dollar has lost over 90% of its value since they took over! I mean, the Fed is NOT a Gov’t Agency, folks… It’s supposed to be an independent entity… But now, it’s got it’s hands in all kinds of things that aren’t on their job description, and they are in cahoots with the U.S. Treasury, and before we know it they will be regulating all the banks and financial institutions… All, from doing such a good job at protecting the value of the dollar! I shake my head in disgust… And I should NOT be the only one doing so!

So… While I’m on my soapbox, and ranting at the Fed, and the people making the decisions… Big Ben Bernanke is up for reappointment… I think the thing I would like to see from Big Ben before I would reappoint him is for Big Ben to come out and say… “I’m in favor of Ron Paul’s Bill to audit the Fed” Now, that would cause me to fall out of my chair from the shock of disbelief!

Speaking of the bill to “audit the Fed” I believe every voting citizen should contact their representative and let them know you support the bill to “audit the Fed”…

And… While I’m up here on the soapbox, I might as well get this rant off my chest too… Well folks… I think we’re in for yet another stimulus package… yesterday, during a press conference the president was asked about that very thing, and his reply was not a resounding “NO”… it was a “not yet”…

Now you know me… I said after the first $150 Billion in the spring of 2008, that there would be more… and I said after the $787 Billion this past winter, that there would be more… and does a “not yet” from the Gov’t that loves to spend money, give you a warm and fuzzy that there won’t be another one? I didn’t think so!

Yesterday, the data cupboard gave us Existing Home Sales data… For the second consecutive month, sales of previously owned homes in the U.S. increased, but the improvement was less than expected, further fueling fears of a slow, weak recovery for the economy as a whole… And the most important thing from the report is that the Home Sales were driven by two things… A drop in home prices… The median price for an existing home last month was $173,000, down 16.8% from $207,900 in May 2008. And… The low mortgage rates that existed up until about 3 weeks ago… Mortgage rates have climbed back above 5% (remember when we thought that was a low rate?) and the message that I’m getting is that mortgage lending is drying up once again… Most of the lending had centered on re-fi’s any way, not Home Sales…

Hey! Remember earlier this month when the Jobs Jamboree number printed and everyone (except those that knew better because of the BLS) was celebrating? Well… I saw a piece on Reuters last night that caught my attention… Mass layoffs — at least 50 job losses by a single employer — grew to 2,933 last month, from April’s 2,712, the U.S. Labor Department reported. That is practically a tie with March’s figure, which set a record. Hmmm… That certainly paints a different picture of the labor market than the BLS Jobs Jamboree now doesn’t it?

The Data cupboard will also give us the latest readings on Durable Goods (don’t expect miracles here!) New Home Sales (no miracles here either!) and then the FOMC… The U.S. Treasury will also be auctioning $37 Billion of 5-year Notes today… Good luck!

Down in New Zealand… Consumer Confidence surprised to the upside, and is helping to boost the kiwi performance this morning… These are “index” numbers so they probably don’t make much sense on the outside… Just look at them as “better”… New Zealand Consumer Confidence rose to an 18 month high in 2nd QTR from 96.0 to 106. Optimism about near term prospects improved from -57 to -28.

And finally… Gold and Silver have taken some tough shots to their respective mid-sections this week… I even said to Chris Gaffney yesterday… “Silver sure is tempting below $14, isn’t it?” I’m reminded of an old saying we use to have on the Margin Desk in my early years in the brokerage business… Just input the asset and price to make this saying work… For instance, we’ll use Silver… “Hey! If you liked Silver enough to buy it at $15, you’ll Love it at $13.98!”

Of course, I personally don’t expect Gold and Silver to remain at these bargain basement prices too long, but then that’s just my opinion, and according to the Legal Beagles, I have to say that I could be wrong!

Currencies today 6/24/09: A$ .8010, kiwi .6435, C$ .8740, euro 1.4085, sterling 1.6585, Swiss .9320, rand 8.0830, krone 6.4120, SEK 7.85, forint 197.30, zloty 3.2180, koruna 18.56, yen 95, sing 1.4525, HKD 7.75, INR 48.52, China 6.8330, pesos 13.28, BRL 1.9790, dollar index 78.75, Oil $68.77, 10-year 3.64%, Silver $13.92, and Gold… $928.40

That’s it for today… The Heat Wave continues here… But, like I told someone yesterday… Hey! It’s summer, it’s supposed to be hot! When I was a young man playing my guitar around the country out of VW micro-bus, I built in-ground swimming pools as a day job. In Oklahoma! Now talk about a HOT job! YIKES! I know there are hotter jobs, but that was the worst for me! Nice game last night for my beloved Cardinals… And, my little buddy, Alex, has his last baseball game of the year tonight. At least it is an 8:15 game! Well, the doctor visit yesterday was interesting… He’s happy that I’ve done so well… But the honeymoon on the weight is over according to him! Of course, I have no idea what’s he’s talking about! HAHAHAHAHA! Let’s get this going… I hope you have a Wonderful Wednesday!

Source: More Stimulus On The Way?

It certainly appears as if the credit crisis is well and truly over or, at the very least, the light which most of us think we can see at the end of the tunnel is no longer that of an oncoming freight train.

No wonder equities are currently enjoying one of their best spells ever. And while equities continue to go up and up, most of us are left scratching our heads. Is this the real thing or will it go down in history as ‘just’ another bear market rally? Not so long ago, the entire financial system stared Armageddon in the face. Now, only a few months later, equity markets behave as if all the worries of yesterday have been washed away. How is that possible?

“Never in the history of the world has there been a situation so bad that the government can’t make it worse.”

-Unknown

The great bank illusion

The current bull market began in earnest in the second week of March, but what really got everyone going were the surprisingly good Q1 US bank earnings which were reported during the first half of April. Most commentators interpreted the numbers as the clearest piece of evidence yet that we are now firmly on the road to recovery.

Of course US banks made good money in Q1. The environment created for them is the equivalent of the US government reducing the cost of goods to zero for its embattled car manufacturers and then going on to buy – courtesy of the US tax payer – a couple of million cars that nobody really needs. Even Detroit would make money given those conditions!

Liquidity is trapped

The problem for the rest of us is that the banks are not sharing the candy they have been handed. Much of the liquidity created by the central banks remains trapped in the financial sector (see chart 1). Quite simply, the multiplier is not doing its job, as many banks prefer to hoard cash rather than increase lending at this juncture.

This is both good and bad news at the same time. Good because it implies that we probably do not have to worry too much about the inflationary effect of the aggressive monetary easing currently taking place; bad because it means that the economy is not going to kick back to life as quickly as everyone would like – and expect.

Meanwhile investors are growing cautiously optimistic about the GDP outlook for the second half of the year with many now forecasting modest growth – at least in the United States. Only a fool would suggest that GDP would shrink by 5-10% per quarter in perpetuity, as has been the case over the past two quarters. The economic slowdown is now decelerating and, as I pointed out last month, there are good reasons why we may see a temporary lift in economic activity later this year, but it will almost certainly prove transitory.

We are still in a bear market

The dangerous conclusion to draw from the experience of the past few weeks is that all is now well and dandy and it is time to load up on stocks again. I cannot emphasize it strongly enough: The bull market of March-April 2009 is almost certainly a bear market rally but, as one of my partners pointed out the other day, NYSE saw four 20%+ rallies between 1929 and 1932 (see chart 2). Bear market rallies can be extremely powerful and hence deceiving.

The problems are not over yet. Not by a long stretch. It will take longer than 18 months to unwind the excesses of the past 25 years. Analysts at Morgan Stanley reckon that the 15 largest banks which between them have shrunk their balance sheets by about $3,600 billion so far in this crisis, will shed another $2,000 billion in 2009¹. If you do not share my pessimism, please take a quick look at chart 3 below. The US financial sector debt load (as a % of GDP) is now 117%. In the early days of the great bull market in 1982, the same number was 22%. Households are not much better off with total household debt now at 96% of GDP vs. 47% in 1982.

Further write-offs to come

The IMF reckons that both European and US banks – but in particular the European ones – are well behind the curve in terms of recognizing their credit crunch related losses. According to the IMF, there is at least another $1,500 billion to come. So when the US banks reported surprisingly good numbers for Q1 it was certainly not because the economy had suddenly and miraculously revived itself, but because some of the oldest tricks in the book were used to gloss over much bigger problems².

As the recession bites into the lives of ordinary people, banks will face losses not only on sub-prime mortgages but on all loan products. As you can see from chart 4, sub-prime is indeed a small fraction of the total loan book for the US banking sector.

Delinquencies are on the rise

And that is precisely what is beginning to happen as illustrated in chart 5. Delinquencies are now on the rise on all mortgage products; however, whereas sub-prime started to deteriorate as early as 2007, it is only recently that delinquencies related to Alt-A and adjustable rate mortgages have taken off, and prime and jumbo loans are only now starting to suffer.

These are all temporary problems, though, however bad they may appear. By far my biggest concern at the moment is the enormity of the debt problem facing most OECD countries. In the March issue of the Absolute Return Letter I referred to an important study conducted by Carmen Reinhart and Kenneth Rogoff back in December of last year³ which I would like to re-visit (see chart 6).

Banking crises run and run

Reinhart and Rogoff studied every banking crisis of the past generation and made some startling observations. One in particular caught my attention. It has to do with the subsequent rise in government debt which, according to Reinhart and Rogoff, has been “… a defining characteristic of the aftermath of banking crises for over a century”. According to the authors, governments inevitably underestimate the ultimate cost of a banking crisis, because the indirect costs (such as falling tax revenue in subsequent years) end up much higher than predicted.

The IMF estimates that the cost of the current crisis to the United States will eventually reach 34% of GDP or close to $5 trillion. However, the Obama administration, through its various implicit and explicit guarantees, is already using a number close to $9 trillion⁴. And Reinhart and Rogoff’s historical average of 86% of GDP implies an ultimate cost of over $12 trillion!

The IMF is too optimistic

I have a lot of respect for all the good work being produced by the people at the IMF; however, they are sometimes too politically correct for my taste; maybe too afraid of stepping on someone’s toes. So when they go public, as they did recently, with an estimate of how much the current crisis would ultimately cost, their projection will more than likely prove hopelessly inadequate.

The true cost is important, because it has to be financed through new bond issuance, and it is my thesis that the sheer size of this tsunami will eventually overwhelm the world’s bond markets. As you can see from chart 7, using the official IMF estimates, the twelve most industrialised of the world’s G20 countries (in my book known as the Dirty Dozen) will have to issue about $10 trillion worth of new bonds to cover the cost of the current crisis.

The final cost will be enormous

However, if you (like me) believe that IMF underestimates the true cost of this crisis, Reinhart and Rogoff offer a more realistic approach (see chart 8). Using their least costly case study (Malaysia 1997) as our best case scenario, the true cost comes to $15 trillion. If one uses the average of 86% instead, the cost jumps to a whopping $33 trillion. I didn’t even bother to produce a worst case scenario – it all got too depressing!

I need to put the $33 trillion into perspective, because it is so big that it is almost incomprehensible. According to Wikipedia (see chart 9), total private wealth across the world today is about $37 trillion less the losses incurred in 2007-09, so the real number is probably closer to $30 trillion now. Total global savings (loosely adjusted for the big losses in 2008) are probably somewhere in the region of $100 trillion. In other words, financing this crisis could absorb one-third of total global savings. No wonder Gordon Brown looks tired!

Where do we find the money?

Obviously, governments may buy a portion of these bonds themselves, but they cannot afford more than a fraction of the total unless they want to challenge Mugabe as the ultimate master of illusion. Neither should investors hold out for sovereign wealth funds to do the dirty work. As is clear from chart 9, the total amount of wealth accumulated in these funds is pocket money when compared to the projected bond issuance over the next few years.

Hence it comes down to the price at which governments can attract sufficient demand from people like you and me. One of two things may happen. Either this crisis will ignite such a bout of deflation that investors will happily own government bonds yielding 2-3% or the deflation scare goes away ultimately, the global economy recovers and bond investors demand much higher yields for taking sovereign risk. I am not yet sure which scenario will prevail, but I do know that both are quite bad for equities longer term. Take your profits!

Source: The $33,000,000,000,000 Question

So far, American taxpayers have shoveled out almost $600 billion in Troubled Asset Relief Program (TARP) funding to prime the economic pump and get the banks lending – and people spending – again.

Yet a report by The Wall Street Journal shows the banks are lending less money than they did five months ago. And further research shows no matter how much TARP money the government pumps into the U.S. banking system, American consumers may just not be ready to drink from the trough – a sobering reality that could doom the chances of a quick economic rebound.

Meanwhile, the banks’ perceived reluctance to lend – coupled with their lavish spending on bonuses and management perks, has the the Obama administration on the defensive, sensitive to skepticism about the government’s ability to revitalize the banking system.

Bank Lending Still Anemic

Despite government pronouncements to the contrary, pumping billions of dollars into the financial sector has not had the desired result, meaning lending hasn’t accelerated. In fact, according to the recent Wall Street Journal analysis, initial loans and refinancing outlays at the nation’s big banks dropped by 23% from October to February.

According to the data, 19 financial institutions made or refinanced a total of $226.3 billion worth of loans in October. That figure plummeted to $174.2 billion for February, The Journal reported.  In fact, the total dollar amount of new loans declined in three of the four months the U.S. government has reported the data, and all but three of the 19 largest TARP recipients originated fewer loans in February than they did in October.

For its part, government officials say the current situation could have been a whole lot worse without TARP funding.

Just last week, the U.S. Treasury Department praised “the relatively steady overall lending levels.” Without those capital injections, “lending would have suffered a far smaller total volume of loan originations in February than January,” the Treasury Department said.

But bank executives defended their lending levels by saying the reason behind a decline in new loans, refinancing deals and modifications of troubled loans is the lack of demand from consumers and businesses – and not the banks’ willingness to lend.

JPMorgan Chase & Co. (JPM) showed one of the biggest lending declines, dropping from $61.2 billion in October to $39.7 billion in February – a drop of 35%.  But JP Morgan executives explained the bank made more than $151 million in loans in the first quarter, “despite the fact that loan demand has dropped dramatically.”

Commercial lending slid by about 40% and may have been depressed by a partial thawing of the bond markets, where some corporations raise money instead of borrowing it from banks. About $70 billion of corporate bonds were issued in February, up from $21.4 billion in October, according to Thomson Reuters.

The figures show that consumer loans, especially mortgage refinancings, account for a large portion of bank lending. Nearly half of February’s lending went to consumers, up from about one-quarter in October.

But excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. And because the United States has accounted for one-third of total growth in global consumption since 1990, any change in U.S. consumer behavior has profound implications, not just for the United States, but for the worldwide economy.

Increased Savings Rate Could Slow Rebound

Consumer spending is the engine of the U.S. economy, accounting for about 70% of gross domestic product (GDP). And in the go-go days of the early 21st century, U.S. consumer spending was in full swing.

U.S. households nearly doubled their outstanding debt to $13.8 trillion between 2000 and 2007, according to the McKinsey Institute. During that unprecedented period, personal consumption accounted for 77% of real U.S. GDP growth and personal liabilities reached an astounding 138% of disposable income.

But a shift occurred as the global financial crisis worsened at the end of 2008: U.S. households reduced their outstanding debt for the first time since World War II by curtailing spending and reducing borrowing.

In fact, recently released U.S. Federal Reserve data shows that outstanding consumer credit dropped from $2.95 trillion to $2.56 trillion in January.

But as consumer spending and borrowing plunged in recent months, the saving rate has rebounded, reaching 5% in January. And each extra point in the savings rate means more than $100 billion less in spending a year, according to a recent McKinsey study.

In fact, the study found that if consumers continue to reduce debt, the increased savings rate would result in $535 billion less consumption a year, a potentially serious drag on a nascent economic recovery.

Banks and Obama Still Not Out of the Woods

Looming over all this is the possibility that banks may need more government assistance in the near future in order to keep lending – even at the current depressed levels.

JPMorgan analyst Matthew Jozoff predicts banks could suffer another $400 billion in losses as a result of continuing credit deterioration, which could force policymakers to deploy yet another round of capital infusions.

Obama administration officials acknowledge that they may still have to ask Congress for more money in the future. Beyond the 19 big banks, which are defined as those with more than $100 billion in assets, the Treasury has also injected capital into hundreds of regional and community banks.

The most immediate expense may come in the next several weeks, when federal bank regulators complete “stress tests” on the nation’s 19 largest banks.  The tests are expected to show that at least several major institutions will need to increase their capital cushions by billions of dollars.

That could include Bank of America Corp. (BAC), a bank that many experts say probably should have been liquidated long ago.

In order to avoid another capital infusion, the government might elect to take equity in return for previous loans.  Converting the loans into common stock would increase the capital of big banks by more than $100 billion and give the government a large equity stake in return.

Of course, converting those loans into common shares would turn the government into the bank’s biggest shareholder – a move some critics see as a back door to nationalization. The move would also serve to further dilute the holdings of existing shareholders.

While the option appears to be a quick and easy way to avoid a confrontation with congressional leaders who are wary of putting more money into the banks, the administration would no doubt be heavily criticized for displaying such “socialist” tendencies.

[Editor's Note: In this second installment of a two-part look at whether the credit crisis continues to crimp financing for companies and consumers, Money Morning takes a look at bank lending. In Part I earlier this week, we studied venture-capital-investment trends.]

Source: A Look at Liquidity: The Real Reason Banks Aren’t Lending

Over the past few months, China has capitalized on the financial turmoil that has paralyzed the world’s “developed” economies by stocking up on cheap commodities, weeding out competition to its largest state-run companies, and acquiring even more foreign assets.

Indeed, with China’s economic growth projected at an enviable 8% for this year, that country’s government has been able to spend less time promoting immediate growth and liquidity, and more time preparing for the economic renaissance that almost certainly seems to be the Asian giant’s destiny.

By exposing Western free-market capitalism, undermining the United States economic clout, and eviscerating commodities prices, China is using the financial crisis as the perfect opportunity to advance its domestic agenda.

That agenda begins with the recently unveiled $586 billion stimulus plan – a plan primarily focused on infrastructure.

China’s financial institutions have little or no exposure to the toxic subprime assets that spawned this current global crisis. Thus, instead of having to spend hundreds of billions of dollars to bail out its banks, China can choose develop the stage on which it will display its future economic might.

And the first phase of that plan is key: Before its plans for a massive infrastructure overhaul can be realized, China must first load up on the raw materials crucial to its execution.

With Prices Down, China’s Stocking Up

Prices for commodities like aluminum, copper, iron ore and oil are all down substantially from last year as the global financial crisis has torpedoed demand. And now that prices have gone down, China’s commodities stockpiles are going up.

Imports of copper, iron ore, and oil all rose in December, as China took advantage of low commodities prices:

• Iron ore imports were up 6.2% in December, on a year-over-year basis.
• Copper imports were up 19.3%.
• And imports of crude oil climbed 11.6%.

“The authorities are thinking about the issue from a strategic point of view,” a senior researcher at China’s State Reserve Bureau (SRB) told Reuters. “As almost all raw material prices went sky-high in the last few years, China has not built up some of the key state reserves. Now is a much better time to stock up.”

The government announced last month that it would purchase of 290,000 metric tons of aluminum from eight of the nation’s largest smelters at about $1,806 a ton. And on Jan. 13, representatives from the SRB again met with domestic smelters, this time to discuss plans to build a stockpile of up to 300,000 tons of zinc – a metal used in galvanized steel.

A 300,000-ton zinc reserve could cost about $494 million (3.36 billion yuan), based on recent spot prices of $1,630-$1,640 a metric ton, as quoted on the Shanghai Nonferrous Metals Market.

Market participants speculate that the government is also mulling a 200,000-ton copper reserve, now that prices for that metal have tumbled more than 50% from a record $8,940 a metric ton last year.

“China will buy copper for its reserves,” SRB Executive Director and Vice President Wang Chiwei said at a conference in Shanghai.

Prices right now are “attractive,” Wang added, noting that purchases would “suit national interests.”

Chinese copper demand is expected to grow moderately in 2009, despite the global downturn.  Officials expect growth of just over 2% next year, but Barclays Capital (ADR: BCS) analyst Yingxi Yu told Forbes that demand growth could be closer to 3.5%.

The SRB may increase stockpiles of copper by as much as 74% in the next two years, Scotia Capital Inc. predicted in October.

China Digs for Bargains Down Under

Of course, China’s recent drive for raw materials is only half the story.

China is already home to the world’s largest population; now it is on the fast track to passing Japan as the world’s second-largest economy. Access to resources will continue to be a priority in Beijing for decades to come, even long after the $586 billion stimulus plan is forgotten.

That’s why China isn’t just using the global financial crisis as an opportunity to stock up on raw materials, it’s also loading up on foreign companies and assets while it is flush with foreign reserves. And while prices are cheap.

As they struggle with sluggish demand and falling commodities prices, many distressed foreign mining companies and materials suppliers have suddenly found themselves with a generous foreign backer.

In December, China’s third-largest zinc producer, Zhongjin, bought a 50.1% stake in Australian zinc miner Perilya Ltd. for $32 million.

Perilya has found “a strong and well-funded strategic partner committed to the long-term development of Perilya’s assets,” the Perth-based miner said in a statement. The deal included an initial cash deposit of $6.5 million.

Perilya’s deal followed that of Albidon Ltd., which started producing nickel in Zambia just as nickel prices crashed. Albidon raised $5 million from China’s Jinchuan Group, Asia’s largest nickel producer and a shareholder that now owns 18% of the West Perth-based Albidon. But more importantly, Jinchuan will take 100% of the nickel the Zambian mine produces over the rest of its life.

State-owned companies like Zhongjin and Jinchuan have access to China’s massive cache of foreign exchange reserves, which allows them to make acquisitions at a time when few other companies have the resources to facilitate a merger. And while China has focused much of its attention on undeveloped mining assets in Africa, the current financial crisis has opened the door to a wider range of takeover possibilities.

“The Chinese realize there are massive opportunities in the market,” Keith Spence, president of Global Mining Corp. (OTC: GBGD), told The Financial Times. “A year ago, they were going to Africa to acquire early-stage development assets. But now they are looking for larger tonnage, longer life, later-stage assets. There is less of an emphasis on emerging markets, because now there is choice.”

So far, Australia has been the country most often targeted by China for strategic investments.

Australia’s Centrex Metals Ltd., Mount Gibson Iron Ltd., Gindalbie Metals, and Grange Resources Ltd. have all struck deals with Chinese companies in the past year, The Australian reported.

• Centrex Metals sold a 50% interest in two magnetite deposits to Wuhan Iron & Steel Co. Ltd., China’s third-largest steelmaker for $180 million.
• Mount Gibson Iron brokered a rights issue and share placement to Chinese interests, with two major companies taking a stake of as much as 40% in the miner, while also securing discounted off-take agreements.
• Angang Steel Co. Ltd., also known as AnSteel, China’s second-largest steelmaker, paid $162.1 million to boost its stake in Gindalbie Metals from 12.6% to 36.28%.
• And Grange Resources is currently set to merge with Australian Bulk Minerals, which is majority-owned by a Chinese steelmaker.

Peter Vaughan, a partner at Blake Dawson, a Melbourne-based law firm, told The Australian that major Chinese steel mills kicked off a “wave of investment” in Australia from early 2000 – when China’s global economic clout began first started to build. Vaughan said this trend will continue deep into the current year as depressed asset valuations stack the deck in China’s favor.

“China is now in a much stronger bargaining position than they have been in the last few years,” Vaughan said. “Conditions have previously been in the producer’s favor, but demand drops and the tables turn. The Australian resources sector is now a lot cheaper to place an investment in.”

Denis Gately, head of the resources and energy industry group at Minter Ellison, one of the largest law firms in the Asia-Pacific region, agreed that Chinese enterprises are among the few that have the wherewithal to acquire prized foreign assets.

“They have recognized they are the only people in that position and will likely wait until prices fall further south,” Gately said. “The Chinese have an enormous amount of clout as the only potential buyers.”

In addition to building stakes in smaller miners, Chinese companies will be using that clout to build upon stakes in larger mining giants, which every bit as desperate for cash as their smaller counterparts.

Aluminum Corp. of China (ADR: ACH), or Chinalco, for instance has authorized a special team of analysts to watch for an opportunity to increase its stake in Rio Tinto PLC (ADR: RTP) to the maximum 14.99% allowed by the Australian government.

“We have a special team monitoring Rio Tinto’s performance and market movements in real time and will evaluate the best timing to do the stake increase,” Youqing Lu, the vice president of Chinalco, told dealReporter. Chinalco teamed with Alco last year to acquire a 12% stake in the mining company.

Chinalco is one of ten Chinese companies considering further overseas mergers and acquisitions, Xinhua, China’s official news agency reported.

“The crisis presents a rare opportunity for our domestic companies to initiate cooperation with foreign enterprises,” Xiao Yaqing, Chinalco general manager told Xinhua. “When the time is ripe, overseas acquisitions, strategic investments and joint development could all be considered.”

Canada to Profit From ‘China’s New Deal’

There is no question that, given its proximity to the Chinese mainland, Australia will continue to play a vital role in quenching China’s thirst for commodities. But on the other side of the globe, junior mining companies and exploration firms in Canada are hoping to attract prized Chinese investors.

In fact, the Canada China Business Council (CCBC), Canada’s most influential organization in terms of influencing Canada-China trade relations, recently released a report detailing ways Canadian businesses can profit from China’s recent infrastructure initiatives.

The report, entitled “China’s New Deal: Will Canada Benefit From China’s RMB 14 Trillion Stimulus Package,” was released earlier this month. The study details China’s stimulus-spending plan, and outlines areas in which Canadian companies can support Chinese development by providing resources and technology.

“As one of the world’s leading resource exporters, Canada will definitely benefit indirectly from the Chinese stimulus plan,” the Jan. 9 report said. “As well as energy, other resources such as wood, steel, nickel, copper and aluminum will be in demand. There also will be collateral benefit for Canadian transportation companies and the ports authorities.”

It hasn’t taken Canadian companies long to heed the report’s message, or its wisdom.

Earlier this week, for instance, China’s Tongling Nonferrous Metals Group took a 13% stake in Canada Zinc Metals Corp.

Prior to that, China Mining Resources Group Ltd. announced that it would increase its stake in Canada’s Quadra Mining Ltd. from the current 4.02% to a maximum of 19.9%.

D’Arianne Resources Inc. (PINK: DARUF), a Canadian exploration company, could be next to announce a deal with Chinese partners, as it recently reported strong results from its Lac a Paul phosphorous-titanium property.

“As of today, the very encouraging results coming from this first serious exploration campaign on the Lac a Paul project combined with the interest showed by foreign companies during our visit in China, undeniably confirm the potential of our phosphorous project,” D’Arianne Resources said in a statement.

Finally, Canada has the largest-and highest-quality uranium reserves in the world, making it the ideal partner in China’s quest to develop clean reliable energy.

Delta Uranium Inc. (PINK: DLTUF), engaged in the acquisition, evaluation and exploration of uranium in Ontario and Newfoundland, could also be high on Beijing’s target list.

More than 40 developing countries have recently approached United Nations officials to express interest in starting nuclear power programs. And China alone is planning to build 30 new plants in the next 15 years – a venture that will consume an estimated $50 billion in capital. All told, the country may require as many as 200 plants by 2050.

As with Australia, depressed commodities prices have opened the door to investment in major mining corporations, as well as in juniors in the Canadian market. That means the Saskatoon-based Cameco Corp. (CCJ), the world’s largest uranium producer, could also be in line for a large capital infusion.

“If I’m China Inc., and I have $10 billion, would I buy 60% of Xstrata (PINK: XSRAF), or a lot of reserves out in the middle of nowhere?” Kalaa Mpinga, chief executive of Mwana Africa PLC, a London-listed junior, told The Financial Times. “If I had all these billions, I would do this: Buy 15% of Anglo-American PLC (ADR: AAUK) and get a seat on the board.”

Source: What Companies Are Profiting From China’s Commodities Crusade?