The first sentence of a Reuters article on Brazil’s Carinval is certainly… attention catching:

The 10 million extra government-provided condoms are poised, final touches being put on huge floats depicting Queen Cleopatra and Can-can dancers, and the Barack Obama masks are flying off the shelves.

Would have liked to have known the name of the company making those condoms, eh? That extra 10 million is on top of the 45 million already provided at Carnival.

But even “bigger” news to investors like yourselves is the fact that one float’s dancers were wearing costumes costing $13,000… A PIECE! And this in a massive global financial crisis that has caused even some of the mining towns in surrounding Brazilian states to cancel their parades.

By all estimates, though, folks are spending less money this year, and Brazil expects about a 10% drop in foreign tourists to Carnival.

You wouldn’t know it by the looks of Rio, though. I like to have fun, as you’ve read in these pages before (underground pubs in Slovakia, or crazy futbol matches in Argentina), but some of the videos from this year’s Carnival seem… whew… a bit excessive even for my tastes!

Currently Brazil is a little out of favor with investment analysts. Last week, I told Taipan Insider readers that Citigroup thinks Brazil’s market is in for a slide, and that investors shouldn’t buy in until the Bovespa hits 35,000.

I also told them that I didn’t necessarily agree with Citigroup (NYSE:C).

Here’s the thing, though, that everybody does seems to agree on: Countries with strong commodity and cash reserves are going to be great markets on the far side of this financial crisis. The problem is, nobody can time when this crisis will end, or which companies will be around to reap the rewards.

For Brazil, there are a lot of choices, like Companhia Vale (RIO:NYSE), which was just downgraded today despite expanding its iron ore customer base in China…

That means RIO has secured more long-term supply contracts, and that’s a sign of longevity. Clearly something that investors should be looking at if they want to buy shares for the long run in this market.

If you are a member of any of Taipan Publishing Group’s publications, you can read my full article online.

Source: Viva Carnival, Viva Brasil

Nickel was down all day long, barely coming off its intraday low to close at $4.2502/lb., down more than 17 cents. Zinc fell in the pre-dawn hours, rallied into the afternoon, but then lost it all and ended at its intraday low of $0.4785/lb., down a penny and a half. Aluminum was also a daylong loser, giving up a penny and a third, to $0.5736/lb., while lead plummeted to $0.4553/lb., down 2½ cents.

Copper posted another weekly decline, as skyrocketing stockpiles served as a stark indicator of global economic weakness.

Inventories monitored by the LME surged 17,350 metric tons yesterday, to 545,600 tons, a more than 5-year high.

The build in inventories “took some support away,” wrote Michael Widmer, an analyst at BNP Paribas in London. “In addition, purchasing managers in Europe were very weak. There are also concerns over economies in Eastern Europe.”

Norddeutsche Affinerie AG, Europe’s largest copper refiner, also alluded to the “unwillingness of investors and copper processors to take risks.” No surprise there, of course.

In Shanghai, copper inventories fell 11% from a week earlier to 30,105 metric tons. This was the first decline since mid-January, but back then stockpiles were just half the current level.

The International Copper Study Group said yesterday that the global copper market showed a supply surplus of 47,000 metric tons in November 2008, compared with a surplus of 38,000 tons in October.

The ICSG also reported that, for the first nine months of 2008, the market saw a production surplus of 147,000 metric tons, only slightly higher than the surplus of 143,000 tons during the same period of 2007. World refined copper usage in the first eleven months of 2008 increased by 2.6%, or 421,000 tons, year-over-year.

In company news, Brazilian mining giant Vale (NYSE:RIO) said on Thursday its net profit more than doubled in the fourth quarter as cost controls, production cuts and a weaker local currency helped it offset weaker demand for metals.

But miner Anglo American (NASDAQ:AAUK) suspended its dividend for the first time since World War II and announced job cuts, saying it expects weakness in commodity prices to continue.

Source: Base Metals Bleed

Zinc fell off pre-dawn then went flat, ending at $0.4894/lb., down a penny and three-quarters. Aluminum was a steady decliner to $0.5863/lb., down two cents, while lead was weak as well, shedding a penny and three-quarters, to $0.4965/lb.

Copper led the industrial metals lower, cratering the most in three months as the dismal economic numbers continue to roll in.

“Prices were softer across the metals complex as concerns over global growth prospects were exacerbated,” wrote analysts at Barclays Capital in London, climbing stockpiles are “offering little change in the market-surplus dynamic.”

Indeed, stockpile growth has barely paused for breath over recent months, and yesterday was no exception as copper inventories monitored by the LME advanced by 3,100 metric tons, to 526,425 tons, a fresh high since October of 2003. Stocks are now up 55% just so far this year.

Looking near term, Gijsbert Groenewegen, of Gold Arrow Capital Management in New York, said that, “Copper has further downside to go. All the exporting countries are being hit, and manufacturing is coming down. That’s going to bring copper down. The two main usages for copper, housing and autos, are also struggling.”

And with GM (NYSE:GM) and Chrysler (carrying hats in hand to Washington this week, “Upcoming decisions with respect to the automakers will likely be the most dominant price influence for copper over the short-term,” said (NYSE:MF) MF Global’s  Ed Meir.

In company news, Teck Cominco (NYSE:TCK) released Q4 numbers that were mixed. Although the diversified miner saw revenues rise by 13% year-over-year, lower prices and carrying charges dragged the net into the red to the tune of C$600 million.

And in Mongolia, bidding on the prized $2 billion Tavan Tolgoi coal mine promises to be spirited, with all the big names reportedly in on it, including Vale (NYSE:RIO), Xstrata, Rio Tinto (NYSE:RTP), BHP Billiton (NYSE:BHP) and China’s Shenhua Energy. Tavan Tolgoi, which has a coal reserve of 6.5 billion metric tons, is also drawing bids from consortiums of Japanese, Russian and Korean firms, sources say.

Source: Base Metals See Red

European shares hit a one-week trough on Thursday, led lower by banks, as poor corporate results and fresh signs of deteriorating global economic outlook overshadowed a compromise deal on a massive U.S. stimulus plan.

By 0949 GMT, the FTSEurofirst 300 index of top European shares was down 1.5 percent to 791.78 points after falling as low as 787.14. The index is down 4.8 percent this year after plunging 45 percent in 2008.

Banks were among the top fallers on the index, with Commerzbank falling 5.4 percent, Credit Agricole down 3.5 percent and Societe Generale declining 3.4 percent.

Energy shares were also under pressure as crude prices eased to trade below $36 a barrel — down 75 percent from a record high near $150 just seven months ago. BP , Royal Dutch Shell , Repsol and Tullow Oil shed between 0.3 and 1.3 percent.

Governments are using “historically strong medicines to try to revive a patient that is looking very weak at the moment and so far almost everything that has been used has failed to work,” said Henk Potts, strategist at Barclays Stockbrokers.

Investors hoped the measures would support in the long term, but there was a lot of nervousness before they saw the results of the U.S. government’s efforts on the economy, he added.

The pessimism over a compromise deal on a $789 billion U.S. package, which helped Wall Street shares to gain overnight, evaporated after investors scrutinised a raft of disappointing corporate results and macroeconomic data.

Figures showed Japanese wholesale prices dropped in the year to January, the first drop in five years, bringing the world’s second-largest economy closer to its second bout of deflation in a decade as the economy slipped deeper into recession.

Earnings results also hurt sentiment.

Swiss engineering group ABB posted an 88 percent fall in fourth-quarter net profit, oil major Total reported an 8 percent drop in profits due to lower oil prices and output, while banking group KBC booked a $3.4 billion loss due to writedowns.

RIO TINTO STAKE

“Asides from the stimulus package, the big news has been the large stake in Rio Tinto (RIO) being sold to Chinalco,” said Andrew Turnbull, senior sales manager at ODL Securities.

“The deal is said to be the largest overseas deal by the Chinese and really does show how desperate for cash Rio Tinto has become,” he said.

Rio Tinto will sell $12.3 billion in asset stakes to Chinalco and raise a further $7.2 billion by issuing China’s top aluminium maker convertible notes to cut debt, the global miner said. Rio shares were up 1.2 percent.

The negative market sentiment spread to other sectors such as mining, electricity, telecommunications and retail.

Miners, struggling due to falling prices and slowing demand of metals, fell again. BHP Billiton , Anglo American (AAL), Xstrata (AXTA) and Antofagasta (ANTO) fell between 0.8 percent and 3.3 percent.

Among electricity companies, Enel dropped 2 percent and Renewable Energy slipped 1.4 percent.

France’s EDF fell 7 percent after it posted a dip in 2008 core earnings, hit by a larger-than-expected 1.2 billion euro ($1.55 billion) charge related to French regulated tariffs.

Britain’s BT Group dropped more than 5 percent after its core earnings slumped 9 percent in the third quarter and pre-tax profits slumped 81 percent.

Among gainers, French carmaker Renault rose 5.9 percent after it dropped its once sacrosanct 2009 profit targets and said it would focus on cutting inventories this year.

Across Europe, the FTSE 100 index, Germany’s DAX and France’s CAC 40 were down 1.1-1.9 percent.

LONDON, Feb 12 (Reuters)

This from Money Morning:

The Chinese word for crisisis weiji.

But get this – when translated literally, wei means danger and ji means opportunity.  So to the Chinese, a crisis – or danger – represents an opportunity.

Of course, you don’t have to actually speak Chinese to understand what this mindset means for investors.

What you’re seeing in China today is nothing less than the classic definition of a crisis presenting the profit opportunity of a lifetime.

While investors in U.S. markets are mostly concerned about saving their necks, China has been stacking the deck in favor of those who have the guts to pull the trigger on the most undervalued market in memory.

Here’s why you should consider taking an early position in China in 2009.

The Mother of All Stimulus Plans

While it’s not old news, the current crisis in U.S. financial markets is all too familiar.  The Standard & Poor’s 500 Index is down almost 40% from its 52-week high and there seems to be no end in sight.

Worse, the malaise encompassing the United States has clearly spread to the rest of the world, including China.

So it appears that what investors once considered to be the greatest investment opportunity of our lifetime has imploded – just another financial black hole where portfolios go to die.

Truth be told, however, there is ample evidence that China’s economy and markets will weather the storm and ultimately thrive in the year ahead.
The Chinese economy has been the fastest growing in the world for the last three decades, averaging double-digit growth for the last seven years.  And while the credit crisis has slammed on the brakes in terms of growth in the West, China is still on track for a solid 8% growth in 2009.

But the Red Dragon isn’t about to take any chances.  With $2 trillion in foreign exchange reserves available, China can increase the growth rate of its economy – even as it works to boost economic recovery efforts elsewhere in the world.

And that’s just what it’s about to do.

The People’s Republic of China has already announced a $586 billion (4 trillion yuan) spending package.  To put that in perspective, this plan amounts to a staggering 20% of China’s gross domestic product (GDP).  Compare that to the $1 trillion in U.S. bailouts, which equate to about 8% of GDP.

And China’s reserves won’t be doled out in dribs and drabs. The plan calls for spending the whole amount in just a few years.

To further grease the recovery skids, China has reduced interest rates five times in the last three months, and loosened lending rules.  Now China’s banks are perfectly positioned to get the ball rolling, flush with cash from a world-leading savings rate of 35%.  And because they are state-owned, the cash will flow quickly from the banks to government projects.

The convergence of the recent market swoon and the stimulus plan means you now have the opportunity to buy great companies at the dawn of the Chinese century.

But specifically, where should you look to park investment capital in the Chinese market?

Well, there are solid plays across all spectrums of China’s economy, but the best are in infrastructure, consumer goods and energy.

Infrastructure Paves the Way to Profit

The first place to look is infrastructure development, which has been the main engine of China’s explosive growth over the past two decades.

While most believe China’s economy is export driven, statistics show public works spending accounts for 4%-6 % of the country’s GDP growth. From 2007-2010, China will spend a whopping $725 billion on infrastructure improvements in a race to accommodate its rapidly migrating populace.

By 2030, 1 billion of its people will live in cities, up from 600 million today.  About 170 mass-transit systems will be needed.  Another 40 billion square meters of floor space will be built in 5 million buildings – 50,000 of which could be skyscrapers.

And all of these developed regions will be connected by new roads. Shorter transport times drive down costs, and smooth the transition to city living for China’s exploding middle class.

Plans for China’s road system call for 12 major routes across the country from north to south and east to west connecting millions to new routes of commerce, according to The Wall Street Journal.  The system will stretch 53,000 miles by 2020, surpassing the 47,000 miles of roadways in the United States.

It will take massive amounts of steel, cement, and bulk transportation to build those roads.

Money Morning Contributing Editor Martin Hutchinson believes one big winner from the infrastructure boom will be Vale (ADR:RIO) the world’s largest producer of iron ore. As the world’s leading producer and consumer of steel, China is also the world’s leading importer of iron ore, which – along with coking coal – is a key component in steel production.

And while prices and demand for Chinese steel fell sharply in the second half of 2008, they are already beginning to pick back up.

In fact, steel production in the Chinese city of Tangshan, in the Hebei province, has risen to more than 70% of capacity as companies resumed output after prices stabilized, the Tangshan Evening News reported Dec. 26. About 39 out of 57 iron and steel factories in Hebei, China’s biggest steel-producing province, are operating now, compared with 25 in August.

Tangshan is an industrial-level city in that steel-rich region.

“The iron-ore stocks have been overly poorly treated in the past couple of months with all the fear over China,” Michael Heffernan, a client adviser with Austock Securities Ltd., told Bloomberg News.

“Negativity over the Chinese situation is overdone,” Heffernan added. “In the past couple of months the Chinese may have been posturing to get the best possible deals they could when negotiations over contract prices reopen.”

That’s good news for Vale, which looks attractive with a Price/Earnings (P/E) ratio of only 8.6.

A big source of China’s iron-and-steel demand has to do with the country’s commitment to railroads. A full $100 billion of the stimulus package will be spent on rail services.

That makes Guangshen Railway Co. Ltd. (ADR:GSH) a good play.

Guangshen Railways is the biggest rail operator in China with cargo and passenger operations between Guangzhou and Shenzhen, as well as Hong Kong.

There is an acute shortage of rail capacity to carry raw materials from China’s western provinces to manufacturing centers on the Red Dragon’s East Coast. Right now, cargo capacity is only 35% of demand, according to the Chinese Railway Ministry.

That helped revenue at this $94 billion company to jump 17% in the first three quarters of 2008, despite a crippling snowstorm in January.  Guangshen also yields about 3%, rewarding investors who are willing to hold the shares as they wait for the stimulus to kick in.

China’s Urban Migration and Growing Consumer Class

The opening of new highways is providing greater mobility to China’s population, accelerating the massive move from the hinterlands to the cities. Incredibly, China will have 221 cities with more than one million inhabitants by 2025 – compared with 35 in Europe and nine in the United States today.

Quite simply, that urban migration is responsible for creating the largest consumer class the world has ever seen – a middle class greater than the entire population of the United States.

Retail sales in China are estimated to have risen about 21% in 2008, according to the Ministry of Commerce. And now that weakness in the global economy has dented exports, the government is making an even greater effort to boost domestic consumption.

That’s why Money Morning Contributing Editor Horacio Marquez likes China Life Insurance Company Ltd. (ADR: LFC).

China Life is experiencing continued growth for reasons unique to government regulations.  Without a social security system, Chinese consumers must fund their own retirement – one reason the Chinese save an amazing 35 cents of every dollar they earn.

Also, China Life’s investment portfolio hasn’t been hit by the market meltdown, because government regulations prevented the company from owning subprime-related mortgages and securities. With 43% market share, Moody’s Corp. (MCO) expects premiums to grow between 30% and 40% in 2008.  And right now, only 3% of China’s consumers own life insurance, leaving plenty more room for growth.

Another company worth looking at is China Mobile Ltd. (ADR: CHL).

With 443 million subscribers, China Mobile is the dominant provider in the world’s largest mobile telecom market.  And in terms of growth, an additional 3 million to 4 million consumers become mobile phone subscribers in China each month, according to the Chinese Ministry of Information.

The company’s earnings per share (EPS) increased 31% in the first three quarters of 2008 and China Mobile stock yields a healthy 3.2%.

Now, the mobile services giant is in talks with Apple Inc. (Nasdaq:AAPL) to introduce the iPhone to the burgeoning Chinese market.  And with the global slump hurting smaller players, it’s on the hunt for acquisitions with attractive valuations in emerging markets.

Soaring Energy Demand = Growing Profit

Despite a slight slowdown in the economy, China’s energy appetite continues to grow at a ravenous pace. And even though the country is building one coal-fired power plant a week, China’s unable to keep up with exploding demand.

China’s electricity consumption rose 5.2% in 2008 and investment follow.  A total of $84 billion (576 billion yuan) was invested in the sector in 2008 – a 1.52% over to 2007.  Power grid spending rose 17.69% to $42 billion (288.5 billion yuan).

As with other forms of infrastructure, China plans to up its investment in electricity over the next several years. China has already announced $29 billion in new energy projects, including a new natural gas pipeline, construction of 10 new nuclear power plants, and a new coal mine, set to produce 14 million tons of coal a year.

Here are two solid profit plays on the new infusion of cash:

Money Morning Investment Director Keith Fitz-Gerald likes Yanzhou Coal Mining Co. Ltd. (ADR:YZC).

China burns more “black rock” than the United States, Japan and Europe combined, and this company is one of China’s biggest coal suppliers. It produces lots of high-grade, low-sulfur coal, which burns cleaner and fetches a premium price.  The company also boasts profit margins of 22% in an industry where the margins average about half that amount.  For the first three quarters of the year, the company posted profits that were up 364% from a year ago.  This kind of growth, in a stock that’s trading at three times earnings, is a big time potential bargain – especially given its dividend yield of 4.3%.

Both Fitz-Gerald and Hutchinson recommend like Huaneng Power International Inc. (ADR:HNP), as well.

Huaneng is the largest utility in China, and is a virtual lock to benefit from growth in any form. It owns 16 operating power plants, and has controlling interests in 13 others. As a state-owned enterprise, it has the contract to produce the power for the entire eastern region of China, including Shanghai and Beijing.  Although it’s been generating losses lately due to high coal prices, the power company is likely to increase output and profits with any economic expansion.

If you’re leery of investing in individual stocks you might want to look at the Templeton Dragon Fund Inc. (NYSE:TDF). Over 80% of the closed-end’s assets are directly invested in China. And with roughly 50 positions, it provides ample diversification.

PS. This is the tenth installment in Money Morning’s “Outlook 2009” series, which looks at the global investing outlook for the New Year.
Source: China’s Red Dragon Turns Financial Crisis into Opportunity

This from Money Morning:

With BHP Billiton Ltd. (NYSE:BHP), it’s a case of the strong getting stronger and possibly even running away from the pack.

Back in 2001, BHP Ltd. and Billiton PLC merged to form BHP Billiton Ltd., the world’s
leading diversified resources group. And it never looked back.

Now, the lowest-cost natural-resources producer with the broadest portfolio of offerings, BHP superbly positioned itself to weather the current global downturn. Indeed, back in June the company reported its seventh-consecutive year of record profits. Financially, the company is well positioned to maintain its high level of investment in its business.

And because the Melbourne, Australia-based mining giant has so many of its operations in the Pacific region, it is perfectly positioned to continue serving two of the world’s fastest-growing markets: China and India.

The bottom line: BHP is exceptionally well diversified – not only in terms of the commodities it mines and sells, but also in terms of the markets it serves. This has allowed it to minimize the regulatory, climatic and geological risks it faces.

And that diversification is paying off. As millions of people emerge from poverty in Asia and other markets from around the world – led by the creation of a massive middle class in China and fueled by global synchronic growth – the demand for commodities will soar in the years to come. And so will commodity prices.

China alone has expanded the worldwide demand for steel by an amount that equaled the combined production of Canada and Mexico. Over the past year – from copper to coking coal to crude oil – we saw similarly impressive growth statistics around the world, an uptick that is putting pressure on the capacity of the commodity producers around the world. During that time, BHP’s profits grew spectacularly, but it’s also important to note that the company grew in a very balanced and conservative manner.

At a time that many international banks came close to collapsing and needing recapitalizations, BHP posted a net operating cash flow of  “only” $18 billion. This strong cash flow, combined with a very low net debt leverage of only 22% at the end of June, has allowed the company to maintain its share buyback program and increased value for investors. It’s also allowed for a generous increase in BHP’s dividend, which at Monday’s closing price of $40.40, yields an appetizing 4.06% and that could easily get to the 5%-6% area soon.

BHP’s decision to end its takeover of Aussie mining rival Rio Tinto PLC (NYSE:RTP) was also a good one.  Rio Tinto’s acquisition of Alcan Inc. put Rio in a leveraged position, which increased that company’s credit and business risks. Besides, in a time of low liquidity and scarce financing for deals, the divestments of assets that a merged BHP-RTP would have to complete to receive the needed financing would have so devalued the deal that it almost wouldn’t have been worth doing.

What About the Global Recession?

The recession has greatly impacted commodity prices. Oil has dropped from its record level of more than $147 a barrel in July, to less than $40 a barrel. Analysts are forecasting a near 60% drop in the price of coking coal for next year, as well as price declines of 20% to 30% for aluminum, copper and nickel.

But even with these price declines, BHP’s margins could actually expand in many of its key lines, as marginal players shut off production and BHP’s volumes expand. Cost-cutting, new lower-cost production, and synergies may also offset the adverse effects of falling prices.

Additionally, prices for iron ore and coking coal could actually start to rebound as more governments turn their attention to massive infrastructure projects and the need to diversify energy sources.

For example, BHP is still moving ahead with an expansion in its uranium production, as the company has “so far been able to substantially maintain sales volumes.”

At the same time, the uncertainties with respect to prices are huge.  Currently, from iron ore, to copper and aluminum, price negotiations for next year’s contracts have gone nowhere.  Buyers insist on bringing contract prices closer to the now-lower spot prices, but producers are trying to minimize the damage by waiting for prices to bounce back.

Until that happens, the old contracted prices – which are much higher than the current spot prices – are still in effect for much of BHP’s volume. Of course they will come down, but the real question is by how much.

Why Commodities Could Come Back Faster than Wall St. Thinks

Wall Street estimates have are extremely bearish at the moment. That is reflected in BHP’s stock price, which has been slashed by nearly three quarters in the past nine months.
However, I do not believe any of the current price projections are factoring in the two “mothers of all infrastructure-stimulus plans,” being launched simultaneously by China and the United States. The operative word here is stimulus.  And the focus of these plans is infrastructure, which uses huge amounts of steel, copper and other raw materials.

Also, all of these commodities are priced in U.S. dollars.  And the U.S. Federal Reserve just happened to drop the benchmark Federal Funds rate down to nearly 0.00%, while also shifting its monetary printing presses into overdrive. This is likely to lead to an orderly decline of the dollar, and consequently, a rise in commodities prices.

Other countries are in the same boat – from China, India and Australia, to the European Union, and even to Brazil and Chile. In every case, the central banks are dropping interest rates and bank-reserve requirements, and launching stimulus plans along similar lines, even as their central governments are cutting taxes.

Inflation will be a key result. And a declining dollar and zero interest rates are the winds behind the sails of commodity prices.

My expectation is that demand for steel will surprise analysts to the upside as these stimulus plans start kicking in.  In fact, we have already seen some minor firming of steel prices in China, as well as a solidifying of bulk shipping rates.  Further helped by a weaker dollar and zero interest rates, commodity prices will rebound from this year’s weakness.  This will enable analysts to actually abandon their “end-of-the-world” scenarios for commodity prices as the prospects for higher-negotiated prices increase.

We already are seeing increased actions by the Chinese government, which has continued to drop interest rates and bank reserve requirements, and has increased support to consumer lending, as well as the housing sector.  In China, more than any other large economy, government action is crucial, and the direction is in favor of higher economic activity.

At this very low valuation and with a very loose global monetary policies almost certain to give it a tailwind, BHP’s stock has already found some buyers at lower levels and has been able to cross its exponential 200-day moving average to the upside for the first time in this bear market.

It’s a proven fact that recessions are the best times to pick up cyclical stocks for the long term.

No question about this: the recession will end someday.  Many, including the International Monetary Fund (IMF) and myself, expect a pick-up in activity in the second half of 2009.  And stocks typically run some six months ahead of the economy.

Even as we are getting horrible economic news in the fourth quarter, as the full effect of the global paralysis is revealed in economic metrics, we should note that stocks vary according to the second derivative of profits:  In other words, they respond to changes in the rate of profit growth (or contraction).

Right now, market projections in general and in BHP in particular, factor in the full effect of a horrible fourth quarter. But if the first and subsequent quarters, although still bad, are “less bad” than this current quarter, the stock could actually rally from here, while still in the midst of bad news. And this process, while not linear, and mired with confusing volatility, should deliver strong profits.

ACTION TO TAKE: Buy BHP Billiton Ltd. (NYSE:BHP). This is roughly the right time for an investor to pick up BHP shares for the long run, especially ahead of the so-called “January Effect,” if there is one this year. However, the uncertainties remain daunting in terms of commodities pricing, government policies and the global economy.  So it is a good idea to stagger the purchases over the next three months by buying half of your position before yearend and the other half on weak days in the first quarter.  I would wait on most of the others, other than Vale (NYSE:RIO), given their weaker financial position, lower margins and more exposure to price drops in commodities.

Source: Buy, Sell or Hold: Mine Profits From BHP Billiton

This from Money Morning:

Between September 2007 and June 2008, oil prices doubled, gold rose 30% and commodities, in general, advanced by a similar percentage.

So why, six months later, when prices have fallen back below last year’s levels, does everybody think they won’t rise again? The difficulties of extraction haven’t gone away, nor have the prospects of increasing consumption in the faster-growing emerging markets such as China. Yes, the prices of commodities are severely affected by marginal moves in supply and demand, but this is ridiculous!

Rest assured, commodities prices will rebound in the New Year. The reasons will soon become quite clear.

The decline in commodities prices since the summer is broad-based. The Reuters Continuous Commodities Index traded recently at 341, down 25% from a year earlier and off about 45% from its June high. At $48 a barrel, oil is trading at less than one-third of its June high. And gold, which appreciated less than other commodities in the spring, is still down 18% from the $1,000-per-ounce level it reached earlier this year.

Conventional wisdom blames the decline in commodity prices squarely on the global recession. Since the rise in demand from emerging markets – particularly the huge consumption bases of China and India – had caused the previous run-up, it seems natural that the absence of that demand growth would cause prices to decline. After all, that happened in 1982, when a deep recession in the United States spread to a number of other countries. Oil prices plunged from $40 a barrel to a mere $10, breaking the back of the Organization of the Petroleum Exporting Countries (OPEC) in the process.

This time around, however, the math doesn’t seem to work. For one thing, the world as a whole is by no means locked into recession. We in the rich countries think of our economies as spiraling into a deep decline, but the reality is that we may only be witnessing a secular shift caused by the narrowing of income differentials between rich and poor countries as globalization proceeds.

In countries such as China, India and Brazil – three of the four so-called “BRIC” economies – growth has slowed and many are suffering imbalances in their financial structures, but there is little sign of actual decline in any of them. Indeed, if China’s recently announced $590 billion infrastructure investment serves to redirect growth toward domestic consumers, it is possible that the demand for oil and other commodities there may show very little dip at all; it takes a great deal of iron ore and other commodities to produce $100 billion worth of railroads, for example, one of China’s stated objectives.

On the supply side, OPEC was full of spare capacity in the 1980s. South Africa and the Soviet Union were still expanding gold production, and the explorations of the 1970s had produced surpluses of many other commodities. But in the past two and a half decades, things have changed.

Oil, for example, remains in short supply. Both deep offshore fields – like those discovered by Petroleo Brasileiro SA, or Petrobras (ADR: PBR), in the Tupi Complex – and the tar sands (like the ones in Canada and Venezuela), are economically unfeasible with oil trading at such a low price. And, if prices remain low, the expansion and exploration of new sources of production will be curtailed even further.

More importantly, though, supply and demand is only one of the reasons commodity prices rise and fall. What really spurred the big price rise in commodities that took place earlier this year was the explosion in the money supply throughout the world.

Money supply, unlike demand, is something that hasn’t evaporated with the economic downturn. In fact, it has actually ramped up. Even though money markets have become illiquid, central banks throughout the world are forcing down interest rates and pumping out liquidity by every means they can think of [Indeed, the policymaking arm of the U.S. Federal Reserve meets today (Tuesday), and is expected to cut rates yet again. For a related story, click here].

Meanwhile, governments everywhere (except Germany) are implementing massive “stimulus packages” that will destabilize budgets and insert huge additional demand into the global economy. Since the governments will have to borrow the money to finance those stimulus packages – and the budget deficits that are inevitable in an economic downturn – central banks will be compelled to pump out even more money to accommodate all the increased debt; otherwise, interest rates would go through the roof and finance for the private sector would become unobtainable, hardly the object of this whole costly exercise.

The future is thus one of rapidly increasing inflation, combined with a healthy recovery in global demand, at least in the emerging markets, as Europe and the United States may suffer deep recessions this time around.

To take advantage of this likely trend, I would recommend a broad portfolio of shares whose prices are closely linked to the prices of major commodities. Among those you might consider:

• Vale (ADR:RIO): As a gigantic Brazilian iron ore producer, Vale will benefit enormously from China’s new infrastructure program (Think of all those steel rails!). The stock is currently trading at just over $12 a share with a Price/Earnings ratio (P/E) of about 7.0 and a yield of slightly more than 1.0%.

• Rio Tinto PLC (ADR:RTP): Another huge mining conglomerate, the long-and-bloody attempted takeover of Rio Tinto by BHP-Billiton Ltd. (ADR: BHP) recently fell apart. At $93, Rio Tinto shares have a yield of 5.8% and a prospective P/E of about 3.0. The company is overleveraged, so somewhat dangerous, but you’d be getting paid for the risk.

• Suncor Energy Inc. (NYSE:SU): The largest pure player in the Canada’s Athabasca tar sands, Suncor’s marginal cost of production from operating facilities is about $30 per barrel and the cost of opening new facilities is about $60 per barrel. It’s currently trading with a P/E of 8.0 but has a yield of less than 1.0%, as it needs all its cash.

• SPDR Gold Trust (NYSE:GLD)exchange-traded fund (ETF): The largest ETF that invests in gold, GLD has more than 750 tons of the “yellow metal” held in trust.

Yanzhou Coal Mining Co. (ADR:YZC): China’s largest coal miner, Yanzhou has a P/E of 4.0, yields 3.5% and enjoys low costs – not to mention a super-close proximity to the gigantic market that is China.

Source: Five Ways to Profit from the New Year Rebound in Commodity Prices

This from Money Morning:

The second phase of emerging markets expansion is well on its way – a period of self-sustaining growth, driven by consumer growth and infrastructure spending.  And Latin America, following China and other Asian economies, is one of the key global pillars of growth that will save the global economy and the U.S. financial system from total collapse. But not all the countries in Latin America will go on to prosper.  There is a wide gulf in the policies that will continue to separate the winners from the losers.

Let me explain.

In a recent article in our affiliated monthly newsletterThe Money Map Report, Money Morning Investment Director Keith Fitz-Gerald made three important points:

• The emerging markets (of which Latin America is the second-most-important leg) will play a growing role in the continued long-term growth of the world economy.
• The U.S. economy will continue to grow long-term, but its relative importance in the world economy will continue to decline.
• In the near term, the emerging markets could well play a determining role in keeping the overall global economy – and the U.S. financial system – from dropping into a depression-like funk that we won’t be free of for years. Emerging economies in Asia and parts of Latin America have huge cash reserves, much of which will be invested in infrastructure projects over the next 20 years.

In the next three years, China, alone will invest as much as $725 billion in infrastructure, while Brazil will invest $225 billion for the same purpose.
This is important to remember, given that the dramatic sell-off the emerging markets have experienced has many investors doubting the ability of these countries to “decouple” from the global economy.  The reality of the situation is that most investors and pundits are failing to differentiate between economic decoupling and market decoupling.

The Gloomy Present

While growth in emerging economies has dropped slightly, the prices of securities and currencies in emerging markets has fallen drastically.   Many investors think that the U.S. economic crash will lead to a dramatic drop in U.S. orders of emerging-market products, which will cause those economies to drop off. That, in turn, would squeeze the profits and market valuations of the companies that operate in these economies.

But that’s a mistaken assumption. And here’s why.

In Brazil, for instance, exports account for a mere 13% of gross domestic product (GDP). In China, exports are just 10% of GDP. So some contraction in U.S. and European orders can easily be counterbalanced by fiscal and monetary stimulus in these countries.

On Oct. 27, in the depths of a rabid, indiscriminate sell-off, I published an extremely bullish piece on Brazil. Since that article was published, Brazil went on to rally as much as 47%. As of Friday’s close – even after some subsequent profit-taking – the exchange traded fund (ETF) that represents the Brazilian market (NYSE:EWZ) is still up 21% (and has risen as much as 42% since my recommendation).

And most emerging markets economies have plenty of fiscal and monetary maneuvering room. Leading the pack is China, which accounted for some 27% of global growth last year, and which has continued to use both fiscal and monetary tools to keep itself on a solid growth path.

It recently slashed interest rates again, down to 6.66% (a lucky number in the Chinese culture, meaning “things (are) going smoothly”).  With record foreign reserves of $1.9 trillion, China also approved a “fast and heavy-handed” $586 billion stimulus, mainly in housing and infrastructure, to be implemented through 2010.  And the Chinese yuan will drop almost 7% vis-a-vis the U.S. dollar to cushion losses in trade.  It has also lowered taxes on investments in capital goods.  And in a key move that’s been almost totally overlooked by the media, China has made huge market-oriented reforms in agriculture.

China has just allowed its 780 million farmers to rent, transfer or utilize as collateral their rights to their lands and eliminated all taxes on agricultural production and to farmers.  This will allow for a massive increase in the scale of production by consolidating companies.  In this way, China will keep its 120 million hectares dedicated to agriculture exclusively, with no possibility of urbanization, while at the same time allowing the millions of small farmers to sell out, and get capital to move to the cities.  This will not only increase the productivity of Chinese farming dramatically by allowing for economies of scale to work and attracting billions in investments, it also will create a huge incentive for these millions of farmers to move to the cities, boosting housing and infrastructure demand.

Brazil’s plans are very similar to those of China. There’s a:

• Strong fiscal stimulus, allowing a drop in the value of the real currency (a decline that’s already been substantial) in order to cushion exports.
• An easing of capital requirements to Brazil’s strong banking system, which will incentivize housing and car loans.
• Export financing.
• And huge local infrastructure projects.

There is another little-understood phenomenon that cushions the blows for emerging economies: Intra-emerging market trade has become increasingly important.  By now everybody understands that iron ore from Brazil and coal and oil from other emerging markets is flowing into China in order to fuel China’s massive infrastructure buildup and growing consumer demand.

The Breakdown on Brazil

Increasingly, a growing proportion of the infrastructure needs of industrial goods being bought by emerging economies are goods produced by other emerging economies.  Trade between Latin America and China has increased by 13 times since 1995, from $8.4 billion to $100 billion.  And China, now the second-most-important commercial partner to the region after the United States, has finally been accepted as a member of the Inter-American Development Bank, committing itself to contribute $350 million to the bank. As an example of this growth in industrial trade, Argentina just bought 279 subway cars from China’s CITIC Group.

However, not all trade with China has been successful, due to China’s notable deficiencies in quality control, especially in health standards.  For example, Latin American imports of medicines manufactured in China had catastrophic results in Panama two years ago, where more than 100 people died and hundreds more became ill from medications containing toxic Chinese glycerine.  Recently, Panama detected toxic chemicals in imported Chinese sweets and crackers and Argentina’s customs recently seized Chinese 20,000 thermos containers for having elevated content of toxic chemicals.

And all of this means that there is a market disconnect between the prices of Brazilian shares and those elsewhere in Latin American equities and the fundamentals of the underlying companies, that we will see played out in the next and subsequent years.  Why?

Just because huge financial losses by banks precipitated a massive de-leveraging cycle, which means they had to sell their holdings, regardless of merit. And that included big sell-offs in preferred investments, including the hugely promising and profitable Petroleo Brasileiro SA (Petrobras) (ADR:PBR), Vale (ADR:RIO), and many others.

Sign up below… and we’ll send you a new investment report for free: “Credit Crisis Report.”

And what is worse, their sales hit the stop losses of major hedge funds, who were also leveraged in such favorite plays as commodities, steel, coal, agro, emerging markets and even defensive stocks such as the U.S.-based Pepsico Inc. (NYSE:PEP).

When you have the proprietary positions of banks and hedge funds all trying to get out of the same door at the same time because of risk management issues, you get the current disconnect between market fundamentals and pricing.

Another impact that we have to understand is that the ongoing dramatic interest rate drops in all major G7 economies and the more than $3 trillion in G7 fiscal programs will have a marked impact on growth next year, containing what would have been a much nastier economic contraction.  But while G7 countries will barely grow between negative 0.5% and a positive 1% in 2009, with the worst contraction front-loaded and recovering in the second half, emerging economies will grow at a minimum of 4%, and in the case of China maybe as high as 10%.

In my October Brazil analysis, I detailed the massive stress that Brazil came under in 1995 because of another exogenous shock: The Mexican devaluation, the so-called “Tequila effect,” which ricocheted around the world, and which caught Brazil in 1995 in a much weaker position than it is in today. Back then, Brazil had a much higher level of debt, much lower reserves, a fiscal sector that needed huge reform, and a much lower capacity for exports.  Brazil dealt with this massive stress effectively and went on to work at each one of its weaknesses in the next 13 years, getting itself into a position of strength today.

While having the temptation and the perfect excuse for a default right at hand, Brazil proved its seriousness back then by taking the hard, but certain road to progress, keeping its international commitments and gradually affecting strong structural reforms.  Since then, it has become a net creditor to the world; it controlled inflation, and avoided an overheating of its economy with tight fiscal and monetary policies during the recent run-up in commodity prices.

This is paying off strongly today.  The policies, run day to day by a sophisticated technocracy led by top economists and international bankers, many of which held top positions in leading international banks, has allowed Brazil to move forward and to anticipate GDP growth of 4% to 5% for the New Year.
Hence, Brazil is by far my favorite Latin American play for 2009.

Checking Out Chile

Following closely behind, and hindered only by its small size, is the poster child of fiscal and monetary prudence: Chile.

Chile, which came out of its 1970s default by eliminating its foreign debt and successfully restructuring its banking system, has made every effort to maintain very prudent fiscal and monetary policies and to diversify its exports away from copper, which, being the largest exporter of the metal in the world, still accounted for 38% of its GDP.

Today, Chile exports many diversified products, including agricultural products, wine, fertilizers and industrial wares.  And because it’s situated on the Pacific Coast, it is geographically well positioned to trade with the fastest-growing markets in the world – China and the other emerging Asian tigers.

But Chile, in order to minimize the cyclical nature of its economy due to the wide fluctuation in the price of copper, decided years ago to start a “rainy-day” fund, which would accumulate wealth in the good years and be used to soften the blow in the bad ones.  Now, Chile boasts a $28 billion sovereign wealth fund, accumulated almost completely from its copper profits.  That’s almost equal to a staggering 14% of the country’s GDP in cash savings!  This will enable Chile to implement counter-cyclical policies to keep growing at 3.5% to 4% next year – or about the current rate of growth, even with the worldwide meltdown.

Chile already has started to deploy this capital, having passed a $1.15 billion government plan on top of last month’s $850 million to stimulate housing and small-business lending, injecting that capital into a government bank that will make available loans for small businesses.

Avoid Argentina

Chile’s fiscal prudence is in direct contrast to Argentina’s lack of discipline.  Argentina’s Peronist government, which squandered the agricultural commodities bonanza in fiscal spending, is now is trying to use its majority in both houses in Congress to pass the nationalization of the privatized pension funds under the excuse of “protecting them from market volatility.”

These funds, which now have successfully grown to more than $30 billion in size, or 73% of the government’s budget and have returned an average of more than 13% a year since inception will allow the government to cover its fiscal gap and debt maturities next year and to financed public works and consumption projects.  The government, at the same time, is suffering from an important loss of confidence, as evidenced by its need to resort to police controls in order to prevent the illegal purchase of U.S. Dollars.  Argentina might end 2009 with growth of negative 2% and unemployment of 10%.  Stay away.

A “Maybe” for Mexico

Mexico, given its strong links to the United States, is receiving a heavy dose of external shocks on many economic and financial fronts – especially where the United States is concerned: It’s being hit by a drop in exports (the United States is the main component), the drop in oil prices, lower tourism (its largest proportion of travelers is from the United States), falling U.S. investments in Mexico, and reduced remittances from Mexicans working in the United States back to their Mexican relatives.

In addition, many companies suffered strong losses in their derivatives hedges, banks have had to reduce lending due to reduced liquidity and the Mexican peso has lost some 22% of its value against the U.S. dollar.  Mexico’s growth in the New Year may fall to about 1% from 2008’s 2.4% pace, and the country is on its way to approving the first budget with a fiscal deficit in four years.  The government’s target will be negative 1.8% of GDP, in order to stimulate the economy.  Mexico, seeing its oil production declining, is seen moving soon towards opening some oil areas for exploration and development, which some estimate could add another 1% to GDP.

Once the U.S. markets have stabilized, Mexico’s stocks will be an incredible buy once more, since they discount a very bad scenario at these prices.

A Case Against Colombia

Colombia, another country that has merited a lot of attention, given its staunch support of U.S. anti-drug and anti-money-laundering efforts, has seen its free trade agreement with the United States inexplicably delayed.

The country foresees a tightening of credit conditions, so it is moving up its peso-based borrowing to this year.  Next year it will issue only $1 billion in foreign bonds and tap $1.4 billion from multi-lateral lenders.  So the refinancing risk for Colombia is muted, given the small amounts involved, and the country’s economy should expand a minimum of 1% in the New Year, even in the worst economic scenario. However, Colombia could grow as much as 4% under a moderate scenario.

That would represent a big drop from the 8% growth recorded this year.

The story in Colombia has been the curbing of inflation, and how far behind the curve the central bank has been, at least as recently as July, when it boosted rates up to 10% and then kept them there.

These ultra-high interest rates, combined with the global slowdown, have blunted demand for consumer products in Colombia. Since the passage of the trade pact is a situation in flux, I want to wait and see right now.

I will not go into the economies of Venezuela, Bolivia and Ecuador, which, with massive intervention by their governments and advances against property rights, are experiencing severe economic and political stress, and which do not offer the guarantees needed for foreign investment.

Source: Some Latin American Markets Show Profit Potential in the New Year, While Others Pose Risk

[Editor's Note: This is the eighth installment of our “Outlook 2009” series, which looks at the global investing outlook for the New Year.]

Just months ago, BHP Billiton Ltd. (ADR: BHP), Rio Tinto PLC (ADR: RTP) and Brazil”s Vale (ADR: RIO) negotiated an 86% price increase in the benchmark price of iron ore as demand for steel boomed.

“Iron ore prices should keep pace with steel prices which have fallen to the 1994 level,” Shan Shanghua, secretary in general of the China Iron and Steel Association, told Bloomberg in a phone interview. “We are asking for a big drop in iron ore prices.”

Vale, the world”s largest iron ore producer set the stage for contract negotiations earlier this year when it secured a 70% increase in the benchmark price of its ore. BHP and Rio upped the ante by using their proximity to Asia as leverage to demand benchmark price increases that ranged from 80% to 97%. The average increase in benchmark iron ore prices paid by Chinese steelmakers was 86%.

Steel demand, output, and prices have declined substantially since then, returning some leverage back to consumers.

The benchmark price, established in April, is paid only on material that meets certain specifications listed in the contract. Other material is sold at a discount to the contract price. Of course, considering the slump in steel demand that has accompanied the global economic downturn, it”s unlikely that BHP, Rio or Vale are getting anything close to their negotiated benchmark prices of about $100 per metric ton.

“It”s the reality that current contracts cannot be fulfilled,” Shan said. “Many bigger mills don”t need to import till the end of March, some even the end of May.”

But Chinese steelmakers still aren”t satisfied, and the government wants to take advantage of the opportunity to haggle down the exorbitant prices that producers squeezed out of Beijing last spring.

If Shan is serious about iron ore prices tracking those of steel, China will demand an 82% reduction in iron ore costs, according to Bloomberg. Benchmark contract iron ore fines sold by Rio Tinto, for instance, currently cost around $92.58 a metric ton. However, a return to the levels seen in 1994 would reduce that same iron to a cost of just $16.685 per metric ton.

China also wants the new contract prices to go into effect Jan. 1, 2009, rather than April.

Of course, few analysts believe that China”s demands will be met – regardless of the tepid outlook for steel demand over the next year – and that this is more likely just a case of China giving the ore producers a taste of their own medicine by playing hardball.

“It”s going to be a difficult price negotiation as miners and mills are divided in the market outlook,” Helen Lau, a Shanghai-based analyst with Daiwa Securities Group Inc. told Bloomberg. “But iron ore prices are determined by demand, not steel prices. The association”s comment is part of negotiating tactics.”

Source: China Plays Hardball with Iron Ore Producers, Seeking 82% Reduction in Price

U.S. stocks slipped in thin holiday trade on Friday after a streak of gains as investors nervously eyed post-Thanksgiving sales to gauge how retailers will fare this holiday season, while worries about global demand hurt technology and energy shares.

Chevron (CVX) fell 1.9 percent tracking oil lower as OPEC gathered to discuss potential further supply cuts to combat falling demand. U.S. crude dropped below $53 a barrel.

Technology shares slid after signs of a downturn in global chip demand as STMicroelectronics cut its fourth-quarter outlook. Industry sources said Taiwan companies want to slash costs. The semiconductor index shed 1.1 percent.

The U.S. stock market was closed Thursday for the Thanksgiving holiday and is trading for half the day on Friday. On Wednesday, stocks ended higher, capping the Dow’s biggest four-day percentage gain since 1932.

Stores across America hope to ring in billions of dollars in holiday sales beginning on the “Black Friday”, the day after Thanksgiving. But retailers fear a looming recession and mounting job losses could cost them dearly during the period that brings in up to 40 percent of annual sales.

“It’s a light volume day so you’re going to see some choppy trading, with so many people out,” said Robert Finkel, consumer trader at Stifel Nicolaus in Baltimore.

“I’m watching how things go from a retail standpoint today – we’ve heard a lot of speculation about how bad it’s going to be, now we’ll get some proper feedback.”

The holiday weekend will test the strength of consumer sentiment, a main driver of the U.S. economy, as the country faces its worst financial crisis since the Great Depression.

The Dow Jones industrial average fell 2.39 points, or 0.03 percent, to 8,724.22. The Standard & Poor’s 500 Index was down 2.39 points, or 0.27 percent, at 885.29. The Nasdaq Composite Index shed 14.26 points, or 0.93 percent, to 1,517.84.

The S&P’s retail index dipped 1.6 percent.

Chesapeake Energy Corp (CHK) fell 14.7 percent to $17.26 after a shelf offering to issue up to 50 million shares.

U.S. aluminum company Alcoa Inc’s (AA) fell after an executive said the company is not actively seeking to raise its stake in miner Rio Tinto Ltd (RIO) .

There is no U.S. economic data due on Friday nor any major companies scheduled to report earnings.

For the month, the Dow is down more 6 percent, the S&P 500 down more than 8 percent and Nasdaq down 11 percent.

By Kristina Cooke
NEW YORK, Nov 28 (Reuters)