Investors are worried. The big question – as always – is whether the primary uptrend remains intact.

And the answer is yes.

To understand just what that target should be, let’s take a look at where we are right now.

Just before Wednesday’s sell-off, measures of the supply of stocks moved to new lows, while demand moved to new highs. This means bull-market-trading rules remain in effect. But as the cyclical bull market matures a little, we need to change the target of our buying efforts.

Although it looked like losses would be cut in the early afternoon, a lack of demand resulted in the major U.S. indices settling gently at support near the high end of the August trading range. The Dow Jones Industrial Average lost 0.4%, the Standard & Poor’s 500 Index lost 0.6%, the Nasdaq Composite Index lost 0.8%, and the Russell 2000 lost 0.5%.

All the major sector groups save healthcare finished in the red. The declines were the most severe among industrial conglomerates. The Industrials Select SPDR (NYSE: XLI) lost 1.4% thanks to a 2.5% fall in Textron Inc. (NYSE: TXT). Bank stocks were also weak as Bank of America Corp. (NYSE: BAC) dropped 2.2%. Defensive healthcare and utilities stocks were relatively buoyant with a gain of 0.1% for the Healthcare SPDR (NYSE: XLV) and just a 0.3% loss for the Utilities SPDR (NYSE: XLU).

Homebuilders were under some heavy selling pressure over the past week, likely the consequence of the U.S. Federal Reserve’s decision to slow its purchases of mortgages. By spending $1.45 trillion, the Fed kept the difference between mortgage rates and the yield on U.S. Treasury debt very low.

Now, as these purchases taper off, mortgage rates will creep higher and erode some of the awesome affordability levels that are driving buyers to take advantage of the government’s first-time homebuyer tax credit and stabilize the housing market. As a result, the iShares U.S. Home Construction ETF (NYSE: ITB) lost 2.7% on Friday and dropped 8.3% last week.

The declines of the past week have been in alignment with our expectation of a short-term correction before equities push on to what should be a more meaningful top near the 1,200 level on the S&P 500. A number of technical indicators, including the percentage of stocks over their 10-day moving average as well as breadth and volume measures, had begun to deteriorate after having moved well into overbought territory the prior two weeks.

We aim to run our portfolios for long-term holds during bull markets, so although we warned of weakness ahead we did not expect it to be serious enough to merit exiting positions. Still don’t.

The big question – always – is whether the primary uptrend remains intact. And the answer is yes. Just before Wednesday’s sell-off, measures of the supply of stocks moved to new lows, while demand moved to new highs. This means bull-market-trading rules remain in effect. But as the cyclical bull market matures a little, we need to change the target of our buying efforts.

However dramatic the action of the past few days has been, it is a sign that some normalcy is returning to the equity markets. Moving forward, it is unlikely we will see long strings of uninterrupted up days, super-strong performance in the lowest quality stocks, and high correlations between stocks. In the final push to the stimulus- and recovery-Fed reaction high that we will likely see over the next three months or so, the emphasis may shift to fundamental analysis and quality.

As you can see in the chart above, stock-performance correlations tend to spike during times of economic stress. When investors enter panic mode and analyst estimates become much less accurate, the focus shifts from individual assets to asset classes and broad sectors of the economy. In other words, when all hell breaks loose investors don’t differentiate between great companies and good companies – they throw them all out.

Once this unease subsides and economic volatility wanes, fundamental analysis once again becomes the most important driver of investment performance.  And that’s okay, because there will be plenty of opportunities as investors shift their focus from stocks that were priced for Armageddon to stocks that are poised to benefit from renewed economic expansion.

The foundations for the transition are already being laid: UBS AG (NYSE: UBS) analyst Jeffrey Palma notes that after nearly a year of downward revisions to earnings, analysts are starting to upgrade their forecasts for 2010. Estimate rebounds are largest in the cyclical materials and retail sectors. Breaking it down by region, the most promising opportunities are in commodity-related stocks in the United States, consumer stocks in Europe, and British banks.

We have recommended SPDR Metals & Mining (NYSE: XME) in our Strategic Advantage service as a great vehicle to play this trend, even though it stumbled last week. Another good one is iShares Australia (NYSE: EWA). Check out our newsletter for a much-expanded list of recommendations.

The Week in Review

Monday: The index of leading indicators jumped 0.6% in August after a 0.9% jump in July and a 0.8% jump in June. The indicators’ August performance represented the fifth consecutive monthly increase. Moreover, the 4.7% increase during these five months was the strongest showing since early 1983, which marked the beginning of one of history’s greatest bull markets.

Tuesday: Home prices backed by Fannie Mae or Freddie Mac jumped 0.3% in July. There were also indications that retail sales plummeted in the week following the Labor Day Back-to-School blitz.

Wednesday: The Federal Reserve announced it would leave interest rates unchanged. Stocks initially bounded higher before abruptly shifting direction and screaming lower. The bulls gunned the Dow Industrial Average close to the 10,000 level before things fell apart. At issue wasn’t the Fed’s target policy rate, which affects short-term interest rates. Instead, traders were apparently concerned that Fed chairman Ben Bernanke and his cohorts failed to expand its direct purchases of mortgages and government debt. This will likely result in higher long-term rates.

Credit markets, though, didn’t care, and carried on with their bull market run. Crude oil fell 4.8% to $68.33, its largest percentage loss since July on a surprise increase in inventories.

Thursday: Some momentum was lost in the housing market after weak existing homes sales numbers put an end for four straight months of gains. Sales last month came in at a million seasonality adjusted annual rate of 5.1 million — a 2.7% drop from July. We continue to see an emphasis on foreclosures with distressed sales making up 31% of total sales. The highlight: Supply of homes fell to just 8.5 months of sales, a level that is believed to reflect a balanced market. There are, however, the issues surrounding a “shadow” inventory of homes waiting for foreclosure proceedings to complete or the slightest whiff of a recovery before being listed.

Friday: The G20 wrapped up its meeting in Pittsburgh with a commitment to tighter regulation of the financial system and system to subject each country’s economic policy to a type of peer review to try to avoid the types of global imbalances — China’s export obsession and America’s credit binge — don’t happen in the future. While the latter can only be enforced by a public shaming by other countries and the International Monetary Fund, it lacks an actual penalty. But it’s a good first step.

Consumer sentiment, as measured by the University of Michigan, improved to its highest level since early 2008 after rising by nearly one-third since late last year. According to Haver Analytics, over the last 10 years there has been a 69% correlation between sentiment and growth in consumer spending.
Unfortunately, the good news didn’t extend to durable goods orders in August: There was an unexpected decline that reversed half of July’s 4.8% gain. A drop in orders for transportation equipment was fingered as the main culprit. However, this metric is quite volatility and the overall trend still points towards a rebound in the manufacturing sector.

The Week Ahead

Monday: A quiet calendar with no economic releases.

Tuesday: The latest on nationwide home prices courtesy of the excellent Case-Shiller Home Price Index. Also, we get another update on consumer confidence.

Wednesday: The government makes its final revisions to second-quarter GDP. The last revision made no change to the initial estimate of a 1% decline. In the first quarter, GDP plummeted 6.4%. Traders will be looking for indications that inventories have dropped and demand is increasing ahead of a projected inventory rebuild in the months ahead. We will also get an update on the health of the manufacturing base in the latest ISM – Chicago Business Barometer.

Wednesday will also mark the end of the third quarter.

Thursday: A busy day with an update on auto sales, personal income and spending, the latest ISM Manufacturing Index, and construction spending.

Friday: The September jobs report is expected to show a loss of 170,000 jobs compared to the 216,000 that were lost in August and a 463,000 decline in June. The unemployment rate, currently at 9.7%, will move closer to 10%. Also, we get an update on factory orders.
In summary, the start of the fourth quarter is on the horizon. We expect it to be a plus for investors, though not without growth and geopolitical scares that create S-turns and potholes. Stay positive amid the turbulence as long as corporate credit markets remain strong and the primary trend is up.

Source: Long-Term Stock-Market Uptrend to Continue

If you are in the metals market, your eyes are certainly watching the action out of China. The more the country builds and expands, the higher its demand for anything that is pulled from the ground.

If you have been paying attention, you already know copper prices reached their highest prices since last October early yesterday. Buyers had to shell out $6,258 for a metric ton of the vital base metal.

While it is disappointing to see prices slipping today, it is no surprise. The commodities markets have often moved in lock step with the global equities market. And with mixed economic data coming from Beijing today, it is surprising prices are not down even further today.

Even with a few nuggets of less-than-expected data, China’s economy is one of the quickest expanding on the planet. Earlier today, Goldman Sachs (NYSE:GS) made the not-so-bold move of increasing its GDP expectations for the country from an annual rate of 8.5% to 9.4%.

Many investors are starting to wonder if it is time for Beijing to begin unwinding its recent stimulus measures.

No matter what the government does in the next few months, there is no debating China is at the center of the world’s commodity demand. Its desire to expand is the lifeline keeping the sector afloat.

With virtually no chance of a major disruption in its role, China is making the commodity and mining sector a fine investment.

Go ahead, make your move

While I have recommended several optimized plays for TFN Strategic Trader subscribers, I know of plenty of investors looking for a plain-vanilla sort of way to play the situation.

Anytime we need simple, the ETF market is there.

The SPDR S&P Metals and Mining (NYSE:XME) fund gives investors a pure shot at one of the most potential-filled industries on the planet. The fund includes holdings of powerhouses like Massey Energy (NYSE:MEE), United States Steel (NYSE:X) and Titanium Metals (NYSE:TIE).

Between those three companies alone, investors get a shot at a recovery global economy.

Of course, ETFs are great investments for the set-it-and-forget-it investing crowd. But they are not for everybody. With diversification comes lowered risk and lowered reward.

And anytime you are paying somebody else to do your buying and selling, it will come with a cost. In this case, SPDR charges 0.35% of your position, a fairly low fee in a high-priced industry.

But if you have been watching the commodities sector on the sidelines, eager to make a move, and are unsure how to do it, I think you just found your answer.

ETFs are a great way to enter the investing world on a low-cost, low-risk basis.

Source: Use the ETF Market to ‘Mine’ Commodity Profits

The Adventures of Tintin is a comic book series started back in 1929. My 9-year-old son loves it. I enjoy reading it along with him because the hero of the series, a young Belgian reporter named Tintin, often finds himself in interesting historical settings and exotic places. (My favorite story is “The Blue Lotus”, which takes place during Japan’s occupation of China in the 1930s.)

In one of these adventures, Tintin discovers oil on old American Indian lands. In a series of panels, a little construction boom transforms a wilderness into a busy city in a matter of hours. It’s funny, but it also makes a point: After you discover oil, there is a whole lot that comes after that. The infrastructure of the oil business, you might say. I was thinking of Tintin after reading more about Brazil’s big oil discoveries.

You’ve probably heard about Brazil’s Tupi and Carioca, which may be the two biggest oil fields discovered in the last 30 years.

The Tupi field may hold 8 billion barrels of oil. If true, only the 15 billion-barrel Kashagan field in Kazakhstan, discovered in 2000, is larger. Tupi, though, may be small potatoes next to Carioca. This latter field may hold 33 billion barrels of oil. Again, if true, Carioca would be the third biggest oil discovery in history, behind only the mammoth Ghawar in Saudi Arabia and the Burgan in Kuwait. Brazil has another field it is assessing now, called Jupiter, which could be of the same scale as Tupi

What makes these discoveries particularly remarkable, in addition to their size, is where they are. They lie underwater, hundreds of miles off the coast of Brazil. Call it “blue water energy.”

Tupi’s oil, for instance, is 7,000 feet underwater and beneath another 7,000 feet of rock, sand and salt. It costs about $240 million just to drill the well there, which is like paying a big cover charge to hear a band you may or may not be happy with. Who knows how many more hundreds of millions it could take to get the oil out and to market?

One thing is for sure. Petrobras (NYSE:PBR), the Brazilian oil company that discovered the oil, will spend a lot of money trying. Already, Petrobras has plans to spend more than $20 billion for marine support vessels and offshore drilling equipment. Those are big numbers, especially when you consider how tight the market already is for these things – not to mention the shortage of men and material to make more.

For perspective, consider that Petrobras has already leased nearly 80% of the world’s deep-water drilling vessels. It will certainly try to lock up more rigs and vessels. But so is the whole industry, which is why drilling companies are making money hand over fist like rose sellers on Valentine’s Day.

It’s not just in Brazilian waters that big prizes lurk. There are meaningful discoveries of oil and gas in the South China Sea, off the west coast of Africa and even in the waters off Trinidad and in many more wet places. Soon we could be poking around for oil beneath the Arctic seabed.

We’ll need lots of subsea wells and platforms and other goodies to put out there in those watery plains. Just consider the pipelines alone. We’ll need miles and miles of offshore pipelines to bring the oil to market. See the next chart, which shows the miles of pipeline needed by region.

According to Quest Offshore, between 2007-2011, the industry will have laid down 35,000 miles of pipeline. That’s a lot of steel. And a lot of pipelay barges to do the work. And crews. It’s a demand that should continue for years to come, even if the oil price comes down.

That’s only part of the story, though. Here’s the other: the existing miles of pipelines that are getting old. This is a familiar theme in our pages. We’ve often talked about the creaky infrastructure surrounding everything from roads and bridges to water and power supply. Matt Simmons, the oft-quoted energy analyst, likes to say, “Rust never sleeps.”

The problem is particularly acute in seawater. It’s more troublesome because you can’t see it. Such infrastructure requires a lot of maintenance, which is not cheap. On the heels of two decades of low oil prices, much of the industry deferred a lot of maintenance. This problem extends beyond just the offshore oil and gas business.

The whole oil and gas infrastructure is a “vast spider web of steel.” There are over 335,000 miles of pipelines in the U.S. alone.

There over hundreds of refineries in the world, as well as thousands of tank farms, gas stations and oil and gas wells. Simmons estimates that 90% of our offshore rigs are too old, pushing the limits of what we know they can do. The average age of the world’s offshore jackup fleet – over 400 rigs – is over 24 years. Our experience running them past 25 years is limited. Plus, newer deepwater projects are pushing the limits of how deep we can go, putting bigger strains on everything.

As Simmons says: “The entire value chain is built of steel. Steel begins to corrode the day it is cast.”

The risk of failure – of leaks or breakages – is high. “If the world wants to continue using energy, its assets need to be rebuilt. Simple law of nature,” Simmons says. “The construction job will rival the combination of building the World War II war machine, the Marshall Plan rebuilding of Europe and the post-World War II Interstate Highway System.”

Simmons gives us one example, just a snippet of the infrastructure the industry is building. It is a $1.5 trillion energy project in the Middle East – Shell’s massive gas-to-liquids plant in Qatar. It is as large as 450 football fields. It will require 300,000 tons of steel and employ 35,000 workers. All the while, the prices of steel, cement, copper, etc., all continue to rise. People, too, are hard to find, like parking spaces in Manhattan. “We let Nintendo work stations replace skilled oil workers,” Simmons says.

It’s a massive opportunity. The offshore boom, and Brazil’s offshore scores, only adds to the urgency of it all. I’m looking now at some of the companies that will participate in the big offshore infrastructure build-out. They also benefit from replacement work, too.

If Herge, the artist behind the Tintin series, were alive today, he wouldn’t be surprised to see the rush of infrastructure that follows big oil discoveries. Some things never change. He probably would be surprised, though, to hear about oil fields deep under the world’s big blue seas.

Sometimes you can buy assets in the stock market for cheaper than what it would cost you to get those same assets in the private market. Taking advantage of the gaps between the two is what investing like a dealmaker is all about. Such a gap, it seems, has opened up in the mining sector.

I think the gap exists because people in the mining business understand two things that stock market investors have yet to fully grasp. First, there is a growing scarcity of high-quality mining assets. Second, there is a shortage of skilled workers. Simmons calls it a “blue-collar boom in mining.” So stock prices don’t yet fully reflect these realities, and prices are cheaper than prices miners get when they buy assets from each other – or start them up from scratch.

First, let’s size up the scarcity of high-quality mining assets, which has led to something of a race to lock them down. For evidence of that, we need look no further than the merger-and-acquisition market. For the first five months of the year, the announced mining takeovers tripled compared with a year ago. The total, about $200 billion in deals, puts mining mergers at the top of the M&A list for the first time since Bloomberg began compiling the numbers, in 1998. Over the prior two years, financial services companies have led the pack.

This feat is even more impressive when you consider the storm in which this financial torch has passed – amid a U.S. recession, growing inflation and an unfolding credit crisis. Global M&A overall is down 37%. Yet there is the mining industry atop the dealmakers’ pile, grinning ear to ear and still flush with cash for even more and bigger deals. The world’s biggest mining transaction ever would be BHP Billiton’s $147 billion bid for Rio Tinto. Transactions this size would have been unimaginable even five years ago.

What this means, in my view, is that mining companies think it is cheaper to buy mining stocks than it is to open new mines. It’s pretty simple. If you can buy eggs for $1 or raise your own for $3, you buy eggs all day long. New mines are hard to bring online. And it takes a lot of time. As a Morgan Stanley (NYSE:MS) adviser recently put it, “If companies want to grow, they can either find something that might take 10 years to develop or buy something,” he said. Even so, exploration is up, as well.

There is a lot of risk with new mines, too. Especially since many of the new sources of mines are in politically unstable parts of the world, like Africa, or are difficult and expensive to mine. What new deposits have been found also tend to have lower grades. That means the resource isn’t as concentrated and there is more filler to process to get to the good stuff, be it copper, zinc, iron ore or what-have-you. Repeatedly, too, I hear mining companies warn about rising costs – for labor, equipment, energy and transportation.

The newer twist to the metals story is the power supply problems of many countries – South Africa, Chile, China and others – all important producers. Years of underinvestment in power supply – an issue I’ve written to you about before – is a global problem. And you can’t fix it by flicking on a switch. It takes years to build power plants and add capacity.

South Africa is a particularly egregious case of power shortages. The effect on production is devastating. In the first quarter, mining output fell 22%, to its lowest level in 40 years. Mining companies in South Africa face the risk of repeated power outages and/or forced reductions.

Chile is suffering from severe power shortages, too. It depends on Argentina and Bolivia for natural gas. As the latter two countries consume more natural gas, they export less to Chile. Chile’s water levels are also 40% lower than a year ago. Since Chile depends on hydroelectric power, this is a big problem. Electricity costs are skyrocketing in Chile. As it makes about 35% of the world’s copper, its ability to expand or even maintain that production in the face of power shortages is in doubt.

These are just two examples, but there are certainly many more. Another factor holding back new supply and making existing mining operations so valuable is the lack of skilled people. Companies doing everything from mining coal to operating offshore rigs all note the big challenge in finding enough qualified people.

The traditional skills are in short supply – people who can run a machine shop or a mining operation, for example. These skills are also not easily acquired. Yet a wide gulf exists between what these people make and what the guy running a mortgage trading desk on Wall Street makes.

As Michael Aronstein, a longtime money manager and strategist, recently put it:

“The relative compensation [difference] between somebody who is sitting on a derivatives desk and a guy who actually can diagnose and repair a locomotive has probably reached its millennial extreme… But that’s going to change. I think we’ll see the narrowing of all these spreads, a process that started at the lows in ‘02.”

Add all this up – the hot M&A market, the power supply problems, worker shortages and more – and the bottom line is that supply is having a hard time meeting demand.

And demand is there, fueled by booming economies in China, India and Russia. In fact, much of the M&A business comes from these three countries. They need new supplies of metals to keep up with demand at home. For example, Aluminum Corp. of China (NYSE:ACH) and Sinosteel have spent more than $16 billion buying mining assets across the globe. These companies are looking to secure raw materials such as coal and iron ore.

Mining stocks, not surprisingly, have done well over the past couple of years, even as the broader market has gone nowhere.

For example, S&P’s Metals and Mining (AMEX:XME) ETF, a decent proxy for mining stocks, has doubled over the past two years. The overall market has barely budged.

Yet the view from the ground, as the foregoing argues, seems to be that mining stocks may still be too cheap.

Regards,

Chris Mayer
for The Daily Reckoning

Source: Blue Water Energy, The Offshore Oil Boom