"Most investors aren't able to grasp this commodities cycle's massive potential. The main reason is that few investors are willing to accept the big transformation that's taking place in several emerging market economies, led by China and India.
"We've been advocating this change for quite some time. And after several years of doing so, investors are more receptive. However, they're not totally convinced yet.
"This is the main reason this bull market in emerging markets and commodities has another strong leg up before it reaches all-time highs. But we're far from that point. Meanwhile, copper remains one of our favorite metals.
"Our long-standing recommendation to take advantage of copper's strength is Freeport-McMoRan Copper & Gold. Copper suffered from supply challenges along with investors' underestimation of its potential early in the year.
TheStreet.com's Jim Cramer says that rebuilding from natural disasters can alter the growth picture for a country.
Is it Katrina all over again? Or is it bigger? Much bigger? That's what I am thinking about this Chinese earthquake.
Katrina distorted the U.S.'s growth pattern for more than a full year. The raw materials, the effort, the work, the reconstruction affected businesses from small-scale retail to refining and infrastructure.
We don't really know how China works, although a lot of people tell us they do. To me, the Chinese are always a day away from revolution or civil war and the trick of the government is to stay one step ahead of the posse. (Chinese hands will dispute that, but you have to appreciate that it takes a special skill to be wrong for more than a century and still maintain credibility.)
That means massive reconstruction: bricks, lumber, cement, steel and all the trimmings. Massive imports, not controlled by the Chinese and their little negotiation games like they play with iron and steel and coal. Just full-bore buying and something that could take growth for China back to the levels that everyone thought it couldn't absorb without more inflation.
"The co-editors of Vital Resource Investor caution that "no market moves in a straight line, and in commodities, the action is often extremely violent." However, for long-term investors, they offer some favorites in iron ore, aluminum and copper.
"All commodity bull markets are ultimately gored by demand destruction, alternatives and new supply. But it will almost certainly be years before that happens to this one. And that means plenty of money will be made along the way.
"We're still extremely bullish on iron ore as the market remains in deficit and prices continue to rise. Chinese domestic supply has been falling and, if this continues, imports will make up the difference, thereby helping the miners.
"China consumes 51% of the world's iron supply. Portfolio holding Companhia Vale do Rio Doce (NYSE: RIO), the world's largest iron ore producer, will benefit from the shortage in iron ore supply.
"We favor aluminum in the industrial metals sector. We've been advocating aluminum for some time, and the market's finally going our way. Aluminum prices have been impacted by lack of available power in China and South Africa and higher alumina and bauxite prices.
"A once in a lifetime super bull market in commodities is underway," note resource experts Mary Anne and Pamela Aden. Here, the advisors look at some favorite commodity stocks in their The Aden Forecast.
"Commodities are in a mega super rise is because of the dramatic changes in the global economy. The rise that started in commodities in 2001 has continued to expand over the years and we believe the upmove is just warming up and it has years to run.
"There are several reasons for this. The weakening dollar and low interest rates have certainly helped push up the whole sector while investment demand grew as an inflation hedge. But the key reason why the commodities are in a mega super rise is because of the dramatic changes in the global economy.
After hitting a one-year low of $52.51 in March, the stock hit a one-year high of $120.20 in October. FCX opened this morning at $100.26. So far today the stock has hit a low of $99.40 and a high of $102.82. As of 11:20, FCX is trading at $101.71, up $2.38 (2.4%). The chart for FCX looks neutral and improving, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider an April bull-put credit spread below the $75 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in just two months as long as FCX is above $75 at April expiration. Freport McMoran would have to fall by more than 27% before we would start to lose money.
FCX hasn't been below $75 since August and has shown support around $92 recently. This trade could be risky if the demand for copper falls due to futher economic weakening, but even if that happens, this position could be protected by the support the stock might find just below $80, where it bounced last month.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in FCX.
According to Roger Conrad and Yiannis Mostrous, "Resource stocks are by nature volatile. The important thing is we're still very much in a long-term bull market. And when the market mood does shift, today's pain will convert very quickly to massive gain."
In Vital Resource Investor they explain, "There is ongoing consolidation in this sector and the recent setback in stock prices make deals more attractive for acquirers." Here, they look at Companhia Vale do Rio Doce (NYSE: RIO), a play on consolidation in the iron ore industry.
"And when the market mood does shift, today's pain will convert very quickly to massive gain. The long-term underpinnings for vital resources are strong as ever: Soaring demand from the world's emerging growth engines, a growing scarcity of easily accessed supplies, rising development costs, resurgent resource nationalism and ongoing sector consolidation.
"It's this last trend that's captured our attention lately. Importantly, when it comes to developing vital resources profitably, size is essential. This year has already witnessed two mega-deals: Freeport Copper & Gold (NYSE: FCX) has bought Phelps Dodge and Rio Tinto (NYSE: RTP) purchased Alcan.
"And we're certain to see many more announced in coming months. The recent dance between BHP Billiton (NYSE: BHP) and its giant rival suggest the need to get bigger is greater than ever. Even if it doesn't succeed, the proposed merger is already increasing rivals' urge to merge.
China Investment Corp, which manages China's foreign exchange reserves, and China steel companies Baosteel Shougang Group and Angang Steel are said to be working on a bid for Rio Tinto (NYSE: RTP), Forbes reported Monday, citing China Business, the state-owned Chinese weekly. Rio denied receiving an approach from Chinese investors, Agency France Presse reported.
Deal talk had sent Rio's shares up about 7% in Australia early Monday. However, in the U.S., there was little follow through: Rio's shares fell $2.20 to $433.85 in mid-day Monday trading.
Earlier this year Rio rejected an offer from BHP Billiton (NYSE: BBL), saying BHP's offer undervalued the company. Two subsequent requests for talks by BHP were also turned down.
MOST NOTEWORTHY: Ericsson, Circuit City and Hot Topic were today's noteworthy downgrades:
Societe Generale downgraded shares of Ericsson (NASDAQ: ERIC) to Hold from Buy after the company lowered its Q4 guidance. Goldman Sachs downgraded shares to Neutral from Buy on the company's lowered Q4 revenue outlook and the growing probability that the wireless infrastructure market will decline again in 2008.
Circuit City (NYSE: CC)'s rating was lowered to Neutral from Overweight at JP Morgan, as they believe the company's high cost turnaround will require a strategic partner or acquirer, which may not happen until after 2H08 and this year's holiday season.
Citigroup downgraded shares of Hot Topic (NASDAQ: HOTT) to Hold from Buy to reflect their pushed out expectations for an earnings recovery.
OTHER DOWNGRADES:
Office Depot (NYSE: ODP) was downgraded to Peer Perform from Outperform at Bear Stearns.
Lehman downgraded Telecom Italia (NASDAQ: TI) to Underweight from Equal Weight.
The market's choppy/consolidating (or perhaps worse) period continues. No single market participant can change that reality, but you can make the best of it -- specifically by looking for bargains.
Miner Freeport-McMoRan (NYSE: FCX) is one such opportunity. Freeport is the world's second-largest copper producer and a major miner of gold and molybdenum. Further, FCX's purchase of Phelps Dodge in March 2007 means that the company now has proven and probable reserves of: copper, 75 billion pounds; gold, 128 million ounces; and molybdenum, 1.9 billion pounds, net minority interests.
But perhaps most important, Freeport is one of only eight companies that have the economies of scale to compete in the global mining sector of the early 21st century. Look for continued merger/acquisition talk in the sector, but don't think of Freeport as an acquisition play: FCX has a large portion of the global copper market, geographical diversification, and enduring relationships with key customers, among other strengths, to continue to perform well in the years ahead.
TheStreet.com's Jim Cramer says that this is among the worst markets he remembers, and explains how to live through it.
We've just crossed into no man's land with this dramatic selloff of what has been working: agriculture, oil, minerals and defense -- although the latter held up well.
We are now square into 1990, where only a few stocks hold up and things go very awry. It is a time to be defensive and be glad you caught as much as you did, but recognize that we will not go up without emergency Fed relief because there simply is too much stress in the system.
Are we in a bear market? I have long ago recognized the worthlessness of those labels. You say "bear market" and maybe you miss the next six points in Coke (NYSE: KO) (Cramer's Take) that could be had or the next five in Merck (NYSE: MRK) (Cramer's Take). We may have a nice leg up in dividend-oriented stocks. We can catch bounces in commodity stocks, and we might just want to start buying some beat-up stocks with solid rest-of-world exposure.
Richard Rhodes, professional trader, money manager and editor of The Rhodes Report was one advisor who accurately forecast the recent decline and moved into short positions going into this past week.
And while he sees the potential for a near-term bounce, this week's action leads the advisor to say, "A major trading high has formed, which will lead to a -10% to -20% correction...perhaps deeper."
He explains, "If there was ever a 'bell' to signal the end of an intermediate or long-term rally; we think the decline from the S&P 500 high of 1565 to yesterday's low at 1465 suffices as such."
The constriction of credit and liquidity, he notes, has led to very poor advance/decline figures. As such, he suggests being a seller during any rallies that result fro the "month-end bullish pattern and short-term oversold condition."
Indeed, even in his Long Only Portfolio – a portfolio that as its name implies only holds long position – he now says, "We are going to a very rare, but very prudent 'no position' stance." As for his Long/Short Portfolio, he says, "We are now aggressively short."
Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT) -- volatility Elevated on renewed Kerkorian speculation. HOT, a leading hotel and leisure company, is frequently mentioned as a private equity break up/recapitalization candidate. Chatter is circulating that Kirk Kerkorian's Tracinda has a mid-$90's offer on the table for HOT. HOT is recently up $0.63 to $70.64. HOT has a market cap of $15 billion with long term debt of $1.8 billion. HOT reported quarterly March 2007 total revenue of $1.4 billion. HOT July option implied volatility of 34 is above its 26-week average of 27 according to Track Data, suggesting larger risk.
Countrywide Financial Corp. (NYSE: CFC) -- volatility not confirming renewed takeover speculation. CFC, the largest U.S. home mortgage lender, is recently up 26 cents to $38.16. CFC July option implied volatility of 36 is near its 26-week average of 34 according to Track Data, suggesting slightly larger price fluctuations.
NYMEX Holdings-(NYSE-NMX) volatility Flat as Arbs consider Chicago Mercantile Exchange (NYSE: CME) and Intercontinental Exchange (NYSE: ICE) positions after CBOT Holdings (NYSE: BOT). NMX -- an energy and metals marketplace -- has a market cap of $11.58 billion. Arbitrageurs are aware if the CME's bid for the BOT or ICE's bid for BOT does not go through, NMX could be vulnerable to a bid from the losing bidder. NMX overall option implied volatility of 33 is near its 22-week average of 31 according to Track Data, suggesting non-directional risk.
BHP Billiton-(NYSE-BHP) option implied volatility suggests Flat Risk. BHP, the world's largest mining company, has a market cap of $153 billion, is recently up $1.36 to $52.11. BHP has been frequently mentioned during the last 17-months as having an interest in doing a deal with Freeport McMoRan Copper & Gold Inc. (NYSE-FCX), Alcan Inc. (NYSE: AL) and Alcoa Inc. (NYSE: AA). Prudential has an Underweight rating on BHP. BHP overall option implied volatility of 32 is near its 26-week average according to Track Data, suggesting non-directional price fluctuations.
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Freeport McMoRan
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Richard Rhodes, professional trader, money manager and editor of 
Starwood Hotels & Resorts Worldwide, Inc.
NYMEX Holdings
Alcoa's Q2 2008 earnings transcript
Anheuser-Busch (BUD) sues InBev, what's next?
Wal-Mart might help your portfolio during the recession
