Eoin Treacy of Fullermoney says that as commodities prices weaken, you need to look carefully before investing.
Q. Eoin, I've read that China's annual consumption of copper has declined from a 28.66% growth rate to 2.4%. What does that mean for continued growth in China and also for the global copper market?
A. China and indeed much of Asia and the Middle East are in a generational-long period where they have to build infrastructure from the ground up. The push for educating, housing, transporting and employing large young populations requires massive investment, fueling demand for commodities across the boards.
The supply side was completely taken unawares by this demand following the 20-year crushing bear market that cut exploration budgets to the bone. That is now changing, as major mining groups compete for the best resources, particularly in politically stable parts of the world.
China continues to lead the world in terms of GDP growth, although it has recently manufactured a slowdown to combat rising inflation, generally positive for the economy.
Chesapeake Energy (NYSE: CHK) closed at $45.25 Monday. Natural Gas futures are recently down 2.25% to $8.53 according to Bloomberg. BMO Capital Markets has a $68 target price on CHK. CHK September option implied volatility of 61 is above its 26-week average of 42 according to Track Data, suggesting larger price movement.
SPDR Gold Trust (NYSE: GLD), a commodity-based exchange traded security, closed at $86.84. Gold is recently trading down 1.70% to $892.50. GLD option volume was heavy on August 4, 2008 with 106,112 contracts trading. GLD over all option implied volatility of 25 is near its 9-week average according to Track Data, suggesting non-directional price movement.
Companhia Vale do Rio Doce (NYSE: RIO) will report Q2 EPS on August 6. RIO, a Brazilian mineral company, closed at $26.36. Goldman has a Buy rating on RIO. RIO option volume was heavy on August 4, 2008, with 237,545 contracts trading. RIO August option implied volatility is at 66, September is at 56; above its 26-week average of 49 according to Track Data, suggesting larger price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
MOST NOTEWORTHY: Vale, Allos Therapeutics and Torchmark were today's noteworthy initiations:
Lehman believes Vale (NYSE:RIO) is well-positioned to benefit from rising steel demand in emerging economies. The firm started shares with an Overweight rating and $45 target.
Citigroup initiated Allos Therapeutics (NASDAQ:ALTH) with a Buy rating and $11 target and believes the company's lead drug PDX is likely to be the first FDA approved agent for peripheral T cell lymphoma.
Friedman Billings expects Torchmark's (NYSE:TMK) sales to get back on track given increased recruiting, ongoing management initiatives, and the potential demise of Medicare Advantage. Shares were assumed with an Outperform rating and $72 target.
OTHER INITIATIONS:
Baird initiated Navigant Consulting (NYSE:NCI) with an Outperform rating and $24 target.
KeyBanc assumed Ingersoll-Rand (NYSE:IR) with a Buy rating and $49 target.
Mindray Medical (NYSE:MR) and China Medical (NASDAQ:CMED) were initiated with Overweight ratings and targets of $50 and $54, respectively, at Morgan Stanley.
"I believe the #1 rule for making money in the next decade is to get long whatever the Chinese are buying," says Tony Sagami in the Asia Stock Alert.
"China will need to consume an unprecedented amount of natural resources to fuel its red-hot economy," says the advisor who offers his speculations as to the most likely takeover candidates in three areas -- energy, metals and food.
"There's no doubt in my mind that China is on a buying spree. And I'm not just talking about oil, either. Fact is, the Chinese have a ravenous appetite for virtually all commodities.
"While I don't have any inside knowledge about what companies the Chinese have in their sights, I do know what industries are strategically important to their lofty growth objectives.
"China needs energy - and lots of it - so you can expect frenzied buying activity to lock up reliable supplies of multiple sources of energy. In my book, oil, natural gas, coal, and uranium are all key players. My #1 pick for an energy takeover: Cameco (NYSE: CCJ), the largest uranium producer in the world.
Is investing abroad because the U.S. is going through a rough patch a good idea? If so, why? What foreign markets are attractive? Investing abroad is a good idea -- but not because the U.S. is melting down. Instead, it turns out that emerging markets are outperforming developing ones because they are supplying the commodities that fuel demand for 10% annual growth in emerging markets like China and India.
Emerging markets are up 20% in the last year while developed markets like the U.S. are flat. The reason to invest in these markets is not so much because the U.S. is going through a rough patch but more because these other markets are doing so much better and they are going to continue to do well regardless of what happens in the U.S.
But the U.S.'s rough patch may not be as bad as people had thought. An economist at Wachovia Corp. (NYSE: WB) changed his estimate of the chances of a recession from 90% to 45%. So the U.S. may turn out to be a good place to invest if stocks are priced for a recession that doesn't happen.
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.
MOST NOTEWORTHY: Google, Boyd Gaming and Microsoft were today's noteworthy initiations:
Kaufman Bros. believes Google (NASDAQ: GOOG) has "only begun to scratch the surface" of its local market opportunity. Shares were assumed with a Buy rating and $680 target.
Banc of America believes Boyd Gaming (NYSE: BYD) will face financing challenges with its Echelon resort, and initiated shares with a Sell rating and $14 target.
Lehman reinstated Microsoft (NASDAQ: MSFT) with an Equal Weight rating and $34 target based on peaking Vista/Office 2007 cycles, uncertain online strategy, and increased investment.
OTHER INITIATIONS:
Goldman started AON Corp. (NYSE: AOC) with a Neutral rating.
Broadpoint initiated Covanta (NYSE: CVA) with a Buy rating and $32 target.
"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.
TheStreet.com's Jim Cramer says those aspiring to be rich need to find the stocks that can win now, and in any environment.
Everything's great over the long term ... if you are really rich!
I am thinking that because of the pleasing words I always hear from really rich people on TV: really rich money managers and investors and analysts.
And it's true. When you are really rich things are great. When you are really rich you can go invest in those really good municipal bonds that yield more than treasuries, the ones that you have to buy in $500,000 increments typically, although maybe $100,000 will get you in. When you are really rich who the heck cares if you sit in cash for the next 18 months. Doesn't hurt you.
When you are really rich it is great to have cash and watch real estate go down to prices that are reasonable or be able to go to a bank and say "what do you have in foreclosure?"
A potential $90B deal between mining companies Companhia Vale Do Rio Doce (NYSE: RIO) and Xstrata has hit a number of snags that could possibly end talks, reported the Wall Street Journal, including that Xstrata shareholder Glencore International, which has agreements to market a large part of what Xstrata's mines, wants to expand that to include Vale products besides iron ore.
Montreal-based Gildan Activewear Inc (NYSE: GIL) recently paid $135M for V.I. Prewett & Son, a supplier of private label socks to large retailers such as Wal-Mart Stores Inc (NYSE: WMT). Gildan expects socks to add about $200M in annual revenue, equal to about 20c a share, according to "The New America" column in Investor's Business Daily's.
Retailers Lowe's (NYSE:LOW) and Nordstrom (NYSE:JWN) to report Q4 earnings. Lowe's will hold its conference call at 9:00am, Nordstrom will hold its conference call at 4:30pm.
Tuesday, February 26
Office Depot (NYSE:ODP) to report Q4 earnings; conference call at 9:00am.
FCC to hold Open Commission Meeting at 9:30am.
Macy's to report Q4 earnings; conference call at 11:00am.
Wednesday, February 27
FDA to hold Anti-Infective Drugs Advisory Committee Meeting at 8:00am.
BP plc (NYSE:BP) to hold business update at 9:00am.
Toll Brothers (NYSE:TOL) to report Q1 earnings; conference call at 2:00pm.
Vale (NYSE:RIO) to report Q4 earnings; conference call at 10:00am.
PDUFA Date for Jazz Pharma (NASDAQ:JAZZ) and Solvay Pharma's (SVYSY) Luvox CR for treatment of Obsessive Compulsive Disorder and Seaosnal Affective Disorder.
According to the Wall Street Journal's "Heard on the Street," bears believe it may be too early to bargain hunt among financial stocks, as they think there may be more bad news to come after Citigroup Incorporated (NYSE: C) announced it took an $18B write down in Q4.
MiningMx.com reported that BHP Billiton has reached an "impasse" with South Africa's government over the conversion of the company's exploration leases to new order mining rights.
MOST NOTEWORTHY: Genitope Corp, Discover Financial and Mine Safety Appliances were today's noteworthy downgrades:
Genitope Corp (NASDAQ: GTOP) was downgraded to Underperform from Sector Perform at RBC Capital following MyVax's failure to meet its Phase III trial endpoint.
Calyon downgraded shares of Discover Financial (NYSE: DFS) to Neutral from Buy citing the weak macro environment.
Private equity firm Blackstone (NYSE: BX) is expected to join with China's sovereign wealth fund in a bid for mining firmRio Tinto (NYSE: RIO). Blackstone's bid follows a $140 billion offer from BHP Billiton (NYSE: BHP), which Rio Tinto rejected. If Rio Tinto accepted any bid from Blackstone, the private equity house is expected to divide up Rio Tinto's assets.
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.
Eoin Treacy of Fullermoney says that as commodities prices weaken, you need to look carefully before investing. 
Chesapeake Energy
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"I believe the #1 rule for making money in the next decade is to get long whatever the Chinese are buying," says 
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Main market news here: 
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