Red-Hot Resources

"Luck is not chance, it’s toil; fortune’s expensive smile is earned.”

Thursday, January 24, 2008

3 Important Stories for a Potentially Wild Day

Yesterday's whip-saw action in the markets was just what I was talking about in a Red-Hot Resources issue that went out before the market rallied. Here are some points I made in that issue ...

Why aren’t I talking about fundamentals? Well, I think natural resource stocks are fundamentally very cheap. But there are bigger “fundamentals” at play here: The fact that the Federal Reserve, Treasury, White House or Congress could jump in at any moment with some new market-saving plan fundamentally alters the game.

It reminds me of when I used to play the game “Risk” as a kid with my friends. Sometimes, one of the guys would get so angry at his losing position that he’d wipe the board clean and stomp off.

That’s what the government is trying to do. The fundamentals are lousy. The banks have jumped into the credit abyss and they’re dragging the rest of the market with them. That’s a losing proposition for politicians in an election year – and politicians hate to lose. So, they’ll keep trying to change the fundamentals with helicopter-drops of cash, tax rebates, heck, maybe even a resolution trust corporation to take of the mortgage crisis.

Will any of these potential game-changers work? I don’t know. But with the fundamentals shifting under our feet, the smart thing is to wait for a breakout one way or another and play that breakout.

With that in mind, here are three stories you might want to read.

Important Story #1 …

New York's Dinallo Wants Banking Industry to Fund Rescue of Bond Insurers New York regulators are pushing the biggest U.S. financial institutions to rescue bond insurers, led by MBIA Inc. and Ambac Financial Group Inc., and avert credit- rating downgrades that may further disrupt financial markets.

My take – the banks are more likely to do this if the government guarantees they won’t lose money on the deal – a “free money” situation. Since this is an election year, that’s entirely possible. But without government guarantees, this deal could still fall apart.

Important story #2 …

China's Economy Expands 11.2%, Supporting Global Growth as U.S. Slows China's economy expanded more than 11 percent for the fourth straight quarter, supporting global growth as a recession looms in the U.S.

My take – yesterday, CNBC was populated by a flock of bobble heads saying it was “obvious” that the global economy is not decoupling from the US. While I still think the US is important, it is not the be-all and end-all for the global economy that it used to be. And if India and China see their exports falling off, they will likely ratchet up domestic spending in the form of an infrastructure buildout, if only to keep a lid on social unrest.

Important Story #3 …

Potash Profit Doubles on Nutrient Prices, Higher Shipments of Fertilizer Potash Corp. of Saskatchewan Inc., the world's largest maker of crop nutrients, said profit more than doubled to a record as rising commodity prices spurred fertilizer demand.

My take – if you’re looking for one sector in North America that should continue to shine if the economy weakens, the farm sector is it. Exports are driving growth across the board.

My other two picks are precious metals and energy.

Check out my new gold and energy blog at