We have been front-running many very positive catalysts since I first recommended buying Amazon.com Inc. (Nasdaq: AMZN) on Feb. 5.

First, that put us ahead of the bull-market rebound in U.S. stocks that started in early March. My recommendation also predated the launch of Kindle 2, as well as stimulus measures deployed by the United States and China in April.

Just as predicted, the U.S. economic recovery has gathered momentum and Amazon has benefited greatly by offering a compelling value proposition to a cash-strapped consumer. 

The loose monetary policy and the massive fiscal stimuli of the U.S. Federal Reserve and the weak U.S. dollar have combined to fuel a rally of the Nasdaq Composite Index and Amazon has outperformed the whole way. 

In June, I recommended that long-term holders maintain their positions in Amazon, and that traders start reining back positions gradually as valuations became extended.  And I took that slightly conservative position, despite my deep conviction that Amazon stock remained unquestionably bullish.

Amazon reported solid second and third-quarter earnings, and the stock has almost tripled from my initial February recommendation.  In fact, the company blew the top of Wall Street estimates and kept running strongly. Operating margins expanded from 3.6% to 4.6% in the third quarter. That improvement is mammoth for a rabid discounter that thrives on volume.

What has this meant for investors? The day before my February recommendation of Amazon, the company’s shares closed at $61.06. By the third week of June, when I reiterated my recommendation, Amazon’s shares had climbed to $82.96 – a gain of nearly 22% in just four months.

Amazon’s shares closed Friday at $132.97, a jump of 60% since the third week of June and a total gain of 118% in the nine months since I labeled Amazon’s shares as a “Buy.”

What can we learn? In the technology sector, one must always be looking ahead to the next wave and its financial implications. With their debates about the future distribution of content – with digital distribution poised to take the place of CDs and DVDs – analysts have failed to factor in that Amazon has found a way to stay in the game: Kindle. Just as MP3 players and iPods have changed the music publishing industry, Kindle has revolutionized the publishing business.

In addition, Amazon has identified another segment of the IT business where it excels: managing a huge, highly efficient storage and computing infrastructure. It has launched its vaunted cloud computing platform, which allows users to rent these capabilities in order to store information and compute it while being linked online to Amazon’s infrastructure.

This allows businesses to outsource the headache of maintaining and optimizing their own infrastructure. It also increases the security and integrity of user data.

So, just as Amazon’s superior online shopping and infrastructure capabilities enabled its runaway leadership in online sales, its innovation will help the company succeed in streaming content like movies and music online.

However, some clouds are beginning to dot the horizon.  Wal-Mart Store Inc.’s (NYSE: WMT) expansion into this field cannot be ignored. And in the hi-tech gadget field, where Amazon is not traditionally been a force, we have seen other players looking to dethrone the Kindle’s success, including Apple Inc. (Nasdaq: AAPL).  The latter is a threat that nobody can slight, given its tradition of obliterating its competition with superior design and functionality.

Of course, even if Apple or others succeed in stealing market share from Amazon in the e-reader market, they won’t dent Amazon’s leadership in selling published content.  In addition, the global roaming capabilities of the Kindle will allow sophisticated clients worldwide that have Amazon accounts to buy its content, expanding the reach of digital book sales no matter which country they’re in.

In any case, we are going to take our original capital out in recognition of the near tripling of our investment and let the rest ride.

Regardless of the outcome of the reader device wars, Amazon will likely benefit from increased online sales and the secular growth explosion that is taking place in the industry.  So I am still confident that, even at these lofty valuations (the stock is trading at 78 times earnings), Amazon will do very well in the long term.

Recommendation: Take your original capital out of Amazon.com Inc. (Nasaq: AMZN) and let the rest ride long term (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Amazon.com Inc.

[Editor's Note: Commodities are hot. In some cases, white hot.

Oil, gold and silver are the hot commodities of today. But the shrewdest investors will look toward the horizon, and try to project just what the commodity profit plays of the future will be.

If you need help, just ask Money Morning's Horacio Marquez.

As worries about oil escalate - whether those worries are about future supplies, future prices or global-warming - more and more muscle is being placed behind alternative power technologies. That's especially true in the hybrid vehicle market, where a specific technology has emerged as the clear leader.

The technology is lithium-based rechargeable batteries, and its emergence is sending lithium demand skyrocketing.

The profit potential of this market is stunning - but only for investors who can figure out the right way to play it.

Here's the thing: Marquez - a Money Morning contributing editor who also edits the Money Map VIP Trader - has uncovered the lithium-tech leader.
This company is a global player with a solid market cap and is well known within the hybrid industry. But surprisingly few investors know about the company, or have ever even heard its name.

To learn more about this company - to get in ahead of the masses - and to find out more about Marquez's Money Map VIP Trader, please click here.]

News and Related Links:

• Money Morning:
  
  Buy, Sell or Hold: Amazon.com Inc. (Nasdaq: AMZN) Remains Unquestionably Bullish
• Money Morning:
  Buy, Sell or Hold: Amazon Stock is Positioned as a Long-Term Winner
• Money Morning:
  How Sustainable is the Kindle’s Early Success?

Last year, on Aug 25, I recommended readers start buying shares of Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) in incremental amounts until the end of 2008. 

I emphasized that Berkshire should be a core, long-term holding in investors’ portfolios and not a stock to trade in and out off.   Today, the stock is about 11% above the price that it finished 2008 at. 

I was always confident that the huge amount of cash on Berkshire’s books would provide it with countless opportunities to pick up quality assets at bargain prices should the market falter.

“Under Buffett, Berkshire Hathaway is a like an astute and disciplined kid in a candy store,” I wrote last August.

Buffet, a savvy and well-financed investor, made the most of this opportunity to cherry pick new acquisitions at ridiculously low valuations and profit handily. Notably, he took big stakes in Goldman Sachs Group Inc. (NYSE: GS) and battery and carmaker BYD Co. Ltd. – both of which he profited handsomely on.

In fact, Berkshire’s concentrated stock holdings, including Wells Fargo & Co. (NYSE: WFC), American Express Co. (NYSE: AXP) and others, have strongly outperformed the Standard & Poor’s 500 Index this year, giving BRK very sizable book value gains. 

And on the operating side, Berkshire’s insurance business has shown gains in insurance premia and in operating cash flow.  All of this added to the already pristine financial strength of the company.

Great crises bring great opportunities and great institutions take advantage of those opportunities.  Berkshire Hathaway, true to its discipline, has done just that. It recognized the immense opportunity and deployed its huge war chest in the greatest acquisition Warren Buffet has ever made – the roughly 76% of Burlington Northern Santa Fe Corp. (NYSE: BNI) that it did not already own.

Warren Buffet is investing in a business that he knows extremely well and that has tremendous long-term potential.  Railroads will almost certainly keep gaining in value as energy prices make them more cost-effective. Burlington Northern benefits from high energy prices because rail is many times more energy-efficient than other modes of transportation, and because it is integral in the transportation of coal, which meets about 50% of the US economy’s fuel needs.

BNI’s large, unique assets make it an absolute bargain at today’s prices.  And with the dim prospects for the U.S. dollar, and with the U.S. economy in recovery mode, money put into any business that is leveraged to energy is likely to pay off. 

The acquisition reduces Berkshire’s huge cash position and the risk of value destruction that would come from inflation. It also increases the beta of Berkshire stock, that is, its sensitivity to equity market swings, due to the strong exposure to a very cyclical business.  At the same time, this move reveals to us the confidence that Warren Buffet has in U.S. economy.

The likelihood that rating agencies will downgrade Berkshire’s credit rating is a modest price to pay for the appropriate strategy at managing one’s balance sheet, eliminating exposure to inflation, and taking advantage of higher prices and greater rail cargo volume moving forward.

Having Berkshire Hathaway stock is a good choice in current conditions.  It’s the perfect time for the company to take advantage of its financial strength and vast war chest.  It has not disappointed, as many of Warren Buffett’s earlier critics have been proven wrong.  It now becomes an even more attractive, astutely diversified play on the rebound of the US economy.

To cap it all, Berkshire has decided to split its Class B stock 50 to 1, making it more accessible to smaller investors.  This is a welcome and long overdue move that will certainly expand the stock’s global appeal.

Recommendation: Buy shares of Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) if you haven’t already (**). And if you currently have shares, we encourage you to hold onto or add to them. 

(**) Horacio Marquez owns no interest in Berkshire Hathaway Inc.

[Editor's Note: Commodities are hot. In some cases, white hot.

Oil, gold and silver are the hot commodities of today. But the shrewdest investors will look toward the horizon, and try to project just what the commodity profit plays of the future will be.

If you need help, just ask Money Morning's Horacio Marquez.

As worries about oil escalate - whether those worries are about future supplies, future prices or global-warming - more and more muscle is being placed behind alternative power technologies. That's especially true in the hybrid vehicle market, where a specific technology has emerged as the clear leader.

The technology is lithium-based rechargeable batteries, and its emergence is sending lithium demand skyrocketing.

The profit potential of this market is stunning - but only for investors who can figure out the right way to play it.

Here's the thing: Marquez - a Money Morning contributing editor who also edits the Money Map VIP Trader - has uncovered the lithium-tech leader.

This company is a global player with a solid market cap and is well known within the hybrid industry. But surprisingly few investors know about the company, or have ever even heard its name.

To learn more about this company - to get in ahead of the masses - and to find out more about Marquez's Money Map VIP Trader, please click here.]

News and Related Links:

• Money Morning:
  Buffett Bets on Bright U.S. Economic Future With Burlington Acquisition
• Money Morning:
  Buy, Sell or Hold: Berkshire Hathaway Inc.
• Money Morning:
  Berkshire’s Back, So What’s Warren Buffett Buying Now?

On June 29, I recommended buying the TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW). The fund is up about 15% since that recommendation and there’s been a distribution of about 2% of the initial investment. Not bad for sitting in bonds and equities of global mega-caps that pay high dividends.

Since this is a close-ended balanced mutual fund that pays a very attractive yield, the fund can invest between 50% to 60% in municipal bonds and between 40% to 50% in global equities. It also can trade at a premium or a discount to net asset value.

Anyone who invested in June was lucky to get in when there was an anomaly in the market and the fund was trading at about a 20% discount to its net asset value. Today, that discount has narrowed to a still high 13%. This discount, and the very high yield that the fund pays, protect it from market downside much more than regular stocks and municipal bonds.

I generally do not like to recommend buying actively managed funds, because one has to bear the manager’s risk. But I made an exception in this case, because both the asset class that I wanted to invest in and the quality of the manager.

Let me explain.

Municipal bonds are an important, but poorly understood asset class. Investing in municipals requires a thorough knowledge of the bond issuers, their fiscal positions and other key determinants of repayment. It also requires diversification and very careful follow-up and management.

There are few truly good managers in this field, so experience and inside knowledge of this difficult market makes a huge difference. And because of the difficult fiscal situation that many states are going through right now, it is imperative to be right on top of political developments that will impact the finances of these states and the probability of repayment.

It is important to note that state governments and other municipal issuers are not reluctant to use their taxing authority to ensure that they remain in good standing. In fact, I learned long ago that the rate of default was about 1% during the Great Depression. So a well-diversified portfolio would enjoy very high yields and barely suffer in the rare case of a default.

Municipals are paying very juicy yields today, which also benefit from tax exemptions. But in addition, TYW’s municipal bond portfolio is managed by one of the very best municipal managers in the nation: Vincent Giordano.

I met Mr. Giordano back in 1991, when I joined Merrill Lynch Asset Management. He was managing their entire municipal bond area and was one of the leaders of this successful institution at the time. His thorough and intense management was responsible for the tremendous success of the area, which in a couple of decades grew from only $2 billion under management to many tens of billions.

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

My office was located close to his, so I was quick to consult him on developments in the fixed income market and I found him to be a treasure of valuable information and analysis, always ahead of the curve.

So, when he retired from Merrill Lynch Asset Management – prior to the sale of that business to Blackrock Inc. (NYSE: BLK) - to start his own fund management operation, I was quick to take note. Having a manager of the caliber of Vincent Giordano is a real advantage.

That’s why you should hold on to our position in TS&W/Claymore Tax-Advantaged Balanced Fund.

I believe there’s a typical profit-taking as the year draws to a close. Leveraged investors must take profits so they don’t carry and show much leverage in their books at the turn of the year. This will turn out to be an opportunity, rather than a problem.

There’s an annual dividend yield of more than 9% at the entry price. And since much of this yield is tax free, the after-tax calculation computes to a yield of about 13% or 14%, depending on your tax bracket.

In this environment of global yield seeking, I doubt that there will be an entry price like the one seen in June. But if an over-reaction in the market, affords that opportunity, I would buy more of this fund with both hands. Liquidity in the markets will likely normalize pretty soon, and for sure by Jan. 2, so take advantage of volatility.

The fund fell 14 cents, or 9.23%, Friday to close at $9.23 a share.

Recommendation: TS&W/Claymore Tax-Advantaged Balanced Fund (NYSE: TYW) and start increasing your positions progressively, if it pulls back below $9 a share (**).

[Editor's Note: Commodities are hot. In some cases, white hot.

Oil, gold and silver are the hot commodities of today. But the shrewdest investors will look toward the horizon, and try to project just what the commodity profit plays of the future will be.

If you need help, just ask Money Morning's Horacio Marquez.

As worries about oil escalate - whether those worries are about future supplies, future prices or global-warming - more and more muscle is being placed behind alternative power technologies. That's especially true in the hybrid vehicle market, where a specific technology has emerged as the clear leader.

The technology is lithium-based rechargeable batteries, and its emergence is sending lithium demand skyrocketing.

The profit potential of this market is stunning - but only for investors who can figure out the right way to play it.

Here's the thing: Marquez - a Money Morning contributing editor who also edits the Money Map VIP Trader - has uncovered the lithium-tech leader.

This company is a global player with a solid market cap and is well known within the hybrid industry. But surprisingly few investors know about the company, or have ever even heard its name.

To learn more about this company - to get in ahead of the masses - and to find out more about Marquez's Money Map VIP Trader, please click here.]

News and Related Story Links:

• Money Morning:
  Buy, Sell or Hold: The TS&W/Claymore Tax-Advantaged Balanced Fund is a Diversified Profit Play with a High Yield

Nearly one year ago – Oct. 27, 2008 – I recommended buying the iShares MSCI Brazil Index (NYSE: EWZ). That week, the exchange-traded fund (ETF) reversed its decline and rallied 31%.  Today it is about 110% higher than our original entry point, which pretty much marked the bottom. 

In that article, I highlighted two top Brazilian companies that would lead the recovery: Petroleo Brasileiro (NYSE ADR: PBR) and Vale (NYSE ADR: RIO). And a few months later I specifically recommended Petrobras in “Buy, Sell or Hold” column.  It has since rallied 66%.

Now that circumstances and valuations have changed dramatically, we must revise those forecasts.

My initial recommendation was in a market that had priced in an end-of-the-world, doomsday scenario. I expected massive measures to be implemented by central banks and governments to contain the crisis. 

In Brazil, specifically, my recommendation hinged on the structural strengths that government had painstakingly built into the nation’s economy. I was focused on fiscal and monetary discipline and the country’s decades-long successful struggle to wean itself from imported oil.  And it doesn’t hurt that this commodity powerhouse has just about everything the world needs to grow – other than lithium.

I also highlighted the highly professional central bank, which, independent of political pressures, kept real interest rates high in the Brazil’s commodities-crazed bonanza years. That restraint kept the economy from overheating, built a rock-solid cushion of international reserves to be deployed precisely in a crisis like the one we experienced last year, and resulted in a healthy internal banking system.  The recommendation of EWZ worked like clockwork.

The inevitable critics, many of who laughed at the concept of decoupling, have been proven wrong.  Brazil was the last Latin American economy to go into recession and the first one to come out.  Brazil posted a second-quarter growth of 1.9% and next year it will grow almost 5%.  The economy has added 1 million jobs, which replaced the 800,000 jobs lost during the crisis.

When a country enjoys twin surpluses (primary fiscal and current account) and is sitting on some $200 billion of international reserves, the risk of capital flight that could cripple the economy is minimized.  In Brazil’s case, its high level of foreign reserves and a flexible, floating exchange rate were enough to insulate the economy from the global banking freeze and provide the financing to keep exports rolling. 

The fact that Brazil’s economy is only 13% dependent on foreign trade limited the downside effects of the global crisis. The fiscal surplus and strong banking system allowed for ample fiscal stimuli and credit expansion to take place.  BNDES, the Brazilian development bank, was responsible for a full 39% of credit expansion. Tax cuts and fiscal spending increased, replacing some export-led growth lost.

This has been and will continue to be very positive for equity valuations, as accelerating growth points to rising profits.  But the $64,000-dollar question is: Can this pace be maintained?

To be sure, Brazil is seeing some slippage in its key strengths.  And some of those setbacks have been the result of political developments.  Brazil will hold its presidential elections on Oct. 1 of next year.  As in any presidential election around the world, the incumbent party has a strong incentive to be more stimulative on the fiscal front than it would otherwise be.  And the fact the current President Lula de Silva cannot run will make the election even more heated. 

Additionally, bias toward growth will be very well received by advanced economies that welcome any possibility of generating local jobs via exports.  So the markets are likely to treat any slippage as benign, as Brazilian growth and company profits will “surprise” Wall Street in the second half of next year.  And Brazil is, after all, “slipping” from a very strong position. 

Despite the government’s expected increase in fiscal spending – which is already some 35% of gross domestic product (GDP), excluding interest on debt – Brazil will increase its 2010 fiscal surplus to a full 3.3% of GDP from 2.5% of GDP this year.

However, this fiscal spending and loose monetary policy will increase inflation expectations.  Actually, with key short-term rates at 8.75% and inflation right below 4.5%, Brazil’s monetary policy is one of the tightest in the world.  But these levels are at record lows for Brazil, which traditionally runs tight monetary policies to prevent its economy from overheating. 

There is little risk that Brazil will move rates up anytime soon, since inflation is still expected to remain at these levels though the elections.  If anything, I expect Brazil to be slightly behind the curve on the monetary side until the elections, as the growing fiscal surplus provides some cover.

The International Monetary Fund just published a book entitled “Crisis Averted – What Next?”  In it, the IMF highlights the fact that commodity exporters like Brazil are leading the recovery and will have to exit monetary and fiscal stimuli earlier than the rest of the world. The organization suggests that such nations exit their fiscal stimuli well before they act on their monetary side. 

Brazil’s superbly-managed central bank last week left its rates unchanged at 8.75%, and signaled that it would not move them for quite some time.  Some analysts, including me, don’t expect Brazil to hike rates until after next year’s Oct. 1 presidential elections. 

Brazil’s trade balance also requires attention.  Its September trade surplus was $1.3 billion, down from $3.1 billion the prior month.  The strong appreciation of the Brazilian real, which has rallied some 35% against the U.S. dollar this year, was the main impetus behind this decline.

It is natural that the dollar suffers as the U.S. and other advanced economies slog through a slower recovery. And as Brazil’s economy expands strongly into next year, the nation’s current account will turn negative, to between $18 billion and $28 billion in 2010. 

Imports will grow much faster than exports, but this won’t be a problem for a country that boasts $233 billion in international reserves. And as the current account weakens and turns negative, the real’s appreciation will slow and even start to reverse in the second half of next year.

In the meantime, Brazil’s attractive equity market and fixed-income yields, and its appreciating currency, will continue to attract large inflows of foreign investment.  These inflows will add to Brazil’s international reserves, but this “self-insurance” war chest against global crisis will be costly.  That’s because the returns that the Brazilian Central Bank obtains on its U.S. dollars are very low compared to what international investors get in Brazil’s fixed-income markets.  Hence, in order to slow down the inflows and the appreciation of the real, Brazil enacted a 2% tax on fixed-income and equity investments to deter speculators.

This concern is not unique to Brazil. Many other countries are considering, or have already taken measures to prevent bubbles in their internal markets.  In Asia, the central banks in Hong Kong, Taiwan, the Philippines, Thailand, Indonesia and South Korea have all taken measures to weaken their currencies to counteract recent weakness in the dollar.

European, Canadian and Singaporean government officials have openly voiced their concerns about a weak dollar, and Colombia is considering capital controls. Brazil’s tax is a step in this direction.  At the end of the day, countries will do well to focus on the structural issues that hinder the competitiveness of their companies, rather than resorting to stopgap, distortive measures.

All in all, these setbacks will not detract from the allure of a strengthening economy with pricing power in its commodity exports in a non-inflationary environment.  And strong inflows will continue, even though portfolio inflows will be somewhat lower because of the newly administered tax.

So, we will continue to go long on Brazil, but since we’re up 110% on my previous EWZ recommendation, we should lock in some profits for risk management purposes.

EWZ fell 1.08% Friday to close at $74.34 a share.

Recommendation: Rebalance your portfolio by selling half of your position in the iShares MSCI Brazil Index (NYSE: EWZ) (**).  That is, extract the original capital and leave the profits running, effectively playing with “house money.”  For investors that do not already have EWZ in their portfolios, take advantage of volatility from here to the end of the year to average into a full position.

(**) Special Note of Disclosure: Horacio Marquez holds no interest in the iShares MSCI Brazil Index (NYSE: EWZ).
[Editor’s Note: Commodities are hot. In some cases, white hot.

Oil, gold and silver are the hot commodities of today. But the shrewdest investors will look toward the horizon, and try to project just what the commodity profit plays of the future will be.

If you need help, just ask Money Morning’s Horacio Marquez.

As worries about oil escalate – whether those worries are about future supplies, future prices or global-warming – more and more muscle is being placed behind alternative power technologies. That’s especially true in the hybrid vehicle market, where a specific technology has emerged as the clear leader.
The technology is lithium-based rechargeable batteries, and its emergence is sending lithium demand skyrocketing.

The profit potential of this market is stunning – but only for investors who can figure out the right way to play it.

Here’s the thing:  Marquez – a Money Morning contributing editor who also edits the Money Map VIP Trader – has uncovered the lithium-tech leader.
This company is a global player with a solid market cap and is well known within the hybrid industry. But surprisingly few investors know about the company, or have ever even heard its name.

To learn more about this company – to get in ahead of the masses – and to find out more about Marquez’s Money Map VIP Trader, please click here.]

News and Related Story Links:

• Money Morning:
  
  Buy, Sell or Hold: iShares MSCI Brazil Index
• Money Morning:
  With One of the Hottest Economies on the Planet Brazil is Finally Living Up to Its Promise
• Money Morning:
  
  Buy, Sell or Hold: Brazil’s Petrobras Will be Poised for Big Gains When the Economic Recovery Kicks Off in Earnest
• Money Morning:
  Tax on Foreign Investment Won’t Dent Brazil’s Currency

BHP Billiton Ltd. (NYSE ADR: BHP) is the largest and most diversified mining producer in the world.  And the company has had the foresight to acquire assets that provide access to the highest-potential minerals and commodities on the planet. 

Other than lithium – "the next oil," which will skyrocket with pure electric car production starting next year – BHP has leading positions in key low-cost mineral deposits around the world.

The company’s highly disciplined management has afforded it consistent profitability and a very strong balance sheet.  That has allowed BHP to take advantage of the economic downturn by cherry-picking mining properties around the world. 

In June, for example, BHP reached a $116 billion deal with Rio Tinto PLC (NYSE ADR: RTP) that will allow the two mining giants to merge their Western Australia iron-ore operations.  Also, they are in a friendly $200 million takeover of United Minerals, which has deposits adjacent to a large BHP mine. 

Deals like these create strong long-term value for shareholders and deliver results. And, in BHP’s case, they also help the company to fulfill it’s long-term mandate of capitalizing on booming demand in the emerging markets, which account for 15% of the global economy and which are growing much faster than the rest of the world.

China, in particular, needs to grow its economy at 8% in order to employ the 18 million people that join its labor force each year.  And with international reserves of  $2.3 trillion and no debt, Beijing can dial up its own growth number. 

China’s vast international reserves and solid balance sheet gives it what I love to see when analyzing countries: varying degrees of freedom.  That is, China has many economic and policy options to control its own destiny, instead of being dependent, as Warren Buffet likes to say, “on the kindness of strangers.”

And these policies have been so effective that China is already starting to consider reining in some of the stimuli that the central government deployed just after the crisis began.

But do not be alarmed. Beijing’s requirement that the economy grow at a rate of at least 8% a year will continue to afford investors with a tremendous potential for profit – and certainly more opportunities than in countries still struggling to emerge from the financial crisis.

What’s more, China’s stimulus has already been effective in driving domestic consumer demand. By October of last year, the vast majority of China’s growth was coming from internal investment and demand, rather than from exports.  So the economy is indeed making the desired transition.

That means there will continue to be a lot of new buildings, roads, cars, refrigerators and many other things that require not only electricity, but steel to produce.  Steel, of course, is produced using iron ore, whose supply is highly concentrated among three players. BHP and Rio Tinto are two of those three, and the final player is Vale SA (NYSE ADR: VALE).

When you consider China’s rabid demand for large amounts of raw material, it’s no surprise that Beijing is reaching long-term supply agreements with companies like Vale, Rio Tinto and BHP.

But it’s not until put China’s strongly emergent consumer demand together with the precipitous drop in the value of the U.S. dollar that you get the complete picture.

You see, in the absence of an alternative reserve currency, real assets are a nice hedge against U.S. dollar weakness.  And if – like China – you have $2.3 trillion in international reserves, you need some sort of portfolio diversification.

What makes this investment premise even better is that China is not the only positive emerging market story: Brazil, India and Russia also look strong.  Hence, with global growth accelerating – and a U.S. currency depreciating – commodities such as minerals are red hot and getting hotter.

The rise in consumer purchasing power in China, India, Brazil, Russia and other emerging economies will lead to a sharp spike in electricity consumption as an enormous wave of new consumers buy televisions, washing machines, refrigerators and other consumer electronics.

BHP sees energy demand growing at an annual rate of 8% in China and 7% in India. And it has wisely positioned itself to capitalize on this trend.

Coal is the most widely used energy source in the world, accounting for about 40% of global energy production. And BHP is one of the world’s largest coal producers, with mines in South Africa, South America, Australia, and the United States. Also, it’s fair to say that demand for coking coal, which is used to fire steel smelters, will rise exponentially when steel production recovers. 

BHP also owns and operates Australia’s Olympic Dam, which has the world’s largest uranium deposit.

At $71.71 a share, BHP’s stock is trading at 19 times earnings and is essentially at the top of its 52-week range. In fact, the shares have almost tripled from their 12-month lows.

However, the company is bound to surprise to the upside as the dollar devalues and the global economy accelerates next year.  Technically, the stock is in a solid uptrend.  Given the sizable gains the stock has posted this year, you might see some correction between now and year end, which would be a superb opportunity to add to your initial position.

Recommendation:  Take an initial stake in BHP Billiton Ltd. (NYSE ADR: BHP) now, and look for any weakness between here and year-end to average into a full position (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in BHP Billiton Ltd.

[Editor’s Note: Commodities are hot. In some cases, white hot.

Oil, gold and silver are the hot commodities of today. But the shrewdest investors will look toward the horizon, and try to project just what the commodity profit plays of the future will be.

If you need help, just ask Money Morning’s Horacio Marquez.

As worries about oil escalate – whether those worries are about future supplies, future prices or global-warming – more and more muscle is being placed behind alternative power technologies. That’s especially true in the hybrid vehicle market, where a specific technology has emerged as the clear leader.

The technology is lithium-based rechargeable batteries, and its emergence is sending lithium demand skyrocketing.
The profit potential of this market is stunning – but only for investors who can figure out the right way to play it.

Here’s the thing:  Marquez – a Money Morning contributing editor who also edits the Money Map VIP Trader – has uncovered the lithium-tech leader.

This company is a global player with a solid market cap and is well known within the hybrid industry. But surprisingly few investors know about the company, or have ever even heard its name.

To learn more about this company – to get in ahead of the masses – and to find out more about Marquez’s Money Map VIP Trader, please click here.]

News and Related Story Links:

• Money Morning:
  With Rio Tinto’s Snub of Chinalco, Aussie Backlash Against China’s New Capitalists Continues to Escalate.
• Money Morning:
  Buy, Sell or Hold: HSBC Holdings PLC (NYSE: HBC) Has Absorbed the Financial Crisis’ Impact and Is Now Exploiting It.
• Forbes:
  
  BHP Launches $189 Million Takeover of United Minerals.
• Wikipedia:
  Olympic Dam Mining Project.

In tough times, the strong get stronger, and HSBC Holdings PLC is (NYSE ADR: HBC) is cherry-picking the world.

HSBC is one of my favorite banks in the world. And that feeling is shared. In fact, “the world’s local bank,” as they like to call themselves, is the largest recipient of deposits in the world. HSBC operates in 86 countries around the world and has 55% of its assets in Europe, 23% in Asia/Pacific, including its original base in Hong Kong, 26% in North America and 4% in Latin America.

This diversification is invaluable in an increasingly globalized world. Additionally, it spreads out all of the risks to which a bank is exposed: systemic, economic, regulatory, currency, deposit-raising and lending.

Geographic diversification, a strong balance sheet and disciplined credit saved HSBC in the downturn.

There’s an old adage in banking that I learned when I joined a venerable U.S. financial institution at the beginning of my career. It goes: “Any fool can make a loan, but collecting it is not that easy.”

The point is, having the largest amount of deposits really counts. A solid deposit base, a strong balance sheet and a “boring” long-term strategy are precisely what a bank should have.

Key dimensions used to analyze banks show how fast and healthily HSBC’s loan portfolio is growing. But the really impressive growth is coming in the bank’s ratio of deposits to loans. You don’t want to see exploding growth in loans, because it almost always leads to bad loans down the line.

What you really want to see is a bank that has its own funding – a bank that doesn’t depend on credit markets.

Banks I call “money junkies” crash when credit markets seize up. We saw this happen to many financial institutions last year when the inter-bank markets froze.

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

I’ve analyzed emerging markets for almost 30 years, and I can tell you that one recurring theme is fragile economies blowing up through their banking systems. The banking system acts like the proverbial canary in the coalmine. And when these economic blow-ups occur, weak banks disappear and their best assets are snatched up by the best capitalized and most-liquid banks at rock-bottom prices.

Because of its unequalled strength in deposit gathering, HSBC has an enviable ratio of about 120% of deposits to assets. In fact, a study I did back in 2001, led me to the conclusion that HSBC would be one of the few banks flooded with billions of dollars in corporate cash if a global financial debacle should occur.

You see, good banks lend money to those who do not need it. And cautious depositors should deposit in banks that are flush with deposits in times of crisis.

HSBC Weathers Downturn, Retools for Recovery

To be sure, HSBC did take its share of lumps in this downturn. The bank grew fairly aggressively prior to the economic collapse, because of a global synchronic growth episode, which prompted enormous demand for loan growth around the world for at least five years.

It was also hampered by its acquisition acquisition of Household Finance Corportation, the assets of which are being wound down.

But, given the company’s traditional credit discipline, its share of trouble was relatively small compared to what the competition suffered through. And in the end, the bank’s strong capitalization, global diversification and discipline saved the day. HSBC’s exposure to a variety of resilient economies around the world, including Asia and Latin America, gave it an edge over U.S.-based firms.

Now that the worst appears to be over, HSBC already has taken the appropriate medicine: It raised almost $20 billion in capital to bring its Tier 1 capital to a very high 10.1% and began a major clean up of its existing problem areas. That means loan loss provisions will be decreasing throughout 2010 and eventually to a low of 1.1% within a couple of years. And capitalization will keep growing as the company does a sale-leaseback of its New York headquarters.

In the meantime, HSBC’s growing net interest margin is likely to keep expanding strongly as interest rates rise and yield curves around the world become steeper. You see, inflation is a bonanza for banks, which take deposits short-term and lend longer term. Thus, when longer-term interest rates rise more than short term rates, banks smile. And the world is still employing re-flationary fiscal and monetary policies, which means that this is very likely to occur.

The upside does not stop there, either.

HSBC’s more than $1.1 trillion in customer deposits – mostly from its more than 125 million retail customers – are very stable, because retail customers are less likely to switch banks than are its 2.8 million corporate customers.

HSBC also has announced that it is moving its Chief Executive Officer Michael Geoghegan to Hong Kong – the very place that it started business in 1865. A “little” detail: HSBC will be listing its shares there pretty soon, and this exchange is well known for explosive growth in the stock prices of Chinese banks that brought out initial public offerings (IPOs).

Now, HSBC is not really a Chinese bank. But the relocation of the its top executive to Hong Kong, its already strong presence in the region, and its announcements about pending negotiations to acquire the Asian businesses from troubled Royal Bank of Scotland Group PLC (NYSE ADR: RBS) and ING Groep, N.V. (NYSE ADR: ING) will give HSBC a very strong presence.

HSBC is looking to pick up the retail and commercial-banking assets in China, India and Malaysia from Royal Bank of Scotland and the private-banking assets of ING. There are no guarantees of victory, but this is precisely what a strong bank should do; take advantage of the crisis to grow in a disciplined fashion in its core areas of expertise.

In addition to HSBC’s expansion in private banking, retail and commercial banking, the firm is also expanding in insurance. So, we see a focused strategy of expanding in desirable, profitable and fast-growing activities in the most dynamic economies. This is just too good to pass up.

Tough times often provide salivating opportunities for the players that did their homework and remained boringly disciplined during the preceding benign credit cycle. And that’s precisely the case for HSBC right now. So hop along for the ride, as this very well managed and strong bank expands and recovers from a global recession.

HSBC’s stock price should appreciate very strongly over the next couple of years.

Technically, the stock has crossed the 200-day moving average to the upside, it appears oversold and is sitting on the 50-day moving average. Now is a good moment to buy it. If you see market-induced weakness in the stock before yearend, I would add to the exposure and hold long term.

Recommendation: Buy HSBC Holdings PLC is (NYSE ADR: HBC) at market (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in HSBC Holdings PLC.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Map VIP" trading service.

And in a new free report, Marquez discusses his find of one huge potential profit play in the form of an energy company that controls a resource that could soon replace oil as the world's most coveted energy resource. Projected demand for this wonder fuel already exceeds production by 16 times. Just in the next 90-120 days, investors in this most precious commodity could see gains of 100% as the world market for this substance shoots past $90 billion. And you can see a copy of that free report, simply by clicking here.]

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In the last few months we have seen a very strong stock market rally. The market has recovered from highly distressed levels and posted exorbitant gains.  In addition the “wall of money” from the U.S. Federal Reserve has pushed risk-prone investors back into the market, pushing its general level up. 

You see, the massive fiscal stimuli and ultra-easy money from the Fed does indeed have real effects on the economy.  Whether you want to call them artificial or real, the stimuli have moved and will continue to move profits, until it is withdrawn.  And the timing of the deployment of the fiscal and monetary stimuli, the timing of its positive effects and the timing of its eventual removal are uncertain.

In addition, we have many short-term uncertainties. The upcoming Group of 20 (G20) meeting has potentially important ramifications for the global financial system and for global currencies. We also will get more data about foreclosures, existing and new home sales and the Federal Deposit Insurance Corp.’s (FDIC) funding needs.  Finally, we have Damocles’ sword hanging over the market with the potential for additional deficit from President Obama’s healthcare reform.

So we are going to go for a safe play that enjoys a nice dividend and presents a compelling value proposition right now: Kimberly Clark Corp. (NYSE: KMB).

When in doubt, go for consumer staples.  And a superbly run Kimberly Clark will do the trick.  The stock has overcorrected recently, and the headwinds of soft consumer demand and volatile commodity costs are abating.  What’s more is that KMB’s major source of growth will continue to be emerging economies. 

U.S. consumer activity is not as dead as it looks.  While unemployment is still climbing, the rate at which people are losing jobs is declining on a consistent basis.  Additionally, the pick-up in home sales and in the stock market is helping slowly reverse the negative wealth effect suffered from last year’s crash.  Programs like “Cash for Clunkers” and tax incentives for purchases of new homes are having a positive effect on those sectors and are generating increased incomes in the industries that benefit from them.

With respect to emerging markets, the situation is even more positive. Advanced economies are surely going to commit their support to emerging market growth at the G20 meeting in Pittsburgh this week. 

This is good for KMB, because supportive trade and capital flows will help propel the main source of KMB’s growth.   Emerging markets have been giving KMB more than three times the growth than advanced economies have.  And the trend will continue.

It is easy to understand why.  For starters, it helps a lot to have much higher population growth.  Also, income growth is higher as the currencies appreciate, and people leave poverty to join the middle class at a much higher rate than in the advanced economies. 

The expected rate of growth for next year in emerging markets will continue to accelerate and dwarf the rate of growth of the United States, Europe and Japan for years to come.

Growth rates in emerging economies are catching its self-sustaining levels, which should lead to further acceleration next year.  This has been my thesis since last October, when I called the turn on Brazil with my recommendation of the iShares MSCI Brazil Index (NYSE: EWZ), which has since doubled in value.

Then we have the issue of volatile commodity prices, which have led KMB to raise prices, hurting some demand.  KMB is taking further restructuring measures to address costs in short order.  This will improve profitability short term, and it will give the company a lasting competitive advantage.

What is critical for KMB’s success is their established brand leadership.  The company’s brand enjoys superior recognition and acceptance and creates sustainable competitive advantage in an industry that is little affected by economic mishaps.  This cements the defensive nature of our call.

Meanwhile, KMB’s price-to-earnings (P/E) ratio on estimated earnings is only about 11 times.  That makes the stock a gift for investors that could easily pay about 15 times for a name like this.  Adding to the allure of the value proposition is KMB’s generous dividend yield of more than 4%.  This dividend is supported by a mammoth cashflow that ensures that it is safe.  In fact, the dividend payout ratio is only 60%. 

Rather than investing in U.S. Treasuries, why not own a stock of a company that will surely appreciate strongly over several years?

And there is yet another reason to buy KMB.  There is short interest that in this market is likely to get squeezed out of their positions.  By many measures, KMB is an attractive short-squeeze play.  Shorts typically increase their positions in defensive stocks in bullish markets in order to go long against highly cyclical stocks.  Now, close to year end, as we are right now, it is highly probable that they will be reversing their position in order to close their books for the year.

And for those lovers of technical analysis, this stock is a gem:

• Its 50-day exponential moving average crossed to the upside violently in mid-July and has been consolidating at these levels.
• The stock is sitting at the precise lower-end of the Bollinger bands.
• And, very importantly, it is way oversold by many key indicators.

So, this is a defensive stock that pays a generous 4.2% dividend yield, and enjoys an earnings surprise upside as it deals with headwinds.

Recommendation: Buy Kimberly Clark Corp. (NYSE: KMB) at market(**).  I suggest you buy anywhere between one third to half of your position initially, and dollar cost average into a full position over the next four weeks.

 (**) – Special Note of Disclosure: Horacio Marquez holds no interest in Kimberly Clark Corp.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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The just-concluded Group 20 (G20) meeting left us with a chorus of very "prudent" governments and central bankers singing the praises of easy monetary and fiscal conditions. 

So where can we take refuge when all the central banks in the world print money and governments run deficits in order to spend like drunken sailors? 

The answer is gold.

Fortunately for us, we foresaw this scenario a while ago. On April 20, I recommended that investors diversify their portfolios by adding the SPDR Gold Trust ETF (NYSE: GLD).  The fund is up about 14% since that recommendation, but it’s not yet time to sell, as there are still a number of factors working in gold’s favor.

For starters, there is more and more talk of the U.S. dollar losing some of its luster as a reserve currency.  But this debate is moot for the moment.  The reality is that it will take a long time to reduce the preeminent role of the dollar as the store of value of choice for central banks around the world.

Earlier in March and later in June, Zhou Xiaochuan, governor of the People’s Bank of China made a pitch for the creation of an international global currency delinked from sovereign currencies.  This increased speculation about the probability of China deemphasizing the dollar within their extraordinary high foreign reserves of almost $2 trillion. 

Some 64% of global reserves are in U.S. dollars, according to the International Monetary Fund (IMF). So if China and other holders of U.S. debt were to reduce their holdings, it would have a substantial impact on the greenback’s value, as well as on U.S. interest rates, given that those countries would be selling U.S. Treasuries.

Zhou suggested the use of the IMF’s Special Drawing Rights (SDRs) as an alternative. The SDR is a currency linked to a basket of four major international currencies in the following approximate weightings: U.S. dollar (44%), euro (34%), Japanese yen (11%) and British pound (11%). 

But the reality is that this would be highly impractical. To begin with, there are almost no instruments denominated in SDRs that China and other countries could invest their reserves.  And if the IMF issues the instruments, then it would be taking the other side of the trade, which means it would have to start lending in SDRs, too.  This is very unlikely.

Furthermore, no other currency on the planet is large enough to serve as the world’s main reserve currency.  The sole exception, in terms of having a comparable size of the economy, is the euro.  The euro serves 16 members countries of the European Union (EU) and a few others peg their currency to it.  But the problem with the euro is that even though the entire EU is comparable in size to the United States, it is comprised of many countries with very different fundamental strengths and weaknesses. 

Therefore, each of these countries issues bonds and each of these, by themselves, are too small and offer too little liquidity for central banks to accumulate as reserves.

But right now – given the large size of the current and projected U.S. deficits and the easy monetary policy – the incentives for holding dollars have diminished.  The risk that inflationary pressures will build up next year, and in turn lead to higher interest rates, are not negligible, even though the U.S. Federal Reserve keeps assuring the markets that it will stifle these pressures before they materialize. 

Last Friday, John Taylor, a renowned economist and an expert in monetary policy, opined that the Fed would need to start raising interest rates in early 2010 in order to stem price pressures.

In the meantime, emerging markets such as China and Russia complain about the vulnerabilities of the U.S. dollar.  But these visible complaints have to be construed merely as verbal intervention.  These countries are acting in their own self-interest, because they have very large holdings of U.S. Treasury bonds.  They are trying to "encourage" both the Fed and the U.S. government to act very prudently and conservatively with monetary and fiscal policy. 

The United States has offered plenty of assurances to China that it will remain vigilant about inflation. But the trick is being able to identify these inflationary pressures and to take action way before the actual inflationary pressures become entrenched in the economy.  And the Fed will need to rely on its projections to do that. 

In this uncertain environment, making economic projections is much easier said than done.  And one would rather err on the side of being a bit late in raising interest rates and reducing quantitative easing. If the Fed is slower than needed, and some inflationary pressures build, it they can resort to raising rates a bit faster and resolve the problem. But if the central bank raises rates – and reduces the quantitative easing policy too soon – it could send the economy into another recession. 

This could be problematic since it would increase the risk of the U.S. economy falling into a deflationary spiral and put additional pressure on the U.S. financial system.  Therefore, it seems reasonable to assume that the Fed has greater incentive to err on the lenient side than on the hawkish side.

Remember that we are not out of the woods by any means.  Unemployment, which is a lagging indicator, is still increasing and there are many other large problems to resolve in the economy. Without even considering the impact that healthcare reform will have on the U.S. budget deficit, we see the following important headwinds:

• Consumers are very weak.  It’s not just the jobless that have been affected.  The uncertainty about continued employment for those who still have jobs led to an increase savings rates as would be consumers postpone spending.
• The huge drop in home prices has put about one in four homes in an "upside down" mortgage situation. That means consumers cannot sell their houses without taking a loss, and cannot borrow against their homes to make other expenditures.
• The drop in home values has had another effect:  It has increased the need for consumers to save.  This need has been reinforced by the large hit to 401(k) savings and other retirement plans.  As a result, savings rates have zoomed to 7% of personal income. The savings rate could even hit 10% as consumers strive to rebuild their nest eggs.  Additionally, the "Baby Boom" generation has saved too little and retirement is just around the corner.  Consumers make some two thirds of the U.S. economy, so this new predisposition to saving will be a drag on consumption for a long time.
• Capacity utilization is still low, which greatly reduces producer pricing power.  This, along with very high unemployment, gives the Fed time for now.  Low capacity utilization also keeps investments in factory expansion low.
• Recent banking data revealed that many smaller U.S. banks will be closing their doors, taxing the already overstretched resources of the Federal Deposit Insurance Corp. (FDIC), which will have to be recapitalized, adding to the U.S. fiscal deficit.
• We have not yet seen the fallout from the commercial real estate drop, which Money Morning has warned will be severe.  Since the U.S. consumer is not buying as much, many properties will not be able to keep up with their payments and will default on their loans.  Commercial real estate generally follows the trends in residential real estate with one or two years of lag.
• Last, but not least, we are going to see an economic acceleration in the United States in the third quarter, but that acceleration might be driven to a large extent by inventory rebuilding.  The U.S. economy will probably surprise to the upside in the third quarter with growth.  Among other things, the government’s Car Allowance Rebate System (CARS), popularly known as "Cash for Clunkers," should show up positively in the numbers.  But once the levels of inventories are brought up to their necessary levels, that extra growth will not be present in the following quarter.  And the demand from Cash for Clunkers will cease to be a factor.

All of these reasons warrant caution for the Fed.  Some economists, including Nobel Prize winner and former World Bank Chief Economist Joseph Stiglitz, have highlighted the risk of a "W-shaped” recession/recovery scenario, and have even suggested the need for another stimulus package.  While that might do more harm than good, this position highlights the dovish bias that the Fed is likely to maintain.

What About the Rest of the World?

China enjoys many degrees of freedom to move its economy forward and has had resounding success in doing so.  It has no debt and more than $2 trillion in foreign currency reserves.  Its banking system is small in relation to the size of its economy, which gives the country a lot of room to expand credit, and the savings rate of its consumers is sky-high.  This leaves China with the capital resources to deploy growth strategies.  Since the largest companies are all government-owned, when the government decides to deploy capital, it gets done swiftly and powerfully throughout the economy, with great effect on growth.

As a result, China’s economy grew at the breakneck annualized pace of 14% in the second quarter. 

Other emerging markets, like Brazil and India, are in similar, though not as potent, positions to move their economies forward. And they are doing so aggressively. India is expected to post on average 7% plus of annual gross domestic product (GDP) growth. 

Emerging economies – those that did not splurge the bonanza of the prior five years of strong growth in commodity prices and other exports — are now in the position of stimulating their economies with easy monetary and fiscal policies.

Massive stimulus packages, the scorching demand growth from capital investments, and reborn consumers in emerging Asia, have combined to rekindle global growth.

Resurgent Growth in Europe

Both Europe and Japan are emerging from their recessions – even though Japan may post a negative growth number in the fourth quarter – and Britain and Italy are lagging behind in the recovery.  But the most important European economies, led by Germany and France, are pulling ahead.

It is understandable that European Central Bank (ECB) President Jean Claude Trichet, recently mentioned that the recovery was uneven in Europe.  Most market pundits took this as a sign that Europe would not be raising rates as fast as previously anticipated. 

However, keeping interest rates low is much harder to do than it is to say.  Unlike the Fed, which has symmetric objectives – promoting economic growth and controlling inflation – the ECB’s only mandate is to control inflation.  The reason for this notable difference in objectives is that the European economy is much less flexible than the American economy, mainly due to its very rigid labor laws and other regulations.

Thus, the Europeans start running into inflationary problems when their economy grows above 2.5%. 

The ECB just raised its own growth forecasts.  Similarly, the Organization for Economic Cooperation and Development (OECD), which comprises the 30 most influential free-market representative democracies, indicated that the global recession is coming to an end much faster then they previously thought, but said that the recovery will rely on massive spending and low interest rates for some time.  The OECD cited the strong rebound in Asian economies as having jumpstarted this global reacceleration.

Because the Federal Reserve will have to err on the cautious side, and because of the institutions’ differing mandates, the ECB will probably tighten monetary policy before the U.S. central bank does. That means the euro and emerging market currencies will keep appreciating against the U.S. dollar and the price of gold will soar.

The protests that will come from time to time from Chin and Russia will be just that: verbal intervention.  They will not resort to sudden changes in the composition of their foreign reserves, at the risk of doing further damage to the dollar.

In fact, China and other countries generate some 90% of their large current account surpluses in U.S. dollars.  But their holdings of dollar-denominated assets are only about 64% of their total reserves.  That means they already consistently sell the difference, and this selling so far has not decimated the dollar.

So do not expect a sudden devaluation of the greenback, nor fear China currency reallocations.

But we can and do expect a gradual weakening of the U.S. dollar to occur next year. 

And as much as we all hate it, we will be able to take comfort in the fact that we avoided a much worse evil: Deflation.

So we are going to remain playing it with gold.  Also, this "currency" play gives us added diversification to the portfolio.

Recommendation:  Buy SPDR Gold Trust ETF  (NYSE: GLD) (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in iShares SPDR Gold Trust ETF.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.
In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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If NRG Energy Inc. (NYSE: NRG) were an athletic prospect, scouts would rate it as a “triple threat.” That’s because the Princeton-based wholesale power generator is involved in all three of the key energy sources of the future: Solar, wind and nuclear.

And that’s only part of the reason I like this stock.

Growing profit margins and earnings momentum add to the energy company’s appeal – and a rebound in U.S. economic activity hasn’t even begun in full.

When NRG announced its second-quarter results a few weeks ago, the company said that its profits tripled from a year ago – eclipsing Wall Street estimates and setting a new record. It also boosted its earnings guidance for all of 2009, and increased its stock-buyback target from its previous $330 million worth of its shares to $500 million.

Income from continuing operations was $432 million – a marked improvement over last year’s $41 million loss.  And its recent acquisition of the Texas retail-energy business of Reliant Energy Inc. [now RRI Energy Inc. (NYSE: RRI)] is starting to pay off.

In two months the tie-up has already delivered $200 million of the planned $400 million in adjusted earnings before income taxes, depreciation and amortization (essentially a cash-flow metric that professional investors refer to as “EBITDA”) gains for the year.  With disciplined management this acquisition should outperform its estimated gains.  This analysis is being recognized as we speak by the market, with unusual January call option activity in RRI stock last Friday.

NRG has interest in 44 power plants with 24,005 megawatts (MW) net ownership, most of which is in the United States. Plants in Texas and the Northeast account for almost 18,000 MW, giving the company positioning in fairly strong markets where environmental, but NRG also has operations in Australia and Germany.

The company distinguishes itself by having operating margins that are roughly double that of its peers – the product of its efficient fleet composition and prudent active energy price hedging policies. The hedges NRG currently has in place are likely to outperform analysts’ estimates, as well. That’s because no analyst wants to be caught over-estimating upside, especially in volatile markets like energy futures. So, Wall Street consistently undervalues the expected value of these hedges, which the firm carries on a mark-to-market basis. That was the case in the second quarter.

With respect to the economy, industrial sector inventories are very low, meaning they will need to be replenished in the third quarter.  The government’s Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers,” gave a nice boost to industrial production, and some signs of stability and even some gains – let’s cross our fingers – can be seen in some areas of the housing market. 

We’re by no means out of the woods, yet, but U.S. gross domestic product (GDP) did better than expected in the last quarter – shrinking by just 1% – and is likely to beat analysts’ expectations in the third quarter as well. That’s good news for NRG because the third quarter is traditionally the most profitable quarter of the year for utilities. Prices should firm up, benefiting this company’s already stellar return on investment (ROI).

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

And in addition to being well positioned to profit in the short-term, NRG is an outstanding long-term play because it’s ready to capitalize on the next stage of “green” energy development: low carbon emissions. After all, green is the color of money.

The company’s natural-gas, new and existing commercial nuclear, and new and very large wind-and-solar-power projects are sure to benefit longer term from the move towards environmentally-friendly forms of energy generation.

With total liquidity of $4 billion, NRG is in an impeccable position to develop its planned projects and take advantage of small opportunistic acquisitions, should they appear.  The company has a very prudently managed balance sheet and a shrewd growth management discipline, which is an invaluable attribute in adverse economic conditions where cash is king.

And let’s say that all of these advantages that we have outlined here have not gone unnoticed by the competition:  Two companies in the last three years have attempted to acquire NRG.  Most recently, Exelon Corp. (NYSE: EXC) attempted to buy NRG outright. And even when the takeover attempt was rebuffed, NRG stock did not suffer. Exelon has since backed off from its acquisition attempt.  That stock-price stability reflects strong investor confidence in management’s execution. 

At Friday’s closing price of $27.50, NRG’s stock was still down about 30% from its 52-week high of $39.09 – just one of several reasons it still has room to rise, even after a scorching 91% run from its 52-week low of $14.39.

The stock is trading at a low 10 times forward earnings, has been consistently above its 200-day moving average since mid-July and is oversold by many proprietary measures.  This stock could be ripe for a strong upward move as we approach the end of the year.  What’s more important is that the intrinsic long-term value of the company is undervalued at these prices.

Recommendation:  Buy NRG Energy Inc. (NYSE: NRG) at market (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in NRG Energy Inc.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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• Investopedia:
  EBITDA.

The U.S. stock market has enjoyed a strong rally since the early spring, but while the economy has shown improvement, it still faces major headwinds. So it may be best to hedge against the U.S. dollar, which is likely to experience a significant decline over the next few months.

There are a lot of uncertainties permeating the market right now, not the least of which is healthcare reform. Will that reform entail a public option that could add $1 trillion to the deficit?  How is reform going to be financed?  And is it going to mean higher costs for employers across the board, or just the healthcare insurers? 

Investing is made infinitely more difficult when 18% of U.S. gross domestic product (GDP) is hanging in the balance.

And you still have to consider: 

• That unemployment is likely to keep rising, perhaps over 10%.
• That the U.S. Federal Reserve’s policy of quantitative easing is slowing down.
• That there is almost certainly a second wave of home foreclosures on top of the current commercial real estate epidemic.
• And that retail sales are still a long way from recovery.

There is also reason to believe that the U.S. dollar will continue to be weak, though it probably won’t sell off precipitously.

The U.S. dollar has weekend against the Euro lately, having fallen 0.8% Friday.  Technically speaking the chart shows a traditional “cup and handle” formation that could lead to an acceleration of the dollar’s downward trend.  Gold prices, up about 13% Friday, confirm this trend and could soon break through the $1000/oz resistance.

Fundamentally, if the economy – encumbered by high unemployment and a relapse of the housing market – does not pick up the dollar could be further imperiled.

Weakness in the dollar will also be affected by the Fed’s withdrawal of liquidity, which is likely to proceed at a gradual pace.

Finally, diversification away from the dollar among the world’s central banks is taking place, albeit at a slower pace than many analysts have suggested, and that too, is weakening the dollar.

Let’s concede that there is no currency that could supplant the dollar as the world’s major reserve currency. So, it’s unlikely that the world’s central banks will simply abandon the dollar anytime soon. However, we must also acknowledge that a reduction in the weightings of the U.S. dollar within central bank reserves is already underway.

An Aug. 14 article by BNP Paribas currency strategist Ian Stannard in Euromoney recently described this gradual shift in currency reserves.  The article noted that only 62.5% of global currency reserves are in U.S. dollars, down from about 66% in 2005.

So I do not anticipate a sudden shift in central bank reserves, but rather a continuation of the measured restructuring we’ve seen so far. Thus, the slow weakening trend in the U.S. dollar is likely to continue.

So, in this very uncertain investment scenario, I prefer to go for more secure returns in bonds.  And we can achieve great diversification at a cheap cost with the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD).

For starters, its weighted average coupon of 6.26% offers a current yield slightly north of 6% at today’s prices.  Investors are assuming interest rate risk, which means that if interest rates climb, the value of the bond has to come down.  But in the short term, there is no immediate threat of inflation.

Looking at the major holdings of the fund – which has no single position that accounts for more than 1.26% of its total holdings – I see some names that have demonstrated continued stability and others that have shown recent signs of improvement, such as American Express Co. (NYSE: AXP).  So I do not expect any major credit spread hiccup here.  I certainly do not see any hiccup that a 6.26% coupon would not compensate for.

For an additional hedge against dollar weakness, I suggest you revisit my June 8 recommendation of the iShares SPDR Gold Trust ETF (NYSE: GLD). You may also consider buying a bit of the PowerShares DB US Dollar Index Bearish (NYSE: UDN) fund.  Do not go overboard. Err on being light, rather than heavy on hedging, since timing currency moves is very difficult.

Recommendation: buy iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD) at market.  Consider hedging part of the US dollar risk by buying the iShares SPDR Gold Trust ETF (NYSE: GLD) and PowerShares DB US Dollar Index Bearish (NYSE: UDN). Both funds should account for a fraction of your position.  Have a 5% stop loss on UDN (**).

 (**) – Special Note of Disclosure: Horacio Marquez holds no interest in the the iShares iBoxx $ Investment Grade Corporate Bond Fund, the iShares SPDR Gold Trust ETF, or the PowerShares DB US Dollar Index Bearish fund.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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