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.

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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

Not many investors noticed in September 2008 when Warren Buffet took a 10% stake in Hong Kong-based battery maker BYD Co. Ltd. for $230 million.

They should be noticing now.

Shares in BYD, which also makes cell phones and automobiles, have quintupled in a little more than 12 months, meaning that Buffet’s investment is now worth more than $1.5 billion.

But Buffet’s interest in this little-known Chinese stock isn’t the main story here. In fact, the investing icon is simply focusing a bright spotlight on an industry that could serve as a major profit play for years to come.

The real story here is battery power, a technology market that’s heating up in a big way. Just the market for rechargeable batteries is expected to zoom from $36 billion in 2008 to $51 billion in 2013.

And yet the battery market gets less attention than solar or wind power, its higher-profile (but less-technologically developed) cousins.

Modern battery technology is the keystone of the global push to find an energy alternative for oil. In fact, a specific new category of rechargeable batteries is actually a “breakthrough” technology that has the potential to replace as much as 148 billion barrels of oil over the next 50 years, a potential savings of $10.4 trillion – even at current prices.

And oil prices will certainly blast well above the current $78.50 a barrel as supplies diminish.

What these numbers don’t tell you is that there’s a powerful catalyst at work, one that’s behind the big push to develop new, rechargeable battery technologies: the electric – or “hybrid” – car.

Billions Bet on “Third Element” Technology

While last year’s record oil price of $147 a barrel served as a wake-up call for the car-driving consumer, it was also the catalyst that shifted the plug-in-auto industry into high gear.

In response to the oil price surge in 2008, U.S. President Barack Obama promised to invest at least $150 billion on alternative energy during his term.

But a big chunk of his $787 billion stimulus bill will finance development of a new, rechargeable battery technology for Plug-in Hybrid Electric Vehicles (PHEV).

The technology in question: Lithium-ion.

Sometimes referred to as the “Third Element” – because of its No. 3 position on the Periodic Table of the Elements, lithium is believed to have been one of the few elements synthesized in the “Big Bang” that created the universe.

Now it’s a key ingredient of the new class of rechargeable batteries needed to jump-start the plug-in car market. The other ingredient is capital.

President Obama’s American Reinvestment and Recovery Act allocates $2 billion for the development of battery systems, components and software for advanced lithium-ion batteries and for hybrid electric systems. Another $300 million will support an Alternative Fueled Vehicles Pilot Program.

While those allocations will nurture the continued development of lithium-ion technologies, another program is aimed at hybrid-vehicle buyers: Starting this year, buyers of commercial plug-in electric vehicles can receive a tax credit of up to $7,500.

And that was just a down payment: The $25 billion Advanced Technology Vehicles Manufacturing Loan Program will make sure the industry itself continues to develop.

Automakers have latched onto lithium-ion battery technology as the road to the future. Right now, nearly every automaker on the planet is gearing up to flood the market with some form of electric-powered car:

• Daimler AG (NYSE: DAI) plans to roll out a hybrid version of its S-Class sedan later this year. The entire Mercedes lineup eventually will be available as hybrids in the next five years.
• Tesla Motors Inc., of San Carlos, Ca., has already delivered the Tesla Roadster, a stunning electric two-seater that sells for more than $100,000.
• Nissan Motor Co. Ltd. (ADR OTC: NSANY) retooled a factory in Smyrna, Tenn. to produce a pure electric vehicle. Nissan expects to sell as many as 50,000 units of the hybrid Altima in its first year.
• Ford Motor Co. (NYSE: F) is bringing out the pure electric Transit Connect commercial fleet van in 2010 and plans to invest $550 million to retool a Michigan truck plant to manufacture a pure electric Focus in 2011.
• Chinese carmakers Hafei and Coda are planning to bring a mass-produced electric car to market in California in fall 2010.
• And General Motors Corp. (OTC: MTLQQ, NYSE: GRM), is counting heavily on new-technology lithium-ion batteries to power the Chevy Volt, its revolutionary and much-hyped PHEV, which is due to debut next year.

A Global Power (and Profit) Play

For further confirmation that the PHEVs are more than just a passing fad, look at the money being invested by governments across the globe.

Aabar Investments PJSC, an investment company wholly owned by the Abu Dhabi government, recently bought a 4% stake in Tesla Motors from Daimler. And Aabar Chairman Khadem Abdulla al Qubaisi says the fund is planning several more electric-vehicle ventures with Daimler.

“When we acquired our stake in Daimler in March, we identified a number of potential areas for co-operation between our two businesses. One of these was a desire to focus on the development of electric vehicles,” al Qubaisi said.

But here’s the real kicker: Aabar Investments is using Abu Dhabi oil revenue to finance its foray into these oil-supplanting battery technologies.

Worldwide demand for batteries of all types – both non-rechargeable (primary) and rechargeable (secondary) is projected to advance at roughly a 7% annual clip through 2010, reaching $73.6 billion, according to a study published by The Freedonia Group, a Cleveland-based market-research firm.

Not surprisingly, the “World Batteries” study predicts that China will post the largest gains, while sales increases are also expected to be strong in India, Indonesia, South Korea, Poland, South Africa, Brazil and Russia.

But it’s the China market that promises to put a real charge into the worldwide battery business.

On the home front, Beijing is pushing its assault on battery power through its “20% by 2020” campaign, meaning that 20% of China’s power needs will be served by renewable-energy technologies.

From a global standpoint, China is using its big advantage in labor costs to establish a leadership position in the worldwide battery market, and already has more than 50 factories cranking out product.

It’s an aggressive plan, to be sure, but it’s also cohesive and complete. And Beijing has the cash to make it happen.

[Editor's Note: Although it's a new technology, there's a clear leader in the lithium-battery-technology market.

The company's profit potential is stunning.

And Money Morning Contributing Editor Horacio Marquez has found it.

The firm in question is a global player with a solid market cap and is well known within the hybrid-vehicle sector. But surprisingly few investors know about the company, or have ever even heard its name.

It's no surprise that Marquez uncovered this gem, since he's forged a reputation for spotting profit plays long before the institutional money piles in. This profit-creating talent was one that Marquez displayed time and again during his years on Wall Street and is one that he now makes available to the subscribers of his Money Map VIP Trader investing service.

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:

• Power Electronics:
  China to Overtake United States in Battery Market
• China Daily:
  China eyes 20% renewable energy by 2020
• Department of Energy:
  ATVM loan program.
• Fox Business News:
  Reportlinker Adds Advanced Rechargeable Battery Market: Emerging Technologies and Trends Worldwide Report.
• The National:
  Aabar takes stake in Tesla.
• The Freedonia Group:
  Official Web Site.
• Popular Mechanics Magazine:
  Plug-in Hybrid Electric Vehicles.
• WhiteHouse.gov:
  President Barack Obama.
• WebElements.com:
  Lithium.
• Automotive News:
  Mercedes plans more hybrids, AMG models.

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.]

News and Related Story Links:

• Money Morning:
  Buy, Sell or Hold: H.J. Heinz Co. (NYSE: HNZ) Is a Long-Term Keeper, but Will Struggle in the Months Ahead

• HSBC:
  HSBC Merges Household Finance Corporation into Household International, Inc.

• GlobeStreet.com:
  HSBC in $330M Sale-Leaseback of US HQ

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.]

News and Related Story Links:

• Money Morning:
  Buy, Sell, or Hold: iShares SPDR Gold Trust ETF.
• Money Morning Special Report on the U.S. Real Estate Sector (Part I of II):
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• Money Morning:
  
  Emerging Markets Seek to Dump the Dollar as World’s Main Reserve Currency
• Money Morning:
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• Money Morning:
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• Wikipedia:
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• Money Morning:
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• Money Morning:
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• Money Morning:
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Intel Corp. (Nasdaq: INTC) is a cyclical company.  That is, its stock does extremely well when the economy is ready to accelerate, and does poorly when the economy decelerates.  So it’s no wonder that last year the stock fell more than 50% from the record-high of $27.78 a share it reached December 2007. However, the company has rallied more than 50% from its Feb. 23 low of $12.08 a share. It closed Friday at $19.64.

So, what’s next?

For starters, Intel beat second-quarter earnings estimates by 10 cents a share, as its revenue climbed 12% year-over-year to $8 billion.  Beating earnings estimates is important, but beating on the top line and showing sales growth is even more important in a recession. The reason: It shows that you can do well in spite of a weak economy.

Like most chip stocks, Intel is an economic leading indicator of sorts – a fact that bodes well for the U.S. recovery. Intel said demand actually strengthened as the quarter moved along.  This is the precursor of a much more vigorous third and fourth quarter, which traditionally is when tech companies perform the best.

Adding more fuel to the fire, Intel increased it sales forecast to $9 billion from $8.5 billion and boosted the outlook for its gross margins to the upper end of the 53%-55% range.

One of the big reasons for Intel’s recent progress is the impending launch of  Microsoft Corp.’s (Nasdaq: MSFT) Windows 7, which has been well received by many analysts.  Upgrading to Windows 7 from Windows XP in an existing machine is quite a task. It requires erasing the hard disk and installing the new operating system and all the other software from scratch. PCs with Microsoft’s latest operating system, Vista, will be able to get Windows 7 upgrades without any sacrificing of files.

This is different from the traditional incremental upgrades, in which many of the older files remained in place, while the upgrade took care of overwriting and deleting the unnecessary old system files and installing the new ones.  For small companies that have outdated technology, this process is too tedious and it is much more expedient to buy new machines with the new operating system preinstalled.

And there are a lot of old machines with outdated software out there in the business world.  It is not uncommon to see five-year old machines that are not capable of running new resource-intensive applications.  To verify my analysis, I called friends in Fortune 500 companies that manage PCs for their own corporations or for top technology vendors.

The feedback was unanimous in that Vista’s complexity – despite its significant features that were attractive to some specific users – made the operating system an overall disappointment to companies.  The operating system lacked the desired stability and increased maintenance costs.  So the consensus was that corporations would be quick to abandon Vista for Windows 7.

And given the complexity in upgrading existing Vista systems, and the old age of the equipment, it makes sense that many companies would seek to replace entire machines altogether.  So we have the old the “Wintel” symbiosis kicking into high gear.

Also, corporations have cut personnel deeply and need to increase the productivity of their now-overburdened workforce.  Some 70% of employees are not satisfied with their current position, given the additional stress and lack of additional pay.  Therefore, upgrading their technology to make their jobs easier is a high priority.

This won’t be too difficult, because companies’ profits have actually grown 23% in the last two quarters.  With Corporate America now having recapitalized, a new technological wave makes all the sense in the world.

Thus, the argument that the demand pickup is just filling the chain and inventory rebuilding, and that we will be disappointed come January does not seem to hold.  In either case, you will see an outperformance of earnings come the next report, so we should use any downdraft to get into Intel stock.

Also, Intel has regained its technological leadership against Advanced Micro Devices Inc. (NYSE: AMD), despite that fact that AMD is doing well in areas where integrated graphics are important, finally leveraging its acquisition of ATI.

With all cylinders firing, Intel is poised to deliver an upside earnings surprise in the third quarter and blow through estimates in the fourth quarter.  Valuation is cheap compared to the Standard & Poor’s 500 Index, considering the rate of growth that Intel is experiencing and expected to deliver both in the short term and well into next year as Windows 7 deployment motivates sales.

The stock is clearly above the 200-day moving average and seems a bit overbought short term.  So do not chase it. But start buying right away, looking to average down over the next 45 days if possible, averaging up until you reach your full position if it keeps running.

Recommendation: Buy Intel Corp. (Nasdaq: INTC) by averaging into the stock over the next 45 days, thus reducing market risk (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Intel 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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• Money Morning:
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• Money Morning News Analysis:
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• AMD.com:
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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.]

News and Related Story Links:

• Reuters:
  NRG Energy Inc. Raises FY 2009 EBITDA Outlook; Board Approves Increased Share Buyback.
• Money Morning:
  Buy, Sell or Hold: Time to Take Profits on Diamond Offshore Drilling (NYSE: DO).
• 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.]

News and Related Story Links:

• Euromoney:
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• Money Morning:
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• Money Morning:
  
  Buy, Sell, or Hold: iShares SPDR Gold Trust ETF

Steel maker Nucor Corp.’s (NYSE: NUE) stock has rallied some 51% from its March 3 low of $29.84 a share and has twice bumped against its recent high of $49.91 a share. 

The stock is still a far cry from its record-high level of $83.56, but is only 0% below its 52-week high of $53.46.  Much has changed since then, as the U.S. auto industry is no longer producing the 16 million cars it produced in 2007, nor the 13 million it managed to sell last year.  This year we are looking at some 10 million units sold, according to J.D. Power and Associates, the leading forecaster in the industry.

But there is encouraging news:  The very quick restructuring of both General Motors Corp. (NYSE: GRM) and Chrysler Group LLC, the U.S. Federal Reserve’s efforts to stabilize the financial markets, and the U.S. government’s fiscal stimulus plans have helped keep the economy from falling into a depression.  The Fed’s support for the auto industry included buying auto receivables under the Term Asset-Backed Securities Loan Facility (TALF) program, in order to restart this type of securitization.

Therefore, the paralysis of sales that we saw late last year, when the financial system froze and there was no financing available, has subsided and sales are increasing.  In fact, J.D. Power expects U.S. vehicle sales to increase to 11.5 million units next year, a full 15% pickup from projected 2009 levels. 

In fact, we are already seeing an increase in auto sales already, thanks in no small part to the government’s Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers.” So far, CARS has spent some $1.29 billion and Congress has expanded the original $1 billion authorization by another $2 billion. 

Total light vehicle sales for July were just shy of 1 million units, a milestone the industry hasn’t topped since August 2008, mostly due to the program’s success.

This shot in the arm on the back of the general cost restructuring that Ford Motor Co. (NYSE: F) is carrying out under Allan Mulally has already prompted Ford to increase production of its Focus model. 

Similarly, Chrysler has reported that it is running two plants in overtime and a third shift at another plant just to keep up with demand.  And GM, which is seeing a huge rebound in sales, will add to this by increasing advertising spending and selling new cars on eBay Inc.’s (Nasdaq: EBAY) popular online auction Web site. Most of Wall Street is in “wait-and-see” mode, which gives us more of an incentive to jump in.  But the steel story is not just about cars.

Nucor will not only profit from the remaining $1.75 billion to be deployed through the government’s cash for clunkers program and the general improvement in market conditions, but on the pick-up in government construction in the United States that will result from U.S. President Barack Obama’s massive fiscal stimulus.

Additionally, the company will benefit from the already massive stimuli being deployed in China, Brazil, India and Russia.  And let us not forget Europe, where the European Central Bank will soon consider raising its benchmark lending rate to 1.25% from its current record low of 1% in order to prevent inflationary expectations from building up.

China will achieve more than 8% growth this year, driven by public spending, especially in construction and a strong pickup in auto sales  (up 63.6% in July from a year earlier) and domestic appliances.  All of these have a very high content of steel. 

Similarly, India’s gross domestic product (GDP) will grow by more than 6%, barely down from last year’s 6.7% expansion. Auto sales in India jumped 18% last month.  Remember that India’s Tata Motors Ltd. (NYSE ADR: TTM) launched the cheapest car in the world last January and this is likely to work wonders in today’s budget-conscious market.

So what about Nucor itself?

The company reported a second quarter loss of $133 million, which improved over the first quarter’s $189 million loss.  But the key is that volumes are already turning around.

Volumes increased 11% in the second quarter, which allowed the company to increase its capacity utilization from 45% to a still very low 46%. 

And this is where the upside lies. 

In capital-intensive industries like steel, the very high fixed costs induce very large swings in profits, depending on volumes.  And not only did Nucor see its volumes pick up in the second quarter, the trend should continue accelerating in the third quarter and beyond, thanks to the recent burst in car sales and increased government infrastructure spending.

In addition, prior to the cash for clunkers program, Nucor announced it already expected to see an improvement in its third-quarter results. The company said that many of its customers had run their inventories too low and would need to replenish them just to meet demand.

So, at reporting time, investors could be very positively surprised by Nucor and many other companies in the sector, which will provoke many analysts to increase their stock targets.

And to make the whole story even better, we are counting on increasing inflationary expectations and a weaker dollar, which will continue to drive portfolio managers to hedge this risk in commodity stocks. 

That means Nucor, which has been bumping into strong resistance levels since the beginning of January, but making higher lows in every subsequent correction, is likely to break out of its current range with an explosive rally before it even reports third-quarter earnings. 

Nucor stock closed down 92 cents, or 1.93%, Friday at $46.79 a share.

Recommendation: Buy Nucor (NYSE: NUE) at market (**).

 (**)  Special Note of Disclosure: Horacio Marquez holds no interest in Nucor (NYSE: NUE).

[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.]

News and Related Story Links:

• Money Morning:
  
  “Cash For Clunkers” Gets a Reprieve
• Reuters:
  
  U.S. ‘10 auto sales may top 11.5 million units: JD Power
• Wall Street Journal:
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• Money Morning:
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Since I recommended PepsiCo Inc. (NYSE: PEP) on Oct. 20, the stock has greatly outperformed the market, up about 10%. 

However, the stock has underperformed since the market began its rebound on March 10. And since the end of March, Pepsi’s shares have lagged those of arch rival, The Coca-Cola Co. (NYSE: KO), since the end of March, as well.  I recommended Coca Cola last week after the company reported stellar growth in the emerging markets.

While Pepsi’s less-than-stellar performance is not yet a major concern, the trend is discomforting.  In addition, there has been a major divergence in the strategies of these two companies. 

While both Coke and Pepsi divested of their bottling operations many years ago, Pepsi just agreed to buy back two of them: Pepsi Bottling Group Inc. (NYSE: PBG) and PepsiAmericas Inc. (NYSE: PAS). And it paid a stiff premium in each deal, about 24% and 23%, respectively, above their pre-deal market prices. The total value of the deal was a cool $7.8 billion. 

Now allow me to say that these companies are impressive operations by themselves:

• Pepsi Bottling Group is PepsiCo’s largest bottler. The company takes in $14 billion a year and operates in the United States, Canada, Greece, Mexico, Russia, Spain and Turkey, and boasts 67,000 employees.

• Pepsi Americas is PepsiCo’s second-largest bottler. It brings in $4.9 billion annually from operations in the United States, Ukraine, Poland, Romania, Hungary, the Czech Republic and Slovakia.  In addition, its new joint venture covers the Caribbean and Central America.

So why bother with these acquisitions?

The justification for this move is that “in a rapidly changing, more-complicated global market, a leaner, more agile business model is pretty important," said Pepsi Bottling Group Chief Executive Officer Eric J. Foss.

Pepsi touted the tie-up itself, citing such advantages as attempting to create a more-flexible, efficient and competitive system that is more inclusive of other Pepsi brands.

The idea is that a merged operation will allow for much faster introduction of new products, for bundled offers, for enhanced customer service, and for cost savings from redundancies and economies of scale.

Sure, we can buy into many of those ideas, which are sure to result in some gains.  In fact, we can even envision the many new marketing initiatives that will result from these acquisitions.

But make no mistake: What has pushed Pepsi to go in this direction is the superiority of Coca Cola in the emerging markets.  While both firms prided themselves on product innovation and marketing, Coca-Cola has come out on top, as I wrote last week.

In addition, the capital requirements of a bottling and distribution operation are very high and the return on equity is much lower than Coca-Cola’s core business of creating the product, marketing it, and selling the concentrate and bottling rights to bottlers.  This decision will make less cash available in the immediate future for stock buybacks and dividend increases and represents a big gamble.

There are two pressing questions to have in mind:

• Will the marketing synergies PepsiCo claims it will garner from the deals be successful in winning market share away from its rival and thus justify the added capital requirements of the newly acquired operations?
• And will Pepsi be able to capture the synergies from the merger fast enough?

What’s for sure is that Pepsi’s action goes against its decision to concentrate on its core competencies. Management theory has proven time and again that companies should concentrate in one segment of the entire value chain (in Coca Coal’s case, product innovation and marketing) and leave the less-attractive and less-profitable areas to others.

Furthermore, it’s clear to me that “asset-light” companies – firms such as C.H. Robinson Worldwide Inc. (NYSE: CHRW), which divested assets that have large financing requirements and that carry large fixed costs – reduce the cyclicality of the business, and thus reduce the risks to profits from economic downturns.  That means “asset-light” companies are preferable to “asset-heavy” companies.

Therefore, my bias is against the added complexity and capital requirements involved with the Pepsi deal.  And we must now wait to see if the company can deliver on the two key questions above.  But we can never count out Pepsi’s innovation and resiliency, and so we will give them the benefit of the doubt.

PepsiCo stock closed down 9 cents, or 0.16%, at $57.74 a share Friday. That’s up 32% from its hit 52-week low of $43.78, reached in Early March.

Recommendation: “Hold” PepsiCo Inc. (NYSE: PEP), but do not add to your position, and give preference to Coca Cola’s stock – at least until Pepsi is able to prove that it can execute the merger efficiencies and win market share from its arch-rival (**).

** Special Note of Disclosure: Horacio Marquez holds no interest in PepsiCo Inc.

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