By William Patalon III
Executive Editor
Money Morning

The stock market has soared 58% since its March 2008 low – and the media is proclaiming that the recovery has begun.

Not so fast.

There are three major factors threatening to stall the recovery before it even gets started.  And the “jobless recovery” you’ve been hearing about is just one of them.

That’s why now it’s more important than ever to protect your money.

This report unveils the 3 factors holding back the U.S. recovery.  And, it shows you not only how to protect your money, but how to profit until the economy rebounds for good.

Are American Workers Facing a Jobless Recovery?

Since the recession started in December 2007, the economy has shed a staggering 6.9 million jobs, the highest number of job losses since the Great Depression.

High unemployment has put a serious damper on the economy.  It’s simple – if people don’t have jobs, they can’t spend money.

The reduction in consumer spending ripples through every sector of the economy – touching such key business areas as housing and manufacturing, and influencing the prices of such everyday items as gasoline and food.

The most commonly quoted number in the media is the “official” unemployment rate, which now stands at 9.7%.

But to get the real picture, you have to add in what the government refers to as “discouraged” workers and “marginally attached” workers – those who have stopped looking for work, or who haven’t looked for work recently.  Add those in and the U.S. unemployment rate starts to approach 17%.

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And it gets even worse. If you include the people that the government doesn’t even count – such as unemployed farm workers, the idle self-employed, and workers in private homes – the unemployment rate reaches a jaw-dropping 20.6%, according to figures compiled by John Williams of Shadow Government Statistics. If that’s true, an astonishing 25.5 million people are currently out of work in the U.S.

Analysts have been cheered by the recent decline in initial applications for jobless benefits (down by 12,000 to 545,000 in the week ended September 12).  Overall, payrolls lost “only” 216,000 jobs in August, which was lower than economists’ forecast and the smallest number of job losses in the past year.

U.S. President Barack Obama said recently that unemployment is “bottoming out,” and cited increases in exports and heightened manufacturing activity as evidence of long-awaited economic expansion.

However, declining initial claims doesn’t mean new jobs are being created.  There are still an astonishing number of people unemployed.

In fact, a September survey of economists indicated the unemployment rate would soar past 10% in 2009, according to Bloomberg News.

“It’s nice to see another move down in initial claims but the continuing number is definitely kind of sticking at pretty high levels,” Michael Feroli, an economist at JPMorgan Chase & Co. (NYSE: JPM) told Bloomberg. “As long as we’re continuing to see pretty high initial and continuing claims, we’ll still have negative job growth.”

The fact is, economic pundits know that either the unemployment situation in the U.S. improves in the second half of 2009 or the entire economic recovery could be snuffed out.

The Housing Market Continues to Struggle

The housing market is still feeling the pinch as well.  Housing starts increased by just 1.5% in August, and are down by a whopping 29.6% from a year ago.

More alarmingly, new permits – considered a gauge of future activity – were down a whopping 44% from a year ago, according to the Commerce Department.

Adding to builders’ anxiety is the pending expiration of an $8,000 tax credit for first-time homebuyers, which is set to end in November.

White House Spokesman Robert Gibbs said the administration’s economic team is evaluating the tax credit’s effect on new home sales and will soon make a recommendation on extending the credit to the president.

If the credit is not extended past November, builders fear the upward trend in housing sales could be stalled or even reversed.

A revision to the latest data showed new-home sales exceeded forecasts in July, extending a string of gains to four straight months, putting a much-needed dent in inventories, according to the National Association of Home Builders (NAHB).

But, the NAHB report indicated much of the increase might be due to falling prices of new homes, with median prices down by 11.5% since July 2008.

“The real reason home sales are picking up is that home prices have collapsed,” Mike Larson, a Weiss Research analyst commenting on the NAHB index told The Wall Street Journal. “That collapse has made housing affordable once again in many markets.”

If prices begin to rise again, home sales could grind to a halt quickly.

Rising Inflation Looms on the Horizon

In the last year alone, the Federal Reserve has injected over $2 trillion into the financial system via increased loans to banks.  The Term Asset-Backed Securities Facility (TALF) program has added another $25 billion and they’ve pledged to pay back $1.75 trillion in mortgage-backed securities, Treasury notes and bonds.  In addition, they’ve lowered the benchmark Federal Funds rate to nearly zero.

Factor that in with Congress’s $787 billion bailout, and the money supply has increased 110% in the past year.

This is a huge jump from the 6% average annual increase that has occurred in the 95 years since the Fed was created.

“That can only lead to serious inflation, perhaps even hyperinflation.  This will cause the value of the U.S. dollar – which has been eroding since 2001 – to decline at an even-more-frenetic pace,” said Money Morning Contributing Editor Peter Krauth.

Over time, this erosion will lead to a big increase in the prices of many goods.

At what point will inflation become enough of a concern, and at what point does U.S. growth become sustainable enough, to warrant a change in Fed policy? Bernanke has provided very few clues about what his so-called “exit strategy” will involve, or how it will be implemented.

At some point, Bernanke will have to raise the Fed’s benchmark rate from its current record low range. However, doing so to soon could undermine the fragile recovery, while waiting too long could lead to a surge in inflation.

The Federal Open Market Committee (FOMC) has voted unanimously to keep the benchmark Federal Funds Rate at its record low range. But as the economy recovers, there is likely to be more disagreement over whether or not the withdrawal of monetary stimulus is moving at the appropriate pace.

“We at the Fed are ready, willing, and able to tighten policy when it’s necessary to maintain price stability, ” said Janet Yellen, President of the San Francisco Federal Reserve Bank. “We don’t want to wait until we’re at 5% unemployment and 2% inflation because if we wait that long, given the lags in monetary policy, we’d clearly overshoot.”

How to Protect Your Portfolio

There seem to be more questions than answers surrounding the future of the economy.  Despite soaring unemployment, looming inflation and a struggling housing sector, the stock market has rallied 58% from its March 2009 low.  Are we about to face a major market correction or will the rally continue?

One of the best ways to hedge against a struggling dollar and an economy that may be stalling is by investing in commodities.  Money Morning Contributing Editor Peter Krauth thinks spectacular gains are in store for gold and silver stocks.

“The biggest bang-for-buck still lies with the junior gold sector,” said Krauth. The best proxy for this is the S&P/TSX Venture Composite Index (CDNX), otherwise known as the Toronto Venture Exchange. It consists of about 75% resource stocks.  The CDNX has been steadily carving new highs almost uninterrupted since March, now posting a whopping 80% gain since its December 2008 low. That’s an impressive performance, especially for an index.

You can also play gold and silver more directly with exchange-traded funds (ETFs).  Consider the SPDR Gold Trust (NYSE: GLD).  Each share of GLD represents 1/10th of an ounce of gold.  It’s highly liquid, and provides you with the quickest and easiest way to get exposure to gold.

Investing in silver might be an even better option: The metal is currently trading at less than 15% of its 1980 high, the equivalent of $130 per ounce. If that’s a move you like, the iShares Silver Trust ETF (NYSE: SLV) seems the best way to play silver directly.

[Editor's Note: The U.S. Treasury has just approved a new currency experts are calling "Gold Dollars." This new currency can be used just like regular dollars, but is backed by physical gold. Not many investors know about this change yet. This report gives you all the details on "gold dollars," and how you can use this program to your benefit. ]

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• Bloomberg:
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• CNBC:
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• Money Morning Special Report:
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By Peter Krauth
Contributing Editor
Money Morning

We’ve all heard that inflation drives up gold prices.  When inflation is on the rise, investors buy more gold to hedge their portfolios.

And, with all the government bailouts and stimulus packages, it’s hard to deny that inflation is coming.  After all, the money supply has more than doubled since October.

Yet few people realize that inflation may be the least of the reasons why gold prices will push higher.

Since bottoming out in 2001, gold prices have risen by nearly 300% and have twice targeted the $1000 mark.  And that’s happened in a relatively “inflation-free zone.”

There are other forces at work here.  This report will show you exactly why inflation is only a small part of the gold story.  And, we’ll identify the best ways to profit from the coming gold rush.

Gold Trend #1: Gold Mine Production is Decreasing.

Annual worldwide mine production of gold has decreased by 9.3% since 2001.  Considering gold prices have nearly quadrupled since then, why isn’t more gold being produced?  The answer is simple.  Resources are being depleted and their quality is diminishing. And, when a discovery is made, it takes about 7-10 years to get a mine permitted and into production – making it difficult to quickly ramp up gold production.

Gold Trend #2: Gold is Getting Harder to Find.

Fewer and fewer large gold discoveries are being made every year. And the discoveries that are being made tend to be in more remote and less geopolitically attractive areas.  Considering that the risks to opening any gold mine are considerable, mining companies just aren’t interested in mining in areas that have significant political and geographical drawbacks.  As a result, miners are having difficulty replacing depleted resources.

Gold Trend #3: Investment Demand for Gold.

Large institutional investors, such as hedge and pension funds, are making large allocations to gold and gold shares. Individual investors are also getting in on the action, with gold exchange-traded funds (ETFs) gaining influence. SPDR Gold Trust (NYSE: GLD), the largest physically backed ETF on the planet, is now the 6th biggest holder of gold bullion with more than 1000 tons. That is helping to facilitate and spread the ownership of gold by individuals.  In fact, in the first half of 2009 investment demand for gold is up 150% over the first half of 2008, according to the World Gold Council.

Gold Trend #4: Central Banks are Buying Gold.

The Central Bank Gold Agreement, originally signed in 2001 and recently renewed for another five years, limits the amount of gold European central banks – including the International Monetary Fund – can sell to 400 tons per year.  This means that even if governments want to sell off their gold reserves, they can’t  – further straining the supply of gold on the market. The U.S., the world’s largest holder of gold, is holding on to their stash as well.  Some governments are going even further: Venezuela’s Finance Ministry now requires 70% of gold produced in the country to be sold domestically. At the same time, Russia, Ecuador, Mexico and the Philippines are all buying gold.  And China has increased its reserves by a staggering 76%.

Gold Trend #5: Push for Gold-backed Currencies.

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As investors the world over lose faith in their government’s ability to contain the financial and economic crises, many are calling for gold backed currencies – much like the U.S. dollar was until the early 1970’s.  Even Zimbabwe, which a year ago had hyperinflation running at 231 million percent annually, is now considering reintroducing its Zimbabwe dollar, but this time fully backed by assets, including gold.  In order for this to happen, countries would have to purchase enough gold to back all their currency – putting extreme pressure on the gold supply.

Gold Trend #6: Asian Demand for Gold is Exploding.

Asia, with its more than two and a half billion people, has a major impact on investment demand.  Asians have a long-standing cultural affinity for gold as a store of wealth.  India is the world’s largest gold consumer.  For the last 50 years, until 2009, the Chinese government has forbidden its citizens from owning gold.  But now China is encouraging its citizens to buy silver – which automatically draws more attention to gold.  Today, Chinese investors even have access to gold-linked checking accounts. As a result, demand for gold in mainland China is expected to triple in the next few years.

Gold Trend #7:  Gold is in a Secular Bull Market.

Gold’s price has increased every single year since 2001.  This is a clear signal that we are currently in the middle of a secular bull market for gold.  A secular bull market typically last about 17 years and ends with a mania stage where investors throw the concept of supply and demand out the window and frantically invest in gold.  We’ve seen this same pattern repeat itself over the last hundred years of investment history and we’re about to see a major run up in gold prices.  The gold market is very small in relation to the currency, bond or stock markets, so when investors start to pile in, look out.  Prices will go through the roof – making the tech and housing bubbles seem small in comparison.

How to Play the Gold Rally

There are a few ways to play the rise in gold prices.  You can buy investments backed by gold or you can invest in gold miners themselves.

To play gold prices directly, invest in the SPDR Gold Trust (NYSE:GLD) Each unit of this ETF represents 1/10th of an ounce of gold.  It’s highly liquid, and provides you with the quickest and easiest way to get exposure to gold.  It’s also the lowest risk option, without the storage costs associated with buying physical bullion.

Next up on the risk scale is the Market Vectors Gold Miners ETF (NYSE:GDX).  This investment vehicle tracks the world’s major gold and silver producers.  While more volatile than GLD, the leverage offered based on the gold price and profitability makes this an attractive option.  And you have the added benefit of owning some 30 precious metals producers all wrapped into one simple investment.

Barrick Gold Corporation (NYSE:ABX) is the world’s largest gold miner.  With lots of liquidity, it draws considerable interest, in particular from big money institutional investors.  Keep in mind, ABX carries more risk than the two previous options, as you have exposure to a single company.  But this gold mining behemoth is sure to pay off big as gold rises and eventually soars.

[Editor's Note:  Millions of Americans could suffer another 41% hit to their portfolios in the coming months - and most don't even know it. Yet there's one way to ensure that never happens to you. In one step you can avoid the pitfall, collect guaranteed cash payments, and pocket a 43% rate of return on your money - enough to get an easy double in less two years.  Click here to get the full report.]

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By Sid Riggs
Contributing Editor
Money Morning

In four short months, the dollar’s value has sunk 11.2% on the New York Exchange. In fact, it just recently hit its lowest level of 2009 against six major currencies, including the Euro, the British pound and the Canadian dollar.

And it wasn’t an accident.

Not only has the U.S. Federal Reserve tied an anchor to the dollar’s legs, China has beefed up its own efforts to supplant the dollar as the global currency reserve.

This report pulls the curtain on China’s plan to demolish the dollar for good. It also shows you how to protect your savings – and increase your portfolio -  as the dollar struggles on every front.

The Global Currency Game

The United States isn’t the only country with a falling currency. Same is true for India, Brazil, South Africa, Mexico, Singapore, Switzerland and a host of Eastern European countries.

A bloc of Russian banks recommended that its government should devalue the ruble by as much as 30%.

But what’s most amazing about this is that most of these countries are intentionally devaluing their currencies. For the U.S., a lower dollar value means it’s cheaper to pay back U.S. debt.

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For the rest of the countries, a devalued currency makes their goods cheaper overseas. Having cheaper goods means stronger exports. Stronger exports mean manufacturing and  more jobs. You get the idea.

It’s a selfish game, and it basically amounts to making an economy seem healthier than it actually is.

Governments across the globe are in a “race to the bottom.” Yet to make matters worse,  the U.S. Treasury is creating some deceptions about the buyers of U.S. debt and sidestepping the issue of devaluation, money supply, and inflation.

Which Message from the Treasury Do You Buy?

The U.S. Government wants the public to believe that China, Japan and Europe are still happily buying U.S. debt to fund the American economic turnaround. The only problem is – they’re not.

Treasury numbers out just last month indicated that China and Japan are reducing their exposure to U.S. debt. China, for example, the largest foreign holder of U.S. debt, reduced its investments by $4.4 billion to $763.5 billion in April – its first monthly reduction since February 2008.

That begs the question – which one is it? Is China buying or selling?

The reality is that the Treasury dept changed the way U.S. debt is accounted for when purchased on the open market. U.S. debt selling on the open market can be accounted as having been sold to “foreigners” even if the purchaser was the Federal Reserve – which is exactly what is happening.

A little sleight of hand by Uncle Sam and all of a sudden China and Japan can appear to be buying debt while at the same time selling debt.

China knows a thing or two about cooking the books, and is using this synchronized global currency dive to step in and throw its weight around. Let me show you…

A Yuan-Dominated Trade Empire

China officials have gone on record saying they want to move the global currency peg away from the dollar in favor of currency diversification. But at the same time, neither China’s currency – the yuan – nor any other currency has the liquidity to replace the dollar as the world’s pillar currency.

China’s distaste for the dollar is supported by Brazil, Russia and India – the four countries comprising the BRIC emerging markets. And not coincidentally, China has used them as allies in its ruse.

Instead of buying directly from trading partners, China has been setting up swap agreements where the Chinese yuan is used instead of the dollar to pay for goods and services.

So far, China has set up currency swaps with Argentina, South Korea, Hong Kong, Indonesia, Malaysia and Belarus.

But most alarmingly, China and Russia have agreed to expand use of their currencies in bilateral trade. And China and Brazil are discussing similar trade plans.

And as they build a larger network of swap agreements (close to $200 billion in June alone), China can trade directly with their trading partners without ever having to put their currency on the open market – and with no need to settle in dollars.

Already, the countries that buy and sell goods as part of these swap agreements can use their Chinese yuan to buy goods and services in China and its neighbors who depend on China’s trade network. Think of it as billion-dollar gift certificates that can only be used exclusively for China’s trading partners.

For instance, Brazil could use its yuan to buy goods and services from Indonesia or Malaysia…with no need to settle in dollars.

The dollar would lose enormous credibility and confidence if China can create one of these swap agreements with a major Western economy.

And China will likely continue to extend these swap agreements to as many people as they can until one day, the world wakes up and realizes China has created a global marketplace for their currency without playing by the rules.

No doubt that will greatly hurt the status of the U.S. dollar as the world’s reserve currency.

Protecting Your Wealth When the Dollar Dies

Regardless of China’s actions, the dollar continues to be plagued by economic events.  Not only is it losing its value and importance globally, it’s also losing value domestically.

With the U.S. Federal Reserve pursuing a policy of quantitative easing and a federal budget deficit that’s spiraling out of control, the dollar is extremely vulnerable.

The Federal Reserve has lowered its benchmark Federal Funds rate to a range of 0.00%-0.25% and has said it will remain there for “an extended period.”

The Fed has also injected more than $2 trillion into the financial system, expanding credit through increased loans to banks to provide liquidity. It’s also created the Commercial Paper Funding Facility – which holds $109.2 billion in short-term IOUs issued by corporations – and the Term Asset-Backed Securities Loan Facility (TALF) – which has lent $25 billion to investors to buy securities tied to auto and other consumer and business loans.

And the central bank itself has pledged to buy $1.75 trillion in mortgage-backed securities, Treasury notes, and federal housing agency bonds.

So what should you do? Get out of the dollar. And get into gold.

That’s what China is doing…

The Red Dragon announced recently that it has increased its holdings of gold by about 450 metric tons in the past six years.

One way to stock upis to buy gold outright, either in bars, or though the gold-linked, exchange-traded fund (ETF) SPDR Gold Shares (NYSE: GLD). Today, GLD itself holds more than 1,000 tons of gold, and has a market capitalization of $33 billion.

Buying stakes in gold miners is also an excellent way to hedge against the enormous inflationary pressures filtering through the U.S. economy.

In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographic diversification, while including substantial leverage to the price of gold.  Market Vectors is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

[Editor's Note: The U.S. Treasury has just approved a new currency experts are calling "Gold Dollars." This new currency can be used just like regular dollars, but is backed by physical gold. Not many investors know about this change yet. This report gives you all the details on "gold dollars," and how you can use this program to your benefit.]

The recent 21% tumble in the Chinese markets had investors around the world bailing out of China as fast as they could.  But, this sell-off actually created one of the biggest buying opportunities of a lifetime.  Here’s why China is poised to take off – and how to cash in as China leads the global economic recovery.

August 2009 was one of the worst months ever for the Chinese stock market, with stocks dipping 21%.  But the major sell-off wasn’t based on any fundamental news – it was a case of frightened investors worried that China is the next bubble.

The truth is, China’s fundamentals are sound.  Chinese consumers are accelerating their purchases, exports are growing and Chinese GDP is on track to grow 7.9% by year-end. This is no bubble – Chinese stocks don’t have anywhere to go but up.

Don’t let western bias fool you. It is not the U.S. that will lead the global recovery – it is China and other emerging economies.

China’s markets are for real – and so are the returns. Over the last five years, China’s markets have returned over 100% – even after the massive sell-off caused by the global financial meltdown. Over the same time period the S&P has actually lost money.

This is just the beginning.  This report will show you seven reasons the Chinese economy has nowhere to go but up – and how to profit.

1. Incredible GPD Growth Driving Returns

On July 15, 2009, China’s National Statistics Bureau affirmed what we’ve expected all along. China’s 2nd quarter GDP came in at an impressive 7.9%. Recently, HSBC China economist Qu Hongbin went a step further, forecasting that the Chinese economy will grow 8.1% this year and expand to 9.5% in 2010. The increasing GDP numbers reflect that China’s recovery is much broader and more robust than most western analysts originally gave the red dragon credit for. This impressive growth comes not only from China’s massive $586 billion fiscal stimulus package, but from strong growth in consumer demand.

2. China Can Stimulate Its Economy Without Going into Debt

While the U.S. has had to print trillions of dollars to attempt to stimulate its economy, China’s story is much different. With $2.3 trillion dollars in reserves, China has been able to strategically stimulate their economy -without having to deficit-spend to do it.   Even though the $586 billion Chinese stimulus package passed in November 2008 represents a whopping 16% of the country’s GDP, China hasn’t had to go into debt or print money like the U.S. did. This gives China an incredible opportunity to shore up the economy without damaging its future economic prospects.

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3. China is Funding Global Growth

When the International Monetary Fund (IMF) announced they were considering issuing $50 billion in bonds to better finance aid to countries struck by the global financial crisis, they turned to China to purchase them.  How times have changed.  Two decades ago, the IMF would have been calling the U.S. to help fund the recovery. But with the U.S. economy crippled, China is the only industrial economy in the world that has enough reserves to actually do anything.  Of course, China’s willingness to assist the IMF is both humanitarian and shrewd.  As IMF Managing Director Dominique Strauss-Kahn said, “The crisis is certainly an opportunity to reshuffle the IMF’s governance, to see the new balance of powers in the world.” Clearly, China’s extensive reserves give the country the opportunity to exert its power over the entire new world economy.

4. China is Moving the World Away from the U.S. Dollar

Not only is China taking advantage of its economic strength to gain leverage in the IMF, it is also pushing for a move away from the U.S. Dollar as the world reserve currency. As the largest holder of U.S. dollar reserves in the world, China has a lot of reasons to be concerned with the value of the U.S. dollar. Chinese officials are watching very closely as Washington desperately spends to resuscitate the U.S. economy. In an effort to diversify away from the U.S. dollar, China has been buying gold, oil, and other dollar denominated commodities necessary for its growth. If the value of the U.S. dollar declines, the value of China’s new assets will increase. In one easy step, China has not only helped its strategic growth, but it also created a hedge against Washington’s shenanigans.

5. China is Creating a Marketplace for its Currency

Since December 2008, China’s central bank has signed bilateral currency swap agreements with six different countries – including Argentina, South Korea and Indonesia – worth  $95 billion dollars. The countries that participate in these swap agreements can use Chinese yuan to buy goods and services in China.  With these agreements, China has created a market for its currency without ever having to put it into the open market. China will likely continue to extend these swap agreements with as many countries as it can, until one day the world wakes up and realizes China has created a global marketplace for its currency without playing by the rules.

6. China Has Room to Grow

While we in the West grapple to keep up our inflated standard of living, China still has plenty of room to grow. Annual per-capita income in China is only $6,000 – compared with $47,000 in the U.S.  The sheer size of China (1.3 billion people) and its increasing prosperity is an enormous force that can’t be ignored.  Remember, China is not some backward third world economy. It is currently the third largest economy in the world. China’s economy will surpass that of the United States by 2035 and be twice its size by mid-century, according to the Carnegie Endowment for International Peace.

7. Global GDP Growth is Shifting East

As the global markets begin to mend themselves we will see global GDP share move from the west to Asia – led by China. The U.S., Canada, and Europe will only account for 49.4% of global economic output in ‘09, according to the Center for Economics and Business Research. Not only that, Western economies will decline to just 45% of global economic activity by 2012 – far ahead of the original estimates that predicted the West wouldn’t fall below 50% until 2015.

As China’s share of global GDP rises, so does its share of the global markets. From the end of 2003 to the end of July 2009, the NYSE’s share of global market cap shrunk 29%, according to the World Federation of Stock Exchanges. Over the same time, the Shanghai Stock Exchange increased its share of global market cap by 636%. In addition, by 2020 – just 11 years from now – China’s share of global consumption will be equal to that of the United States. That’s what happens when you introduce a prosperous economy to a population of 1.3 billion people.

How to Invest in China:

Not all Chinese companies are created equal, so we prefer using ETF’s to play the entire trend instead of choosing any individual companies.  Remember, the ride won’t be straight up – China will have hiccups.  But, we are staring at the leading edge of the investing opportunity of a lifetime and you don’t want to be left on the sidelines.

One of the most popular ways to invest in China is through iShares FTSE/Xinhua China 25 Index (FXI), but I prefer PowerShares Golden Dragon Halter USX China (PGJ). PGJ has a more broadly diversified portfolio of companies and sectors, with no more than 28% of the entire holdings in any one sector, and no more than 5.46% of the entire holdings to any one company. FXI on the other hand, has concentrated 51% of their entire holdings in the financial sector, and as much as 9.3% of the entire holdings in one company (China Construction Bank Corporation). That may prove be to genius over time, but as a measure of the entire Chinese market, we feel PGJ offers better diversification.

If you like income, take a look at Templeton Dragon Fund Inc. (TDF) which is yielding 6.8%. Managed by legendary emerging markets fund manager Mark Mobias, TDF is a closed end fund focusing mainly on China (58.4% of holdings), but also on neighboring Hong Kong and Taiwan (29.9% and 11.4% of holding respectively).

If you have the stomach for more a little more risk, look at Claymore/AlphaShares China Small Cap (HAO). The name “small cap” may be a little misleading. This fund is more of a blend between mid-cap and small-cap stocks. The fund is very well diversified between the different critical sectors in China and no single company represents more than 2.6% of the entire funds holdings.

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This report outlines when the U.S. economy will turn around, the effect of President Obama’s policies and how to protect your finances in the meantime. 

If there’s a proverb that captures the outlook for the U.S. economy, it’s the one that says: “It’s always darkest before the dawn.”

The first quarter certainly presented us with some of the darkest days the economy and stock markets have seen in decades.

But when all is said and done, will they be the darkest? Or are more to come?

When the dawn does come, it will be one to remember. And if U.S. President Barack Obama gets it right, then investors will be presented with the greatest investment opportunity of our generation.

At that point, shares of American companies will be at such low levels that wholesale buying by individuals, mutual funds, pension funds, institutional money managers, and foreign-controlled sovereign wealth funds, will generate gains that will not only make us whole, they will make us rich once again.

Bet let’s take a step back and examine every caveat of the U.S. economy – what President Obama is doing to fix it, and when economists believe the stock market and gross domestic product (GDP) will turn around.

We’ll also show you how to keep your money safe – even bear market investments the pros are making – until the stock market gets back on track. 

U.S. Economy/GDP

While many analysts expect U.S. corporate earnings and overall economic data to remain weak by historical standards, there may well be enough of an improvement over the prior months and quarters to spark some optimism that there are better times ahead.

For instance, a 5% to 6% contraction in first quarter GDP will look decent vs. the wrenching 6.3% decline the U.S. economy experienced in the fourth quarter. Mix in some still weak – but improving – corporate earnings season and there may be reason to hope that Obama’s prediction of an economic rebound in 2010 may not be off target after all.

The U.S. stock market has endured three protracted bear markets since 1900 (1906-1921, 1929-1942 and 1966-1982) and there’s evidence the United States may be ensconced on one of those periods again.

While there are some positive indicators, caution (or even cautious optimism) should be the order of the day.

Plenty of questions still need to be answered before we can proclaim an end to the bearishness and a definitive market recovery. This environment is not the time to be a hero. 

But there are three significant wildcards at play here that could keep the market from sinking into an even deeper malaise – and that could, in fact, be a catalyst for higher stock prices and perhaps even an improved economy in the months to come. Those three wildcards include:

• There’s an estimated $4 trillion in cash in investors’ hands on the sidelines – capital that could be drawn in to further pump up the markets, should the recent rally continue.
• The federal government has already committed to funding $11.6 trillion in stimulus initiatives, and the sheer magnitude of that government intervention could play a substantial role in determining just how long this downturn lasts – or how quickly it ends.
• Stocks are, in many cases, currently trading at levels not seen since the late 1990s, meaning the market is dangling bargains too enticing to ignore.

Eddie Cohen, a market historian and chief investment officer for Stavis & Cohen Financial, believes that investors need to remain cautious and to understand that market sentiment can literally turn on a dime, especially if the volatility levels remain high. He also foresees some potentially positive developments on the horizon and believes that patient long-term investors who are willing to ride out the short-term volatility may want to commit some money to stocks in profit from these low valuations.

Given that there is “an estimated $4 trillion in cash on the sidelines right now … as investors become more confident, some of these funds could potentially find their way into equities and help drive the markets higher,” Cohen said.

Obama Economy

Many commentators have described the current economic disaster as “difficult to understand.” But that’s not really true: The United States and the world in general are currently undergoing the inevitable aftermath of a decade of excessive money creation, from 1995 in the United States, and from 2001 for much of the rest of the world.

Not only did such a prolonged period of cheap money produce asset bubbles in stock, housing and commodities, it also produced a leverage bubble of excessive debt among consumers, businesses and financial institutions that must be wound down, an agonizingly painful process. The disaster was primarily caused by government, in particular the U.S. Federal Reserve and the (government-created) housing finance agencies Fannie Mae and Freddie Mac, but there’s no question that perverse management incentives in the financial sector, unsound new financial tools and sloppy regulation also played important roles.

During the election campaign, Obama and his supporters had great fun assigning blame for these troubles. Now it’s Obama’s job to come up with solutions.

What he has to realize – and he may already know this – is that there is a clear conflict between minimizing the current pain of recession and minimizing its duration. Actions that provide short-term relief generally create new problems that both delay the ultimate exit from the downturn and may cause a deeper economic “hole” before recovery takes place.

At first blush, the Obama administration seems likely to continue some of Bush’s economic policies. The second tranche of the $700 billion TARP bailout has been used to support bank lending, homeowners and carmakers, while there is talk of a “bad bank” approach to dodgy mortgage-backed assets, similar to the original TARP plan, which would absorb hundreds of billions of additional bad assets.

By nature, he is a much deeper and more long-term thinker than President Bush, Bernanke or former U.S. Treasury Secretary Henry M. “Hank” Paulson. Obama also is surrounded by economic advisors Tim Geithner, Larry Summers and former Fed Chairman Paul A. Volcker, who all are committed to a free market rather than a government-directed economy – and who, in Volcker’s case at least, realize that short-term economic pain can be used to produce long-term gains that far outweigh it.

The recession of 1981-82, produced by Volcker’s tight money policy, was painful but highly worthwhile. The reason: It resulted in the disappearance of inflation and a period of almost recession-free economic growth that lasted a quarter of a century.

Thus, it absorbed its approximate parameters and would be badly damaged by the uncertainty such abandonment would cause.  However, President Obama has already said that he sees the necessity of balancing the federal budget over the long haul, and with Volcker by his side he must realize that a similar course must be taken with respect to monetary policy.

Stock Market/Economy Recovery

Eventually, say in 10-20 months, there will finally have been enough business failures, enough write-downs of bad debt, enough corporate layoffs, and enough foreclosures that the market will have hit bottom. With so much excess fat trimmed away, a reasonably lean economy will finally shed the excess weight needed to start getting healthy again.

However, the stock market will likely recover about six months ahead of the economy’s actual recovery.

Here’s the most likely economic recovery scenario to expect:

Due to a kind of financial or economic inertia that’s so prevalent in a major recessionary environment like this one, the downward trends in the housing market, asset prices and job cuts will continue. That will force the federal government to push forward with the $11.6 trillion in financing commitments that it’s so far made, but not fully funded. It’s also likely to bring out new bailout candidates – and to attract some repeat customers, as well.

That inertia is a major problem because it could create a vicious cycle that’s hard to break. Take the job cuts. U.S. companies (and, increasingly, those in Europe and Asia, too) – fearful that the downtrend in profits and recessionary conditions will be with us for awhile – decide to get themselves into aggressive fighting trim, and carve off whatever fat they can find. Job cuts are the easiest way to cut costs en masse. So layoffs continue as long as the bad news persists.

And that would create a crisis in confidence for consumers. The jobless consumers pull back on their spending. Consumers who are still working are now fearful for their own jobs, and stop spending, too. When the source of 70% of your economy has gone into hibernation, the impact will be both widespread and deep. Corporate profits take another hit, leading to more job cuts, leading to additional profit declines… you get the picture.

It’s now generally recognized that the Bush tax cuts played a huge role in the burgeoning federal deficit and ballooning national debt. But it’s also generally held that President Obama has little choice but to cut taxes as he has.

Those tax cuts, coupled with the bailout infusions and the stimulus spending, will have a secondary effect, which again underscores why this turnaround will be such a challenge.

Just days before the Obama took office, the Congressional Budget Office projected that the U.S. budget deficit would nearly triple from last year’s $455 billion – and would reach a staggering $1.2 trillion. And that was even before Obama unveiled his $787 billion stimulus, bank-rescue and anti-foreclosure plans – or other fix-up initiatives that are sure to surface in the months ahead.

To finance that deficit, the government will have to borrow… heavily. In a market in which credit is already tight, stepped-up government borrowing can have the unfortunate side effect of “crowding out” private-sector borrowers, meaning corporations will have to pay much higher interest rates for borrowed funds – if that money is available at all.

That will affect companies in one, or both, of two ways:

• Companies will pay more for borrowed money, which will crimp their profits – and we’ve seen the unfortunate side effect of that.
• Or it will make it too costly, or even impossible to expand. Indeed, companies that are “on the bubble” in terms of solvency, may not be able to issue the commercial paper needed to finance daily operations, meaning they’ll be tipped into bankruptcy, and will have to cut still more jobs.

None of this will be good for stock prices, or for the banks, meaning the recession will continue to roll along.

Bottom line: the economic recovery will take time. Again, look for the stock market to recover about six months or so ahead of the economy’s actual recovery. But expect the “rebound” under this hypothetical set of circumstances to be weak, long and slow. There’s even the potential for a “double-dip” recession.

How You Can Recover

Nat Levy, a principal with Houston-based McNeil, Levy & Friedman LP, is a five-decade veteran of the financial-services sector, and has seen his share of uncertainty. In the near term, it rarely pays to prognosticate – so he doesn’t.

The one prediction he will offer is that some investors will look back on miscues they made today with more than a little regret.

“Right now, we find ourselves in one of those ‘if only I had…’ periods,” said Levy.  ”My one educated guess is that in five years from now we’ll look back and think ‘If only I had invested in this; if only I had remained invested in that, etc.’.”

Eddie Cohen points to the usual suspects like automakers and banks as industries that continue to face considerable challenges in the periods ahead.  While he sees signs of renewed housing activity in terms of new and existing home sales, he acknowledges that prices continue to fall each month, foreclosures are increasing, and the newly laid-off workers could exacerbate those trends.

Cohen – like Money Morning – believes that commercial real estate may be the next shoe to drop; vacancies are increasing, rents are under pressure, and banks may not be willing to loan large sums of money to related companies looking to refinance.

Because inflation could become a problem, Cohen says investors should have some exposure to gold in today’s environment.

“The unprecedented level of government intervention has added significant liquidity to the marketplace, but, ultimately may lead to higher levels of inflation,” he said. “Gold can serve as a potential hedge against such price pressures.  Additionally, as the country’s debt and deficit positions mount, the dollar could remain under pressure and gold can be viewed as an insurance policy against a weak currency and the uncertain times faced today and in the future.”

Cohen states that investors can invest in gold directly by purchasing bullion or through funds or exchange-traded funds – one being the iShares SPDR Gold exchange-traded fund (GLD) – that track the price movements of the so-called “yellow metal.” His firm uses a manager who buys bullions and stores it in a vault, which he says gives his firm’s clients the opportunity to access a product whose price moves more in lockstep with the market price of gold, and is even more cost effective than gold funds or ETFs.
 
In terms of stocks, Cohen believes investors should consider small-cap shares.

“Historically, coming out of recessionary times, small-caps are among the best performing equity asset classes,” he says. “Granted, many of these companies may have struggled during the dire economic times as investors shun anything other than industry leaders. Now may represent a decent time for cautiously optimistic investors to again look at small-cap companies, particularly when combined with some exposure to gold as a hedge against renewed downside pressures on stocks.” 

Cohen recognizes that the newly enacted government programs could prove helpful in jump-starting the U.S. economy – which should enable the recent upward move in stock prices to continue. In particular, he sees some successes in the Fed’s attempts to get corporations and municipalities borrowing again. 

“The credit markets definitely are showing signs of life,” said Cohen. “In the first quarter, domestic companies issued over $350 billion in new investment-grade paper and interest rate spreads between [corporate bonds] and Treasuries are coming down. Likewise, according to Lipper, investment-grade [municipal bonds] were up 4% to 5% in the first quarter and investor demand for such offerings seems to be on the rise. In fact, the state of California moved up a recent sale of $4 billion in bonds by a day to accommodate the demand for what turned out to be one of the largest tax-exempt offerings since 2007.”

Mortgage-market distress could also create some investment opportunities for investors who do their homework, Cohen says.

“I am a firm believer that challenges create opportunities, and no products have experienced more significant challenges over the past few years than mortgage-related securities,” said Cohen. “Amid the subprime debacle and related credit crisis, all mortgage products have struggled and even the higher-quality paper is being priced as if it is a toxic asset. We use a fixed-income manager who has been buying up more stable mortgage-backed issues at what he perceives to be tremendous values because of the negativity that has enveloped the entire asset class.”

A market historian to the end, Cohen likes to return to what he knows best when attempting to analyze just where he believes the markets will head next.

“Dating back to 2000 through mid-March, the equity market lost about 3% in value, so history may suggest we are about halfway through what some would call a secular bear market,” Cohen said. “During such times, it is quite common to experience periods when markets really take off. In fact, during the last few weeks in March, equities rose over 20% and some investors have pointed to that move as evidence that the market had bottomed and the turnaround had begun. In reality, since October 2007, we have seen six rallies of various magnitudes.” 

[Editor's Note: When it comes to banking or global economics, there's literally no one better than Money Morning Contributing Editor Martin Hutchinson, who brings to the table the kind of high-level expertise that our readers have come to expect. Hutchinson was recently honored by Slate for correctly calling the Bear Market bottom. He also writes regularly for our monthly newsletter, The Money Map Report, in which he and other Money Morning colleagues also make investment recommendations for subscribers. To find out more about The Money Map Report - including a special offer that includes The New York Times bestseller, "Crash Proof" - please click here.]

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 Experts roundly agree that the recession is only a short-term blip in the long-term escalation of oil prices.

And this time, there are 1.05 trillion reasons why oil is going to climb well past its peak last year.

Table of Contents:

• Oil Production: Why OPEC’s Keeping a Lid on Production
• Oil Prices: Why Crude Thrives on the Diving Dollar
• Oil Outlook: The Coming Oil Price Shock
• Investing in Oil: The Best Companies, Stocks and ETFs

Oil has staged an impressive rally since dropping below $35 a barrel in mid-February.
And while there remains a risk that prices will retreat further due to sluggish demand, there are also three very compelling reasons why oil is still a safe long-term bet:

• OPEC has made substantial progress in reducing the amount of oil on the market.
• The dollar has been made vulnerable by the U.S. Federal Reserve’s aggressive policy of quantitative easing.
• And low oil prices and tight credit have reduced global energy investment, putting future supply at risk.

There’s no question that downside risk remains. On April 13, the Paris-based International Energy Agency (IEA) lowered its demand forecast by 1 million barrels a day, and now expects the world will use about 83.4 million barrels per day in 2009. That would be 2.4 million barrels a day, or 2.8% less than last year.

But so far dwindling demand has failed to contain oil prices.

As Money Morning predicted in its annual outlook series, the first quarter was a volatile one, in which oil prices tested the low $30s before surging over $50 in recent market rally.

And analysts are almost completely united in the view that, despite its short-term volatility, declines in production, exploration and development, and the value of the dollar will drive oil prices substantially higher in the years ahead.

Oil Production: Why OPEC’s Keeping a Lid on Production

The members of OPEC generated tremendous revenue from oil prices that soared over $147 a barrel last year. However, just as the world’s top oil producers began looking for ways to spend their massive stockpiles of cash, prices began a plunge that would see crude lose more than three-quarters of its value.

In a desperate effort to put a floor under oil prices, OPEC – supplier of 40% of the world’s oil – has issued three production cuts totaling 4.2 million barrels per day (bpd), or nearly 12% of its capacity, since September.

While the cuts have not yet been able to return oil prices to the group’s desired price range of $60-$70 a barrel, the cartel abstained from making any further reductions at its latest meeting in March and even voiced optimism that crude would reach $60 a barrel by the end of the year.

“That suggests to us that not only does OPEC have the firepower to support this oil price, but there’s enough internal agreement between OPEC members that they can actually achieve it,” Tom Nelson, an analyst for the Guinness Atkinson Global Energy Fund told BusinessWeek.

Many analysts had speculated that OPEC members would ignore the quotas and continue to produce oil to generate income, thereby rendering the cuts ineffective. But OPEC’s discipline has proven many critics wrong.

Despite foot-dragging from Iran and Venezuela – two countries that rely heavily on oil revenue to fund massive social programs – OPEC has gotten about 80% compliance on the 4.2 million bpd production cut. Historically, the cartel only gets about 60% compliance on such cuts.

As of February, Saudi Arabia accounted for about 46% of the 3.4 million bpd decline in production, according to PFC Energy. And the United Arab Emirates have fully complied with their share of the cuts. Iran’s compliance by that time was only 33% and Venezuela had only adhered to half of its commitments.

Still, Abdallah El Badri, OPEC’s Secretary General, estimates the production cuts will take about 800,000 bpd of supply off the market, significantly reducing the overhang in global markets, BusinessWeek reported.

OPEC officials from Libya, Algeria, and Iraq have all said that oil prices will reach $60 a barrel by the end of the year.

“One of the reasons why OPEC felt able to roll over quotas was that they do appear to have set a floor for prices,” Mike Wittner, an analyst at Societe Generale SA (ADR: SCGLY), told Reuters. “According to a lot of the balances, including ours, if you have OPEC holding steady or cutting a bit more, you get a big, counter-seasonal stock draw in the third quarter.”

Oil Prices: Why Crude Thrives on the Diving Dollar

Crude futures doubled from July 2007 to July 2008, soaring from about $74 a barrel to a record-high $147 a barrel. Much of that rise can be attributed to supply and demand, but there was another catalyst for the soaring prices that few investors recognized: The rapid decline of the dollar.

From July 2007 to July 2008 the dollar plunged 16% against the euro. And as the dollar became less valuable the cost of commodities around the world skyrocketed.

At the time, inflation – not deflation – was the predominant concern among the world’s leading economists, as a decade of low interest rates and unconstrained lending in the United States sucked the life out of the dollar. And while inflation is nowhere near the levels it reached last year, it’s important to recognize that the policies of the U.S. Federal Reserve are no less inflationary.

The Fed has cut its benchmark lending rate to a range of 0%-0.25%, and soon after, Fed Chairman Ben S. Bernanke said the central bank would purchase up to $300 billion of longer-term Treasury securities and $750 billion of mortgage-backed securities as it pursues a policy of quantitative easing.

This announcement by the Fed, along with a corresponding rise in equities, has been the driving force behind oil’s recent rally.

Ultimately, the same fear of inflation that typically drives investors into the gold market is similarly buoying oil prices. And even though the dollar has yet to be seriously affected, there’s no ignoring the fact that the more than $1 trillion worth of government bonds and mortgage-backed securities injected into the market will imperil the dollar’s value.

Oil Outlook: The Coming Oil Price Shock

Now that a weak dollar and reduced production have bolstered oil prices, there is a growing concern about how much higher crude will climb once demand returns. Tighter lending conditions and a trough in oil prices have badly crimped investment and jeopardized future supplies.

More expensive energy projects such as oil sands have been put on hold and the number of drilling rigs at marginal shallow-water fields around the world has been scaled back to a three-year low.

Oil drilling activity dropped 43% in the 12 months through March, with year-over-year oil exploration in the United States alone down 38%. High bids for offshore drilling rights in the central Gulf of Mexico fell by more than 80% compared with last year.

OPEC has said that with oil generating substantially less revenue as many as 35 new projects could be delayed past 2013.

“I have often described unsustainably low oil prices as carrying the seeds of future spikes and volatility. In a low-price environment, the trend is often to focus on survival instead of expansion,” said Ali al-Naimi, the Saudi oil minister. “If we place a low priority on preparing for the future, that lack of action can come back to haunt us through supply shortages and another round of high prices.”

The current economic crisis could reduce future oil supply growth by 8 million bpd, according to a recent study by the Cambridge Energy Research Associates (CERA).

CERA now says that production will grow by just 7.5 million bpd over the next five years, down from the 14.5 million bpd increase it predicted last summer. According to the research group, as demand recovers throughout that span, production will struggle to keep up and a new commodities bull market, similar to the one seen in 2008 will begin.

“Seven consecutive years of rising oil prices – unprecedented in the history of the oil industry – have come crashing down, thus burying the notion that the commodity price cycle was a historical relic,” said the report.

CERA isn’t the only organization worried about the lack of investment in new oil projects, either. The International Energy Agency (IEA) – energy advisor to 28 industrialized nations – has also issued warnings about a coming supply crunch.

The IEA estimates daily oil demand will rise from the current level of 86 million barrels to 106 million barrels by 2030. To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years.

China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.
About 7 million bpd of additional capacity needs to be added to the market by 2015.

“Unless sufficient companies have the will and financial ability to invest through the down cycle, there is a real risk that supply growth may lag the eventual rebound of demand, leading to substantial price increases – possibly as early as this year,” Richard Jones, the IEA’s executive director said at a recent conference in London.

Jones estimates that as much as 2 million bpd of expected new oil production has already been deferred.

The IEA predicts that, by 2015, a lack of investment and rising demand will create a “supply crunch” – that will once again send oil prices up into the triple digits.

“There remains a real risk that under-investment will cause an oil supply crunch in that time frame,” the IEA said in an executive summary of its “2008 World Energy Outlook.” “The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.”
The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.

“Every bull market in oil is really born in the zenith of a bear market,” said Phil Flynn, an analyst at Alaron Trading Corp. “The cutbacks we see today are going to lead to a spike somewhere in the future. The big question is when it’s going to happen.”

Investing in Oil: The Best Companies, Stocks and ETFs

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

 ”Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Money Morning Contributing Editor Horacio Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ’spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.

Keith Fitz-Gerald, Money Morning’s Investment Director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR: CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL), or the United States Gasoline Fund LP (UGA).

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[Editor's Note: When it comes to banking or global economics, there's literally no one better than Money Morning Contributing Editor Martin Hutchinson, who brings to the table the kind of high-level expertise that our readers have come to expect. Hutchinson was recently honored by Slate for correctly calling the Bear Market bottom. He also writes regularly for our monthly newsletter, The Money Map Report, in which he and other Money Morning colleagues also make investment recommendations for subscribers. To find out more about The Money Map Report - including a special offer that includes The New York Times bestseller, "Crash Proof" - please click here.]

Last year was a bad one for pension plans worldwide, with the global financial crisis vacuuming an aggregate $5 trillion from companyoperated retirement plans in such key markets as the United States, Japan the United Kingdom and The Netherlands.

The plunge in stock prices knocked worldwide pension assets down from $25 trillion to $20 trillion, an excruciating decline of 19%, Reuters reported. 

Only Germany, which was protected by a high allocation to bonds, saw its pension assets increase in value.

U.S. pension plans – which account for 61% of global pension assets – were especially hardhit. In a year in which U.S. stock market declines eradicated $7 trillion in shareholder wealth – equal to the total stockmarket gains of the prior six years – companysponsored pension funds found themselves underfunded to the tune of $409 billion at the end of 2008, while U.S. retirement accounts were lighter by $2 trillion.

That’s a lifechanging loss, forcing many soontobe retirees to adjust their plans at least for the foreseeable future – or to scrap them altogether. American workers are postponing longdreamedof plans for their Golden Years, opting to work longer than they planned, taking second jobs, downsizing the lifestyles they’ve enjoyed for decades, or even all of the above.

As headlines from around the world remind us, this global retirement strategy is more than just government reports or statistics this crisis has a very human face.

Just consider how these retirementfund losses are personally affecting people who had been counting on income from those vanished funds:

• Colorado’s largest pension fund lost $11 billion, or 25% of its assets, affecting more than the 413,000 current and former government workers.
• North Carolina’s state pension fund, which covers 820,000 state employees, lost 17% of its value in the past year.
• In Jacksonville, Fla., a police union is threatening to sue the city if it doesn’t live up to its pledge to provide a step increase to the police pension – although city officials say the money just isn’t there anymore.
• Alarming to many, the New York state pension fund hired Bank of America Corp. (BAC) and Parish Capital Management to manage $550 million as part of an expansion of its private equity portfolio.
• Even more frightening, some companies found a loophole to increase a CEO’s pension by 10% to 40%  – even as those very same companies slash pensions for their employees, The Wall Street Journal reported.

Pension Losses Will Have Widespread Fallout

The pensionfund losses will hit home on many levels.

For individuals, lost retirement funds are especially painful – especially for consumers who have watched the value of their home plummet, and for others who have seen one or more persons in the household lose their jobs.

The pensionfund declines could also end up crimping corporate earnings.

In the United States, companysponsored pension funds are gradually going the way of the dinosaur, and one day may be extinct. Companies prefer to push the cost and liability of saving for retirement off on their employees, and are gradually closing down the corporate pension funds that were once viewed as a key part of a worker’s benefits package – almost as important as salary and vacation.

For a number of years, companies have been shifting away from those ageold pension plans by instead offering socalled 401(k) plans, which allow workers to contribute portions of their pretax earnings toward retirement, and which sometimes even feature a company "match” on a portion of those contributions.

But conventional pension plans remain in place – a reality (and problem) that’s coming home to roost.

At the end of 2007, U.S. companysponsored pension plans were funded to the tune of 104% – meaning they were actually carried a surplus of $60 billion, according to HR consultancy firm Mercer Inc.

But with the evisceration of the Dow Jones Industrial Average, Standard & Poor’s 500 Index and Nasdaq Composite Index – not to mention the ultralow yields of government bonds brought on by the aggressive ratecutting campaign by the U.S. Federal Reserve – the pension funds that were overfunded at the end of 2007 were dramatically underfunded at the end of 2008 – by a whopping $409 billion.

At the end of 2008, because of that oneyear swing of $469 billion, U.S. pension funds were only 75% funded. According to Mercer, that means that pension expenses are likely to increase from $10 billion in 2008 to $70 billion in 2009 as companies are forced to inject new money to meet anticipated retirement obligations.

That added expense will reduce profits.

“To put this into context, net income for [Standard & Poor's] 1500 companies in 2007 (the last year the full information is available) was $727 billion, so an increase in pension expense of $60 billion would equate to an 8% reduction in profits,” said Adrian Hartshorn, a member of Mercer’s Financial Strategy Group, which helps companies manage financial risk in their retirement portfolios.

After stock prices plummeted last year and again early this year, companies have responded with costcutting measures that are both deep and wide. Companies are faced with two choices: Take cash out of the business or reduce the money that’s being pumped into their pension plans.

If they choose the latter, further pension purging could take the form of benefit restrictions and plan freezes, Mercer’s Hartshorn said.

Perhaps the best example is aerospace giant Lockheed Martin Corp. (LMT), which lowered its 2009 earnings forecast from a range of $7.65 to $7.90 per share to one of $7.05 to $7.25 because of rising pension costs.

“Although we, along with many others, thought that pension was likely to be painful in 2009, this is twice the adjusted expense that we were projecting,” Rob Stallard, a New Yorkbased analyst with Macquarie Research Equities, wrote in a report, Bloomberg News reported. "Baking the pension issue into the stock should allow investors to return their focus to defense policy, spending programs and execution.”

Lockheed is by no means alone. The Pension Rights Center, a U.S. consumer organization dedicated solely to protecting and promoting the retirement security of American workers, retirees and their families, compiled a list of more than 75 companies that have recently changed their pension plans.

Relief on the Way?

Still, amid all the financial chaos last year, there was enough lobbying power to bring the pension crisis to the attention of Congress.

And one of President Bush’s final actions was signing the Worker, Retiree, and Employer Recovery Act of 2008, which hopes to cut back on the number of employers reducing pension benefits, especially as stock markets crumble.

Provisions of the bill include:

• Aid for singleemployer pension plans.
• Relief for multiemployer plans.
• And temporary penalty suspensions for individuals 70½ and older who do not make required distributions from their Individual Retirement Accounts (IRAs) and 401(k)style plans in 2009.

Retirees who don’t withdraw the minimum from their retirement account – an amount based on their account’s balance last year – would normally face a 50% tax penalty.

“By making minimum withdrawals from retirement savings accounts optional rather than mandatory for next year, older Americans are poised to hold on to more of their diminished nest eggs,” David Certner, AARP legislative policy director, said in a statement, MarketWatchreported. "By freezing the withdrawals for next year, every older American who was forced to make a choice between taking a withdrawal that was calculated based on a much higher value in their retirement account or face a high tax penalty – will be eligible for this financial relief.”

However help or recovery arrives, it will likely to do little to stop employers from trending away from offering pension funds to their employees.

More than 60% of workers with retirement coverage in 1983 had only a traditional pension. Today, that figure is 20%, because employers shifted to 401(k)s – a move that also shifted risks and responsibilities to employees, The New York Times wrote.

[Editor's Note: Uncertainty will continue to be the watchword for at least the first part of the New Year. Little wonder, as the global financial crisis continues to whipsaw the U.S. financial markets in a manner that hasn't been seen since the Great Depression. It's almost enough to make you surrender and give up the investment game forever.

But what if you knew - ahead of time - what marketplace changes to expect? Then you'd be in the driver's seat right? You'd know what to anticipate, could craft a profit strategy to follow, and could then just sit back, watching and waiting and finally profiting from the very marketplace events you anticipated.

R. Shah Gilani a retired hedge fund manager and a nationally known expert on the U.S. credit crisis has predicted five key financial crisis "aftershocks" that he says will create substantial profit opportunities for investors who know just what these aftershocks are, and how to play them. In the Trigger Event Strategist, Gilani uses these "trigger events," as gateways to massive profits. To find out all about these five financialcrisis aftershocks, and about the triggerevent profit strategy they feed into, check out our latest report.]

If you’re an emerging-markets investor, and you happened to peruse the study that the Institute for International Finance released this week, you must’ve experienced alarm – if not panic. The IIF expects the inflow of private funds into these markets to plunge to only $165 billion this year – an amount that’s just 18% of the $929 billion that flowed into these very same markets in 2007.

For investors, the message is clear: We’d better concentrate on those emerging markets whose inhabitants have hefty piggybanks of their own.

The details of the investment slowdown are as alarming as the headline. Bank loans to emerging markets will decline from an inflow of $165 billion to a net outflow of $61 billion. Private non-bank debt investment will decline from $125 billion to $31 billion, and even official flows will decline from $41 billion to $29 billion.

Net portfolio equity investment will remain negative, though the outflow will be only $3 billion compared to 2008’s $89 billion. Only direct foreign investment will increase, rising 12% from 2008 to $195 billion.

In terms of regions, emerging Europe will suffer worst, with inflows plummeting from 13% of regional gross domestic product (GDP) in 2007 to just 1% in 2009. Latin America will also suffer, with inflows dropping from 11% of regional GDP to 3%.

Overall, inflows to emerging markets will drop by 5.8% of emerging market GDP between 2007 and 2009 – almost double the declines of the late 1990s crisis (3.7% of emerging market GDP) and early 1980s (3.2%). Emerging market cash flows will also be affected by the need to repay $223 billion of private market debt this year.

This will cause a reordering of the economic pecking order in the emerging markets.

From 2003 to 2007, the availability of natural resources and/or cheap labor was more important than high foreign reserves or a big domestic savings base, so Argentina (natural resources) and emerging Europe (cheap labor, relative to the EU average) did well.

In 2009, access to capital will be more critical than either of those other strengths. Countries without a large domestic savings base, or with substantial balance-of-payments deficits, or with low foreign exchange reserves, are likely to suffer badly.

Many emerging Europe countries have balance of payments deficits exceeding 10% of GDP so will suffer badly. Within that region, the Baltic states – fairly uncorrupt and friendly to foreign investment – will do much better than Romania and Bulgaria, which are both corrupt and xenophobic.

In Latin America, Brazil has an excellent domestic savings base, which it has been nurtured by policies that keep interest rates much higher than the rate of inflation. It is also quite friendly to foreign direct investment. Hence, in spite of its high foreign debt, Brazil should do fine.

Conversely, Mexico has a lower domestic savings base, relies heavily on remittances from Mexicans in the United States (which have declined sharply) and is quite hostile to foreign investment, particularly in the energy sector. Hence it is likely to have a tough year.

In Asia, China – with huge domestic savings, $1.95 trillion in foreign exchange reserves, and low foreign borrowing – will do fine. Conversely, India’s high domestic savings are offset by a profligate government, which runs a wasteful deficit of more than 10% of GDP. Hence India is quite reliant on foreign borrowing, and is likely to have problems.

Which ETFs the Pros are Buying

For investors, the message is clear. Our emerging markets investments must be concentrated in countries that will not be badly affected by the decline in foreign capital inflows, preferably where domestic savers have piggybanks that are large enough to fund expansion locally.

In particular, without delving into particular stocks, the following country-specific exchange traded funds (ETFs) are worth looking at:

• The iShares MSCI Brazil Index (EWZ) has net assets of $3.4 billion, a Price/Earnings (P/E) ratio of 7.0, and a dividend yield of 6%. Money Morning Contributing Editor Horacio Marquez recently recommended this Brazilian ETF in this weekly “Buy, Sell or Hold” series.
• The iShares MSCI Chile investable Index (ECH) has net assets of only $112 million and a P/E of 13. However, Chile is interesting because it built up a reserve fund of $21 billion (12% of GDP) during the years when copper prices were high – it is thus not dependent on foreign-fund inflows. 
• The iShares FTSE/Xinhua China 25 Index (FXI) invests in the 25 largest Chinese companies. Net assets are $5.9 billion, its P/E ratio 10, and its yield 2.7%.
• The iShares MSCI Taiwan Index (EWT) has net assets of $1.3 billion, a P/E of 9 and a yield of 8%. Taiwan is highly liquid, with large reserves, a high savings rate and almost no foreign debt
• The iShares MSCI Singapore Index (EWS) has net assets of $800 million, a P/E of 9 and a yield of 8%. Like Taiwan, Singapore is highly liquid, with large foreign exchange reserves and little debt. Taiwanese and Singapore companies may indeed benefit from the liquidity crunch by finding attractive investment opportunities in regional cash-short emerging markets with high growth potential, such as Vietnam.

[Editor's Note: With the U.S. financial markets in tatters from the global credit crisis, Money Morning and its affiliated monthly newsletter, The Money Map Report, have trained their profit-seeking sights on markets outside U.S. borders. Of all those markets, one dwarfs all the others put together. And that's China. As his intriguing and insightful columns on China demonstrate, Money Morning Investment Director Keith Fitz-Gerald has a network of contacts in China, Japan and other key markets that gives his readers advantages that other investors never enjoy.

That makes Money Morning a "must read" each day. Our monthly newsletter, The Money Map Report, is even better. To get you to give it a try, we're willing to give you a free copy of investing icon Jim Rogers' bestseller, "A Bull in China" just for subscribing. The book is filled with top-level investing intelligence on all the top companies - and best stocks - in China. Check out our new report, which shows you how to get a free copy of this book. Just click here.]

[Editor's Note: This is the ninth installment of our "Outlook 2009" series, which looks at the global investing outlook for the New Year.]

By Jason Simpkins
Associate Editor
Money Morning

Oil prices have fallen 70% since hitting a record $147.27 a barrel in July, which means in just five months, crude has given up all the price gains it made in the past four years.

After such a wrenching plunge, many analysts believe the outlook for the “black gold” remains bleak – and in the short term it certainly is. In the long run, however, dwindling supplies, resurgent demand, and a lack of investment will cause crude oil to double, triple, or even quintuple in price over the next few years.

In fact, the Paris-based International Energy Agency (IEA) – energy advisor to 28 industrialized nations – says oil will rise to $100 a barrel by 2015, as a result of a major “supply crunch,” and will ultimately soar to $200 a barrel.

But before it does, prices are likely to sink even further, perhaps falling as low as $20 a barrel in the first quarter of the New Year.

Indeed, much of Wall Street expects oil prices to average about $50 a barrel in 2009. Some of the firms and their specific forecasts include:

• Deutsche Bank AG (DB), which says oil prices will average $47.50 for all of next year.
• Merrill Lynch & Co. Inc. (MER), which predicts that prices will average $50 even.
• Moody’s Investors Service (MCO) also says crude will average $50 a barrel in 2009, but says that average will increase to $55 a barrel for 2010.
• Goldman Sachs Group Inc. (GS) is slightly more bearish, predicting that prices will average $45 for all of next year – after falling as low as $30 in the 2009 first quarter. (It’s worth noting that Goldman – just five months ago – predicted oil prices would hit $200 a barrel in 2009).

But analysts also agree on something else: When the recessionary tide finally recedes, all of the factors that drove oil to its record high last summer will once again be exposed, and crude will again soar to record highs.

“We may see prices drop lower – into the twenties, even – but there’s a better-than-average chance that they’ll be back over $70 a barrel by the end of next year,” says Money Morning Investment Director Keith Fitz-Gerald. “That’s where firms like Goldman and Merrill are getting all of these ‘middle-of-the road,’ $50-a-barrel estimates. And it’s why investors who buy in through the first quarter could enjoy compelling returns at the end of the year.”

In the meantime, however, low oil prices are crimping investment in new capacity, a reality that will lead to much higher prices down the road.

Just ask the IEA.

IEA: Rising Demand + Lack of Investment = ‘Supply Crunch’

According to widely respected energy advisor, global oil demand will slide 0.2%, or 200,000 barrels per day (bpd), this year, falling to an average of 85.8 million bpd. But the IEA also says that oil demand will advance by an annual average of 1.6% between 2006 and 2030.

The bottom line: Regardless of any short-term pullback, daily demand will rise from the current level of 86 million barrels to 106 million barrels in 2030. In other words, daily demand in 2030 will be 23%.

To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years. 

China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.

About 7 million bpd of additional capacity needs to be added to the market by 2015. And right now – because of marketplace changes – the financial incentives to make that happen just don’t exist.

Exploration costs have more than quadrupled since 2000, as oil producers have been forced to take on more complex projects, and the costs of both labor and materials have skyrocketed. At the same time, the steep drop in oil prices has put even more pressure on energy companies to curtail their investments rather than increase them.

Earlier this year, for instance, ConocoPhillips (COP) and Saudi Arabia Investment Co. (ARAMCO) were forced to postpone bidding on the construction of a 400,000 bpd export refinery at the Yanbu Industrial City.

“We see and hear about energy investments being delayed … this is a major worry and could lead to a supply crunch and much higher oil prices than we’ve seen before,” said Fatih Birol, the IEA’s chief economist.

The IEA predicts that, by 2015, a lack of investment and rising demand will create a “supply crunch” – that will once again send oil prices up into the triple digits.

“There remains a real risk that under-investment will cause an oil supply crunch in that time frame,” the IEA said in an executive summary of its “2008 World Energy Outlook.” “The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.”

The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.

“While the situation facing the world is critical, it is vital we keep our eye on the medium to long-term target of a sustainable energy future,” Nobuo Tanaka, the Paris-based agency’s executive director, told reporters in London. “While market imbalances will feed instability, the era of cheap oil is over.”

While it’s probably true that the “era of cheap oil” is in our rearview mirror, a new question has arisen: Just how high do oil prices go?

According to some analysts, the IEA’s target price of $200 a barrel is far too conservative.

$500 Oil?

The lack of exploration and development is certainly a problem. But a much bigger issue is the fact that output from the world’s existing oil fields has sharply declined.

“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.

And output from the world’s oilfields is declining faster than previously thought.

In its “2007 World Energy Outlook,” the IEA estimated that output from the world’s existing oilfields was declining by 3.7% a year. But in its latest report, published in November, the IEA revised that estimate to an annual decline of 6.7%. (The November report was based on the first major study of the world’s 800 largest oil fields.)

Unfortunately, the IEA is behind the curve.

For nearly a decade, Matthew R. Simmons has said that the world’s oil production was nearing – or already at – an “inflection point.” While his book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” was scoffed at when it was originally published back in 2005, Simmons is now viewed as perhaps the preeminent expert on the so-called “peak oil” movement.

“Like most people who ignore conventional wisdom, he was scoffed at, ridiculed, and denied,” commodities guru Jim Rogers told Fortune magazine. “And now, of course, people are starting to say, ‘Oh, well, I thought of that.’”

Simmons, chairman of the Houston-based investment bank Simmons & Co. International, poured through hundreds of technical documents submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years.

“I finished reading the last paper on a Sunday afternoon,” Simmons told Fortune, “and I sat back and thought, ‘Holy crap, this is unbelievable. I’ve just discovered the biggest energy illusion ever in the world. We’re in big trouble. I’m going to write a book.’ “

Much of the alleged Saudi Arabia subterfuge has to do with a complete lack of transparency with respect to the Organization of Petroleum Exporting Countries. After OPEC decided to base its production quotas on reserve figures in the 1980s, several of the cartel’s producers suddenly raised their levels of  “proven reserves” by 40% or more.

Back in 1988, for instance, Saudi Arabia raised its proven-reserve figure from 170 billion barrels to about 260 billion barrels. That figure has remained more or less constant since then, despite the fact that billions of barrels of oil have been pumped out of the ground.

“Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve,” Rogers told Money Morning during an exclusive interview in Singapore recently.  “It’s astonishing.  The figure never goes up and it never goes down.  They have produced dozens of millions – billions – of dollars of oil in that period of time.

“Every oil country in the world has declining reserves except Saudi Arabia,” Rogers said. ”And I know that every oil company has declining reserves.  So unless somebody discovers a lot of oil very quickly in very accessible areas, the surprise is going to be how high the price stays, and how high it goes.”

Simmons thinks oil prices could hit $300 a barrel – and could possibly even surge as high as $500 a barrel – during the next several years.

“Black Gold” Profit Plays

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

Chevron was actually recommended as a “Buy” by Money Morning Contributing Editor Horacio Marquez in his “Buy, Sell or Hold” column earlier this year.

“Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ’spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.

Fitz-Gerald, the Money Morning investment director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR: CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL), or the United States Gasoline Fund LP (UGA).

[Editor's Note: As the whipsaw trading patterns energy investors have endured this year have shown, the ongoing financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive.

Money Morning Investment Director Keith Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." But Fitz-Gerald brings more than a realization - and an understanding - to the table, here. After a decade of work, he's also developed a new computerized trading model based on a mathematical concept known as "fractals." This system allows him to predict price movements of broad indexes, or individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and this new market environment.]

No one knows if the price of oil will continue breaking records – but one thing is certain:

The biggest oil companies are hardly the best oil investments.

Four of the six "majors"- Royal Dutch Shell, BP, Chevron and ConocoPhillips – have profit margins that fall below the S&P energy-stock average of 9.7%.

And of those four, Chevron and ConocoPhillips are the only ones whose shares are actually higher than they were a year ago.

The fact is that companies outside of the "Big 6" are handing investors the best returns.

Two in particular stand out as potential triple-digit plays. The first is China’s largest producer of offshore crude and natural gas. It not only supplies the mainland’s thirst for energy, but it has a whopping with 2.6 billion barrels in reserves.

Its huge reserves are growing in value with every up tick in oil prices. Add in a dividend of $1.13, and this company’s prospects sing to both short- and long-term investors.

It also has one of the highest profit margins in the industry – with translates to stock appreciation, as you’ll see in a moment.

The second high-profit play is in Europe, with operations expanding throughout the globe. It’s the world’s leader in deepwater exploration technology, which means it spends significantly less time and money finding oil than its competitors.

That’s a major advantage – and it shows. It just trounced Wall Street estimates by 34.29% for the first quarter. And it pumps out a healthy 2% dividend.

This exclusive report gives the details on both and shows why they are two of the best oil plays available in this time of soaring prices.

The Most Profitable Oil Company… Period

No other oil company is nearly as profitable as Hong Kong-based CNOOC Ltd. The offshore oil and natural gas explorer has a jaw-dropping profit margin of 34.45%, more than quadrupling those of four supermajors - ConocoPhillips (6.75%), Royal Dutch Shell (8.35%), BP (8.40%) and Chevron (8.61%).

CNOOC has four oil production areas offshore China, as well as offshore oil facilities in Indonesia and certain upstream assets in regions, such as Africa and Australia.

As of December 31, 2007, it had about 2.6 billion barrels of reserves. And CNOOC’s proximity to mainland China and other emerging economies ensures that its oil doesn’t stay in the barrel very long.

You see, all it takes is a stroll down the street in China to see that demand for oil and gasoline is going to increase far faster than most U.S.-based analysts would ever believe – or understand.

"Nowhere is that more evident than China where I’m traveling now," Money Morning Investment Director Keith Fitz-Gerald said recently while leading an investor’s tour of the Red Dragon. "Beijing alone is adding 1,500 cars a day. Across China, the number is obviously higher. The same is true in India, but to a lesser degree."

[Editor's note: As the economies of China and India soar, the investment opportunities in each have become staggering... though not all are winners. "The Essential Investor's Playbook" lays out more than a dozen stocks that will best capture profits in both emerging economies.]

According to Fitz-Gerald, every investor must have a China strategy. And that especially holds true for the energy sector.

And CNOOC Ltd. is a prime candidate to fulfill both the "China" and "energy" portions of your investment portfolio.

Because let’s face it: China isn’t going to stop growing anytime soon. Incomes are rising and all the major automobile makers are setting up billion-dollar plants there.

Patient investors may be handsomely rewarded in the long-term, as CNOOC is uniquely positioned to capitalize on China’s thirst for oil for decades.

And given the weak dollar, CNOOC could also be on the prowl for acquisitions, which would further boost its earnings potential.

Going Deep on Petro Profits

A company can make all the money in the world, but it won’t turn a profit if it drains its wallet in the process – especially as oil prices climb.

Norway-based StatoilHydro ASA is an integrated company that’s involved in nearly every element of the oil and natural gas industries – a business model that saves hundreds of millions in outsourcing costs and adds just as much from multiple income streams.

Specifically, it produces, transports, refines, markets and sells oil and natural gas – both regionally and worldwide.

And that’s a major reason why StatoilHydro saw its year-over-year net income rocket 62% in the first quarter. The company also bested Wall Street’s first-quarter estimates by 34.29%, serving investors a 94-cents-per-share profit compared to its 70-cent forecast.

All totaled, Statoil has 7,000 kilometers of pipeline from the Norwegian continental shelf to Europe.

It’s now the world’s largest energy operator in waters more than 100 meters deep, producing an average of 1.7 million barrels of oil equivalent per day. It has proven reserves of more than 6 billion barrels of oil, has operations in 40 countries and is expanding aggressively to diversify internationally.

Statoil’s front-end operations are ubiquitous in northern Europe, where its network consists of about 2,000 Statoil-branded service stations, 470 tanker trucks and 99 depots spanning eight countries.

But more pertinent in the face of an energy crisis, StatoilHydro sends out one-third of its total daily output – about 600,000 barrels of crude and other fuels – to the United States.

[Editor's note: A former head of research for Merrill Lynch released a "tell all" document today... detailing how to buy oil for just 25 cents a barrel... and cash it in for an outrageous short-term gain.]

In March, the company announced plans to spend as much as $2.1 billion on operations in Brazil and the Gulf of Mexico. It bought the 50% stake it didn’t already own in Peregrino, a heavy oil field in Brazil, and 25% of the deep water Kaskida discovery in the Gulf of Mexico, from the Texas-based Anadarko Petroleum Corp.

Statoil’s cost-effective operations are maximizing the record revenues it’s seeing from high oil prices. And its globally integrated operations ensure the company will generate more revenue streams and better returns for investors.