Editor’s Note: This is the 19th Installment of an Ongoing Series Highlighting the Global Investing Outlook for 2008.

While 2008 has not been the banner year for mergers and acquisitions (M&A) that 2007 was, several blue-chip operations including Microsoft Corp. (MSFT), Time Warner Inc. (TWX) and JPMorgan Chase & Co. (JPM) have picked up where private-equity firms left off last fall.

Now, Blockbuster Inc. (BBI) is the latest high-profile company to join the deal-making ranks with a takeover proposal of its own. 

After a private bid went unanswered, Blockbuster made an unsolicited $1 billion acquisition bid for wounded electronics retailer Circuit City Stores Inc. (CC) for at least $6 a share – a move that sent Circuit City’s shares up 60% in pre-market trading Monday. 

Blockbuster said it first approached Circuit City Chairman and Chief Executive Officer Phillip Schoonover with the offer on Feb. 17, but when the movie-rental giant didn’t get a response, Blockbuster decided to take its proposal public "because it believes the shareholders of Circuit City should have the opportunity to participate in determining the destiny of the company."

However, Blockbuster already has an outline with regard to what that "destiny" would be: The merged companies would create a $18 billion retail enterprise that would benefit from their complementary products, marketing, distribution and financial synergies.

"Our vision for the ‘new’ Blockbuster is to be the most convenient source for media entertainment," Blockbuster Chairman and Chief Executive Officer James Keyes wrote in a letter to Schoonover.

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A Blockbuster Deal for a Browbeaten Market

Circuit City is the second-largest electronics chain in the United States, but the company has struggled recently. Over the past year the company has slashed retail management positions, eliminated jobs at its corporate offices and laid off 3,400 retail workers.

Making matters even worse: Circuit City not only lost more market share to industry leader Best Buy Co. Inc. (BBY), on March 28 it lost its spot in the Standard & Poor’s 500 Index.

Blockbuster hasn’t faired much better. Once an innovative icon in family entertainment and a cornerstone in the realm of media distribution, Blockbuster has more recently been the victim of increased competition and such technological changes as "video-on-demand" that have threatened its business. So it’s cut marketing costs and shed unprofitable customers in a desperate bid to fend off the Internet-based Netflix Inc. (NFLX).

The company’s troubles have led some – including Circuit City – to question whether or not Blockbuster even has the capital to follow through on its $1 billion all-cash offer.

"To date Blockbuster has been unable to satisfy Circuit City and its advisers that Blockbuster’s proposal could be financed," Circuit City said in a statement.

The statement also questioned whether the proposed acquisition would require debt financing (and, if so, what the terms and structure would be) and how large a rights offering would be required to fund the transaction.

In a conference call, Blockbuster’s Keyes said the company has the support of billionaire board member Carl Icahn.

Presuming Blockbuster does indeed secure the proper financing, Louis Basenese, an mergers and acquisitions (M&A) expert and the editor of The Takeover Trader newsletter, said the deal bodes well for both companies, but mainly because independently, they are headed for the trash heap.

"This is clearly a merger to fight off extinction," Basenese said. "Combining forces might only delay the inevitable."

Technology business blog, the Digital Home, called Blockbuster’s proposal "laughable."

"Blockbuster is nothing more than an irrelevant shadow of its former self. For years, the company stood atop the rental business and destroyed any and all competitors in its path," Digital Home author Don Reisinger wrote. "But once Netflix saw it fit to change the way the rental business works, Blockbuster couldn’t adapt and its once booming business turned into an overpriced cesspool of old business models."

A 2008 M&A Revival

A recent report from Thomson Financial indicated that the global volume of M&A plunged 31% to $661 billion in the first quarter of 2008. But that drop-off comes after a banner year for M&A activity. Total global deal volume checked in at $4.5 trillion in 2007, up 24% from the previous high-water mark set in 2006.

Since then, credit conditions have tightened significantly as many banks were badly burned by credit defaults. But while an era of "easy money" has come to an end, there is still ample opportunity for takeovers and tie-ups.

Basenese attributes most of the drop-off in M&A to a shift in the balance of power. Over the past several years, private equity firms had established themselves as the main drivers behind M&A activity by outbidding companies for assets.

However, it was those same buyout firms that led to the collapse in first quarter deals, with a 77% drop in acquisitions. And that has opened the door for companies flush with cash to get back down to business.

"Corporations are sitting with almost near record amounts of cash on their balance sheets," Basenese said. And with that, they can "take advantage of the depressed stock prices of competitors without the fear of being outbid by overly aggressive private equity shops."

Deals on the Docket

Microsoft made its move with an unsolicited $44.6 billion bid for Internet portal operator Yahoo! Inc. (YHOO). So far, Yahoo has done its best to thwart Microsoft’s advances, but most analysts believe Microsoft will get its way if it ups its $31 a share offer.

If that buyout goes through, it will be the largest-ever acquisition in the high-tech sector, exceeding even Kohlberg Kravis Roberts & Co.’s $26 billion buyout of First Data Corp.
However, Yahoo’s explicit opposition to the takeover makes it impossible to rule out a narrow escape.

"While we continue to see no other competing bidders, we believe Yahoo is aggressively pursuing strategic alternatives. One possibility is a tie-up with Time Warner, whereby Time Warner would contribute its online content assets to Yahoo in exchange for a stake. We believe this could serve as a forcing function to a higher Microsoft bid," Citigroup Inc. (C) analyst Mark Mahaney wrote in a note to clients.

Time Warner’s AOL recently made a move of its own, with its $850 million acquisition of Bebo Inc., a popular online social network. The San Francisco-based Bebo has 40 million members around the world and an especially strong presence in Britain. While social networking sites such as Facebook Inc. and MySpace.com have the American market locked up, 60% of Bebo’s traffic comes from Europe and 16% from Asia.

According to a recent report in BusinessWeek, eBay Inc. (EBAY) may be the next tech company to make a move in the M&A market. Lorraine McDonough, eBay’s mergers chief, told the magazine that her company is in a "good position to make acquisitions."

The company kicked off 2008 with a hasty purchase of payment-security firm Fraud Sciences for $169 million. And eBay isn’t stopping there. The company expects to make eight or nine more acquisitions this year.

Despite stagnating economic growth and an abysmal credit market, high-tech mergers and acquisitions have surged 132% this year through March 25. And other sectors are likely to follow suit. 

More Still to Come

Basenese believes that several converging factors will provide the "deal grease" needed to jumpstart the M&A market:

• An absence of private equity – exacerbated by the credit crunch – opens the door for corporate buyouts in the first half of the year
• A full-force return of private equity kingpins later in the year 
• The devalued dollar makes U.S. companies more attractive to foreign buyers
• Stock market woes have devalued companies, making more of them takeover targets

"Many takeover targets just trade at too good a price to pass up. Adding to the urgency is the fact private equity buyers won’t be sitting on the sidelines much longer. More and more of the leveraged loans in the pipeline are being cleared," Basenese said in an interview.

"Once those loans clear, rest assured private equity will return, making acquisitions more expensive for strategic buyers."

Editor’s Note: Money Morning’s "Outlook 2008" series last covered soaring coal prices and sovereign wealth funds.

News and Related Story Links:

• Blockbuster:
  Blockbuster Proposes Combination With Circuit City

• Associated Press:
  Blockbuster Bids $1B for Circuit City

• Circuit City:
  Circuit City Confirms Receipt of Unsolicited Proposal from Blockbuster

• The Digital Home:
  Blockbuster’s pending acquisition of Circuit City is laughable

• Money Morning:
  Outlook 2008: Three Ways to Profit From A Takeover Market That’s Alive and Well

Almost two months into a new and volatile year, investors have already been trying to figure out what will be the big winners when November and December come around.

But instead of looking ahead, in this instance, hindsight may prove more fruitful.

The agriculture markets have been on fire for the last couple of years. Corn and soybeans have skyrocketed on the back of huge ethanol demand. Wheat exploded as droughts cramped supplies and demand in emerging markets soared.

Seeing dollar signs, many farmers have decided to use their land to grow more profitible crops. For the short-term, that may pay off the mortgage but the longer-term effect could spell shortages [thus producing price increases] for those soft commodities they’ve stopped growing – in this case, cotton.

According to the National Cotton Council’s early season planting intentions survey in 2007, U.S. growers intended to plant 13.2 million acres of cotton in 2007. This was a significant decrease of almost 14% from 2006, and the 2008 decrease is expected to be even more dramatic.

But at the same time, demand for the softest of soft commodities hasn’t waned – if anything, the rapidly growing middle classes of China, India and Latin America are buying more T-shirts, jeans, hats, etc. 

In fact, China is wasting no time securing the natural resources it needs to keep its economy going – and that includes cotton. China is also smartly buying now, while cotton is cheap.

The emerging powerhouse is so serious about cotton that it has created its own cotton futures market. Many analysts had noted an imbalance between China’s growing economy and the relatively small size of its domestic futures markets. This imbalance was seen as a negative and something that could hinder China’s development in the long run.

The ‘Gigantic’ Zhenghzhou Cotton Futures Market

Chinese merchants and manufacturers are very serious about the cotton business; all you have to do is look at cotton futures trading on the Zhengzhou Commodity Exchange (ZCE).

The exchange is the center of cotton trading in Asia. Daily volume in Zhengzhou cotton futures – which will complete their first year of trading on June 1 – is now running at about 50,000 contracts. Open interest at the ZCE has been running between 60,000 to 80,000 contracts per day since last November.

To put it in perspective, the New York Cotton Exchange reached the 70,000 contracts per day threshold only after a century of trading. Literally, it took 120 years and a record U.S. cotton crop to accomplish it. The ZCE did it in less than a year.

Even with all the global interest in cotton, the futures have sold off heavily and there is a lot of bearish sentiment – at least until now.

Why Cotton is Looking Oversold

If the picture is so bullish for cotton, then why has it been selling off so much lately?

One big reason is demand has not been as high as expected in the first quarter, which has limited the upside trade in cotton, at least for now.

Cotton futures have had a bit of a boost in the last few months that will likely continue during 2008 because of speculative fund buying in cotton. The price for cotton is still relatively very cheap.

Analysis of the farming regions in the U.S. indicates that all areas will have some reduction of cotton, mostly in the south.

Also, weather is always a major factor for any agricultural commodity, and it will be pivotal in determining final crop size, no matter what.

Clothing, home furnishings, and even medical supplies are all industries that rely heavily on cotton. If the weather influences the harvest the way many are predicting, the price of cotton could be the next great bull market in commodities.

 Locked Out of Cotton

Unfortunately, most U.S. investors can’t directly tap a cotton-specific ETF – officially called ETFS Cotton and only traded on the London Stock Exchange.

Until something local arrives, investors will have to follow the farmers’ pursuit of other hot agricultural commodities.

Deutsche Bank’s Power Shares Agricultural Fund (DBA) is intended to reflect the performance of commodities in the agricultural sector – soybeans (31%), wheat (28%), corn (23%), and sugar (16%).

Van Eck’s recently launched Market Vectors Agribusiness ETF (MOO) takes a different approach. This fund reflects the infrastructure of the agriculture industry, focusing on chemicals (34%), agri-product operations (33%), equipment (24%), livestock operations (6%), and ethanol/biodiesel (2%).

Those investments aren’t shots in the dark, either. In fact, you might take comfort knowing that famed investment guru Jim Rogers – who predicted the global commodities boom we’re experiencing more than a decade ago – has said several times recently that he is buying agricultural commodities. [To see how you can obtain a free copy of Rogers' just-released bestseller, "A Bull in China: Investing Profitably in the World's Greatest Market," please click here.]

News and Related Story Links:

• Money Morning:
  Different Sources of Demand Mean Different Commodities Will Continue to Rise

• Money Morning:
  Outlook 2008: Five Ways to Profit From Soaring Agricultural Prices

A year ago at this time, few investors had ever heard the term "sovereign wealth fund."

But now these government-controlled investment pools are making headlines virtually every day, and their cash is surfacing in deals of almost every type. Most recently, the funds have provided bailout capital to the likes of Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), UBS AG (UBS), and Morgan Stanley (MS) – financial-sector heavyweights whose balance sheets have been eviscerated by the subprime-spawned credit crisis.

In doing so, these massive cash pools are highlighting potential turnaround plays for investors.

"Sovereign wealth funds provide an important data point for investors," says Money Morning Investment Director Keith Fitz-Gerald. Despite what critics say, "sovereign funds operate out in the open, and their objectives become very clear. This is in stark contrast to the secret workings of hedge funds, that operate in private, and only divulge their holdings and objectives after the fact."

In the political arena – especially in Washington – these multi-billion-deals have transformed sovereign wealth funds into a topic of controversy. On Wall Street, these deals have made the funds an object of fear and uncertainty.

The New Robber Barons?

Here at Money Morning, we’re referring to sovereign wealth funds as "Global Cash Barons." By bringing their huge hordes of cash to bear on the financial problems of the day, the sovereign Cash Barons are – in a way – the modern manifestation of the 19th Century Robber Barons, the so-called "Captains of Industry" that novelist and philosopher Ayn Rand described as being among the "greatest benefactors of mankind … because they had brought the ‘greatest good’ and an impossible standard of living – impossible by all historical trends – to the country in which they functioned."

Call them sovereign wealth funds or Global Cash Barons, but the bottom line is this: The investments that these massive cash pools make over the next 12 months will be some of the biggest profit opportunities investors will find. Shrewd individual investors would do well to closely watch the moves they make – and follow suit wherever possible.

Wall Street, long the flagship of global capitalism, is being usurped by these state-controlled Cash Barons. These funds have been around since the 1950s, but they’ve become much more active of late – and it’s that increased activity that’s caused controversy.

The governments of such countries as Dubai, Saudi Arabia, China, Russia and Norway operate the big investment pools – and more are on the way. The capital was amassed chiefly through crude oil sales, although China started its fund with some of the estimated $1.3 trillion in foreign reserves it amassed from the massive trade surpluses it routinely runs.

The richest sovereign funds include the Abu Dhabi Investment Authority, or AIDA ($875 billion), the Government of Singapore Investment Corp. ($330 billion), and Norway’s Government Pension Fund Global, or GPFG ($322 billion), although several others may be larger [See the sidebar, "The Richest Cash Barons," at the end of this report.]

Some of the world’s top sovereign wealth funds include Singapore’s Temasek Holdings Pte. Ltd., Mainland China’s China Investment Corp., and Dubai’s Dubai International Corp.

New funds have been announced in recent months.

Many of these Cash Barons are looking for more than just an investment return: They are seeking the deal-making know-how that over time will transform them into global financial titans. That quest induced the China-controlled State Foreign Exchange Investment Co. to invest $3 billion in private-equity whiz, The Blackstone Group LP (BX) back in April. The funds often take passive stakes, meaning they don’t demand management say-so and don’t seek seats on the target company’s board of directors.

The Next Wall Street?

But their ultimate objective could well be to enable them to one day unseat Wall Street as the deal-making Mecca of the capitalist world.

It could happen.

Sovereign wealth funds currently control an estimated $3 trillion. That’s already believed to be more than the $1.5 trillion to $2 trillion held by worldwide hedge funds [though some sources put the hedge-fund estimate as high as $5 trillion].

The International Monetary Fund (IMF) and other experts predict the state-run venture funds could control $12 trillion by 2015. But Money Morning’s Fitz-Gerald thinks the ultimate total will actually be much bigger: Even now, he estimates that the total capital under the control of the global Cash Barons is more likely to reach $20 trillion by the middle of the next decade.

The growth rate is certainly accelerating. The U.S. Treasury says that 20 new funds have been created since 2000 – more than half of them since 2005 – bringing the total to nearly 40 funds with total assets between $1.9 trillion and $2.9 trillion.

If that happens, no matter which estimate proves the most accurate, it’s clear the state-run funds will be major financial forces in the world economy in just a few short years. For some context, consider that the estimated U.S. gross domestic product for 2006 was only slightly more than $13 trillion.

Fueling Angst

In recent months, these Cash Barons have injected more than $70 billion into struggling commercial banks, brokerages and investment-banking institutions – most of them in the West.

In many cases – Citigroup being an excellent example – sovereign funds have snapped up prime U.S. assets with terrific long-term futures at near-term bargain prices.

Add to that the fact that China – with its $1.3 trillion in foreign-exchange reserves – holds several hundred billion dollars of U.S. government debt, and it’s enough to cause considerable angst among Americans who believe that foreign governments are methodically placing themselves in a position of considerable potential influence.

That growing angst hasn’t gone unnoticed – by the governments that operate the funds, or the governments that oppose them.

In October, finance ministers and central bankers from the Group of Seven industrialized nations called for rules to guide international investments of government-run funds. But the G-7 officials weren’t advocating such rules out of fear of the funds or their motives – many of these countries operate funds themselves and were calling for the rules to head off a protectionist reaction to the funds’ perceived lack of transparency.

In December, U.S. Securities and Exchange Commission Chairman Christopher Cox said the growth of these state-directed funds may lead to an upsurge in political corruption because governments might attempt to exert influence over the companies or markets they’ve invested in.

And yet, banking companies worldwide need the capital – especially in the United States, where the subprime-mortgage debacle has badly mauled the leading players in the commercial banking, mortgage-lending, investment-banking and brokerage sectors. The question is: Without sovereign-wealth capital, where would the U.S. economy be right now?

That quandary seems to sum up the schizophrenic viewpoint most Americans have about sovereign wealth funds.

"They don’t like us, but they need our money," Kristin Halvorsen, finance minister of Norway, told Forbes magazine recently.

Norway’s sovereign wealth fund – recently described as a "model of rectitude" – has an investment of more than $300 billion spread across 700 companies, though it’s avoided the banking-bailout deals that are so popular with the Cash Barons of Asia and the Middle East.

One problem has been the lack of transparency: Sovereign funds have been notoriously loathe to reveal their holdings, which contradicts the basic nature of the U.S. financial system, where disclosure is a key tenet. Some of the funds are starting to be more forthcoming about their investments, and their alleged intent.

"Sovereign wealth funds, until recently, had a very bad reputation," says Stephen Jen, the chief currency strategist at Morgan Stanley, the U.S. investment bank that made a study of sovereign funds – and accepted an investment from one, too. "But there was no rebuttal. They said very little in their own defense. But going into a sector [like the U.S. financial-services sector] that is in desperate need of assistance is a form of rebuttal. They are refuting the notion that sovereign wealth funds are going to be a source of volatility, of uncertainty, or that they will disturb the market. What they have done is anything but."

In December, after booking $9.4 billion of write-downs on its way to a fourth-quarter loss, Morgan Stanley said it had sold a stake in itself to China Investment Corp. for $5 billion.

New Players to Debut

In late December, in a move that underscores the growing global importance of state-run investment pools, Saudi Arabia announced plans to establish a sovereign wealth fund that would eclipse Abu Dhabi’s multi-faceted $900 billion venture to become the largest in the world.

The new Saudi sovereign venture will probably be created and managed by the Saudi Arabia Public Investment Fund, which up until now has been limited to internal investments, The Financial Times reported. Previously, that country’s oil-generated wealth had been apportioned among the Saudi kingdom’s central bank, Saudi Arabian Monetary Agency, also known as SAMA, and partly into the personal coffers of the nation’s ruling family, the international financial newspaper reported.

This new fund will represent a major shift in the investment policy of SAMA, which, up to now, had been limited to conservative stocks and bonds, especially U.S. Treasuries.
Interestingly, while SAMA’s balance sheet is public information, banking-sector insiders in the region say that those figures portray only a sliver of Saudi Arabia’s actual wealth. The reason: The royal family has stakes in scores of investment vehicles, most of which are not known.

Contrast that with Saudi Arabia’s Persian Gulf peers, which have increasingly shifted their investment strategies to prepare for the day when the region’s oil reserves run dry:
These other countries have been investing in such alternative investments as high-risk hedge funds and other alternative investments. What’s more, as recent news reports underscore, these venture funds are increasingly taking direct stakes in major corporations – especially financial-service firms.

Unlike its peers in the Gulf, Saudi Arabia has expanded its spending and its budget for 2008 includes spending for important infrastructure projects, the Financial Times reported.

Abu Dhabi is one of the seven emirates that make up the United Arab Emirates. It, along with its neighbors Qatar and Dubai, have been making serious investments in many markets around the world, increasing their foothold as the financial epicenter of the Middle East and diversifying their revenues beyond their vast oil reserves.

India also is looking to start a sovereign fund of its own.

As long as investors understand that the Cash Barons of Asia and the Middle East appear to be in the game for deal-making know-how and long-term profits, the best way to play this newly emergent – but potentially powerful – market trend would be to follow along on some of the best investment deals these state-controlled investment funds make.
Let’s consider three.

A Turnaround to Bank on

Of all the financial-sector forays the Cash Barons have made to date, the one we like best at Money Morning is beleaguered U.S. banking giant Citigroup Inc. (C).

Citigroup – and financial-sector stocks in general – underscore why it’s shrewd investing strategy to follow the best sovereign-wealth fund plays. These state-run investment vehicles bought into the financial-services sector at a point one could argue was the absolute market nadir: Nobody wanted the shares, and analysts were actually rating them as "sells" in some cases.

But once the sovereign funds placed their bets, the private-equity crowd – a shrewd group themselves – subsequently followed suit.
"Financials are going to be a big sector play in 2008," Joseph Russell, a managing director at the Chicago-based hedge fund, Citadel Investment Group LLC, told The Wall Street Journal.
Many private equity firms have been laying the groundwork for months to make Russell’s prediction a reality.  In June, Washington, D.C.-based Carlyle Group announced the formation of a Financial Intuitions Group. The group – headed by Edward J. "Ned" Kelly III, the former chairman, president and CEO of Baltimore-based Mercantile Bankshares Corp., and David K. Zwiener, former president and COO of The Hartford Financial Services Group, Inc. (HIG) – will seek out global investments in the financial services sectors, including banking and insurance.
Kelly, The Wall Street Journal reports, is on the lookout for troubled firms that could benefit from an equity boost. He’s also watching for firms that are interested in divesting subsidiaries in order to raise some quick capital. Carlyle hasn’t set a firm budget for financial sector investments and is willing to invest up to $5 billion in the right deal.

If you were a sovereign-wealth-fund shadow investor, you’d have likely already made your investment in a bank or brokerage when you spotted the Carlyle Group’s announcement. If so, this is exactly what you’d want to see. Once you have your investment position, the more interest the stock attracts, the higher it will trade. And there’s a predictable progression: Once the private-equity folks invest, the mutual funds and money managers will follow. Only then, with the share price nearly fully recovered, the retail investor will finally ante up, sending your shares even higher into profitable territory.

But it’s important to follow the correct sovereign-wealth-fund investment. In terms of a financial-services play, we believe that investment is Citigroup.

At a recent price of $26.34, Citi’s shares are down 58% from their 52-week high of $55.55.

In my 1998 book, "Contrarian Investing: How to Buy and Sell When Others Won’t and Make Money Doing It," my co-author and I divined several key indicators that help investors identify which down-on-their luck corporations can actually be turned around. Citi already meets the key requirements we’d used to identify profitable stock plays.

• Its stock is down by at least 50% from its 52-week high.
• It has installed a new management team.
• And, in lieu of having heavy buying by insiders, Citicorp has received massive investments from what my co-author and I referred to as "knowledgeable outside investors."

In Citi’s case, those "knowledgeable outsiders" were almost all sovereign-wealth-fund buyers – once again buying in at bargain prices as U.S. investors were fleeing in terror. That’s a mistake.

With the help of these knowledgeable outside investors, Citigroup raised $22 billion in new capital. And the lion’s share came from Middle East Cash Barons, most of them state-controlled.

The first cash infusion came in November, when Citi received a $7.5 billion investment from Abu Dhabi Investment Authority (ADIA), the United Arab Emirate’s state-controlled sovereign wealth fund. Under the terms of the November investment, ADIA’s stake will not breach 4.9%, and it will have no managerial oversight.

And that was just the start.

In January, Citi announced that it had raised an additional $14.5 billion.

Saudi Prince Alwaleed bid Talal – a well-known Contrarian investor who already holds a 3.6% stake in Citi – boosted his stake in the bank to the 4.9% maximum permitted without triggering a U.S. regulatory review, Bloomberg News reported.

Alwaleed isn’t a sovereign fund – he’s a global juggernaut all by himself. For purposes of context, however, Alwaleed’s investment is still important to note. You see, it was Alwaleed who bailed out Citigroup-predecessor Citicorp Inc., with a $590 million investment in 1991. That 1991 turnaround foray made Alwaleed Citi’s largest individual shareholder for more than 15 years. Even recently, with Citi having shed half its value, Alwaleed’s investment was still worth approximately $6 billion.

And at the same time Citi announced Prince Alwaleed’s latest investment, the bank also disclosed that it would receive cash investments from sovereign wealth funds in Singapore and Kuwait, as well as an investment from former Chairman Sanford "Sandy" Weill.

The infusion includes nearly $7 billion from Singapore Investment Corp Pte., and $3 billion from the Kuwait Investment Authority.

This turnaround looks uncannily like the one that Prince Alwaleed helped Citicorp engineer back in the 1990s. That was a tremendously profitable venture for investors who took the plunge: investors who’d bet on Citicorp back then had snapped up shares that traded as low as $8.63 in 1991, and then rode them until the stock peaked at $140 a share in 1997, when my co-author and I were putting the finishing touches on our manuscript [These prices have not been adjusted to correlate with the subsequent merger with Travelers Group, or with today's Citi share prices].  [For a Money Morning investment research report that that chronicles the parallels between the two turnaround opportunities, please click here. The report is free of charge].

To understand the high probability of a profitable turnaround, Fitz-Gerald says investors need to keep several factors in mind:

• First, the core of Citigroup’s current problems were caused by a breakdown in risk management – and not a deterioration of the ongoing operations that will provide the profits and cash flow needed for the turnaround.
• Second, the company is globally diversified, and many portions of its business are enjoying very strong growth rates – especially those involved with China and Eastern Europe.
• The company is trading for a pittance: At current levels, the implied normalized earnings power of the company reflects a future stock price that could be as high as $60 a share.
• And even after the dividend cut, the stock has a dividend yield of nearly 5%.

 "Once again, at a time when most investors were running for the exits, some of the world’s savviest investors lined up to buy Citigroup shares," Fitz-Gerald wrote in a recent investment research report.

Deal Yourself In

Of all the sovereign-wealth-fund deals on the books right now, one of the best opportunities for profit is MGM Mirage (MGM), the Las Vegas-based casino-resort operator. But don’t let that description limit your thinking: Thanks to a financing deal from the state-run Dubai World, MGM is actually a high-profit play on China.

Let’s review that deal. Dubai World is essentially a holding company/investment vehicle for the state of Dubai. Last summer, when MGM shares were trading in the $80 range, Dubai World said it would invest $5 billion in MGM.

The goal: Help MGM execute its China strategy, which the Vegas gaming firm has been pursuing since the middle 1990s.

This China strategy has several facets. First, MGM has already invested an estimated $1 billion in Macau – like Hong Kong, a so-called "Special Administrative Region," or SAR. Casino companies like MGM or the Las Vegas Sands Corp. (LVS) are dropping billions in Macau, a resort area situated just off China’s southern coast, because gambling is legal there [it's banned on the mainland].

Indeed, for the nouveau riche of Asia, Macau’s white-hot "Cotai Strip" could easily one day eclipse its Vegas counterpart as the place global gamblers want to frequent.

But as a way of hedging its bets, MGM is also set to develop several billion dollars of additional real estate projects around the world through a joint venture with the Diaoyutai State Guesthouse of Beijing. The long list of projects begins with a series of non-casino hotels in second-tier China cities, where incomes are growing and such luxuries as "vacations" are becoming more the norm – but where Western marketing and branding are still in their infancy. That will allow MGM to roll out one of its typically sophisticated marketing campaigns [customized for China's culture and targeting its emerging middle class].

"At the most basic level, Dubai is hoping to grab a share of the ever-increasing power of the Chinese consumer at a time when China’s consumers have not yet formed opinions about branding or luxury travel experiences,’ said Fitz-Gerald, Money Morning’s investment director. "Given that Asian consumers in general – and Chinese consumers in particular – tend to be much more highly brand savvy than their European and American counterparts, this is an especially important strategy to execute at the present time."

What’s more, China isn’t MGM’s only target market overseas. It’s working with the Mubadala Development Co. in both Dubai and Abu Dhabi on some similar luxury-level [non-gaming] projects. Mubadala is an investment arm of the Abu Dhabi government.

MGM is on the verge of becoming a top global brand in the hospitality sector, and Dubai wants a piece of the action. Last summer, Dubai World launched a tender offer, hoping to acquire 9.5% of MGM’s shares. But it ended the initiative after MGM shares soared to new highs of more than $100 each, vowing to resume the effort if the stock price dropped.

In January, with the shares trading in the $66 range, Dubai World not only re-launched its tender offer, it boosted the number of shares it hoped to buy by 50% to 15 million. Only months after they’d sent the shares to record highs, U.S. investors had been abandoning MGM’s stock, worried that a downturn in consumer spending would torpedo the share price. But Dubai World knew a deal when it saw one.

"We’re a beneficiary to the degree that America’s on sale," MGM Chief Executive Officer James J. Murren told The Associated Press. "There is a significant, very-material influx of visitors coming to the United States, either from Canada, where the dollar’s at parity, or from Asia, or from Europe, and they’re finding great value here in America and certainly in Las Vegas. We clearly think the company’s undervalued."

So does Dubai.

That’s just how U.S. investors have to view this opportunity, says Fitz-Gerald.

"Dubai is getting in on the ground floor of some very powerful trends," he said in a recent interview. "It’s a classic Asian business strategy and one that reflects a very sophisticated understanding of how Asian consumers think and act when it comes to their money."

Let Your Profits Take Flight

Our third and last pick will be an indirect beneficiary of the emergence of the sovereign funds. It’s the airliner-maker and defense-industry giant, The Boeing Co. (BA).

As the Cash Barons transform deal-making into more of a global game, it’s only natural that worldwide travel will escalate. And with the work the funds are doing with such firms as MGM to promote tourism in Mainland China, Macau, Hong Kong and other destinations, worldwide tourism is certain to grow at a faster clip, as well.

What’s more, the Middle East Cash Barons are financing substantial new "destination-oriented" development in their home markets – especially Dubai, which is building glitzy hotels and has even constructed private islands in the interest of making itself into a venue that the newly affluent will want to sample and enjoy.

China alone will require 3,400 new airplanes worth about $340 billion over the next 20 years, Boeing projected in its recently updated annual forecast for the commercial airplane market. And that doesn’t even factor in other white-hot Asian markets – such as Vietnam – or these new travel destinations in the Middle East, all of which will also need to outfit their air fleets as their economies make the leap from "emerging" to mainstream.

During that same 20-year stretch addressed by Boeing’s market forecast, China would have the fastest-growing airliner market in the world, making it the biggest market outside the United States for new commercial airliners. In fact, if you average it out, from China alone you’re talking about sales of $17 billion a year.

Indeed, over the next 20 years, Boeing is forecasting that air carriers worldwide will need to acquire 28,600 commercial aircraft with a value of $2.8 trillion. The Boeing forecast is generally viewed as the world’s best analysis of the global market for commercial airliners and cargo aircraft.

The huge revenue potential of the global airliner market – combined with the low number of viable competitors and the high barriers faced by new potential entrants – is a big reason that Money Morning’s investment gurus all view Boeing as a promising global investment for years to come.

And there’s a bonus: Boeing is a major defense contractor, the kind of company that does well during the periods of global uncertainty like the one we face today.

The stock is down about 20% from its 52-week high. With a current Price/Earnings ratio of about 16 and a forward P/E of roughly 17.5, the stock isn’t pricey. Plus, it carries a dividend yield of nearly 2% – another plus at a time when stocks featuring income streams are worth the extra effort to ferret out.

The Emergence of the "Cash Barons"

Source: Money Morning Research.

Editor’s Note: Money Morning’s "Outlook 2008" series last covered soaring coal prices.

News and Related Story Links:

• Zawya.com/The Financial Times:
  Saudis Plan Huge Sovereign Fund Body.

• Money Morning News Analysis:
  Merrill Lynch is the Latest Beneficiary of Global "Cash Barons" Move on U.S. Financial Services Sector.

• Money Morning Investment Analysis:
  Citigroup: Why This Turnaround Play Has Legs – Big Ones.

• Zawya.com:
  Saudi Arabia Public Investment Fund.
• Money Morning News Analysis:
  Fang-Temasek Partnership the Latest in a String of High-Profile Sovereign Wealth Deals.

• Zawya.com:
  Saudi Arabia Monetary Agency.

• Money Morning News:
  Cash Infusion Brightens Morgan Stanley’s Dismal Fourth Quarter.

• Money Morning News Analysis:
  Surging Demand and a Nationwide Shortage: Why India Wants Coal for Christmas.

• Forbes:
  Dispatches from Davos – Sovereign Wealth Funds.

• Money Morning Investment Analysis:
  Here’s Why MGM is a High-Profit Play on China.

• Examiner.com:
  MGM Mirage, Dubai World Boost Offer.

• Money Morning News:
  Dubai World Halts Investments in MGM Shares – For Now – But Las Vegas Firm Still Offers Great Promise From China.

• Money Morning News:
  Citigroup Cuts Dividend, Receives Another Capital Infusion; Merrill Gets Cash Boost.

• Book:
  How to Buy and Sell When Others Won’t and Make Money Doing it.

• Money Morning Investment Research Report:
  Citigroup: Why This Turnaround Play Has Legs – Big Ones.

• Money Morning Investment Research Report:
  Why Some of the World’s Savviest Investors Are Buying – Gasp! – Citigroup.

• Bloomberg News:
  Saudi Arabia Plans Its First Sovereign Wealth Fund.

• Money Morning News Analysis:
  State Investment Funds: Beware of the Big New Buyers.

• Bloomberg News:
  Standard Charter Sells Stake.

• Emirates Business 24/7:
  DP World declines 29% since listing.

• Money Morning Analysis:
  Qatar Angles to Undermine Rival Middle East Cash Baron Dubai.

• Money Morning News:
  Fang-Temasek Partnership the Latest in a String of High-Profile Sovereign Wealth Deals.

• Reuters:
  U.S. Treasury Says Don’t Restrict Wealth Funds.

• Wikipedia:
  Robber Baron (Industrialist).

• Money Morning News Analysis:
  Private-Equity Firms Follow Sovereign Wealth Funds’ Lead By Seeking Financial Sector Investments.

• Money Morning:
  Blackstone Booms on Its First Day of Trading.

• Money Morning News:
  Tough Talk About Sovereign Funds Spawns Fear of Economic Retaliation Against the United States.

• Money Morning Investment Research:
  China’s Growth Will Clear $340 Billion Worth of Airliner Sales for Takeoff Over the Next 20 Years.

By Jason Simpkins
Associate Editor

Over the past several weeks, the price of coal has soared to record highs. But few analysts think the run is over, and some believe that the price of coal could double in 2008. 

Surging global demand and disruptions in supply have resulted in three straight weeks of record high coal prices at Australia’s Newcastle port, a benchmark for Asian demand. Power-station coal prices gained $9.04 per metric ton, or 7.8%, to reach $125.48 for the week ended Feb. 8, according to the globalCOAL NEWC Index.

And the news for coal-users continued to get worse this week.

So-called "spot" prices for the thermal coal used in power generation reached $130 a metric ton this week, boosted by a series of supply disruptions in China and Australia.

The price of coal is up 37% already this year, analysts say. And that’s after coal prices rocketed 73% in 2007, Bloomberg News reported.

GlobalCOAL’s monthly index for Newcastle thermal coal prices rose $1.71 per metric ton, or 1.9%, to reach $90.87 in January, the fourth consecutive monthly record.

The soaring price of coal comes as coal suppliers and coal consumers enter into negotiations on annual contract prices set to go into effect April 1.

Citigroup Inc. (C), UBS AG (UBS), Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM), have all raised their forecasts for thermal coal contract prices for the 12 months beginning April 1. Both Citi and UBS think the contract price will double to $100 a ton. JPMorgan thinks the price settled upon will be closer to $90 a ton.

Goldman Sachs raised its contract price forecast for thermal coal to $110 a metric ton, which would be a 98% increase from last year’s agreed-upon price of $55.65 and a 22% jump from its earlier prediction of $90.

Both Citi and Goldman have predicted that "coking coal" – the coal used to make steel – will also double, reaching $200 a metric ton this year, up 104% from the contract price of $98 that’s been in effect over the past year.

The contract prices are lower than the market prices reflected at the Newcastle port because they were agreed-upon at the start of the soon-to-expire contract. Because market prices are not bound by such long-term agreements, they can rise or fall in response to current supply and demand conditions.

Spot prices for thermal coal "have soared in the past few weeks in response to severe coal production and transportation constraints in Australia, China and South Africa at a time when power utilities are holding critically low inventories of coal," Goldman Sachs resource analyst Malcolm Southwood wrote in a research report earlier this week. "We believe that the factors that have driven thermal coal prices higher in recent weeks will have a profound impact on [the] 2008-2009 contract negotiations."

The "Coal Rush"

The catalyst behind coal's record run is all about basic supply and demand. Demand has soared over the past several years, as emerging nations like China and India have undergone a rapid economic and industrial expansion.

"All over the world everyone is looking for coal because all economies are developing … so they need energy … that's why we are in this situation," Exxaro Resources Ltd. (OTC: EXXAY) Chief Executive Officer Sipho Nkosi told the Daily Dispatch.

Coal supplies 40% of the planet's energy needs. Japan - one of the world's largest importers - has been burning through its reserves since an earthquake damaged a key nuclear power station. India has been shipping in more coal, as well, despite already large domestic reserves.

India picked up its coal production by a third over the past decade and half, according to the BP Statistical Review of World Energy, but its consumption has also jumped by a hefty 40% during that period. India counts on coal for nearly 70% of its total energy supply.

Demand even is even burgeoning in the United States, which has several coal-fired electric plants under construction, meaning coal demand might jump by another 50 million tons annually.

However the biggest surge in demand has come from China, home to 1.3 billion people and the world's fastest-growing economy.  Coal provides 78% of its energy needs, and coal demand in China jumped nearly 9%  - meaning it now accounts for a full quarter of the world's annual coal consumption, according to The Wall Street Journal.

China, which used to be a world leader in coal exports, did an about face in the first half of last year, importing more coal than it shipped out.

Five years ago, China exported 83 million metric tons more coal than it imported, The Journal reported. But last year, the surplus dropped to a meager 2 million metric tons.
The surplus decline of more than 80 million tons is equal to 12% of the internationally traded market for coal.

Vic Svec, a senior executive at Peabody Energy Corp. (BTU), the world's largest private-sector coal producer, referred to China's ability to influence the price of commodities as a "butterfly effect."  He told the WSJ that "demand from Beijing can ripple back to Queensland, Australia, or Gillette, Wyoming."

Suicide Squeeze Play

In the face of soaring global demand, the supply of coal has been crimped - and in a big way.

The Chinese government said it had closed 10,412 mines by early January, and has plans to close down 1,100 more.

In South Africa, power shortages and flooding in South Africa have forced the closure of several mines. With such setbacks, the price of coal coming out of South Africa's Richards Bay Coal Terminal, the world's largest, jumped nearly 90% last year.

Several mines in Australia, another world leader in coal production, have also been beset by monsoons and flooding.

Xstrata PLC, the world's biggest exporter of power-station coal said yesterday (Wednesday) that customers could miss deliveries from two mines in Queensland because of rain delays. At least four other Queensland coal suppliers have declared force majeure on deliveries since disruptive weather began taking its toll on the Bowen Basin in January. 

Meanwhile, China, a leading producer and consumer, has been devastated by the worst blizzard of the past half-century. Three weeks of snowfall killed at least 60 people and cost the country approximately $7.5 billion.

Major railways and roads have been shut down, making traffic congestion during the Chinese New Year even more problematic for deliveries last week. As a result, less than 25% of the daily demand for coal shipments by rail has been met in the past week.

About 7% of China's coal-fired power plants have come offline. The five biggest electricity producers shut down 90 power stations with a combined capacity exceeding 20,000 megawatts in northern and central China, according to the State Grid Corp. of China.

Zhu Hongren, a senior official from the National Development and Reform Commission, said that no less than 17 provinces have suffered power shortages and 13 provinces have been forced to ration power. The country has been forced to restrict its coal exports to boost domestic supplies.

"China has probably been the key issue; there's been talk of a complete ban on exports and within that light that's another four to five million tons just taken out of the Asia-Pacific market," Gerard Burg, an economist at National Australia Bank Ltd., told Bloomberg.  "The market was already hot and that added more fuel to the fire."

Also, like its toy-making companies, China's coal-fired power producers have faced an increasing amount of regulatory scrutiny because of environmental concerns. A study conducted by the World Bank concluded that air pollution from coal-fired plants is responsible for more than 400,000 premature deaths every year. That number was subsequently raised to 750,000, just weeks after the report's release.

China is home to 16 of the 20 most-polluted cities in the world. And last year, the nation became of No. 1 emitter of greenhouse gases on the planet - a title the U.S. held for more than 100 years.  

The New "Black Gold"

If you're looking to play the price surge of coal, Money Morning Investment Director Keith Fitz-Gerald has two suggestions.

First, take a look at Yanzhou Coal Mining Co. (YZC). The China-based Yanzhou operates underground coalmines and a railway transportation network for shipping coal. It focuses chiefly on low-sulfur coal products, which are best suited for use in large-scale power plants and in metal production. Low-sulfur coal can be combined with coking coal in a metal-production process known as "pulverized coal injection," or PCI.

In addition to China, this company's customers are mainly in such East Asia nations as Japan, Korea and both Eastern and Southern China.

At yesterday's closing price of $87.86, the stock is trading off its 52-week high of $116.73. Its 52-week low is $41.44.

A good ancillary play on coal is Huaneng Power International Inc. (HNP). Huaneng Power is a major China power producer - meaning it's also a big user of coal.

At yesterday's close at $34.57, Huaneng's share price is near its 52-week low of $31.92 and is well off its 52-week high of $57.50. According to Fitz-Gerald, rising coal prices have played a part in Huaneng's share-price decline.

Fear not, Fitz-Gerald says. China's central government would never allow a major power producer to fail. And the share price will rebound and grow as China's economy advances, he said.

Plus, Huaneng's stock pays a $2.70 a share dividend, giving the stock a yield of about 8%. In a market as volatile as this one has been, owning income-producing shares is crucial for investors who want to maximize their portfolio profits, according to Fitz-Gerald.

This article includes reporting by Executive Editor William Patalon III.

Editor's Note: Money Morning's "Outlook 2008" series last covered Biotechnology. Next up: Sovereign Wealth Funds.

Related News and Story Links:

• Wall Street Journal:
  China Spurs Coal-Price Surge

• Forbes:
  Coal Prices May Double In Coming Year

• Bloomberg:
  Xstrata Warns of Delays to Australian Coal Deliveries

• Bloomberg:
  Benchmark European Coal Rises to Record on Australian Rains

• Money Morning:
  Once an Exporter of Products, China Now Leading Global Exporter of Inflation.

• Reuters:
  Goldman, Citigroup raise coal price forecasts

• U.S. Department of Energy: Office of Industrial Technologies, Energy Efficiency and Renewable Energy:
  Pulverized Coal Injection

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Following a spectacular run up last year, many investors are wondering what’s next in Asia.

We are, too.

The steady stream of news so far this year has only seemed to make things worse. And the current market volatility, which began with last summer’s U.S. credit crisis, seems set to derail U.S. economic growth. Throw higher oil prices, inflationary concerns and a dollar that’s turning out to be more like Rodney Dangerfield than Sean Connery into the mix, and you’ve got what seems to be a real mess.

Fortunately, though, if you take a look behind the headlines, Asian markets are holding up just fine and, although they are likely to continue to be volatile during 2008 [along with the rest of the world's markets], they’re full of promise for decades to come.

Much of that promise is obviously due to the region’s growth. But increasingly, it’s also a function of the combined strength of the area…as it relates to China.

A Repeat Performance with a Different Star

If this sounds familiar, it should. For the 50 years immediately following World War II, the region centered on Japan. And investors who went along for the ride went straight to the top on the back of a Nikkei exchange and regional trading alliances that knew no downside…until the late 1990s when the bottom dropped out.

As usual, those who were focused on the short-term got badly burned and have yet to recover, with the Nikkei still trading at merely a quarter of where it was at its peak. Alternatively, safety-focused investors who made intelligent choices did well.

Today, Asia faces a similar situation only this time with China at the helm. And many investors are sitting at a similar cross roads. Like Japan before it, China has experienced a whopping run-up, which makes it all the more tempting for people who missed that initial surge. But China is a riskier investment than ever before.

This combination makes us suspect that now is the time to get serious.

Balancing Risk and Returns

There’s no question the region will continue to grow for decades. Yet, in contrast to the record growth of the past few years, which was driven largely by speculative liquidity, the longer-term growth in the region will increasingly be China-centric.

To cash in, investors will have to do two things:

• Make smarter, "safety-first" choices that diversify – and don’t concentrate – risk.
• And limit investment choices to companies that are poised to capitalize on international exposure in the region.

Here’s why.

Large-cap companies, particularly those with global operations, can build business within the region – and with far less risk than those local companies engaged exclusively in a domestic-focused business. This helps ensure stability. Plus, many of these companies pay dividends, which are vitally important at the moment, because they help offset the elevated risks we take when we invest in the China region.

Further, by concentrating on the so-called "Global Titans" doing business in the region, we mitigate a "split-personality problem" that eventually will end up clobbering most investors who don’t adopt the safety-first philosophy we advocate.

I’ve been involved with Asia investments for more than two decades. And I’ve seen it time and again. The reality is that 99% of all investors seeking profits in the area don’t understand that there are differing investment views when it comes to local money and international money.

For instance, in Asia, managers tend to focus almost exclusively on top-line [revenue] growth, whereas Western managers and investors all tend to focus on bottom-line profitability. Obviously, those two objectives don’t always align. And that creates a potential mismatch that can wipe out unsuspecting investors who are out seeking a "quick buck" profit.

Profit Plays for a Potential Slowdown

Bigger-company shares – like those we prefer – will keep their edge longer, even if there is a China-induced slowdown during 2008. We think such a slowdown is unlikely. But given the high-valuations that remain after last year’s big run-up, it’s a possibility, nonetheless.

With regard to favorite choices that meet our regional criteria, some at the moment include Zurich-based ABB Ltd. (ABB), which provides electrical power infrastructure in the region. China Medical Technologies Inc. (CMED) and Huaneng Power International, Inc. (HNP) fit the "Global Titans" model, too, but in reverse. Both firms focus on China, but also have important international operations with great potential outside of Mainland China.

If a broader holding is more your speed, without a doubt the best in class in our opinion is the China Region Opportunity Fund (USCOX), a mutual fund run by San Antonio-based U.S. Global Investors Inc. (GROW). And U.S. Global, itself, is not a bad play on international growth. It manages some of the best emerging-market funds, and natural-resources funds, in the business. As global growth fuels global investments – and it will – U.S. global will see more money pour into its funds, boosting the management fees it collects, as well as its profits and stock price.

The bottom line on Asia in 2008 is that we expect global volatility to sweep through the region, even though it is awash with liquidity. We see China leading the pack for decades to come, just as Japan did a half century ago. Yet, in the longer-term, we don’t see a direct correlation between regional economic growth and equity valuations. And that suggests that a safety-first approach – with a focus on large-cap companies that are globally diversified – is the strategy to follow if you want to maximize your profits from Asia.

Money Morning’s "Outlook 2008" series last covered Agricultural Commodities.  Next up: Biotechnology.

By Don Miller
Guest Writer

In the agricultural-commodities arena last year, grains put on quite a show. And while we have seen signs of corrections in some commodities in recent weeks, we continue to believe that the long-term trends are highly promising.

Before we look forward, let’s consider some of the events that played out in the grain markets last year:

• Corn skyrocketed to its highest-ever level on the Chicago Board of Trade yesterday (Monday) – rising the maximum allowed by the exchange – fueled by speculation that global demand for biofuels and feed will exceed supplies for the seventh time in eight years, Bloomberg News reported. That grain-based commodity advanced for the third straight year in 2007 – gaining 17 % — after soaring 81% in 2006 and 5.4% the year before.  Continuing diversion of corn to ethanol production continues to crimp supplies, helping prices soar 49% in the past five months.

• Wheat hit a record of $10.095 a bushel on the Chicago Board of Trade on Dec. 17.   Even though it has backed off since then, the price still surged more than 70% last year.  Droughts in Canada [the world's largest producer] and Australia [the No. 2 producer] reduced exports from both countries.

• Soybeans hit a 34-year high on December 29.   Continued strong demand from China [the world's largest consumer of soybean oil], a drought in Argentina, and reduced plantings by U.S. farmers fueled the record high.

Other agricultural commodities are showing similar strength, including coffee, cotton, cocoa, cattle and milk. 

And it’s not just 2007 – commodities seem to be locked in a long-term upward trajectory.  Last year was just icing on the cake – the Dow Jones Commodity Index was up a respectable 11% over the past 12 months, but has risen a whopping 65% in the last five years.

What’s driving this trend?

"We are now watching a fundamental structural shift in commodities markets," says Jim Rogers, a noted financial analyst and investor. "We’re talking a long-term bull market in commodities."

There’s good reason to believe what Rogers says. He’s one of our favorite investment gurus. In 1970, Rogers and partner George Soros started the Quantum Fund, a hedge fund that’s often described as the first truly global investment fund. Over the next decade, the duo guided Quantum to a 4200% gain – demolishing all the indices, and outpacing every other fund in existence.

Rogers has since "retired," traveled the world as a self-proclaimed "adventure-capitalist," and penned several best-sellers – including his latest: "A Bull in China: Investing Profitably in the World’s Greatest Market." He recently moved to Shanghai, where he is watching the commodities bull – up close and personal.

[Editor's Note: To learn how to obtain a free copy of Rogers' latest book, "A Bull in China," please click here].

China: Consuming Grain Supplies at Record Rates

Rogers believes grain prices can only increase over the long haul. And he cites the simplest of reasons for the upswing – dwindling supplies and increasing demand. 

And the biggest reason for this demand-supply imbalance? Rogers attributes it almost all to China – which he says is "a nation that will be consuming extraordinary supplies of all kinds of commodities for years to come."

The fact is, China is the proverbial elephant in the room – the driving force behind growing grain shortages and skyrocketing prices worldwide. With 1.3 billion people overall, rising incomes, and an emergent consumer class that’s growing in size, China’s appetite is advancing, too: It will soon become the world’s largest net importer of grains.    

After a remarkable expansion of grain output from 90 million tons in 1950 to 392 million tons in 1998, China’s grain harvest has plummeted – dropping 70 million tons in 2003, alone.  For some perspective, consider this: A drop of 70 million tons exceeds the entire grain harvest of Canada for a year.

The Chinese government stepped in with cold, hard cash, which turned things around. China’s grain producers got $6.9 billion (51.4 billion yuan) in direct subsidies in 2007, up 66% from a year earlier. 

As a result, China produced more than 500 million tons of grain in 2007, the fourth consecutive year of growth. But production still fell short of demand.
China just won’t say by how much.

That’s one reason the recent price increases – as jarring as they seem – may actually only be the tremors that come before the real quake. China has covered its harvest shortfalls of recent years, but it’s done so by drawing down on its once-massive inventories of grain. But those inventories have now been depleted – forcing the government to cover the shortfall with imports.

China will import 7.2 million tons of corn in 2008, 60% of which will supply state-owned trading firms. Wheat import quotas have been set at 9.64 million tons, 90% of which will supply state-owned firms. And rice imports will hit 5.32 million tons.

The shortages are being driven by the addition of 11 million newborn babies each year – and by fast-rising incomes in China’s afore-mentioned middle class, now 300 million strong, and growing.

As members of China’s new "consumer class" earn more, they move themselves up the food chain, buying and eating more grain-fed livestock products such as pork, poultry, eggs, beef and milk.

No Easy Answers

Don’t look for some new miracle technology to suddenly appear and solve this long-term problem. When supply-and-demand in raw materials gets so seriously out of whack, even the emergence of a new technology won’t necessarily restore the balance all that quickly.

As Rogers says: "Computers or robots may do amazing things, but they cannot find oil or copper where there is none, or make sugar, cotton, coffee, or livestock grow faster than nature allows."

Clearly, this bull-market in commodities is set to continue for years to come. So how do you cash in?

Most investors shy away from actually trading futures, but the facts suggest you might want to take a closer look.  If you do your homework and remain rational and responsible, you can invest in commodities with perhaps less risk than playing the stock market. Indeed, some research demonstrates that there’s actually been more volatility in the NASDAQ Composite Index in recent years than in any commodities index.

The Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX) and Commodity Exchange Board (COMEX) all offer educational materials, broker certifications, and other resources that new traders will find helpful.

But commodity futures can turn upside down in minutes on rumors or facts. Unlike the stock markets, a trader who lacks an effective stop-loss exit strategy can get stuck with a trade that spirals out of control. 

For example, a drought-busting rain in Argentina might send soybeans down the daily limit for several days in a row.  An unwary speculator might not be able to exit the trade until the volatility subsides.  By then, his account could lose thousands of dollars.

Still, these kinds of hair-raising events can be minimized with options and other strategies. If you do decide to trade futures, Rogers currently likes cotton, sugar and coffee. For now, he says, stay away from wheat, as he feels it is overdue for a correction.

If you don’t have the time, patience or risk tolerance to trade commodity futures themselves, Deutsche Bank’s Power Shares Agricultural Fund (DBA) is intended to reflect the performance of commodities in the agricultural sector – soybeans (31%), wheat (28%), corn (23%), and sugar (16%).

Looking for a different approach?  Consider Van Eck’s recently launched Market Vectors Agribusiness ETF (MOO).  This fund reflects the infrastructure of the agriculture industry, focusing on chemicals (34%), agri-product operations (33%), equipment (24%), livestock operations (6%), and ethanol/biodiesel (2%).

For a more-focused, yet still-global approach, you might want to look at companies with broad exposure to China, specifically such "Global Titans" as PepsiCo Inc. (PEP), McDonald’s Corp. (MCD) or YUM! Brands Inc. (YUM), which has such strong global brands as Taco Bell, Pizza Hut and KFC [formerly Kentucky Fried Chicken].

How are these global commodity plays? They all rely on such commodities as sugar, wheat, beef, coffee, and soybeans. They’re benefiting from the rising incomes and soaring growth in such markets as China, Russia, India and Latin America. And, as expertly managed ventures, they know how to balance such factors as commodity costs, market share, overseas growth and product pricing to maximize their profits – as well as the price of the shares in their companies that you hold in your portfolio.

Any or all of these might help you "grow" your investment portfolio in 2008.

Editor’s Note: Guest Writer Don Miller has previously covered such Outlook 2008 series topics as China, Uranium and Housing.
Money Morning’s "Outlook 2008" series last covered the Takeover Market. Next up: Asia.

News and Related Story Links:

• Bloomberg News:
  Corn Soars to Record as Demand for Feed, Fuel May Exceed Output.

• Bloomberg News:
  Wheat Futures Climb as Agricultural Commodities Vie for Acres.

• Money Morning News:
  Investing Guru Jim Rogers Predicts "Worst" U.S. Recession in Years; Urges Investors to Shift Into Commodities.

• Money Morning News:
  Jim Rogers Warns of Fallout From Fed Cuts; Says to Seek Profits in Commodities, Asian Currencies.

• Money Morning Investment Analysis:
  (Jimmy) Rogers and Me: The Latest Wisdom From a Global Investing Guru.

By Martin Hutchinson
Contributing Editor

It’s always difficult to predict a market’s performance over 12 months, but this year in the bond markets it’s simply impossible. The U.S. Federal Reserve will almost certainly change its monetary policy during the year, possibly more than once, and those changes will cause bond prices and yields to gyrate. Since success in the bond market in 2008 will require careful Fed-watching, I thought I’d set out some tips on what to look for.

In dropping the benchmark Federal Funds Rate from 5.25% to 4.25% in three moves since August, the Fed has backed itself into a corner. Central bank policymakers believed they had to drop interest rates because the subprime mortgage crisis had caused the global credit system to seize [although dropping rates hasn't made really fixed that problem], but the Fed didn’t wait until inflation was clearly down for the count before doing so. The result: Inflation is clearly up off the canvas, and is making a nuisance of itself by doing the "Ali shuffle" as it traverses the U.S. economy.

Inflationary Fuels Abound

Since August, oil prices have soared from around $70 a barrel to a just under the $100 a barrel level. That hasn’t happened because members of the Organization of Petroleum Exporting Countries (OPEC) are a bunch of global meanies [though they are], but rather because the soaring worldwide demand for oil has is pushed right up against supply, capacity is stretched very thin, and lower interest rates further stoke world demand and make the shortfall even worse.

That means the Fed may have to take some pretty nasty actions, and probably quite early this year. If oil prices continue increasing moderately – and do not feed through into "core inflation" [which excludes volatile food and energy prices, and which also is the statistic that the Fed looks at] – then all will be well. The central bank will be able to keep short-term interest rates low, which will probably keep long-term bond yields low and bond prices high.

Probably, in that case, the U.S. economy would continue to muddle forward with slow growth, but no outright recession.

That’s the scenario most observers are expecting, and indeed that hope may cause the Fed to drop the Federal Funds Rate one more time, at the close of the Jan. 29-30 policymaking Federal Open Market Committee (FOMC) meeting.

The Inflation Scenario to Watch For

Even so, I have to say that this isn’t the scenario I’d bet on. More likely, at some point in the year, oil and commodity prices – which already have pushed inflation well above the 4% level – will force up "core" inflation, too. At that point, two things will happen:

• The Fed will be forced to raise short-term interest rates, to fight inflation.
• And the long-term Treasury bond market will panic, as investors realize that – as in the 1970s – Treasury bonds suffer from their principal being eaten away by inflation, giving you the double insult of receiving interest payments that boost your tax liability, while suffering capital losses that can only be used to offset capital-gains taxes.

The bond bull’s scenario – where inflation comes down naturally, and the U.S. economy suffers through only a moderate recession – seems very unlikely to me. The Fed has already eased too much for that to happen; long-term interest rates are already below the rate of inflation, and are most unlikely to go lower.

The $500 billion injected into the banking markets by the European Central Bank in mid December makes the inflationary scenario more likely. Essentially, half a year’s European money supply growth has been dumped into the market in one operation. Unless the ECB forces the banks to repay all, or almost all, of that money in January, all that additional capital sloshing around in the world capital markets can do nothing but cause yet more inflation.

Most of those inflationary pressures will reach the U.S. shores, because the U.S. trade deficit is financed by the foreign purchases of bonds, transmitting much of the world money supply growth into the U.S. domestic market.

You therefore need to look at two things:

• The monthly inflation figures – particularly the "core" figures that the Fed watches.
• And the speeches coming out of the Fed.

If the Fed thinks an interest rate rise is necessary, it will try to prepare the market by issuing dark warnings for several weeks before it does anything. So a change in tone in Fed speeches – to one that’s much more worried about inflation – is a pretty good signal that the central bank is preparing the market for a reversal in monetary policy.

The Way to Play Bonds This Year

How should you play this? Well, the downside risk for Treasury bond prices is currently much greater than the upside potential, but yields in the short (2 year to 5 year) range, the usual protection against price drops are truly lousy at around 3%. In any case, if inflation takes off, it is likely that further weakness in the dollar will result.

Thus, you should look seriously at the as the no-load T. Rowe Price International Bond Fund (RPIBX), which invests in high-quality bonds that are not denominated in U.S. dollars.

You also want to find a good way to take a "short" position in Treasury bonds, an investment that will profit when bond yields rise and prices decline. There are currently no inverse bond exchange-traded funds (ETFs), but the Rydex Juno Inverse Government Long Bond Strategy C Fund  (RYJCX) offers the same position in the form of a mutual fund. Rydex Juno is well established, having been founded in 1995, and has over $1 billion in assets; its main disadvantage is that it has a relatively high 1.3% expense ratio.

Editor’s Note: Money Morning’s "Outlook 2008" series last covered Alternative Energy Investments. Next up: India.

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By Robert Williams
Managing Editor
The Oxford Club

If "green" investors want to succeed in the New Year, there’s really only one thing to remember: In 2008, alternative energy is an alternative no longer.

The world’s effort to rescue the earth from years of pollution and environmental neglect came of age in 2007, as "green" investors sent shares of environmental stocks 50% higher [as determined by the WilderHill Clean Energy Index].

As most sectors fell victim to the subprime-led U.S. credit crunch, the declining dollar, the slowing U.S. economy or a combination of all three, environmental stocks were stalwarts. And the good news for would-be "green" investors is that 2007 was only the start of a multi-year growth story.

Today, roughly $1 out of every $10 invested in stocks in the Unites States is flowing into environmentally conscious companies. And that ratio can only increase. As such, when investors position themselves for 2008, don’t just look for an encore – expect a virtuoso performance. Indeed, this year’s returns will at least equal the double-digit gains of 2007, and could well eclipse them.

Why Red China is Going Green

For years, emerging markets investors and businesses with global aspirations have looked the other way with regards to the growing environmental catastrophe that is much of emerging Asia. In the past few years, however, Asia – and especially China – are experiencing mounting pressure to clean up their environmental acts. It’s a controversy that is going to escalate, sending environmental-sector stocks even higher.

China is burning so much dirty coal, so inefficiently, that it’s under explicit pressure to save energy. At its current rate of energy consumption, China will account for roughly one-third of the increase in global energy usage between now and 2030, and most of that will be generated by coal, according to the International Energy Agency.

Simply put, China will use cheapest technology powers the country has. If that means pollution so thick, you can taste it the moment you open your eyes in the morning, so be it. That’s the price that the environment is paying for playing host to the fastest-growing economy in history.

China has largely scoffed at efforts to apply mandatory caps on carbon and sulfur emissions. And no real attempt has been made by the government to fund the costs of bringing alternative-energy power sources on-line.

China missed its target for energy saving last year, and is on pace to miss its goal of cutting energy consumption by some 20% [measured by units of gross domestic product] by 2010, according to The Wall Street Journal.

However, thanks to the Asian culture’s fear of "losing face," a dramatic about face is in the offing for the mighty Red Dragon – and soon. The Chinese capital, Beijing, will play host to the 2008 Summer Olympics, which begin in early August [according to the official schedule, the opening ceremony is set for Friday, Aug. 8]. For the first time, the world will get to see firsthand just how bad China’s pollution problems have become.

That’s why we expect serious commitments to come out of China before an athlete steps foot off a plane, injecting even more pop into a sector that last year was vaulted into the spotlight as a Wall Street darling. And those commitments won’t end once the TV crews leave, either: Cleaning up China’s environment will require a commitment measured in years, not months, and in billions of dollars.

When it comes to China investments, "the smart money is in the clean money," says Keith Fitz-Gerald, the investment director for Money Morning and The Money Map Report.

The Sun Shows the Way

The challenge for investors is knowing which areas will yield the biggest profits. Oxford Club Investment Director Alexander Green has specifically identified solar power as a green-energy sector that warrants close investment attention.

In a recent edition of Oxford’s Communiqué, Green acknowledged the strength of the environmental sector but warned that many investment candidates come with drawbacks. He noted, "Hydroelectric power is dependent on geography. Nuclear energy faces issues surrounding the transportation and storage of radioactive waste. Only solar power, which uses free and readily available sunlight, comes without the baggage. And experimental solar cells are now reaching efficiencies of over 40%."

Using the world’s most abundant resource – light from the sun – as a clean energy source makes imminent sense. But we’re only just now channeling technology into an efficient and inexpensive means of harnessing the sun’s power.

The Solar Energy Industries Association (SEIA) says that solar power will provide 50% of all new electricity in the United States within eight years, creating tens of thousands of new high-tech jobs, while helping to conserve natural gas and saving American taxpayers billions in energy costs.

We’ll be the first to admit that estimate may be on the ambitious side, but the fact is, solar power is making serious headway in powering this great nation of ours. And today, it still accounts for only a small fraction of current energy use, giving the industry and its top-shelf companies huge growth potential. And when you add in the effect that the big new polluters such as China and India will have on the global environment, the solar industry is like a cannon packed with gold shot.

To demonstrate the power of solar, Google Inc. (GOOG)  – a known advocate of green energy – built the largest solar panel installation to date on its corporate campus. Each day, the company provides a real-time update of the power the panels are generating. At the time of this writing, Google had harnessed enough of the sun’s light in the last 24 hours to power 3,191 hours of flat-screen television viewing, 817 hairdryers for 15 minutes, or 319 coffee makers for an hour.

More than $70 billion was invested globally in clean energy and clean technology markets in 2006 – a 43% increase over 2005. And the trickle-down of the massive investment dollars has reached the end-user level. For solar, it’s meant the number of new systems installed in the United States has nearly tripled, according to the Interstate Renewable Energy Council.

China has quickly established itself as one of the world leaders in solar-energy technology. In 2007, half a dozen China-based solar-energy firms issued stock via initial public stock offerings (IPOs), and three of those companies were among the better-performing stock offerings of last year.

To play the industry, look to a cutting-edge, market-leading company like First Solar Inc. (FSLR) because whoever can make the best product the cheapest, wins.

First Solar designs and manufactures solar modules using a proprietary thin film semiconductor technology that has allowed the company to reduce the average solar module manufacturing costs to among the lowest in the world.

What’s more, management expects its cost per watt to continue to decrease over the next several years, due to:

• An increase of sellable watts per solar module.
• An increase in production output.
• A geographic diversification into lower-cost manufacturing regions.
• And lower fixed costs, driven downward by economies of scale, making its panels even more appealing.

The only limitation to sales in the last year has been the company’s production capacity. Customer demand has simply exceeded the number of solar modules the company is able to produce. But a fat order backlog is not a bad thing.

If funds are more you style, consider some of the better-quality exchange-traded funds (ETFs) that focus on "clean" technology. One of the top names is PowerShares WilderHill Clean Energy (PBW).

[Editor's Note: Robert Williams, a veteran commodities trader, is the Managing Editor for The Oxford Club. For information on an Oxford membership, please click here.]Money Morning’s "Outlook 2008" series last covered Uranium. Next up: Bonds.

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By Jennifer Yousfi
Managing Editor

Despite a still-slumping housing market, an escalating credit crunch and spiraling inflationary pressures, the U.S. economy should still manage to advance at a 1% to 2% clip in 2008.

While investors might view that as bad news, there’s actually a positive twist, since it means that U.S. economy will likely dodge the recession that some observers have feared.

Even so, the U.S. economy won’t be in the investment spotlight in 2008, and investors will see the first signs of the "decoupling" of the U.S. market from those overseas. While the United States is narrowly dodging recession, other global economies will be advancing by as much as 10%. The emergence of a growing middle class in such key markets as China, India and Eastern Europe will make global dependence on the U.S. economy a thing of the past. With tens of millions of newly minted consumers ready to spend in China, that country could easily weather a U.S. downturn.

Even with decoupling, U.S. investors still can profit from markets abroad – regardless of what’s going on here at home.

The Homeowner Blues

Volatility and crisis were the watchwords of the U.S. economy in 2007.  As we turn our eyes to the New Year, it’s clear we’re not out of the woods, yet.  Many fear that 2008 will find the United States in a recession.  Other investors believe we are already experiencing the first elements of a recessionary contraction.

If I had to be bold, I’d say we began a recession in December," Bill Gross, manager of the PIMCO Total Return Fund (PTTAX), told the Financial Times in a recent interview.

But will it be as bad as some fear?

As 2007 progressed, many Americans experienced a growing despair as they watched their largest asset – the family home – decline in value.  The United States is experiencing its worst housing recession in more than 15 years. And it’s far from over. Even as consumers watch as the ongoing crisis siphons off the equity they’ve built up, and shaves the market value of their homes, consumers with marginal credit who’d signed up for adjustable-rate loans watched their monthly mortgage payments balloon – until they could no longer afford those payments.

Unfortunately for many, refinancing hasn’t been an option. The vanishing homeowners’ equity made the deals unfavorable to lenders. Add to that a growing credit crisis that quickly became global in nature, and banks and mortgage firms began to ratchet back on the refinancing loans that homeowners needed to escape their soaring mortgage payments.

Soon, the banks that had made the questionable calls on subprime loans were in trouble, too. With the housing market cooling, the homeowners who couldn’t refinance also discovered that they couldn’t sell. Homeowner defaults – loans that are 30 days or more past due – soared and started a firestorm that has swept through the global financial-services sector, singing such stalwarts as Citigroup Inc. (C), Fannie Mae (FNM), UBS AG (UBS), and others.

"It will take most of the year to work out of the housing slowdown. Currently, the inventory of unsold homes is at an eight to nine-month level. We have to get this down to a more normal level of four to five months. In order to get to this level, housing starts will remain low," Dr. Robert Sweet, an economist at MTB Investment Advisors, the investment-advisory subsidiary of M&T Bank Corp. (MTB), said in an interview with Money Morning.

Fannie Mae Chief Executive Officer Daniel Mudd recently said the U.S. housing market wouldn’t revive until 2009.

To try and keep the subprime-mortgage crisis from escalating, the U.S. Federal Reserve recently proposed changes to Regulation Z [Truth in Lending]. The plan highlights four areas of protection for higher-cost loans, including a requirement that creditors to verify a prospective borrower’s income and assets before providing actual loans.

"Unfair and deceptive practices have harmed consumers and the integrity of the home-mortgage market," Federal Reserve Board Governor Randall S. Kroszner said in a statement.  "We have listened closely and developed a response to abuses that we believe will facilitate responsible lending."

Most financial institutions have already moved billions of dollars in Structured-Investment-Vehicle (SIV) fund assets onto their balance sheets.  In the past few months alone, banks have also written down billions of dollars in mortgage-backed assets.

"That was really the last major outstanding piece of the SIV problem," Peter Crane, founder of Crane Data LLC, told Bloomberg News in mid-December, after Citigroup moved $49 billion in SIV assets onto its balance sheet. "The SIV problem is very close to resolution."

The Fed to the Rescue?

After holding rates steady for more than a year, the U.S. central bank’s policymaking Federal Open Market Committee (FOMC) opted to slash short-term interest rates three times in the last four months of the year. The benchmark Federal Funds Rate now stands at 4.25%.

While the central bank’s policy statement after its Dec. 11 FOMC meeting didn’t seem to indicate that future rate reductions were on the way, many experts believe that U.S. Federal Reserve Chairman Ben S. Bernanke and his policymaking colleagues will have to reduce rates further if the U.S. economy is to skirt a recession in 2008.

"The Fed is closely watching the slow economic growth and the potential of inflation," said Sweet, the MTB economist. "My view is that the Fed will cut the Fed Funds Rate to 4.0% when [it meets] in early 2008."

The FOMC’s next regularly scheduled meeting is Jan. 29 – Jan. 30.

PIMCO’s Gross told the Financial Times that the Fed would need to drop the target rate even further – down to 3.0%  – to fully restore economic growth. Gross is widely viewed as the top fixed-income guru in the financial-services industry.

But while the Fed is definitely looking to do what it can to avoid a contraction in the U.S. economy, Bernanke faces a second – equally troubling – challenge. And no matter which route he chooses to take, the solution to one problem will exacerbate the second.

Seventies Flashback?

The Fed has demonstrated caution with regards to interest-rate reductions due to escalating inflation fears.

During the 1970s, the United States was afflicted with stagflation – crippling inflation coupled with stagnant economic growth and high unemployment. Until stagflation appeared, economists believed it to be an almost-impossible combination. Today, investors of a certain age remember the high fuel costs and long gas lines – along with the headlines about rising unemployment and a stalled U.S. economy that refused to be jump-started.

As U.S. economic troubles mount anew, some experts are using the "S-word" again. But stagflation is a worst-case scenario. The only thing worse than having either a recession or a period of inflation is to have them occur together. And for that reason alone, Keith Fitz-Gerald, Investment Director of both Money Morning and The Money Map Report, believes that "the Fed will do whatever it takes to prevent a recession."

However, Fitz-Gerald also believes that the U.S. inflation rate is actually much higher than government statistics show. That "stealth inflation" is currently having a smaller-than-expected impact on the U.S. economy because the United States is currently "exporting inflation to China," Fitz-Gerald says.

But if the U.S.-China "relationship breaks and the dollar continues to weaken – then we’ll have stagflation," Fitz-Gerald says.

2008: The Year of the Greenback?

According toa MarketWatch.com report from late December, "although [the dollar is] trading above its 2007 lows in the waning weeks of the year, it’s still on track to post a yearly loss of more than 3% against the pound sterling, more than 5% against the yen, about 9% against the euro and about 14% against the Canadian dollar."

While the staggering greenback tumbled to historic lows against key major currencies during 2007, the general outlook for the American dollar is slightly more upbeat for 2008.

The dollar is "widely viewed as the foremost casualty of the entire [subprime] calamity, [and should be] the first to respond to the tonic," Andrew Wilkinson, an analyst for Interactive Brokers, told MarketWatch.

Wilkinson predicts the dollar will rise against the euro in 2008, dropping back to its 2007 start of $1.30, an 11% decrease from its recent high of $1.47.

Money Morning’s Fitz-Gerald is a bit less sanguine, noting that the U.S. dollar is "likely to continue to weaken, particularly if the Fed continues to inject liquidity" into the capital markets. And while there will be something of a rebound in the greenback’s value in 2008, "don’t expect the dollar to come roaring back."

Good Opportunities Exist – Even in a Potential Bear Market

As foreign economies decouple from the United States market, those overseas markets should achieve attractive growth rates – even in the face of a slowing U.S. economy.

But while there are definitely some tough times ahead for the domestic economy in the New Year, don’t expect 2008 to be all gloom and doom, Sweet, the M&T Bank economist, said.

"The economy will slow in the first half, and pick-up a little in the second half," Sweet said. "Due to the housing situation, there is about a 50-50 chance of a recession. However, a low unemployment rate may entice the consumer to spend. Therefore, if a recession occurs, it should be short and shallow."

[A recession is technically defined as two consecutive quarters of negative economic growth].

In a report that mirrors Sweet’s sentiment, Bloomberg said that Federal Reserve Bank of Richmond President Jeffrey Lacker, in a speech during the recent Annual Economic Outlook symposium hosted by the Charlotte Chamber of Commerce, said he expects "growth to be very weak for several more months."

"Home construction and [home] sales are unlikely to bottom out before the middle of the year, and I expect housing to continue to be a drag on growth well into 2008," Lacker said. Even so, job growth and rising personal incomes "will support further gains in consumer spending.’"

Both Sweet and Lacker expect an economic slowdown, but both also hold out the same hope: Consumer spending will advance enough to keep the economy from slowing to a standstill – or, even worse, falling into a recession.

Money Morning’s Fitz-Gerald cautions investors to remember that even though U.S. gross domestic product will advance at a modest pace of only 1% to 2% during 2008, the rest of the global economy will be doing quite well – with economic growth rates as high as 8% to 9%.  With foreign economies growing that briskly, there will be plenty of profitable investment opportunities available in the year to come.

With growth sputtering at home and a recession still possible, investors should turn their attention to such U.S.-based multinationals as McDonald’s Corp. (MCD) and Yum! Brands Inc. (YUM). Both firms have substantial portions of their sales coming from overseas, where growth is likely to continue throughout 2008, regardless of what happens to the U.S. economy.

And while they offer significant foreign-market exposure, being U.S. companies, corporations such as McDonald’s, Yum! Brands and such others as The Coca-Cola Co. (KO) and PepsiCo Inc. (PEP) at the same time offer investors the transparency of U.S. financial reporting requirements and the relative protection of the U.S. investment-regulatory system.

But if you prefer to invest more directly in foreign growth, Money Morning Contributing Editor Martin Hutchinson says to try South Korea’s largest wireless service provider, SK Telecom Co. Ltd. (SKM).  SK is well positioned to capitalize on the growing Asian markets. Likewise, the Hsinchu, Taiwan-based Taiwan Semiconductor Mfg. Co. Ltd. (TSM) [commonly referred to as TMSC], the world’s largest dedicated semiconductor foundry, is another Asian tech company that is not currently overvalued and should do well in the New Year, Hutchinson says.

Traditional inflation-sensitive investments such as currencies and commodities are also good plays for 2008, such investment gurus as Fitz-Gerald and "adventure-capitalist" Jim Rogers say. [To see how you can obtain a free copy of Jim Rogers' new bestseller, "A Bull in China," please click here.]
The PowerShares Agriculture Fund (DBA), operated by German giant Deutsche Bank AG (DB), is intended to reflect the performance of four commodities in the agriculture sector – soybeans (31.13%), wheat (28.87%), corn (23.43%) and sugar (16.58%). These include some of the key agricultural commodity plays that Rogers advocates.

Another is Van Eck’s recently launched Market Vectors Agribusiness Exchange-Traded Fund (MOO). Like the PowerShares Fund, this reflects the agriculture industry but in a different way. Instead, the ETF’s holdings reflect returns seen from agriculture chemicals (34%), agriproduct operations (33.5%), agriculture equipment (24.3%), livestock operations (5.6%) and ethanol/biodiesel (2.3%).

For investors who have the constitution of a Contrarian investor – as well as some patience and a long time horizon – it may be well worth a look at some of the beaten-down financial-sector stocks that state-run sovereign wealth funds are buying into in a wholesale manner. Although many U.S. investors are preaching caution – if not total avoidance – when it comes to companies involved with the American financial-services sector, these government-run investment pools clearly view such stalwarts as Citigroup, UBS, Merrill Lynch & Co. Inc. (MER), and Morgan Stanley (MS), as bargain-basement investment opportunities.
Fitz-Gerald favors Citigroup.

"Citi is trading for a pittance," Fitz-Gerald said recently. "In fact, it’s trading at just barely seven times trailing earnings and eight times [projected] 2008 earnings. Yet, if you add up the growth prospects and current valuations, the company reflects a value that could be as high as $60 or more a share. Value investors will recognize this as important because history shows that the lower P/E ratios are when you make an investment, the better your overall returns tend to be. Generally, large globally diversified companies are considered bargains at a P/E of 12, which makes Citi a screaming deal at 7 or 8."

[Money Morning Executive Editor William Patalon III contributed to this report].

Editor’s Note: Money Morning’s "Outlook 2008" Series Last Covered U.S. Stocks. Next Up: Uranium.

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By Ron Brounes
Guest Columnist

As 2007 winds down, many investors are scratching their heads about what the New Year might bring in the financial markets.

But those investors should keep in mind three factors that could point to a potentially positive year for stocks in 2008. Key among those factors:

• The New Year is a presidential election year – periods that traditionally are very good for stock prices: In the past 25 presidential-election years, the Dow Jones Industrial Average has increased 17 times – or 68% of the time.

• When stocks post a positive return in the year before the presidential-election year – as they have so far in 2007 – the market gains recorded during the subsequent election year are even higher, studies show.

• U.S. Federal Reserve policymakers – having slashed interest rates three times since mid-September – are expected to reduce rates even further, providing yet another catalyst for higher share prices.

And don’t forget to track the stock market’s performance in January: Since 1950, in a manifestation known as the January Barometer Effect, research shows that in years where stocks posted positive gains for January, they went on to post a gain for the full year 91% of the time.

While many of the major equity indexes will end the year in positive territory, the overall market performances have been related more to specific sectors or capitalization classes – meaning an investor’s portfolio allocations have been the key to determining whether they’ve succeeded or failed this year.

For instance:

• Energy stocks have benefited from the significant escalation in oil prices during the year [For our latest investment-research report on oil prices - part of Money Morning's ongoing "Outlook 2008" series that's previewing the top investments for the New Year - please click here. The report is free of charge].

• Financial-services stocks have mostly plummeted as the housing bubble implodes and the credit crisis expands with each passing day. That’s opened the door for foreign-controlled sovereign wealth funds to take big stakes in such industry stalwarts as Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER) and Morgan Stanely (MS) – in some cases at bargain-basement prices.

• Techs have enjoyed strong demand as businesses upgrade their computer systems and communications networks – and consumers seek out the "latest-and-greatest" in entertainment and productivity devices.

• Housing continues to struggle as the subprime-mortgage debacle has effectively blunted the much-anticipated economic rebound.

• Given that the holiday-shopping season just concluded – meaning that a complete analysis of retail sales is not yet available – the jury is still out on the retail sector. The holiday retail season is no small consideration, given that this period can account for as much as 60% of a retailer’s sales for the entire year. And since consumer spending accounts for two-thirds of U.S. economic actvity, retail-sales figures are always closely watched.

• Large-caps typically outperform their small-cap counterparts during periods of unease and uncertainty, and this year has been no exception: The Russell 2000 Index has lagged indices of larger stocks this year.

The Year to Come

Looking ahead, many investors are taking their cues from the actions of the U.S. Federal Reserve as they try to predict how the U.S. economy and central bank policymaking decisions will affect their portfolios.

While Federal Reserve Chairman Ben S. Bernanke and members of the policymaking Federal Open Market Committee (FOMC) have slashed the benchmark U.S. Federal Funds Rate at three consecutive FOMC meetings – half a point at the first meeting and a quarter-percentage point at each of the last two – many investors were disappointed the last rate reduction wasn’t much larger.

Almost on cue, Bernanke moved to regain investor trust by announcing a joint liquidity-enhancement effort in conjunction with the central banks of England, Canada and Switzerland.

News of the liquidity-infusion plan came only days after U.S. President George Bush unveiled a controversial plan to freeze rates on certain adjustable-rate subprime mortgage loans, a move his administration hopes will "bail out" many ailing borrowers.

While the analyses of monetary policy and of company fundamentals often serve as the primary forecasters of future stock-market activity, some investors choose to look at a few other predictors – and may not have to wait long for answers.

You see, as the month of December yields to the New Year, the time-tested January Effect and January Barometer Effect may start to creep into the discussions [and trading patterns] of certain investors, traders, and market-watchers alike. 

TGIJ: Thank Goodness it’s January – Almost

The theory of the January Effect basically holds that stocks often rise during the first five trading days of the New Year. After all, many investors engage in tax-loss selling strategies in late December, and also do some "window-dressing" at the end of the calendar year.

Others may need to raise excess cash to cover expenditures made during the holiday season.  Since this activity has little to nothing to do with company fundamentals, "savvy" investors are expected to swoop in to find mis-priced opportunities in the market, and to take advantage of them during the first few days of the New Year. Some prognosticators even claim that the year’s first five trading days set the tone for the rest of the year.

Indeed, since 1970, when the broad-based Standard & Poor’s 500 Index posts an agggregate increase for those first five trading days of January, that broad bellwether has then gone on to notch a full-year gain in 31 out of the 37 years – or 84% of the time.

The January Effect theory began getting more publicity and gaining traction with the advent of 24-hour business news networks, financial blogs, pundits and talking heads sharing more market insight than most investors can possibly digest. As a result, investors increasingly tried to anticipate those January gains by making their investment moves in late December.

The upshot: In recent years, we’ve watched as the January Effect has given way to the Santa Claus Rally, as bargain hunters often emerge during the last few trading days of the year, intent on getting a jump on those early market timers.  In other words, the rally that once took place during those first five trading days of January have been pushed back into late December.

The January Barometer Effect takes this theory one step [or about three weeks] further and states that "As January goes, so goes the year."  Noted market historian Yale Hirsch came up with the expression and his Stock Trader’s Almanac has revealed its value over an extended time frame.  Prior to this year, since 1950, the S&P 500 has posted a gain for the year 91% of the time that the index experienced a positive January.  For those "cautious" investors who desire an even larger sampling, since 1926, that percentage [a positive January foreshadowing a positive full year] falls to 80%, although that’s still a pretty telling predictor of future market activity. 

Every Vote Counts

Looking beyond January, 2008 also brings a presidential election, an event that often has some interesting implications for the stock market.  While some politically-minded investors may spend hours debating whether a Republican or Democrat in the White House would be the best for Wall Street, the truth is that the party of the ultimate victor doesn’t mean a whole lot in the actual election year.

According to the Presidential Election Cycle Theory, in the past 25 presidential-election years, the 30-stock bellwether Dow has posted a positive annual return 17 times – or 68% of the time. [A positive market performance in the "pre-election" - or presidential-campaign - year results in an even-higher-percentage return in the presidential election year that follows, and 2007 looks to be right on target for another gain in the Dow].

The justification for such performance goes as follows:

• During presidential-campaign years, the party in power does everything possible to provide some form of economic stimulus in order to keep the party in the White House – whether it’s the incumbent president, or to install the top candidate of the presidential party as a White House successor. The aforementioned Bush Administration subprime-mortgage-bailout plan is an example for one such proposal offered to stem the tide of recent negativity and economic concern. [For our investment-research report on what the Democratic presidential candidates will mean for investor profits - the first installment of a two-part series - please click here. The report is free of charge].

• Conversely, the opposition party jumps on virtually every mishap that has occurred during the past three years and offers ways that they would be able to manage the economy in a more productive manner. "It’s the economy, stupid," was a catchphrase popularized during Bill Clinton’s first campaign against President George H.W. Bush, who was shackled with a recession in 1992 – only a year after his positive stewardship of the U.S.-led victory in the Persian Gulf War had given him the highest presidential-approval rating in U.S.history. But given the choice between nationalistic pride and their wallets, investors will vote their wallets. Clinton emerged victorious and – from the stock market’s perspective – proved to be a very strong president. If history is on Wall Street’s side, 2008 should prove to be another good year for the markets. [Let's hope January cooperates, as well].

If all else fails, there’s always the Super Bowl Winner Theory and a study of women’s hemlines as market predictors. But then again, investors can always focus on "boring" fundamental analysis, and Federal Reserve policy.

Money Morning’s "Outlook 2008" Series Last Covered China. Next Up: The U.S. Economy.

Ron Brounes, CPA, is a technical financial writer and president of Brounes & Associates (www.ronbrounes.com), a Houston, Tex.-based consulting firm that provides writing, communications and educational services for financial services professionals. A regular contributor to Money Morning, he last wrote about holiday shopping sales.

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