By Horacio Marquez
Contributing Editor
Money Morning

As the U.S. Federal Reserve and other central banks around the world pursue policies of quantitative easing, essentially devaluing their currencies, the specter of inflation is slowly creeping back into the U.S. economy.

And because none of the world’s policymakers seem to know exactly how much monetary expansion will be necessary, or when it will be time to again tighten the reins by raising rates, I have been successfully playing the re-flation trend.

I believe that this trend will be the most important source of profits, not just through this year, but throughout 2010, as well. So, today, I am going to give you one of my preferred plays: Monsanto Co. (NYSE: MON).

There are many important reasons why I love agricultural commodities, and by extension, love Monsanto. 

First, on the demand side, there is a natural bottom for them, since we all need to eat.  And, as the price of the PowerShares DB Agriculture Fund ETF (NYSE: DBA) that tracks these commodities clearly indicates, the bubble in these prices is already gone and prices are back to long-term base levels. 

The correction has been significantly less severe than in equities, due to the nature of the need these commodities fulfill.  But remember that the population of the world keeps growing. And populations in emerging markets, particularly those in the densely populated countries of China and in India, have seen their real incomes grow over the last five years, despite the recent bust. 
China’s economy, for instance, actually grew at 6.1% in the first quarter.  So the drop has been in the rate of demand growth in China, rather than in total demand.

In fact, the drop in commodities prices has been exacerbated by inventory liquidation.  While people and businesses are liquidating inventories, they are actually buying less than they are consuming.  Inventories were liquidated because, as financing became scarce, commodity buyers wanted to reduce the cost of financing and carrying those inventories, and also to reduce price risks by moving to “just-in-time” (JIT) purchases. 

The problem is that, once you’ve liquidated your inventories. you have to hurry to order more as soon as demand for your products accelerates. And that’s already starting to happen as a wide range of global-stimulus measures gain traction.  Thus, you see the beginning of a new bull market in commodities.

My strong contacts with agricultural exporters in Argentina, a top wheat and soybean exporter, confirmed to me that the Europeans are buying hand over fist right now, just to fulfill their just-in-time needs.  Furthermore, China is using the recent market implosion to secure long-term commodity supplies around the world.  Many believe that China’s demand alone is causing strains in the entire system.  But the story does not end there.

China, knowing of the strategic nature of these supplies, has implemented huge reforms in its own agricultural sector.  China’s legacy of communist agriculture has left the nation saddled with millions of unproductive single-family operations. So, in order to achieve economies of scale, they have:

• Made farming activity tax-free.
• Allowed farmers to sell or lease the agricultural rights to their land. This not only helps the farmers generate income, it encourages them to move into the city, freeing up large tracts of land for agricultural development.
• And allowed corporations to buy or lease farmland. This will result in huge productivity gains from mechanization, intensive farming, use of sophisticated seeds and fertilizers and corporate financing.

China is spending $9.5 billion on infrastructure and services in the poor countryside to help farmers cope with the economic downturn, The Associated Press reported.

And I am not alone in this line of thinking. I recently heard legendary investor Jim Rogers saying he is sticking with his “C.C.” trades: China and commodities. 

But rather than buying the DBA exchange-traded fund (ETF), which tends to be volatile, I’d rather turn to the premier supplier of seeds for this global farming revolution: Monsanto. 

Monsanto provides genetically modified seeds that are more resistant to specific weather and pest conditions and deliver superior yields. The company also produces the biotechnology and herbicides needed to control insects and weeds. 

Monsanto dominates the industry in these very profitable, long-term niches, and therefore enjoys a sustainable competitive advantage that vastly differentiates it from other, “me-too” agricultural companies.  This huge technological lead over the competition keeps opening up and will keep leading to increased market share and profit margins. These advantages also  open up partnership opportunities for Monsanto.

You see, the unequaled research-and-development capabilities of Monsanto have enticed firms like Cargill Inc. and BASF SE (OTC: BASFY), which have signed on to co-develop new products. 

Monsanto just beat earnings estimates, accomplishing record sales and minimal margin erosion. What other business has achieved that kind of success in this environment?  Very few, for sure. 

What’s more, at a Price/.Earnings to Growth (PEG) Ratio of about 1.0, this company’s stock is a steal.  Consider the company’s stellar 25% return on equity (ROE) and similar operating margin.

The stock will likely double over the next 12 months, even without considering the coming commodities bonanza. 

Recommendation: Buy Monsanto Co. (NYSE: MON) at market and hold it for at least 12 months (**).  Traders should also be rewarded short term.

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Monsanto Co.

News and Related Story Links:

• The Associated Press:
  China to invest $9.5B to help farmers amid slump
• Money Morning:
  Buy, Sell or Hold: iShares Gold ETF Will Sizzle When U.S. Stimulus Spurs Inflation.
• Wikipedia:
  PEG Ratio
• Wikipedia:
  Return on Equity.

By Horacio Marquez
Contributing Editor
Money Morning

For millennia, gold has been a barometer of financial health and the ultimate store of value. It’s long been considered the ultimate safe haven investment when all else fails, or when economic conditions seem too good to be true.

So now that gold has made a second major run – shooting from $600 an ounce to $900 an ounce after punching through the $1,000 plateau last year – is the “yellow metal” still a prudent profit play, or is it an investment that’s already played out?

To answer that question, we must first ask another: Is the global monetary mirage going to keep inflating, or are we already on a sound monetary footing?

Let’s find out.

The global financial crisis has all the world’s major currencies (the U.S. dollar, the euro and the Japanese yen) racing to devalue against each other. This phenomenon of competitive devaluations occurs when inefficiencies in one country weigh down its economy. Devaluing the currency is an old macroeconomic trick to quickly attain competitiveness against other trading partners. It’s a way of borrowing growth from a neighbor, taxing imports and subsidizing exports.

But this newfound competitiveness is short-lived if the devaluing country does not fix the underlying reasons that gave rise to the currency devaluation in the first place. Devaluing the currency makes imports more expensive, especially commodities. And higher commodity prices and less competition from imported goods gradually feed inflationary pressures into the system. 

Those inflationary pressures eventually “eat up” the value of the devaluation. And at the end of this cycle, you are left not where you began, but poorer, because you have made the income and monetary savings of your population less valuable.

The U.S. Economy’s Uphill Climb

No doubt, we are facing a unique set of circumstances in the markets. We are facing a global recession that actually teetered on the brink of a depression.

While some might think that just recapitalizing the banks will allow the lenders to get back into the business of aiding growth by providing credit, the reality is that the financial blowup is a symptom of structural conditions that keep generating these imbalances over time. 

Let me be more specific.

There are three important structural conditions afflicting the long-term economic health of America:

• The U.S. auto industry has fallen to international competitors.
• Huge Social Security imbalances and an out-of-control medical care system figure to siphon an increasing amount of capital out of the economy.
• And the onerous and incomprehensible U.S. corporate tax system will cause enough friction to slow economic growth.

When the United States couldn’t sell cars and other products abroad, it stimulated its internal consumption in order to keep the economy going. The U.S. auto industry barely subsisted while the rest of America subsidized it with abnormally low interest rates and overpriced cars. Foreign carmakers could underprice them – and with better cars to offer – helping them book large profits, even when manufacturing in the United States.

Over time, the falling market share – in an industry where economies of scale are the name of the game – kept increasing the financial pressure on the U.S. car industry, which was technically insolvent by the year 2000. And up until recently, members of the U.S. industry declined to take the hard medicine and restructure their failing business models.

All the government money in the world couldn’t help the U.S. auto industry without a vital restructuring. The end result will be a trimmed-down, leaner industry whose workers will have less purchasing power. That is a strong change that will not be reversed.

Likewise with the banking industry, capital alone won’t do the trick unless the banks remove the cancer that is eating away at the very foundations of this country’s economic system. Therefore, we’ll see a pared-down, de-leveraged financial system that will produce less secular growth, lower profits and lower employment than its inflated predecessor. 

In addition, although the industry has been “stabilized” with massive subsidies (zero interest rates, wide open discount windows and U.S. Federal Reserve programs designed to bolster asset values) significant losses are still ahead, which will continue to be painful.

There’s one last problem: The U.S. government has yet to address the elephants in the bazaar: The massive inter-generational Ponzi scheme of Social Security and the massive and unsustainable healthcare system. 

If we do not address these two problems seriously, without political pandering and without making the very tough choices we need to make, let the last one leaving the U.S. turn off the lights, because the population pyramid is too narrow at its base to sustain the millions of baby boomers retiring. 

The Obama administration is being proactive in addressing these problems, but the measures it is employing are inflationary.

The Government’s Inflationary Arsenal

In order to prevent a widespread economic depression from fully unfolding, the U.S. government and the Federal Reserve have resorted to a battery of very powerful measures.

These measures prevent the normal course that would have followed the blow-up of the huge unsustainable imbalances built over decades in the U.S. car industry, in the U.S. real estate market and more importantly in the Social Security and Medical Care systems.

In short, the Federal Reserve has resorted to:

• Lowering interest rates to near a range of 0%-0.25%. This effectively is a subsidy from savers to the financial institutions.
• And “quantitative easing.” That is, the Fed is buying U.S. Treasuries to drive their rates lower and to increase the money supply.

These are both merely ways of devaluing the dollar. Of course, the justification of engineering inflation is saving the U.S. banking industry and avoiding a dreaded deflationary spiral, a la Japan in the 1990s, which would mire us in 10 years of economic paralysis.

In effect, the U.S. government is trying to put out the fire with gasoline: Spending unconscionable amounts of money that it does not have, and financing that spending with record levels of debt. The short-term results of a boost in activity will be extremely costly.

Under this scenario, with a depression not in the cards, the market is rallying to adjust to mere recession pricing. But are we out of the woods?  The rampant spending and overzealous monetary easing will result in – you guessed it – inflation.

The Fed’s claims that it is ready and willing to act quickly in order to contain inflation when it finally appears just don’t seem realistic at this point. As a central bank that had to resort to such extraordinary measures just to sidestep the death spiral, could you really risk tightening the reins too much and too soon? No way. The Fed will have to be very slow in taking back the liquidity with which it has just flooded the market.

After all, it is much easier to spike rates later to stop inflation than to deal once more with a crumbling financial system.

Monetary management is more of an art than a science. The Fed doesn’t really know how much time – and to what extent – it will take for their measures to impact economic activity. It is driving while looking into its rearview mirror.  And with this amount of financial adrenalin and imbalances being corrected in the system, the likelihood of a monetary “soft landing” is slim to none.

This brings us back to gold.

With this prognosis, we know that the government’s policies will succeed in achieving what it truly intended: Creating inflation. 

Therefore, gold is a necessary component of almost any portfolio. The problem is that the iShares SPDR Gold Trust ETF (NYSE: GLD) already has accumulated more gold than the rich countries of Switzerland or China. That means any move from the masses of investors to leave the metal will have a huge downward effect on it.

But, knowing this important technical risk, I would still be ready to invest if gold pulls back to the $800 an ounce level. From there, I’d keep building a prudent position, as we should see a price spike once inflation starts showing up in 12 months to 18 months.

Recommendation: Build a position in iShares SPDR Gold Trust ETF (NYSE: GLD), not to exceed 10% of the portfolio (**). Do so on pullbacks, and with a view of selling later once inflation shows up. That’s when the Fed will start hiking rates and reducing liquidity.

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

• Money Morning:
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• Money Morning:
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• Money Morning:
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By Horacio Marquez
Contributing Editor
Money Morning/The Money Map Report

On Feb. 5, we knocked the ball out of the park with our recommendation on Amazon.com Inc. (Nasdaq: AMZN). After getting pummeled by the worst recession since 1930, it’s heartening to see that at these valuations, and with the massive disequilibrium that’s affecting so many market sectors, we can rewarded much more than during normal times.

Amazon was trading at $61.15 a share when we recommended it, and rose about 30% in the nine weeks since. And I’m pretty certain that our investment in Amazon will continue to reward us with a steadily advancing profit.

Not only does the company continue to gain market share against its brick-and-mortar competitors, its innovation and superior strategic execution continues unabated.

Our reasons for buying Amazon stock back in February turned out to be right on target:  Amazon did release the mysterious-but-rumored encore to its successful Kindle, known, appropriately, as the Kindle 2, just one week after we beat them to the punch on their own announcement right here in this column.  And a large amount of other new and improved technologies have been hitting the market lately, from multi-terabyte storage memory devices, to enhanced iPods, laptops and PCs. A step-up in technology is bringing with it another wave of upgrade fever.

Amazon’s “cloud-computing” initiative continues to make major progress, as well.  The impact of this technology – like most new successful technologies – has been grossly understated at the onset, but it promises to gain massive momentum. 

The reality is that Amazon is turning out to be a much better profit play than I anticipated. In fact, after I wrote that article, I bought a Kindle 2 for my youngest daughter’s 11th birthday. 

I had been looking for a way to appease my daughter’s voracious reading appetites. But I also wanted to try the novel device for myself, and save the long and highly inconvenient morning walk through the snow, rain or cold up and down my long driveway to pick up The Wall Street Journal and the Financial Times print editions.  I also wanted to experiment with other foreign newspaper subscriptions like the Shanghai Times.  And lastly, but very importantly, I wanted to see for myself just what the upside for this device actually was. 

The experiment proved to be an immediate success.  In short, I was blown away by the Kindle’s simplicity and powerful capabilities. It can hold more than 1,500 books, the definitions for words a reader might not know appear at the bottom of the page, and you can make notes and cut and paste sections of the onscreen content. 

When parents and teachers across America find out about these capabilities, the Kindle’s sales are going to take off exponentially. These functionalities make reading a book much easier and more useful in this electronic form than in the “hard-copy” formatf. The device also proved to be much more attractive and addictive than I expected and it’s remarkably easy to use.

Critics point to the devices hefty price tag, but the low cost of electronic publications versus paperback or hard cover books – as well as the aforementioned technological advantages – offsets the high cost of the Kindle. 

With the Kindle’s free Whispernet wireless Internet access, I was able to quickly purchase and download the complete works of Charles Dickens (more than 200 works) for less than $5, a Bible (Old and New Testament) for $2, and other works for as little as 75 cents each.

I went on to buy Adam Smith’s “The Wealth of Nations,” Sun Tzu’s “The Art of War” and Baron Von Clausewitz’ “On War” for a pittance.  Just buying the more than 200 Dickens books in physical form would have cost well in excess of $1,000.  And the whole exercise took less than five minutes.  Such convenience and value in buying can be very dangerous to people’s budgets and conversely good for Amazon.

And you don’t have to carry that weight.  A student could conceivably carry all his or her school or university textbooks in the 10-ounce Kindle. Imagine having every book you ever read or studied readily at hand. 

What’s more is that every book you buy is not just stored in your Kindle, but also in your Amazon account – a true testament to the huge value of cloud computing. So, if you ever lost your Kindle, you could re-download your previous purchases into your new device.  And should you max the memory capacity of your Kindle, you can just delete it from the device and it appears as “archived,” reminding you that you can re-download it from Amazon’s servers whenever you please. 

Indeed, the Kindle is both unique revolutionary, and will be a huge success for Amazon.

So, ahead of the quarterly profits I would not dare to take profits in this stock. Sure, technology stocks have been on a tear, and Amazon is one of the leaders, but this is just the beginning. 

We still have the bank stress tests ahead, the General Motors Corp. (NYSE: GM) and Chrysler LLC deadlines and the implementation of the Public-Private Investment Program (PPIP) government program to help ease the toxic asset problem at the banks, so nothing is certain. But I am optimistic about these three situations. 

As we saw with Wells Fargo & Co. (NYSE: WFC), when you are borrowing at 0% interest and lending at 6% through 22% (lowest FICO score credit card loans), profits accumulate very fast and help resolve many problems. 

I expect the PPIP program to be a resounding success, as well, Since it not only provides huge subsidized financing from the government, it moves much of the credit risk in those positions to them. 

Finally, the Chrysler and GM situations – either through bankruptcy or voluntary reorganization – will eventually result in companies that can be great once more.

That brings us back to Amazon’s valuation.  Amazon has continued to grow sales and profits in this recession and as the economy picks up, I can see momentum accelerating.

The first line of true resistance that Amazon stock should encounter is its all-time high.  And if Amazon beats estimates when it releases its earnings on April 23, it will get there really fast.  But even if it doesn’t get there as quickly as I expect, this is a stock to keep well stashed for years to come.

Recommendation:  Buy Amazon.com Inc. (Nasdaq: AMZN) before Monday’s product announcement and ahead of the rollouts of the stimulus packages planned by both the United States and China (**).

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

News and Related Story Links:

• Money Morning:
  Buy, Sell or Hold: Amazon Stock is Positioned as a Long-Term Winner

• Money Morning:
  Not Just a Price Floor, Treasury Programs May be a Stable Foundation for Economic Recovery

By Horacio Marquez
Contributing Editor
Money Morning/Money Map Report

On October 27 of last year, as the market was beaten down in a stampede of panic selling, I realized that it had gone too far in its pessimism with respect to the future of the global financial markets and I recommended the iShares MSCI Brazil Index Fund (NYSE: EWZ).

At the time, the global financial system and the global economy were in a royal mess of proportions not seen since the Great Depression. Many of the major banks in the United States and Europe were in even greater disarray than they are now. With the credit markets totally frozen, consumers, companies and countries that had been caught overextended in their financing and with little or no cash reserves struggled to refinance their debts. 

This tightness paralyzed many of the sectors that rely heavily on financing, like capital equipment, autos, and others. In that manner the financial crisis exposed, and subsequently crushed, those industries that for decades failed to restructure and become competitive – just as we’ve seen with the recent turmoil surrounding the U.S. auto sector.

But I believed then, as I do now, that Brazil has made huge strides from the debt-ridden, top-heavy, bureaucratic government of its past. Brazil restructured its finances long ago and resisted the temptation to use crises in neighboring Argentina and in other places to default on its obligations. 

The Latin American nation now runs one of the most orthodox monetary and fiscal policies in the world, and its highly capable central bank and fiscally disciplined government have maintained fiscal and trade surpluses during the entire episode of global synchronic growth and high commodity prices.  The very high level of real interest rates avoided overheating the economy and creating an over-expansion of credit, which today would have ended terribly.

The decades-long policy of weaning itself off of imported oil by starting its own ethanol program and focusing on deep-sea drilling have helped Brazil achieve a remarkable level of self-sufficiency in the energy sector. And that self-sufficiency really paid off when oil had its massive spike up to $150 per barrel last year:  The country’s savings made it a net creditor of the world. 

So, Brazil – unlike the United States, England and much of Europe – was not over-levered. It was well positioned fiscally, and from an oil dependency standpoint, well equipped to face the dramatic events of last year. 

As a result, the market has valued Brazil’s consistently prudent policies highly. In the four days after my October 27 recommendation, the MSCI Brazil Index fund shot up 31% as investors realized how cheap high quality Brazilian equities were trading and forced liquidation abated. 

The ETF dropped back on some profit taking, but since mid-November, has brutally outperformed the S&P 500 by 37%. 

What We Can Learn From Brazil

We, in the more developed nations, could learn a thing or two from the Brazil about consistent fiscal and monetary prudence, balanced and diversified trade, and self-sufficiency in energy.  And those universally valid principles should continue informing policies around the world today.

And in these crises, it is time to carefully select the very best companies – those with rock-solid balance sheets, superb management teams and sustainable competitive advantages that will survive over the years.  This is precisely the very best moment to start owning them with a long-term view, regardless of short-term volatility.

You see, during the generalized Asian crisis of the late nineties, the entire region saw their financial systems blow up in similar fashion.   But the enduring lesson from Asia and other emerging market crises was that every single country made it back – regardless of economic policies.  The difference in economic policies directly influenced the speed, strength and sustainability of their respective recoveries, but each economy did eventually resume its growth. 

Another major lesson was that, even though the strong companies and markets all suffered price-wise, the stronger companies and markets suffered less and recovered much faster than the weaker ones, which sometimes blew up and disappeared.  Hence, Brazil’s position of strength puts it right in line for a strong recovery. 

Also working in Brazil’s favor is the huge amount of money that the Federal Reserve and the Treasury Department are pumping into the U.S. economy, which, given its unparalleled flexibility amongst the Western economies, will post the quickest recovery. 

This large-scale debt issuance and money printing will eventually result in lower purchasing power for the U.S. dollar, which is already beginning to fuel a commodities rally.  And Brazil – a huge commodities exporter – is perfectly positioned to take advantage of this.

Brazil is making very good use of its strong finances in order to deploy appropriate responses to contain and even reverse the downturn in its economy.  As I mentioned, this strength is not an accident, but rather the result of decades of careful planning and consistent policies to persevere in structural reform and key economic initiatives.

Petrbras: Brazil’s Power Play

That brings us to the best way to play Brazil, independently of just buying the index ETF: Petroleo Brasileiro (NYSE ADR: PBR) – more commonly referred to as Petrobras – and Vale (NYSE ADR: RIO), which I highlighted back on October 27. 

Brazil’s policy of energy self-sufficiency achieved a resounding victory last year.  But there is much more ahead:  Brazil is on its way to becoming a major oil exporter.  And we are going to profit from it greatly.

Not only is oil going to rise strongly as soon as the major adrenalin shots of fiscal stimuli and massive monetary easing kick in around the world, but Brazil’s production is set to grow exponentially.  This double benefit which led President Luiz Inácio “Lula” da Silva to proclaim that God had given Brazil a second chance, will create billions and billions of dollars for Brazil through Petrobras, its leading energy company.

As my colleague Jason Simpkins diligently pointed out in his comprehensive summary of Petrobras’ massive offshore discoveries, the almost unparalleled Tupi and Carioca oil finds – together with the equally unparalleled Jupiter natural gas field – are a game-changer for the country.

Though, even with such an incredibly evident upside, there is always a catch to any bullish story. And in this case, some analysts believe that Brazil might resort to taxation or some other arrangement to minimize the upside for Petrobras shareholders and move that upside squarely into government hands. 

Others point to the huge costs of developing these extremely deep properties, the difficulty in transporting the oil back to land, the length of time involved in developing these fields, and even the difficulty of obtaining financing now that oil has sold off from $150 down to about $50 per barrel.

Of course, I resoundingly disagree with all these objections. And here’s why:

The Brazilian government, unlike those of Venezuela and Bolivia, has a long track record of welcoming foreign multinationals and individual investors and treating them fairly. 

Also, Brazil has been at the forefront of deep sea drilling for years. For example it has a 25% stake in the biggest U.S. oil find in decades: the Jack II in the Gulf of Mexico. And Petrobras actually anticipated the rush for oil by locking in long term contracts for every major deep sea drill rig that they could get their hands on ahead of the market.

Sure, it faces new challenges, but Petrobras – from ethanol to deep sea drilling – has proven savvy with its timing and consistent with its execution. 

Finally, as I had anticipated back in October, projects of huge strategic and financial significance will be a breeze to finance, even in very difficult market conditions.  Indeed, China which has been wisely using this crisis to cherry-pick access to commodities around the world, recently reached an agreement with Petrobras, in which China Development Bank will provide Petrobras $10 billion in financing in return for a long-term supply of oil.

We simply cannot pass on Petrobras With Petrobras ahead of a recovery in activity in the global economy and a devaluation of the dollar.

Petrobras rose 1.83% Friday to close at $35.17 a share. The stock is up 43% year-to-date.

Recommendation: Buy shares of Petroleo Brasileiro (NYSE ADR: PBR), using the current correction to average into this name on weakness over the next month (**).

 (**) Special Note of Disclosure: Horacio Marquez holds no interest in Petroleo Brasileiro (NYSE ADR: PBR).

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

As the hundreds of thousands of readers across the Internet who've read Marquez's insightful BSH missives know, the longtime Wall Street insider has a knack for picking stocks that are poised to move. For a free report that details these ready-to-move plays please click here. The report is free of charge.]