Caterpillar's (NYSE: CAT) fourth-quarter earnings were strong. But the future could be even brighter.

In the wake of one of the most volatile years ever for stocks, safety will be a key theme among investors in 2012.  

China stocks were down more than 20% in 2011. Here are three that bucked the trend to make solid gains.

Agriculture stocks are one place that I'll be looking for profits in the year ahead.

Two of the most notable commodities investors are once again at odds. But why do I care?...

It has been a rough year for uranium stocks, but demand for the controversial metal is starting to resurface.

Apple's (Nasdaq: AAPL) iPad sales are falling, but the company's sales in another area are boosting its earnings forecast.

Risk aversion has taken hold of the market as investors became fearful that Europe will implode and that China's economy will begin to slow down.

Putting your money in a company that explores for or mines rare earth is a speculation-only venture by any definition of the word.

Bank of America (NYSE: BAC) missed earnings estimates badly, and tech behemoth IBM (NYSE: IBM) came in light on sales.

Chinese coal company Puda Coal (PUDA.PK) has fallen to 50 cents a share on suspicion that its Chairman (Ming Zhao) has sold American shareholders down the river, in so many words.

The market finished higher yesterday despite a bearish open. Volume was low for a second session in a row, which is unusual given the huge price move over the past three days.

Earnings season got underway with an underwhelming start by Alcoa (NYSE:AA). The company beat on revenues, but missed pretty badly on EPS due to rising costs and weaker prices for aluminum.

So, today I'd like to respond to one of the ONLY positive emails I received in response to an article I wrote about China stocks, 6 months ago.

Jack Ma, the chairman of the Chinese Internet conglomerate Alibaba Group, said last week that he is "very interested" in buying Yahoo! Inc. (Nasdaq: YHOO).

The market lost ground again last week. Despite early optimism from Europe and a rise in bank stocks, the bulls could not muster any meaningful rally. And the bears quickly resumed the selling pressure, defended 1175 on SPX, and dragged the market back to within 3% of this year's low.

Volume was also high in the decline, which indicates that there still is a large base of investors who are more than willing to sell at lower prices.

Stocks just ended their worst quarter since the financial crisis. The Nasdaq and S&P 500 each lost more than 12%.

The market slowly moved higher once again yesterday. The indices actually started deep in the green. But a midmorning ride down to 1220 resulted in consolidation for the rest of the day. The SPX rose nearly a percent after it surpassed 1220 resistance but it couldn't hold onto those gains. SPX quickly retraced the morning jolt and then declined by another percent near the close after 1220 could not be held by the bulls.

Between 1220 and 1250 there is not much resistance, but at 1220 there is plenty of selling pressure. Although if SPX is able to take out 1220 it could be a fast ride to 1250, maybe briefly higher to 1260 or something in that area.

Two services-related companies and a little-known Chinese coal miner were among the best-performing small-cap stocks on Tuesday. The day marked by President Barack Obama signing off on a bill resolving the federal government's debt ceiling crisis. Wall Street's response was negative, indicating disfavor about the nation's economic health.

There was little to cheer about for stocks, as the Dow Jones Industrials fell for an eighth straight day. The Standard & Poor's Small-Cap 600 has closed lower for the same number of trading sessions, while the Russell 2000 Index is on a seven-day losing skid.

The market didn't exactly fall apart yesterday, but at the same time, there wasn't exactly any conviction buying. But the bulls, despite another down day, did not lose a support zone.

Volume tracked higher again as the indices jostled up and down all day. Large cap technology rebounded, as did big banks, but consumer services and energy experienced a weak day.

While I certainly did not like being stopped out of numerous positions this week, I am content heading into this big weekend in cash. I think many traders may have that attitude as well,  which could make it difficult for the indices to gain any bullish traction until Monday.

The stock market recovered from Wednesday's sharp drop. The major indices traded higher for most of the day, before a late sell-off drove them in onto the red. The S&P 500 closed less than a half-point form support at 1,301.

But while investors seem to be feeling at least slightly better about a budget deal getting done before Tuesday, another negative catalyst has reared its head -- weak economic data.

The market weakened a little more on Tuesday, but the indices stabilized and kept the decline to a minimum. Volume levels were low as SPX consolidated at 1332 support. The industrials were hit the hardest and financials showed unusual strength. Large cap technology also continued to motor higher as stocks like HPQ, AAPL GOOG and MSFT rallied nearly 1%.

The TradeMaster portfolio was active again yesterday. On Monday a Chinese stock and RCMT were added to our long positions. Yesterday, F and another small cap stock were added, but F was a short.

Ford announced its second quarter results Monday before the market opened. Financial results were solid and EPS beat analyst expectations. And shares gapped 2% higher to begin the session. But high volume sales immediately dropped shares back to $13.15 from $13.44 intraday highs.

Congress and the Obama administration are at it again. Talks broke down over the weekend, which is a familiar development. The impasse is certainly weighing on the stock market.

Precious metals are rallying, bonds and stocks are down. Of these assets, it's the move in bonds that are most telling. Bond prices are falling, and yields are rising, because failure to pass a budget opens the door for a downgrade of U.S. debt from the ratings agencies. That, in turn, raises borrowing costs (interest rates) because repayment is suddenly less certain.

I've said it before, but the debt ceiling is a red herring. The United States will default on its debts for the simple reason that they are too high to get rid of in any other way.

Whether it's an outright default for bond holders or the more likely default of inflationary policy, we'll see the US default on its debt, and all of the terrible things the politicians on either side of the aisle threaten us with will come to pass - regardless of what bill is passed or how high the debt ceiling gets raised.

The problem is that we're talking about an abstraction. The dollar does not exist. It's an idea. There's nothing backing it except for some guns and some printing presses.

Earnings season continued at a torrid pace, with large cap stocks beating on revenues and/or earnings per share. The EU finalized a bailout plan, and reports seem encouraging that Congress will reach a budget deal soon.

We've had to suffer through a perfect storm of bad news since May. Now, we seem to be getting a perfect storm of good news. Even the most recent housing construction data was better than expected.

Unemployment, however, continues to lag. And as we've discussed at length, there's no reason to expect hiring to improve significantly, especially with spending cuts coming at the federal level.

China's got a heck of a nerve. Yesterday, CNN reported that the Chinese government's State Administration of Foreign Exchange published the following statement on its website:

"We hope the U.S. government will take responsible policies and measures to boost global financial market confidence and respect and protect the interests and investors..."

And even went so far as to say that the debt issue is a "... reflection of the credibility of the U.S. government..."

Now, I know none of us are happy with the way Congress and the administration has approached our debt issues so far. But China's sitting in its own glass house.

Well that didn't take long. Just a day after it was reported that Greece will benefit from a debt restructuring that will require current bond-holders to take a financial hit, Ireland's finance ministry is demanding a similar restructuring for its bonds.

Of course, this is what happens when you open the door to restructuring. In a union, all rules must apply equally. You just can't give preferential treatment to one country and not expect others to demand the same treatment. The European Central Bank should have known this. And its failure to see this one coming is making the situation even more unstable.

There is a budding divergence between economic data and corporate forecasts. We’ve seen a stark deterioration of economic data across the board. Manufacturing surveys have weakened, auto sales were down in May and then, of course, we got the icing on the cake with the pitiful employment numbers last week.

 

Economists and strategists have been falling all over each other as they lower their 2011 GDP estimates. (Of course, Daily Profit readers had a heads up, as we noted the change in the Fed’s outlook after the last FOMC meeting.)

The International Energy Agency (IEA) recently released a report titled “Are We Entering a Golden Age of Gas?”

Fortunately, you can actually read this report for yourself. I’ve included the link to the report at the bottom of this email. (Warning: the report is nearly 130 pages long.)

I haven’t read the entire report myself, but I thought I’d go over two of the most interesting themes presented.

For one, the IEA projects that natural gas could rival oil usage on a Metric Tonnes of Oil Equivalence (MTOE) by 2035.

Take a look at this chart that plots world demand for different energy fuels:

Bank stocks are getting beaten down again this morning. Bank of America (NYSE:BAC), for instance, is off another 3%, and is trading below $11 a share and well below tangible book value of $11.40.

 

Valuations might look attractive. As a group, the big banks trade with a forward P/E around 10, while the S&P 500 as a whole sits at 13. But investors should always ask “what’s the upside?” And for the banks, that’s a darn good question.

Any first year economics student will be able to slowly and cogently explain the theory of maximum employment, or even give you a run-down on modern monetary theory.

Certainly, most hobbyist economists will be able to fumble their way through an explanation of Keynesian stimulus theory.

But where their book learning and theories and financial models break apart is during a crisis.

Why?

Because: you can’t model a currency crisis. You can’t say when one will occur. You can’t say how bad it will be once it starts.

A currency crisis occurs outside the realm of even the best mathematically correct theories. Such a crisis results from a massive, widespread loss of faith in a given currency. It doesn’t happen in textbooks or in charts, models or in Paul Krugman’s daily hack-job column.

It happens in the minds of men.

That wasn’t the first call for the end of the commodities bull market, nor was it the most serious.

We heard it proclaimed that 2008 was the official end of the bull market – no ifs ands or buts.

“Bull Market In Commodities at an End, For Now” – New York Times

The proof? Well, you might recall that gold, oil and nearly every other commodity on the planet was on the receiving end of a huge uptrend until early 2008, when the “bubble” began to deflate a bit. As the New York Times said in October of that year:

“Since July, when prices for many commodities peaked amid fears of a permanent shortage, the prices of wheat and corn - two cereals at the base of the human food chain - have dropped 70 percent. Oil prices have dropped 55 percent. Important metals like aluminum, copper, nickel and platinum have declined more than half.”

Again, I’ll use a chart of gold as a proxy for the “commodity bubble”:

I know I have a tendency to continually write about two obvious trends – sovereign debt and peak oil – and if it seems like I’m repeating myself, it’s only because these trends are so deadly important to understand for investors.

Commodity investors especially need to pay attention to sovereign debt and peak oil, because these two trends fuel the booms in precious metals and energy investments.

Historically, these sectors are among the most profitable – if you can catch the right stock at the right time.

But today I’m going to write about a slightly different investment sector that should benefit from both trends.

And unlike a high-flying gold stock, or a micro-cap junior oil exploration company, the companies in this sector are big, kind of boring and only have a long, slow history of rewarding investors with fantastic returns.

I’m talking about railroads.

The Commodities Future Trading Commission (CFTC) announced yesterday that they are suing two oil traders accused of manipulating the oil markets in the 2008 run-up to $147 per barrel oil.

The Federal regulatory agency is on a witch-hunt to blame anyone and everyone in anticipation of even higher oil prices in the upcoming months.

Whether the CFTC likes it or not, the fact is that peak oil production probably happened sometime in 2006. With continued oil usage coming from the east (especially China) it should be of little surprise that oil prices keep going up.

And this latest lawsuit from the CFTC will likely have the opposite of the intended effect, resulting in a chilling effect on the oil markets, decreasing liquidity and causing prices to rise.

To take advantage of higher priced oil, analyst Tyler Laundon of Wyatt Investment Research recently put together an in-depth investment research report on how to invest in European oil and gas companies.

Click here to read all about this opportunity now. 

Nearly a month ago, after the last Fed meeting, we started to discuss the likelihood that the U.S. economic recovery was slowing down. After all, the Fed had just lowered its GDP forecast for 2011 and acknowledged that inflation was picking up as a result of QE2.

 

The S&P 500 was above 1,360 at the time.

Will inflation push the Fed to move earlier than it wants to? Or will a weakening economy encourage the Fed that more stimulus is needed?

Obviously, these questions are polar opposites. But it seems that these are the only choices of action for the Fed, assuming it wants to take action. It's more likely, however, that the Fed wants to see how the economy responds to the end of QE2. And I'll admit, I'm curious about that, too...

Twelve years ago, at the infancy of the current bull market in gold, a small group of folks started buying up gold and gold securities.

They didn’t ring a bell or tell their friends. They probably felt a little foolish doing so. They might have felt a little crazy.

Gold had been in a two-decade bear market.

Today, there’s a commodity that’s commonly used, extremely cheap and arguably in a 50 or 60 year bear market.

It’s a commodity that people probably don’t even think about as very investment-worthy – but it’s completely vital to the modern world. Significantly more important than gold even.

And I’m going to tell you how to invest in three companies involved in this commodity today that should see strong gains in the coming years, as well as solid dividends in the meantime.

Is buying now too early? I can’t say for sure. But what I can say is that a bull market in this commodity is as inevitable as the tides. Perhaps literally so…

While silver and gold made new highs almost on an hourly basis over the past two weeks, the International Monetary Fund (IMF) quietly released data predicting that China will become the world’s largest economy by 2016, ending America’s 80+ year reign.

If you’re not completely familiar with the IMF, they’re basically an unelected group of bankers, policy makers and retired politicians who make it their business to manage a variety of important functions such as – well, I’ll let them tell it:

“The International Monetary Fund (IMF) is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

Of course, the line about 187 member countries is really just a convenient technicality, because everyone knows that the IMF gets the plurality of its funding and power from the United States.

So it’s very interesting that the IMF would release such damning and surprising predictions about the end of American hegemony and the continued rise of China.

Take a look at the chart below, which tells the whole story:

The largest aluminum producer in the world, Alcoa Inc. (NYSE: AA) outperformed analyst consensus estimates for the first quarter of 2011. Alcoa announced earnings after the market closed on Monday.

And yet, the company’s stock price dropped more than 5% yesterday.

To be honest, I’m not extremely interested in Alcoa’s quarterly earnings report, or any other company’s earnings report either.

I’m far more interested in the fact that Alcoa sold off after announcing a 1 penny earnings outperformance. At the same time, Alcoa’s revenues came up short of expectations.

Typically, when a company sells off after it beats earnings estimates, it’s a sign of a top for either the company in general, or if it’s a bellwether like Alcoa, it could signal a top in the markets.

Why is Alcoa a bellwether? They’re traditionally the first company to report during earnings season every quarter. Obviously, Alcoa’s earnings won’t bleed into IBM’s (NYSE: IBM) earnings – but the market’s reaction to such earnings could.

The fact that Alcoa’s earnings beat expectations but their revenues came up short also suggests that the earnings growth could be signaling cost-cutting or jiggering the books instead of real growth. You can’t fake sales very easily – but earnings can be adjusted and reworked a hundred different ways.

So what’s going on with revenues?

Shortly after publishing yesterday’s article “A Note to All Chinese CEOs”, I received a message of concern from a reader.

I won’t use this person’s name, but she expressed concern that I unfairly lumped her stock holding L&L Energy (Nasdaq: LLEN) in with Puda Coal (NYSE: PUDA) and other Chinese small caps accused of defrauding shareholders.

As I told this person yesterday, my intent in including LLEN with these other Chinese small caps wasn’t to defame it. To the contrary, from my perspective, LLEN seems to have all the right stuff: good properties, good coal reserves, solid customer bases, and as far as I can tell, competent leadership. In full disclosure, I’m neither long nor short LLEN, and we don’t plan on buying or selling LLEN in any of the Wyatt Research portfolios in the immediate future, to the best of my knowledge.

As you may know I’m also hugely bullish on coal, and since the Chinese now consume more coal than any other country, it’s a no-brainer to look for growth and value in the sector.

Unfortunately though, for this reader specifically as an LLEN shareholder and for Chinese small cap and large cap investors, no matter how great your company is, or how honest the leadership, how cheap on an earnings basis or how promising the story – you must understand that your Chinese shareholdings will likely suffer a similar fate as the other companies, for the simple reason that there seems to be an epidemic of fraud and uncertainty in the sector.

I’m a big believer in the Chinese growth story. As famed commodity investor Jim Rogers says, “the 19th century was the century of the UK, the 20th century was the century of the US, the 21st century is going to be the century of China."

Until recently, one of my favorite ways to play the inevitability of the China growth story was to buy a company called Puda Coal (NYSE: PUDA).

If you’ve been reading my letter for very long, you know what’s going on with coal in China. Coal burning power plants produce over 2/3 of the electricity in China, and a significant portion of that coal has to be imported to China from places like Australia.

That means that demand for domestic coal production has a margin of safety. For Chinese firms, domestic Chinese coal is cheaper, easier to access, and absent of political or regional conflicts or difficulties.

I particularly had interest in Puda, because the company produces metallurgical or coking coal. This type of coal is vital to the production of steel, and so, it’s vital to the production of high-rises and skyscrapers that seem to be popping up in China today like dandelions after a late-Spring rainstorm.

We’re well past the point of being equal partners in the usage of the world’s energy resources. If the chart on the left is any indication, we’re actually well on our way to becoming rather inconsequential as a global energy consumer.

And from the chart on the left, it’s pretty clear that any growth in developing world energy consumption means a commensurate decrease in energy consumption on a percentage basis – but what might not be so clear from the chart on the right: we’re at a point when there’s very little room for emerging world energy consumption to increase without necessarily decreasing energy consumption in the developed world.

To butcher a quote from the 2009 movie “There Will Be Blood” – the emerging markets are starting to drink our milkshakes.

The coal milkshake went first. China surpassed the United States as the world’s largest coal consumer in 2009. Today, China uses more energy than the United States, by a 5-10% margin depending on who you ask.

What’s the next milkshake? It might be oil. China’s oil consumption doubled in the last 6-7 years:

In a speech yesterday, Fed Chief Ben Bernanke made two very important statements. First, he said that he believes the inflation we are experiencing due to higher commodity prices is temporary. Second, he said he could be wrong.

The specific quote goes like this:

“We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability...”

It’s well known that Japan is among the largest holders of US Treasuries. According to the US Treasury website, the Japanese only come second to China in terms of Treasury ownership, with $885 billion in Treasury holdings as of January 2011.

And almost on cue, my favorite contra-indicator proclaimed to the world just days after the earthquake that the Japanese will be forced to sell Treasury holdings.

You might be familiar with my contra-indicator. I’ve called it many things, but it comes down to this: when Tim Geithner, the Treasury Secretary goes on the record to say one thing, you can be almost guaranteed that the opposite will happen.

And on March 15^th, Geithner gave me my answer when he said he didn’t believe the Japanese would sell Treasuries.

I don’t know for sure if Japan is selling Treasuries at this point. But somebody is, and that’s the opposite of what you’d expect, and what historically happens, after a significant crisis.

Usually, capital flies to Treasuries in these circumstances. But today, people are selling dollars and flooding into gold and alternative currencies like the yen.