• The SPDR S&P Dividend ETF (NYSE: SDY) became an investor favorite in 2011. It tracks the S&P High Yield Dividend Aristocrats index, which is based on 50 of the highest-yielding dividend stocks that have increased payouts in each of the past 25 years.
  
  SDY includes companies of all sizes, and its focus on yield means plenty of small-cap companies can make the cut. Investors can go to bed at night knowing that any company that managed to raise its dividend in both 2008 and 2009 provides safety. The fund has more than $8 billion in assets, yields 3.2% and provided total returns of 9.8% in 2011.
  
  
• The Vanguard Dividend Appreciation ETF (NYSE: VIG) focuses on dividend growth, rather than yield alone, to build an index of sturdy, high-quality names. The index is limited to companies that have upped payouts for the last 10 years, regardless of yield, and then applies a proprietary formula to weight them by market value. The top-10 holdings include stalwarts like McDonalds Corp. (NYSE: MCD), The Coca-Cola Co. (NYSE: KO) and Exxon Mobil Corp. (NYSE: XOM).
  
  The fund has $7.9 billion in assets, yields 2.1% and returned a total of 10.7% in 2011.
  
  
• WisdomTree SmallCap Dividend ETF (NYSE: DES) is a fundamentally weighted index tracking the performance of the small-cap segment of the U.S. dividend-paying market. These companies typically perform well as the economy emerges from recessions. The fund is non-diversified and follows a passive investment approach.
  
  The fund has $269 million in assets, yields 3.8% and returned 2.76% in 2011.
  
  
• Finally, for investors looking for international exposure, there's the PowerShares International Dividend Achievers Portfolio (NYSE: PID). Its scope is limited to companies that trade in the United States as American Depositary Receipts (ADRs), so investors have the assurance that the companies adhere to U.S. accounting standards. The fund invests in only high-yield names that have boosted payouts in at least each of the past five years. PID has $569 million in assets, yields 3.9% and returned 4.42% in 2011.

These selections should be enough to get you started. But if you're really serious about income, and you want to know what companies are behind the juiciest dividends, then you can sign up for Martin Hutchinson's Permanent Wealth Investor by clicking here. It's the only way to ensure you're getting the highest-yielding stocks available - not just paper tigers either, but genuine "alpha-bulldogs."

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Where U.S. Stocks Are Heading in 2012

One of the hallmarks of a bull market is a double digits earnings yield. Remember, the 2012 earnings yield is nearing double digits at 8.6%.

The last time theS&P 500 closed at a double-digit earnings yield on a monthly closing basis was November 30, 1984. If you bought stocks in 1984, you caught a ride on the biggest bull market in history.

Let's not forget the P/E ratio. Stocks look cheap by that metric, as well.

For the record, the average P/E ratio for the S&P since the 1870s has been about 15.
At the 1,290 level, the S&P 500 is currently trading at 11.5 times 2012 earnings. That's dirt-cheap.

Even at 13-times 2012 earnings, the S&P is worth 1,452.

Better yet, at a P/E of just 14.2, the S&P 500 would hit 1,586- crushing its old highs set back in 2007.

Anyway you look at it, two of the most important indicators are saying stocks are cheap as we start 2012 - especially with bond yields hovering at historic lows.

Of course, the great unknown in all of this is Europe. And admittedly it's a big one- but there's a good chance they'll eventually find a way to clean up the mess by printing up a few trillion euros in 2012.

The bottom line: 2012 is shaping up to be a great year for equities. You should have at least some exposure to U.S. stocks or risk missing a historic bull market run.

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"The life cycle cost, I think, was decisive," Dicks said. "It's a great victory."

The contract provides Boeing with fresh momentum after the giant aircraft maker had stumbled badly in the past few years.

Earlier this month, the Chicago-based company announced yet another delay in the delivery schedule for its first 787 Dreamliner. Boeing pushed the initial delivery of the bellwether plane to the third quarter of 2011-marking the seventh time the aircraft has been delayed and putting it behind schedule by at least three years.

The contract announcement could be the final chapter of a decade-long battle that has featured intense back-and-forth lobbying, advertising slurs and scandal, as Washington lawmakers pushed to bring the project - and thousands of jobs - into their districts.

Two earlier awards were rescinded, with one forcing the resignations of several Air Force officials and landing a Boeing executive in jail. Another award to EADS and Northrop Grumman Corp. (NYSE: NOC) in 2008 was overturned after Boeing protested.

EADS can appeal the Pentagon's decision, but Pentagon officials said they were sure any protest would fail. Still, with jobs on the line, there is bound to be political pressure to overturn the decision.

The Pentagon is expected to provide both companies with detailed briefings soon. And members of Congress are expected to receive the full explanation next week, congressional and industry sources told Politico.

The chief executive of EADS, Louis Gallois, told Bloomberg News Friday that he was "disappointed" and "perplexed" by the Pentagon's decision.

The supertanker program will support more than 50,000 jobs and 800 suppliers spread across more than 40 states, Dennis Muilenburg, CEO of Boeing Defense, Space & Security said in a conference call with reporters.

That's good news for a country plagued by high unemployment. EADS had planned to assemble its tankers in Mobile, Alabama with non-union labor. Boeing plans to build its tanker in Everett, Washington, where it has assembled aircraft for decades with a strong union labor force.

"This decision is a major victory for the American workers, the American aerospace industry and America's military," said U.S. Sen. Patty Murray, D-WA. "At a time when our economy is hurting and good-paying aerospace jobs are critical to our recovery, this decision is great news for the skilled workers of Everett and the thousands of suppliers across the country."

The other side was clearly disappointed and promised to take a close look at the decision.

"I am deeply disappointed that the EADS team was not selected to build the next air refueling tanker for the Air Force," Sen. Jeff Sessions, D-AL, said in a statement. "In light of today's result, I intend to examine the process carefully to ensure it was fairly conducted."

Both Boeing and the North American unit of EADS submitted bids based on popular civilian aircraft. EADS's tanker was modeled on its A330 wide-body aircraft, while Boeing's successful bid used the older and smaller 767 jet.

Aerial refueling tankers allow the military to refuel aircraft in mid flight, greatly extending the range of smaller aircraft.

The contract calls for Boeing to build a total of 179 of the tankers to replace the aging Boeing KC-135 "Stratotanker," which first entered service in 1957. Approximately 100 of the old models have been grounded since 2006 due to age.

Originally designed and built to lengthen the missions of B-52 nuclear bombers, the Stratotanker morphed into a workhorse in Vietnam, where its use allowed small fighter bombers to strike targets that were previously unreachable. The tankers continue to play a large role in Iraq and Afghanistan.

News and Related Story Links:

• CNNMoney:
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The results marked the end of a $90 billion losing streak that started in 2005, stretched through 2008, and then climaxed with the American automobile icon tumbling into bankruptcy in 2009.

Net income for the fourth quarter was 31 cents a share, Detroit-based GM said. Profits were 52 cents a share, excluding a charge for purchases of preferred shares from the U.S. Treasury Department.

The results topped the 44 cents average estimate of analysts surveyed by Bloomberg News. Revenue rose to $36.9 billion, also exceeding the $34.6 billion average estimate. The company reported $135.6 billion in sales for the entire year.

The turnaround comes after the bankruptcy and a massive bailout by the federal government, which loaned the company $50 billion in exchange for a 61% ownership stake.

In the restructuring that followed, GM slashed debt, cut payrolls, closed outdated factories, shed product lines and reduced health benefits and other expenses by renegotiating union contracts. The changes allowed GM to trim the cost of building a vehicle by several thousand dollars.

But U.S. taxpayers are still the automaker's largest shareholder, holding roughly 500 million shares for a 27% stake of the company. It remains to be seen whether they will ever recoup their investment.

Shares of GM, which went public at a price of $33, closed Wednesday at $34.59. The government will have to sell its remaining shares at an average of price $53 to make taxpayers whole.

GM's global sales jumped 12.2% to 8.39 million vehicles in 2010, within shouting distance of retaking the world's largest automaker title from Toyota (NYSE ADR: TM), which sold 8.42 million.

For the first time in its 102-year history, GM sold more cars and trucks in a foreign market than in the United States. Sales in China jumped 28.8% from 2009 to 2.4 million, while U.S sales came in at 2.2 million, up only 6.3%.

"Their recovery has been fueled by significant cost-cutting, arrival of new products that consumers were seeking along with better management of incentives and supply," Jesse Toprak, vice president of industry trends and insight at TrueCar.com, which tracks the auto industry, told The New York Times. "The sky is the limit for GM after becoming profitable at this low of a sales pace."

The company's turnaround is also the result of revamping its product line in 2010.

As part of its restructuring, GM closed or sold the Saturn, Pontiac, Hummer and Saab brands. Meanwhile, it unveiled a string of hot-selling new models, including the Chevrolet Cruze, the Buick LaCrosse and the Cadillac SRX SUV.

"While GM still has some work to do in terms of improving their product lineup, the current offer of GM vehicles is the most balanced and highest quality they have ever had," Toprak told the Los Angeles Times.

GM also benefited from finding ways to rein in spending on sales incentives and making price increases for its vehicles stick.

Spending on incentives fell more than 5% to an average of $3,397 per vehicle, while the average transaction price in 2010 was $34,149, a 7% increase from 2009. Both of those figures outperformed the industry average, according to TrueCar.com.

GM ended the year with $27.6 billion in cash and $4.6 billion in debt. The company reduced its under-funded pension obligations in the United States to $11.5 billion, down from $16 billion a year earlier.

GM employees stand to reap a big payout. Approximately 45,000 union workers will receive $4,300 in bonuses. About 26,000 salaried workers in the United States will receive from 4% to 16% of their pay as bonuses, and several hundred white-collar employees will get more than 50% of their pay.

GM also resolved a significant accounting concern, announcing that its board and management team have concluded that the company had fixed material weaknesses in its financial reporting process.

If the automotive market continues to improve as expected, 2011 "should be a better year" than 2010, Christopher P. Liddell, GM's chief financial officer, told the NYT.

"Our focus for 2011 is to build on our progress and continue to generate momentum in the marketplace," Liddell said. "We expect our first quarter will be a strong start."

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The exchange has been looking at teaming up with Chicago Mercantile Exchange owner CME Group Inc. (Nasdaq: CME) and commodities trader IntercontinentalExchange Inc. (ICE) in a joint bid to acquire NYSE, people familiar with the matter told The Journal. Of the two, ICE appears to be the more likely partner, although talks are only preliminary at this point, they added.

The bulk of Nasdaq's business comes from intensely competitive, low-margin equities trading, with derivatives and clearing sales of only $265 million, or 17% of overall net revenue. Nasdaq's derivatives revenue comes mainly from stock options, as opposed to the higher-margin futures business.

By comparison, derivatives trading accounted for 33% of NYSE/Euronext revenues and 40% of Deutsche Boerse's.

Derivatives are a contract between two parties used to hedge risks or speculate. They can be based on an underlying asset such as stocks, bonds, currencies or commodities. They can also be linked to specific events like changes in interest rates.

Derivatives have become so valuable to trading venues because they can yield operating margins of as much as 55%. If completed, the NYSE/Deutsche Boerse merger will create the world's largest futures exchange accounting for 40% of the U.S. options market.

Despite trailing badly in the growing derivatives market, however, Nasdaq has been a leader in technology and expense controls, allowing it to remain competitive, analysts say.

Nasdaq, valued at $5.7 billion, has "been doing just fine, judging by the stock price," Richard Repetto, an analyst with Sandler O'Neill & Partners told The Journal. "But in the long run, they need to be bigger."

But any effort to put together a competing offer for NYSE will face significant obstacles.

Deutche Boerse is guaranteed the chance to match any offer for NYSE and a breakup fee of $337 million, The Journal reported. And before any offer can even be made, the two must agree on the terms and structure of an offer for NYSE.

If Nasdaq decides against mounting a competing bid for NYSE, it might look to expand by buying Chicago Board Options Exchange owner CBOE Holdings Inc. (Nasdaq: CBOE), which is reportedly open to an offer. Conversely, it could consider selling itself to ICE, sources told The Journal.

The latest wave of consolidation in the exchange industry was launched by a $7.9 billion bid by Singapore Exchange for the Australia stock exchange operator ASX Ltd. late in 2010.

That was followed by the London Stock Exchange's agreement to purchase Toronto's TMX Group Inc. in a deal that would create a transatlantic operator worth $7 billion in market value and the world's fifth-largest exchange by trading volume.

But both of those deals have run into strong opposition from lawmakers who see the local exchanges as a source of national pride as well as new capital and business.

TMX yesterday (Wednesday) pressed the case for its deal, warning lawmakers that opposing the merger would damage Canada's reputation as a bastion of open and fair markets.

Canada is putting its reputation for free trade and competition on the line, TMX Chief Executive Thomas Kloet told Reuters.

"One of the things Canada has to make sure to consider as it goes through this is what if it says no," Kloet said, adding he was taking political opposition to a deal "very seriously."

Meanwhile, fearful of being left behind, exchanges in Malaysia, the Philippines, Vietnam, Indonesia and Thailand are building electronic trading links between their markets, Reuters reported. The links are intended to eventually allow cross-border dealing in all their listed shares.

The trading bourses of Asia face considerable hurdles to stock exchange consolidation because of cumbersome regulatory environments and complicated ownership structures.

It will be at least several years before South East Asia's stock exchanges join the global trend towards consolidation, Thailand's market regulator predicted.

"Right now the only linkage is through the electronic means of this project, and that is the only likely option for now," Thirachai Phuvanatnaranubala, Secretary General of Thailand's Securities and Exchange Commission, told Reuters.

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Libya produces only about 1.6 million barrels of crude per day (bpd), compared to worldwide production of 87 million barrels, Peter Beutel, an oil analyst with energy risk management firm Cameron Hanover told CNN.Money.com.

Instead, the biggest danger is that the political unrest could spread to Saudi Arabia, the world's largest exporter of crude at 8.4 million bpd.

"Tunisia and Egypt were disconcerting. But the unrest in Bahrain and Libya is far more dangerous," said Dr. Moors. "Bahrain is located strategically in the worst place for such an uprising...because Bahrain connects directly to the eastern province in Saudi Arabia that contains its principal oil production."

If political unrest in Libya spreads to other oil-rich countries and the ensuing chaos disrupts crude oil production in Saudi Arabia, the implications could be huge.

One obvious result would be that U.S. motorists could be paying a lot more at the pump. Prices for gasoline could hit $5 a gallon by peak summer driving season, industry analysts say.

"If this thing escalates and there's a good chance that there'd be a shift in supplies, $5 gas isn't out of the question," Darin Newsom, senior analyst at energy tracker DTN told USA Today.

The average price of regular gasoline is expected to rise to $3.25 within a few days, 2.5% above Tuesday's $3.17 national average, according to Tom Kloza, chief analyst at the Oil Price Information Service. Gas prices are up 20% from a year ago but remain 23% below the record $4.11 average set in July 2008.

But while riots in the Middle East are one factor driving fuel prices higher, there are also other reasons for the surge.

A rebound in the U.S. economy, rising demand from emerging countries the approach of the summer driving season are likely to push gas to $3.75 to $4 a gallon by July.

"We have all the wrong things working together at the right time: an economic recovery, stocks making new highs, a lower dollar, strong seasonal demand and unrest in the heart of oil production," said Beutel.

Gas prices of $5 a gallon or more would have a significant impact on the broader U.S. economy.

"The money that you spend filling up your car is money you don't have to spend at the shopping mall," David Wyss, chief economist at Standard & Poor's told The Wall Street Journal.While $100 oil "is a number we've seen before, it's still going to squeeze consumers' budgets."

If oil prices hit $100 a barrel and stay there it could also put a dent in the wider global economic recovery.

Each $10 move higher in oil prices can knock a few tenths of a percentage point off gross domestic product (GDP), or the total value of all goods and services produced. The world currently spends roughly 5% of GDP on petroleum products, a level last seen in 2008, when oil briefly hit $150 a barrel, The Journal reported.

Worldwide stock markets would tumble on any surge in oil prices.

"If oil continues to rise and the dots get connected beyond Libya, then you can set yourself up for a setback in stocks," David Sowerby, a money manager at Loomis Sayles & Co. in Michigan, told Bloomberg. "People are going to wait and see what type of unrest there is in the largest producing oil countries."

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India was still the biggest market for gold during 2010, with total demand rising by 66% to 963 tons, the WGC said. Buying may slacken this year, however, because the government is likely to increase import duties on gold in the forthcoming budget.

Gold imports by India, the largest buyer of gold in the world, climbed to a record of 918 metric tons in 2010, driven by a surge in jewelry demand with Indians continuing to buy jewelry as a store of value.

"Last year was a great year for gold globally, and especially for India and China. India emerged as the strongest market with total demand rising...amid strong economic growth," Ajay Mitra, the WGC's Managing Director for the Middle East and India, told reporters.

Inflation Drives Demand Higher

Investment demand for gold in China was especially hot in the fourth quarter of 2010, rising 84%, said Wang Lixin, the WGC's China managing director, attributing the surge mainly to concerns about inflation.

"The main motivation behind this demand has been concern over domestic inflation pressure and poor performance of alternative investments, combined with expectations of further gold price gains," the WGC's report said.

The significant increase in demand seen in China, India and around the planet is reflective of the uncertainty facing consumers as people buy gold to protect themselves from macroeconomic risk and rising inflation.

After an extended period of tame inflation, relentless increases in commodity costs are beginning to filter through the global economy.

"Inflation is beginning to cross-pollinate as ultra-loose monetary policy in the United States is exported to places like China, pushing up wages and commodity prices..." analyst Anthony Mirhaydari wrote last week in a column for MSNMoney.

Core consumer prices in China increased 2.6% year-over-year in January, after posting a 2.1% rise in December. The producer price index (PPI) jumped 6.6% -- well above December's 5.9% and significantly more than the 6.1% increase forecast by analysts.

China's broader consumer price index (CPI) increased 4.9% year-over-year in January, exceeding the official government inflation ceiling of 4% for the fourth month in a row.

"We are seeing explosive demand for gold," Zhou Ming, deputy head of the Industrial and Commercial Bank of China Ltd. (ICBC) precious metals department told Reuters. "As Chinese get wealthy, they look to diversify their investments and gold stands out as a good hedge against inflation."

The WGC report also said the surging investment demand in China is a reflection of the ongoing internationalization of the Chinese yuan.

But Money Morning Chief Investment Strategist Keith Fitz-Gerald sees the Chinese government's desire to move away from dollar-based currency reserves as a more important reason for the gold fever sweeping China.

"Appreciating gold demand will have very little to do with yuan appreciation. I have not seen any evidence the two are linked...yet," Fitz-Gerald said in an interview. "What is really happening is that Chinese are buying gold on an institutional level to hedge away from the dollar and build in diversification. This is a conscious part of the yuan decision...the government definitely wants at least a partially hard asset backed global currency."

Demand for Gold a "Global Phenomenon"

The price of gold soared nearly 30% last year, reaching a record high $1,431.25 an ounce in December as the dollar dropped and investors sought a store of value against the loose monetary policies of Western governments.

Global demand for gold last year rose 19% year-over-year to a 10-year high of 3,812 tons. Demand in India and China accounted for about 41% of that total.

The WGC said that the increase in investment demand for gold is a "global phenomenon," and is set to remain strong in 2011 though growth will likely slow from last year's pace.

China's appetite for the yellow metal is expected to remain robust in 2011, making it a significant force in global gold prices.

Demand for gold investments in China could grow 40% - 50% this year, with gold jewelry expected to rise a more moderate 8%-10%, said the WGC's Wang.

Meanwhile, the country continues to cement its role as the world's largest bullion miner after it toppled South Africa from the perch in 2007.

China produced a record 340.9 tons of gold in 2010, up 8.6% over last year, the China Gold Association said last month. But that was not nearly enough to meet demand as gold imports into China soared in 2010, turning the country into a major overseas buyer for the first time.

China imported 209 tons through October 2010, up almost 500% from the total brought in the previous year, according to the Shanghai Gold Exchange. Mine output reached a record 340 tons last year, the China Gold Association said.

Government Pushing Gold in China

Although it's rarely mentioned in the Western media, the Chinese government is encouraging their citizens to buy physical gold bullion as part of an effort to cool further investment in the red-hot real estate and housing sectors.

"Unlike the property market, investment in the gold sector is something the government is encouraging," ICBC's Zhou told Reuters.

China actually banned its citizens from owning gold from 1950-2003.

ICBC, the world's largest bank by market value, sold about seven tons of physical gold in January this year, nearly half the 15 tons of bullion sold in all of 2010, Zhou said.

ICBC is also coming up with other creative ways for Chinese citizens to invest in the shiny metal.

In an initiative with the WGC, ICBC started offering physical-gold linked savings accounts in December. Over one million such accounts have already been opened, and the bank is now storing over 12 tons of gold on behalf of investors.

"There is frantic demand for non-physical gold investments. We issued 1 billion yuan ($151 million) worth of gold-price-linked term deposits in 2010, but we managed to sell the same amount over just a few days in January this year," Zhou said, adding that investors will deposit more than 5 billion yuan ($759 million) in gold-linked accounts this year.

Last week, the bank launched its second physical gold investment product, which sells gold bars to investors. They can then be resold for cash through ICBC based on real-time gold prices.

Zhou said that the huge increase in Chinese demand would continue in 2011 due to a "choppy stock market" and concerns about how rising interest rates will affect property markets.

Fitz-Gerald says insatiable Chinese demand can do nothing but continue to drive gold prices higher.

"For global gold buyers [this will have] a huge impact because Chinese buying programs are going to drive prices a lot higher before this is done...especially if the dollar gets worse," he said.

Fitz-Gerald believes gold prices will hit $2,500 in the near future.

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In a political nod to New York City's status as the world's most important financial hub, the company will have duel headquarters in Frankfurt and New York. NYSE Euronext Chief Executive Duncan Niederauer will be CEO of the new company, while Deutsche Boerse CEO Reto Francioni will be the chairman.

When the deal is completed, Deutsche Boerse will own a company that may generate more than 50% of its earnings from options and futures by 2013, Ed Ditmire, an analyst at Macquarie Group Ltd. in New York, told Bloomberg News.

Earnings from those instruments will top $462 million by 2013, based on analyst estimates compiled by Bloomberg.

The derivatives business of both firms would then be worth $24.7 billion by itself, 5.7% more than the market capitalizations of both companies combined before the two trading giants announced they were talking this week.

"The main reason that this deal occurred is that the market is moving towards the derivatives," Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees about $3.2 billion, told Bloomberg. "It's not because they want real estate on Wall Street."

Derivatives are a contract between two parties used to hedge risks or speculate. They can be based on an underlying asset such as stocks, bonds, currencies or commodities. They can also be linked to specific events like changes in interest rates.

Derivatives have become so valuable to trading venues because they can yield operating margins of as much as 55%. The merger will create the world's largest futures exchange accounting for 40% of the U.S. options market.

By bolstering their profile in the derivatives market, the companies are moving to offset revenue declines in stock trading. Derivatives revenue climbed 14% last year at NYSE Euronext, while cash equities fell 10%, as smaller trading platforms geared toward high-speed automated trading cut into volumes.

NYSE Euronext countered by investing heavily in technology and building data centers in Mahwah, New Jersey, and outside London where customers can house trading systems closer to the physical exchanges to speed transactions.

But fourth-quarter earnings still declined by 20% from 2009, NYSE Euronext reported last week. The company said slumping trading volumes in the United States and Europe and gains by the dollar against the euro hurt its bottom line.

The deal creates an unprecedented exchange powerhouse with more than $20 trillion in annual trading volume and operations in Germany, France, Britain, Amsterdam, Portugal, Belgium, and the United States, according to Reuters.

The companies said the takeover would yield cost reductions of $400 million (300 million euros) a year.

The deal follows a revival of merger activity in global financial exchanges after a period of quiet in the wake of the financial crisis.

International mergers between exchanges often raise hackles among politicians who see them as symbols of national pride and important means of raising capital and other business.

The London Stock Exchange's bid to take over Toronto Stock Exchange operator TMX Group Inc. (PINK: TMXGF) has fanned concerns about foreign ownership in Canada and regulators are sure to closely scrutinize the Deutsche Boerse - NYSE Euronext deal.

Just last week, the Singapore Exchange revised its $7.9 billion bid for Australia's ASX by increasing the number of Australians on the board of directors in an effort to win support from reluctant politicians.

After the deal closes, Deutsche Boerse's Eurex unit and NYSE Euronext's London-based Liffe unit would control more than 90% of European exchange-based futures trading, Reuters reported, raising antitrust questions among regulators.

In the United States, the Department of Justice and Securities and Exchange Commission will have final say on the merger.

Traders who use the exchanges have also expressed concern over the proposed deals, raising fears about a lack of competition.

"Euronext and Deutsche Boerse are still screwing us on fees for clearing, the closing auctions and small and mid-cap trading -- the areas where they still have virtual monopolies," the head of markets at a large European bank - who declined to be named - told Reuters. "A merger is concerning because together they will be more powerful and better placed to protect these monopolies."

News & Related Story Links:

• Wall Street Journal:
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• Reuters:
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The interest hike came on the final day of China's weeklong Lunar New Year holiday and before a report next week that may show consumer prices rose 5.3% in January.

Commodity markets fell after the central bank announcement on concerns the hike might slacken demand in the country that helped guide the world out of the recent financial crisis.

Three-month copper fell below $10,000 a ton, U.S. crude oil futures prices dropped and emerging-market stocks posted losses as China joined India, Indonesia, Thailand and South Korea in boosting rates this year.

These losses could be followed by even more disquietude as investors worry about the effect higher rates will have on global economic growth.

"If inflation stays high in February, the central bank will be forced to increase interest rates on a continuous basis," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Investor confidence will be seriously hurt by expectations of aggressive policy tightening."

Of course, while tighter policy may have tapped the brakes on the Chinese economy and taken a toll on the domestic stock market - which has dropped 12% since hitting a 2010 high in November - Fitz-Gerald thinks the long-term effects will be moderate.

"Ultimately the raising of interest rates will be viewed as a sign of adult supervision and strength," said Fitz-Gerald. "Real interest rates remain negative, which means that Chinese monetary policy actually has a stimulative effect."

As China struggles with a property market bubble and surging food prices on the heels of a drought that's crimping supplies, Beijing's goal is to hold inflation at 4% this year. But the economy is flush with cash after money supplies jumped more than 50% in two years and China's world's-biggest foreign exchange reserves climbed by a record $199 billion in the fourth quarter to $2.85 trillion.

Banks extended $1.2 trillion (7.95 trillion yuan) in new loans last year, exceeding the government's targeted maximum of $1.13 trillion (7.5 trillion yuan). And new lending may have surged to $181 billion (1.2 trillion yuan) in January alone, according to the median estimate in a Bloomberg survey of analysts.
In response, Beijing has raised reserve requirements on banks seven times over the past year and ordered them to lend less.

Beijing also has imposed a series of controls targeting property prices that have stayed stubbornly high. Acutely aware of polls that say the public is angry about unaffordable housing, the country's leaders have said they will not tolerate property inflation and speculation.

"The rate hikes, while ostensibly about controlling inflation, are actually part of a much broader program designed to crack down on speculation and hoarding, while giving the Chinese people reason to keep money in banks rather than shifting into property and equities," said Fitz-Gerald.

In yesterday's move, the central bank raised long-term rates for savings deposits by 45 basis points for five-year terms, 20 basis points higher than for lending. China's one-year deposit rate will climb to 3.25% by June, economists forecast in December.

Isaac Meng, a Beijing-based economist for BNP Paribas SA (PINK ADR: BNQPY), told Bloomberg he expected "accelerated tightening" that would see rates rise by as much as another 1.5 percentage points.

But while more interest rate hikes this year are likely to slow China's economy some, it still is expected to keep humming along at a rate more developed economies can only view with envy. China's gross domestic product (GDP) will grow by 9.3% in 2011, according to a Reuters poll, down from a red-hot 10.3% last year.

Still, that Beijing is tightening the reins on its economy at a time when U.S. and Eurozone interest rates are at record lows is a mark of confidence that the world's second-largest economy is on solid ground, according to Fitz-Gerald.

"In the end, the move will be seen as a sign of strength, with solid growth momentum allowing policymakers to raise rates. Global markets should respond positively to such moves aimed at controlling inflation," he said. "Isn't the action China's now taking exactly what everybody wishes Team Bernanke would do here to counter the more than $14.1 trillion in inflationary kindling now stacked up outside the door?"

News & Related Story Links:

• Bloomberg:
  China Raises Rates to Counter Accelerating Inflation
• Reuters:
  China raises rates to battle stubbornly high inflation
• Money Morning:
  New China Yuan Policy Holds Promise As the "Trade of the Century"
• Money Morning:
  China Monetary Policy: Inflation Won't Last - Growth Will

"Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising," wrote Steven Hess, a senior credit officer in New York and the author of the report. The rating remains "stable," according to the report.

The warning from Moody's came on the same day that Standard & Poor's lowered Japan to AA- from AA, signaling that the ratings firms are stepping up pressure on the world's biggest economies to curb their spending.

U.S. debt has increased from about $4.34 trillion in mid-2007 to roughly $14.3 trillion currently, as the government supported a massive bailout of the financial system and spent trillions in stimulus money in order to bring the economy out of recession. The budget deficit has increased to 8.8% of gross domestic product (GDP) from 1% in 2007.

"Because of the financial crisis and events following the financial crisis, the trajectory is worse than it was before," Hess told Bloomberg News in a telephone interview.

A downgrade would significantly tarnish the world's faith in U.S. Treasury bonds. That would reduce the country's ability to borrow money on extremely favorable terms.

A credit rating tells lenders and investors how likely it is that a borrower will default on a loan. A "AAA" rating means there is little for lenders to worry about. That leads to lower borrowing costs, whereas a lower rating typically results in bond investors demanding higher interest rates to take on riskier debt.

Higher rates also can expand a country's overall debt burden, forcing the government to cut spending programs and raise taxes. That conundrum was recently demonstrated by the social unrest in Greece and Portugal, as citizens marched in the streets to protest tough austerity measures that directly reduced state welfare programs and entitlements.

Even the threat of a lower rating could lead international investors to avoid U.S. assets. About 50% of the almost $9 trillion of U.S. marketable debt is owned by investors outside of the nation, according to Bloomberg's analysis of Treasury Department data.

Moody's said it expects there will be "constructive efforts" to reduce the U.S. deficit and control entitlement spending. It predicted 10-year Treasury yields would rise toward 5% but not exceed that level.
"Other large AAA countries have plans to reduce deficits substantially over the coming few years, indicating that this trend may continue," Hess said.

Congress is currently bickering over whether to raise the debt limit above $14.29 trillion, which the Treasury estimates will be reached between March 31 and May 16.

The debate over the debt ceiling, which was increased a year ago, has grown more rancorous since the November elections, when Republicans won control of the House of Representatives.

Republican lawmakers have pledged to challenge the Obama administration on spending, and have told the president and Democratic legislators that they will insist on budget cuts as a condition of raising the U.S. debt limit.

Moody's warning comes only a few days after President Barack Obama's State of the Union address, in which he called America's current situation a "Sputnik" moment.

The speech caused consternation among analysts, including Money Morning Contributing Editor Martin Hutchinson, who analyzed President Obama's speech in a column last week.

"President Obama's fascination with the ‘Sputnik moment' goes way beyond rhetoric," Hutchinson wrote. "Just as the nation saw after Sputnik, President Obama wants to ‘invest' more taxpayer money in research, hoping to find a new industry or two."

During the hysteria surrounding the Sputnik scare, "Congress...embarked upon an orgy of public spending," Hutchinson wrote. "At a time of zero inflation, the federal spending total for the fiscal year that ended in June 1959 was a staggering 11.7% above that of 1958, the highest peacetime increase between 1949 and the inflationary year of 1976."

And in a two-part interview last week, Money Morning Chief Investment Strategist Keith Fitz-Gerald stressed debt reduction as a fundamental piece of an eight-part plan to fix the U.S. economy.

"There's a longtime axiom among professional traders: Big Government = Small Wallets. Pure and simple," Fitz-Gerald wrote. "There is no such thing as a multiplier effect and every government dollar spent actually replaces a dollar from the private sector. The very notion that the government can spend money more efficiently than private enterprise is badly flawed and robs this country of wealth at all levels."

News & Related Story Links:

• Bloomberg:
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• Money Morning:
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• Money Morning:
  State of the Union: Why You Should Fear America's "Sputnik Moment"
• Money Morning:
  The Real State of the Union: A Rescue Plan for the U.S. Economy

Cocoa, the main ingredient in chocolate, is the main source of income for the government of Ivory Coast and an export ban would cut the funding Gbagbo relies on to pay loyal civil servants and the military.

Cocoa futures on the Liffe commodities' exchange in London were up 3.9% Monday to $3,554 (2,223 pounds) per ton, the highest since early August, after trading as high as $3,661 (2,290 pounds). Cocoa traded as low as $2,830 (1,770 pounds) in November.

Cocoa prices have been rising steadily since November's election, and rocketed up 12% since Jan. 5 on concern that unrest would disrupt supplies. Analysts have predicted that they could continue to accelerate unless the deadlock in Ivory Coast is resolved.

However, retail chocolate prices are destined to rise even if the political situation in Ivory Coast stabilizes in the next few weeks, Marcia Mogelonsky, U.S.-based global food analyst for Mintel, told Bloomberg News.

"The prices will go up because cocoa is now more expensive," and the price of sugar is also rising, Mogelonsky said.

Manufacturers had held the line on prices during the recession, she added. But more recently, manufacturers have, in effect, been raising chocolate prices by shrinking the size of their products.

Another cocoa analyst said prices may shoot up as much as 10% in the coming months.

"I can see the speculators seeing this as a potential to make a quick profit in an extremely bullish environment in commodities," Shawn Hackett, president of Hackett Financial Advisors in Boynton Beach, Florida, told Bloomberg in a phone interview yesterday, adding that prices may surpass the 30-year peak reached in December 2009.

Ouattara's administration officials insist Ivory Coast's main producers have agreed to the ban, but it remains uncertain whether Ouattara will succeed in imposing a nationwide ban, creating confusion across the industry.

The world's largest cocoa traders, including Cargill, Archer Daniels Midland Co. (NYSAE: ADM), Barry Callebaut, Olam and Armajaro, held an emergency conference call on Sunday evening with the Federation of Cocoa Commerce (FOCC) and the European Cocoa Association (ECA), three people with knowledge of the conversations told the Financial Times.

In a joint statement, Brussels-based ECA and the FOCC in London said they hoped for a quick resolution of the political tensions.

"Time, patience and a commonsense approach to the difficulties and delays that may arise are required, but most importantly, all those whose interests are impacted should remain calm in order that we sustain no long term damage to Ivorian farming communities and the cocoa industry," the two industry groups said.

Ivory Coast exported $2.53 billion worth of cocoa in 2009, according to government statistics. Ivory Coast's production has been declining, from 38% of global production in 2007-2008 to 33% in 2009-2010, according to the International Cocoa Organization.

Gains in cocoa futures may help stoke global inflation. Food prices increased 25% last year after Chinese demand strengthened and Russia's worst drought in a half-century devastated grain crops. The poorest nations paid as much as 20% more for imports, according to the United Nations.

World food prices rose to a record in December on higher sugar, grain and oilseed costs, the U.N. said, breaching levels reached in 2008 that sparked deadly riots from Haiti to Egypt.

An index of 55 food commodities tracked by the Food and Agriculture Organization (FAO) rose for the sixth consecutive month in December to 214.7 points, above the previous all-time high of 213.5 in June 2008, the agency said. The gauges for sugar and meat prices vaulted to new records.

Sugar prices jumped for the third year in a row in 2010, and corn gained the most in four years, according to figures compiled by Bloomberg. Food prices may continue to soar unless the world grain crop increases "significantly" in 2011, the FAO said Nov. 17.

Farmers will have to boost global food production by 70% by 2050 as the world population expands to 9.1 billion people from about 6.8 billion people in 2010, the FAO said.

News & Related Story Links:

• Bloomberg:
  Cocoa prices jump as Ivory Coast weighs export ban
• Guardian:
  Cocoa price soars as new Ivory Coast leader suspends exports
• Bloomberg:
  Ivorian Export Ban May Drive Up Cocoa Prices 10%, Hackett Financial Says
• Bloomberg:
  World Food Prices Jump to Record on Sugar, Oilseeds
• Money Morning:
  United Nations Warns of Food Price Hikes, Painting a Picture Similar to 2008's "Silent Tsunami"
• Money Morning:
  Five Ways to Profit as Coffee Prices Soar
• Money Morning Archives:
  Food Prices

Washington, on the other hand, insists China unfairly boosts its exports by undervaluing the yuan, making its products cheaper overseas. President Obama has promised to raise the topic with Hu when he begins his state visit at the White House on Wednesday.

The yuan ended lower in Shanghai trading yesterday (Monday) after gaining ground against the dollar for five days in a row.

Hu also leveled criticism at U.S. Federal Reserve's efforts to stimulate growth by purchasing large amounts of treasury bonds to dampen long-term interest rates - a strategy that Beijing has said exports inflation to emerging economies, including China.

Hu said that U.S. monetary policy "has a major impact on global liquidity and capital flows and therefore, the liquidity of the U.S. dollar should be kept at a reasonable and stable level."

Hu, who will arrive in Washington tomorrow (Wednesday), said the two nations should "respect each other's sovereignty, territorial integrity and development interests and abandon the zero-sum Cold War mentality."

Hu struck a conciliatory tone when he cited trade, energy and terrorism as areas for strengthening cooperation.

"The biggest achievement for this trip will be a strengthening of mutual trust and setting a tone for future strategic development," Liu Qin, a researcher at the China Institute on International Studies in Beijing, told Bloomberg News. "This visit serves as a connection point for the next generation of Chinese leaders and will lay a solid foundation for the next 10 years."

Meanwhile, a group of U.S. senators seeking to increase pressure on Hu said the time has come for congressional action on China's currency policies, and predicted U.S. lawmakers will pass legislation this year to crack down on Beijing's exchange-rate policy.

"The time for talk is over. We've had enough of China's empty verbiage," U.S. Sen. Charles Schumer, D-N.Y, said during conference call with reporters.

Schumer was joined by U.S. Sens. Debbie Stabenow, D-MI, and Bob Casey, D- PA, in backing legislation targeting countries that devalue their currencies. The measure would force the Treasury Department to cite countries with artificial exchange rate policies, and punish offenders through changes in U.S. trade law.

Hu is expected to meet with senior members of Congress during his visit. Schumer and many other lawmakers have complained for years about China's currency practices. But the nature of global trade imbalances and China's pro-export policies will probably curtail any meaningful progress towards improving trade relations.

During the talks, Obama will point to a trade deficit with China that grew 26% last year to $181 billion, as evidence for changing currency policies. In response, China will argue its total surplus is down nearly 40% from its pre-crisis 2008 peak.

"The U.S. had a trade deficit with 92 countries in 2009. So, the United States doesn't just have problems with China and it has little to do with the renminbi," Zhou Shijian, a senior fellow at the Center for U.S.-China Relations at Tsinghua University in Beijing told Reuters.

"It is an old problem, a structural problem that has been around for more than 10 years," he added.

While agreeing that structural problems are part of the problem, Jeremie Waterman, senior director for China at the U.S. Chamber of Commerce, said Chinese policies are also to blame.

"They've clearly pursued over a number of years very much an export strategy as part of their development," he said. "If China were truly a market economy, they would not have the kind of export numbers that they do."

The Chinese have also erected roadblocks to its services sector that keep U.S. financial, telecommunication and express delivery companies from doing more business there, Waterman told Reuters.

News & Related Story Links:

• Wall Street Journal:
  Hu Highlights Need for U.S.-China Cooperation, Questions Dollar
• Bloomberg:
  Inflation Won't Drive Yuan Appreciation, Hu Says Ahead of U.S. Visit
• Wall Street Journal:
  US Senators Target Beijing's Currency Ahead of Hu Visit
• Reuters:
  Deficit and dogma to frustrate Hu, Obama on trade
• Money Morning:
  Yuan Hits 18-Year High as Brazil's New President Joins U.S. Call to Fix Trade Imbalances
• Money Morning:
  Currency War Carries On as G-20 Meeting Fails to Secure Specific Trade Targets
• Money Morning:
  Currency War: China Stands Firm on Yuan as Global Criticism Escalates

Banks seized more than 1 million homes in 2010, according to RealtyTrac. That was up 14% from 2009 and the most since the company began reports in 2005.

About 3 million homes have been repossessed since the housing boom ended in 2006, Sharga said. That number could balloon to about 6 million by 2013, when the housing market may "absorb the bulk of distressed properties," he said.

About five million borrowers are at least two months behind on their mortgages and more will miss payments as they struggle with job losses and loans worth more than their home's value, industry analysts said.

"What makes this almost inevitable is the fact there are 5 million seriously delinquent loans not yet in foreclosure," Sharga told Bloomberg. "They've got to eventually get in the pipeline unless the homeowners cure the defaults."

Money Morning Contributing Editor Martin Hutchinson sees the projected increase in foreclosures as part of the natural evolution of the market after the bubble burst in 2007-2009.

"This is just the backlog. The market's seeking its proper level," Hutchinson said in a phone interview. "It doesn't mean its falling into an infinite pit. It's just catching up with itself."

As the nation's unemployment rate stubbornly hovers at more than 9%, foreclosures mushroomed over the last three years and U.S. housing prices have continued to shrink. Prices have fallen as much as 33% since their peak in 2006, based on the S&P/Case-Shiller Index of 20 cities.

Despite the number of properties in distress, home values may rise 0.6% in 2011, the first annual increase since 2006, according to Fannie Mae (OTC: FNMA), the largest buyer of U.S. mortgages.

Barring something unforeseen, Hutchinson thinks that prices are unlikely to fall much further.

"Prices shouldn't show much more downward momentum, but interest rates will determine that," he said. "A lot depends on how fast the Fed decides to raise interest rates, which could be quite quickly if inflation begins to get out of hand. Of course, unemployment is the real problem."

If large numbers of jobless homeowners facing foreclosure find work this year, then that could push down filings. On the other hand, if unemployment remains high, then 2011 could set another record as banks increase their foreclosure filings to make up for the delays in 2010.

Roughly 250,000 foreclosure filings that would normally have been processed towards the end of 2010 were delayed by an ongoing investigation into lender practices, according to RealtyTrac.

Attorney generals in all 50 states are conducting a probe into whether banks and loan- servicing companies rubber-stamped faulty loan documents using a process that has come to be known as robo-signing. Companies including JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and Ally Financial Inc. temporarily halted some repossessions as they reviewed their procedures.

Foreclosure filings in December totaled 257,747, the lowest monthly tally since June 2008. The number fell 2% from November and 26% from a year earlier, the biggest annual decline in RealtyTrac records.

Even though the courts have yet to rule definitively on the matter, the banks have concluded their foreclosure processes are valid and are moving ahead. Those proceedings will hit the pipeline early this year, resulting in an "ugly" first quarter, Sharga said.

For the fourth year in a row, Nevada had the highest U.S. foreclosure rate with more than 9% of the state's households receiving a filing. Arizona was second at 5.7% and Florida third at 5.5%.

Five states accounted for 51% of the U.S. filing total in 2010, totaling almost 1.5 million. California led with 546,669, down almost 14%; Florida was second at 485,286, down 6%; and Arizona was third at 155,878, down 4%. Illinois ranked fourth at 151,304 and Michigan was fifth at 135,874, both down about 15% from 2009.

Georgia, Texas, Ohio, Nevada and New Jersey also ranked among the top 10, said RealtyTrac, which sells data from counties representing 90% of the U.S. population.

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• Money Morning:
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• Money Morning:
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• Money Morning Archives:
  Housing Market

"The market was able to take a punch in the face in the form of 200 capesizes and loads of smaller vessels last year but I doubt it will manage another punch without having to hit the deck," Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo who correctly forecast in July that rental costs would more than triple by the fourth quarter told Bloomberg.

Rates jumped 33% in fourth quarter of 2010, reaching an average of $34,913 a day. But rates have dropped precipitously in the New Year, plunging 7.7% yesterday (Monday) to $11,900 - the lowest rate since Jan. 8, 2009.

Record numbers of new ships are sailing from yards in China, Japan, the Philippines and South Korea, according to data from the London-based Baltic Exchange, which publishes assessments for more than 50 shipping routes.

About 90% of global trade moves by sea, according to the Round Table of International Shipping Associations. And the cost of shipping goods tends to be more volatile than stocks and bonds, with rates gyrating by more than 10% or more in 32 weeks last year, according to data compiled by Bloomberg.

Bearer of Bad News

Shipping prices are established every working day in the form of the Baltic Dry Index (BDI).

Because BDI provides "an assessment of the price of moving the major raw materials by sea... it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade -- devoid of political and other agenda concerns," according to the Exchange.

The BDI flashed serious warning signals ahead of the 2008 financial crisis, according to Money Morning Contributing Writer Jack Barnes.

The index dropped by more than 90% in six months beginning in May 2008 - a time when global investors still expected economic growth to continue.

"Had you been watching - and heeded its warning - this index would have saved you from the fallout of the biggest financial crisis since the Great Depression," Barnes wrote in a column in July of last year.

But this time the slump in rates is being caused by a vessel surplus, not a contracting world economy.

The current surplus of shipping capacity was caused by orders placed in 2007 and 2008, when daily prices averaged about $111,000. Rates touched a record $233,988 before plunging over 99% during the last six months of 2008 to $2,316 as economies shrank during the first global recession since World War II. Rates roared back more than four-fold in 2009, as the economic recovery took hold.

The wild swings in shipping prices are mainly due to the generally tight supply of cargo ships. It takes two years to build a new ship, and ships are too expensive to take out of circulation the way big airlines park unneeded jets in the deserts of California and Arizona.

That means small increases in demand and small fleet changes can push the prices up quickly, and marginal demand decreases and arcane logistical matters can cause the prices to fall rapidly.

The slump in prices plaguing the shipping lines comes even as the suppliers of the iron ore and coal tap into surging demand to post record profits.

Vale SA (NYSE ADR: VALE), Rio Tinto Group PLC (NYSE ADR: RIO) and BHP Billiton Ltd. (NYSE: BHP) the world's three largest mine operators, will report the highest profits ever this year, according to the median of analyst estimates compiled by Bloomberg.

A Bloomberg survey of more than 100 analysts, traders, and investors last month projected every one of 15 basic raw materials is expected to advance this year. A S&P gauge of 24 prices for commodities rose 20% in 2010, after jumping 50% in 2009.

However, the 200 or so new capesizes joining the existing fleet of about 1,100 vessels will have trouble garnering enough orders to justify higher rates.

"The big problem for 2011 is continued deliveries of new ships," Scott Burk, an analyst at Oppenheimer & Co. in New York told Bloomberg. "It puts a damper on any upside that would occur through an increase in demand."

But even at the low current rates, ship owners should be able to make money, with average daily expenses last year of about $15,000 for costs including crew and depreciation, Clarkson estimates. While the figure doesn't include debt payments, borrowing costs have dropped since the U.S. Federal Reserve cut its benchmark interest rate to near zero in December 2008.

Furthermore, some companies have insulated their fortunes against volatile shipping rates by signing long-term contracts with suppliers. As recently as two months ago, ship owners were signing one-year charters at $33,000 a day, more than double today's spot rate, according to data from Clarkson.

Athens-based Diana Shipping Inc. (NYSE: DSX) and Navios Maritime Holdings Inc. (NYSE: NM) have vessels on longer-term contracts, leaving them less-exposed to spot rates, Natasha Boyden, a shipping analyst at Cantor Fitzgerald LP in New York told Bloomberg.

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• Wikipedia:
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• Money Morning:
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"The turbines are scheduled to be delivered in the second quarter of 2011," Vestas said, adding that the deals include delivery, installation and commissioning, an online control system and a service and maintenance agreement.

Vestas had a strong finish in 2010, announcing new orders from New Mexico, Italy, Norway, and Poland in the final week of the year.

The company said in an earlier forecast that its global order volume for all of 2010 would be between 8,000 and 9,000 MW, after rebounding from a weak level of 3,072 MW in 2009.

Vestas does not disclose the value of its orders, but as a rule of thumb turbine orders are worth around $1.32 million per MW.

China Drives Demand

HSBC Holdings PLC (NYSE ADR: HBC) recently reported that clean energy companies have proven "resilient" to the global financial crisis and recession. Global revenue for the sector was about $530 billion in 2009, down only slightly from 2008's $534 billion.

Global wind power capacity grew by 31.7% in 2009, the most since 2001. And more than a third of that happened in China, according to the World Wind Energy Association.

Barclays PLC (NYSE ADR: BCS) forecasts an additional 35.3 gigawatts of wind power generation capacity for next year.

Once again, Asia – and mostly China– will account for most of that growth.

Earlier this year China announced a $736 billion investment plan for clean energy in the next decade.

New private and public sector investments in core clean energy leapt by 53% in China last year, according to the Global Wind Energy Council. It added 37 gigawatts of total renewable energy power capacity, more than any other country.

"China's wind farm development was the strongest investment feature of last year by far," the Council concluded.

While China was becoming the world's biggest wind turbine market in 2009, energy infrastructure markets in the West remained depressed due to the economic downturn.

That allowed top Chinese manufacturers, including Dongfang Electric (PINK: DNGFF), and China Wind Systems (Nasdaq: CWS) to climb into the ranks of the top turbine suppliers, rivaling Vestas, General Electric Co. (NYSE: GE) and other established players.

In response, Vestas, which has its largest integrated manufacturing plant in Tianjin, China, opened a research and development center in Beijing in October and has declared it will reserve its entire Chinese manufacturing capacity to meet China demand this year.

Building U.S. Capacity

In order to meet demand in China and the rest of the world, Vestas has been building new manufacturing plants in the United States.

Its wholly owned subsidiary, Vestas Towers America, Inc., recently opened the world's largest wind tower manufacturing plant. The new Pueblo, Colorado facility currently employs 400 workers and features nearly 13 million square feet of space and eight miles of on-site railway tracks for the transport of materials and finished tower components.

The company has geared up its North American manufacturing operations by opening several new plants at its U.S base in Colorado, including a blade factory and a nacelle (enclosure) factory. Sales and service operations are based in Portland, OR.

Vestas also has research and development offices in Texas, Wisconsin, Massachusetts and Colorado.

Vestas' stock price has tumbled off its highs near $20 to about $10 due to poor earnings, reflecting 2009's 50% slump in orders. However, many investors may not realize that Vestas takes a conservative approach to accounting and doesn't recognize real revenues on its balance sheet until it delivers its products - often a year or more after signing contracts.

And it has now booked at least 25% more orders in 2010 than in 2008, its highest year on record.

The revenue from those deals should start to flow in early 2011, giving the company an earnings boost for the year. Vestas' stock price should follow earnings higher in short order.

The company will report full-year financial results on February 9.

News & Related Story Links:

• Reuters:
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• Energy Symposium:
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• Global Wind Energy Council:
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• CNBC:
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• Money Morning:
  Wind Power: Pickens Lobbies, While China Acts
• Vestas:
  Vestas China picks up with old customer to deliver 49 MW

Verizon Communications President Lowell McAdam said in October there will be half a dozen smartphones and tablets compatible with LTE on display at the Consumer Electronics Show in Las Vegas in January. The devices are expected to appear in stores in the first half of next year, he said.

The announcement marks the first time Verizon has identified a handset maker for the closely watched 4G launch and it represents an important vote of confidence for Motorola.

Motorola and Verizon Wireless have formed a close relationship over the past two years, based on their mutual support of Google Inc.'s (Nasdaq: GOOG) smartphone Android operating system. In fact, Motorola now produces only Android smartphones.

Verizon features several Motorola smartphones in its current Droid lineup, including most of the higher end devices it supports with extra marketing campaigns. That makes Motorola a very important partner, Verizon's Stratton told The Journal.

"Over last 13 months, they have done a very good job in supporting our business and have worked their way up into almost a preferred vendor," Stratton said. "They have been driving our Droid strategy."

Verizon Wireless, a joint venture of Verizon Communications and Vodaphone Group PLC (Nasdaq: VOD), launched its 4G network on Dec. 5, but had yet to introduce any mobile phones that use it. Verizon is pushing hard to complete an expensive rollout of the network.

The company also is pushing hard to roll out a Verizon iPhone later this year.

Analysts had speculated the release date for the Verizon iPhone would be January, but there have been no formal announcements or comments.

However, Apple Inc.'s (Nasdaq: AAPL) iPad2 also is scheduled for release in the next few months, and it is expected to join Verizon's network. Given that, it seems the earliest release date would be later this year, because it's not likely Apple would release two prominent products so closely together.

Also, initial plans called for Verizon to release its iPhone on the slower 3G network. But if Verizon scraps the 3G iPhone for the faster LTE network, it could delay the launch into the second quarter of 2011.

All this is important because Verizon investors and iPhone junkies are expecting the device to boost Verizon's bottom line, while at the same time providing relief to beleaguered AT&T iPhone users complaining about dropped calls and congestion on its network.

Based on customer surveys showing a significant number of users would switch to an iPhone if it were available on their carrier, and Verizon's own financial reports, estimates are that Verizon could expect to sell around 18 million iPhones in the first 24 months.

Indeed, the addition of the iPhone should reinforce Verizon's market share lead over AT&T, which has widened since the iPhone launched in mid-2007.

During that period, Verizon has out-gained AT&T in adding customers with handset contracts, signing 14.5 million customers, compared to 12.8 million for AT&T, The Journal reported.

However, any impact is unlikely to be immediate. The iPhone's subsidy costs will probably cut into Verizon's 2011 earnings, The Journal reported.

Still, with LTE's higher speeds, data use at Verizon is likely to eventually rise further. Assuming Verizon continues to tier pricing that reduces unlimited data plans, revenue per customer should increase.

And starting in 2012, the impact of subsidizing all those new iPhones at Verizon will be minimized. That's also when the full effect of increased data revenue from its LTE network should begin to filter through.

News & Related Story Links:

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• Money Morning:
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China's vehicle sales have surged since 1999 as its gross domestic product (GDP) growth averaged more than 9% a year, helping U.S. automakers make up for slumping demand in the West. China's vehicle sales surged 30.45% in the first half of the year to 7.18 million units, compared to 5.6 million for the United States.

"China is becoming the center stage of development for the 21st century global auto industry," Bill Russo, a Beijing- based senior adviser at Booz & Co., told Bloomberg. "Economic growth has directly translated into growth in automobile sales."

Fatih Birol, chief economist for the International Energy Agency (IEA) says that today 700 out of every 1,000 people in the United States and 500 out of every 1,000 in Europe own cars. But in China, only 30 out of 1,000 people own cars. And Birol thinks that figure could jump to 240 out of every 1,000 by 2035.

The China's automobile market is expected to grow by 15% in 2011, and sales growth at GM is expected to match that pace, according to GM's China President Kevin Wale.

Volkwagen AG (PINK: VLKAY), Europe's biggest auto manufacturer expects its sales to grow 10-15%, but remain constrained by a shortage of capacity, according to Soh Weiming, the company's executive president for China.

"I would anticipate nothing less than that and we will grow together with the market," Soh told Bloomberg News in an interview at an auto conference in Guangzhou, China on Monday.

Toyota, the world's largest automaker, said it expects its China sales to rise 13% to 900,000 vehicles in 2011. And Nissan Motor Co. Ltd. (PINK: NSANY) projects its sales will rise 17% to 772,000 units.

Even though Beijing is set to withdraw heavy incentives this month that helped boost its auto sales by 34% to 16.4 million through November, car sales growth in China is expected to again surpass the United States in 2011.

Auto sales in China may hit a whopping 20 million in China in 2011, according to data compiled by Booz & Co.

Meanwhile, light-vehicle sales in the United States could reach as high as 12.8 million units, Ashvin Chotai, managing director of auto consultant Intelligence Asia Automotive, told Bloomberg.

Excluding trucks and buses, Chinese passenger-car vehicle sales reached 12.45 million through November this year.

Even though China has stretched its lead over the United States and other markets, the elimination of subsidies and capacity bottlenecks are slowing the pace of growth.

GM and its joint ventures increased vehicle sales in China by 33% over a year ago to 2.2 million vehicles in the first 11 months of this year, the company reported earlier this month. VW-owned brands sold 1.8 million vehicles in China through November, an increase of 38% from a year earlier.

A shortage of manufacturing capacity will constrain VW's ability to meet demand in the nation, Soh told Bloomberg. The Wolfsburg, Germany-based automaker has said it will spend $14 billion (10.6 billion euros) through 2015 to build two factories to supplement the nine it currently operates in China, boosting production to 3 million cars annually.

"The next 24 months will be tough for us as we have production constraints," Soh said. "VW's biggest challenge to growing sales is limited capacity in China."

Hyundai Motor Co. (PINK: HYMLF), which projects sales will grow just 2.9% in 2011 to 720,000 units, will also be limited by a lack of capacity, Noh Jae-man, president of the automaker's Chinese operations told Bloomberg.

Seoul-based Hyundai intends to build its third Chinese factory as it strives to boost Chinese capacity by 50% to 900,000 vehicles a year by 2011. Ford Motor Co. (NYSE: F) is spending $490 million on a third plant in China.

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Verizon iPhone Marks End of an Era

Verizon has been testing its networks and capacity to handle the heavy data load by iPhone users, seeking to avoid the kind of bad publicity that plagued AT&T after booming sales of data-hungry iPhones crippled its network.

AT&T insists that it provides excellent network coverage and service to its wireless customers, in spite of the fact that a new Consumer Reports survey suggests they're deeply dissatisfied with their carrier. The ones who complained the loudest were users of the iPhone.

By making the iPhone available to Verizon customers Apple is striving to fend off an assault on its business from several fronts. The move is expected to help the iPhone compete in its battle with Google Inc.'s (Nasdaq: GOOG) Android handset software, which has made significant inroads on Apple's market share.

While Apple is on track to sell 40 million iPhones across the globe this year, it is under serious pressure from Android in the United States. The innovative iPhone and its operating system software package, known as iOS, was knocked from its lofty perch among U.S. technophobes by Android software in the second quarter of this year.

Android handsets, which have been heavily promoted by Verizon, had 27% of the U.S. market in the second quarter among new U.S. smartphone users, compared with 23% for iOS, market research firm Nielsen Co. said on its website

Nevertheless, introducing an iPhone to Verizon's vast customer base is likely to boost the shares of both companies.

18 Million New Customers for Apple?

Apple could double its earnings in the United States when Verizon becomes a carrier, according to some observers.

In fact, some complicated math reveals that the Verizon handset could boost iPhone sales by a cool 18 million.

Here's how the numbers add up:

• A recent survey by Changewave showed that 34% of users would purchase an iPhone if it were available on their network.
• As of the third quarter this year, Verizon reported it had 93.2 million subscribers in the United States.
• Another study shows that 57.1% of Verizon subscribers access data on their phones.
• If 34% of Verizon smartphone users switch to the iPhone, it works out to 18.09 million.

Not all of the data users will be current smartphone customers and not every Verizon user will switch devices. But a Verizon iPhone will still garner a significant number of disgruntled existing AT&T subscribers who currently put up with patchy service coverage in order to get their Apple fix.

It also may take awhile for either AT&T users or Verizon customers to make the switch because existing service contracts could keep customers locked down. Customers that break their contracts will be subject to a termination fee.

But considering that every iPhone sold represents several hundred dollars of revenue, Apple may not mind waiting 24 months to welcome an extra 18 million customers to the fold.

Verizon Profits on Hold

The addition of the iPhone should reinforce Verizon's market share lead over AT&T, which has widened since the iPhone launched in mid-2007.

During that period, Verizon has out-gained AT&T in adding customers with handset contracts, signing 14.5 million customers, compared to 12.8 million for AT&T, The Journal reported.

However, any impact is unlikely to be immediate. The iPhone's subsidy costs will probably cut into Verizon's 2011 earnings, The Journal reported.

Verizon also is pushing hard to complete an expensive roll-out of its LTE (Long Term Evolution) high-speed, post-3G network, and it's locked in a war with AT&T and T-Mobile to get there first.

Initial plans called for Verizon to release its iPhone on the slower 3G network. But if Verizon scraps the 3G iPhone for the faster LTE network, it could delay the launch into the second quarter of 2011.

"There will be a lot to pack into the new device if it's to be an LTE iPhone," Chris Hazelton, a research director at the 451 Group, told MacNewsWorld. "It will have to be familiar with Verizon's CDMA network -- it must have the entire CDMA stack...and other technologies."

AT&T will launch LTE in mid-2011, but will roll it out nationally much more slowly than Verizon. In the meantime, AT&T's ability to deliver LTE speeds will be limited by network congestion from its iPhone data use.

Indeed, with LTE's higher speeds, data use at Verizon is likely to rise further. Assuming Verizon continues to tier pricing that reduces unlimited data plans, revenue per customer should increase.

And starting in 2012, the impact of subsidizing all those new iPhones at Verizon will be minimized. That's also when the full effect of increased data revenue from its LTE network should begin to filter through.

How to Play the Launch

The impact from a Verizon/Apple deal not only will affect those two bellwethers, but it may stretch across the entire business, giving telecom companies room to widen their reach and expand their profits. Early on, even AT&T may benefit as customers who switch to Verizon reduce the load on its network, convincing some to stay.

It's tough to say if Verizon will get flooded with AT&T refugees or how many of those will stay put. And with the uncertainty about when Apple and Verizon will actually begin to reap significant revenues and profits, investors may be best served by spreading their bets around the telecom spectrum.

There are several exchange-traded funds (ETFs) that give a decent amount of exposure to the industry:

• Telecom HOLDRS (NYSE: TTH)
• Vanguard Telecommunication Services ETF (NYSE: NYSE: VOX).
• iShares Dow Jones U.S. Telecommunications Sector ETF (NYSE: IYZ).
• First Trust Morningstar Dividend Leaders Index Fund: FDL)

All of these ETFs have significant holdings in the telecom sector including integral exposure to Verizon.

For exposure to Apple and other innovators in the telecommunications industry you might consider adding technology ETFs.

While telecom is often a dividend play, technology offers relatively rapid earnings growth and a chance to ride a wave of merger and acquisition activity.

Together, telecom and tech give investors a "barbell" approach to the market: growth on one side, dividends on the other, according to MarketWatch.

There are nearly two dozen technology ETFs, including these long-only plays:

• SPDR Technology Select Sector ETF (NYSE: XLK)
• iShares Dow Jones U.S. Technology Sector Index ETF(NYSE: IYW)
• Direxion Daily Technology Bull 3x Shares (NYSE: TYH)

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• Consumer Reports:
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China's strong gross domestic product (GDP) growth and market liquidity allowed it to dominate, as issuers from Greater China (defined as the mainland, Hong Kong and Taiwan) made up over 46% of global IPO value. The region took in $117.9 billion, a 170% increase in total value over the same time frame in 2009. Save for the second-ranked United States, the leading IPO markets were all Asian, as Japan, India, South Korea, and Malaysia filled out the top six.

"Benefiting from relatively low interest rates in developed markets and abundant liquidity, global investors in the last 11 months have been avidly seeking exposure to the growth in Asia and other emerging markets. This trend is expected to continue," said Gregory K. Ericksen, Global Vice Chair for Strategic Growth Markets for Ernst & Young.

Top Three Deals Worth 25% of Total

The top three IPOs in 2010 were mega-deals that made up one-quarter of the value of total global IPOs.

The $22.1 billion privatization of the Agricultural Bank of China Ltd. was the world's largest IPO ever, and made up 9% of total IPO value globally this year, surpassing the $21.9 billion of another Chinese state-owned bank, Industrial and Commercial Bank of China.

Next in line was the $20.5 billion IPO of the Asian life insurance unit, AIA Group Ltd. in Hong Kong, a spin-off of American International Group Inc. (NYSE: AIG), which was followed by the $18.1 billion generated by U.S. automobile manufacturer General Motors Co. (NYSE: GM) after it emerged from bankruptcy.

Other highlights on the IPO front for 2010 included:

• Europe posted a massive 526% increase in capital raised during the first 11 months of 2010, compared to the same period in 2009.
  
  
• The top three business sectors for 2010 were financials with deals worth $74.9 billion, industrials at $52.7 billion and materials with $34.8 billion. Together the three accounted for 63% of total value.
  
  
• Eighty-six percent of global IPOs priced within their initial filing range, compared to a historical 10-year average of 74.3%.
  
  
• After unsuccessfully holding out for higher prices in 2009, private equity and venture capital firms caved in 2010, backing two-thirds of U.S. IPO listings, raising $39.5 billion - a 58% increase in value from the same period in 2009.

"Under pressure to release capital to investors and with limited access to credit, PE firms looked to public markets as an exit option, often accepting discounted valuations," Ericksen said.

China IPOs Notch Big Gains

China shut down its domestic IPO market for nine months through June 2009 as part of its efforts to cool its red-hot economic growth.

But since the market reopened, investors have been clamoring for shares, driving up initial offering prices. Domestic retail investors bought 80% of Chinese IPOs, reflecting a lack of participation by foreign investors.

Three of the top four IPO markets worldwide were located in Greater China in 2010.

Bolstered by the Agricultural Bank and AIA listings, the Hong Kong Stock Exchange dominated IPO markets in 2010, raising $61.2 billion or 24% of global proceeds. The Shenzhen Stock Exchange ranked second, raising $40 billion or 15.7% of the action, while the New York Stock Exchange came in third with $31.1 billion (12.2%). The Shanghai Stock Exchange ranked fourth, with 6.2%.

But Chinese offerings that reached U.S. markets were the biggest winners.

Mainland Chinese companies this year accounted for five of the 10 best-performing initial public offerings in the United States, although the No. 1 spot belongs to an Indian company - MakeMyTrip Ltd. (Nasdaq: MMYT), according to data compiled by Bloomberg News.

The best performing Chinese companies for 2010 were:

• Jinko Solar Holding Co. Ltd. (Nasdaq: JKS): +188%
  
  
• HiSoft Technology Intl. Ltd. (Nasdaq: HSFT): +175%
  
  
• China Lodging Group Ltd. (Nasdaq: HTHT): +82%
  
  
• SouFun Holdings Ltd. (NYSE: SFUN): +58%
  
  
• Camelot Info Systems Inc. (Nasdaq: CIS): +58%

Although listing on American stock exchanges requires meeting stricter accounting and disclosure standards, Chinese companies consider the rewards to be worth the trouble. Potential access to more capital and a New York Stock Exchange or Nasdaq ticker symbol are the main draws.

"It's the patina associated with the highest-standard marketplace in the world," Scott Cutler, executive vice president and head of listings for NYSE Euronext (NYSE: NYX) told The New York Times. "That means something when you're doing business internationally."

The feeding frenzy surrounding Chinese initial offerings has risen to new heights. Last week, six Chinese stocks started trading on the New York Stock Exchange and Nasdaq - the most ever in a single week.

Shares of Youku.com Inc. (NYSE ADS: YOKU), known as the YouTube of China, popped 161% in its first day of trading last week.

And e-commerce darling China Dangdang Inc. (NYSE: DANG), an online retailer being hailed as the Chinese Amazon.com Inc. (Nasdaq: AMZN), shot up 87% the same day.

Now, the staggering returns recorded by the Chinese companies that have gone public in the United States in recent months are raising warning flags for some analysts who say a bubble may be forming.

"If these IPOs continue to work, they'll play them until the merry-go-round stops," Scott Sweet, senior managing partner of the research firm IPO Boutique, told The Times. "And when it stops, it will stop with little notice - and it will be nasty."

Investor interest in Youku, for example, has dropped off. After an initial surge in the first trading days, the stock closed yesterday (Wednesday) at $33.30 a share, down 39% from its $50 high.

"Drinking the Kool-Aid - it's absolutely that," David Menlow, president of the research firm IPO Financial, told The Times. "When somebody on TV throws out the phrase, 'This is the Chinese equivalent of Amazon,' who's going to dispute its strength in an economy that just doesn't seem to want to stop?"

Chinese companies like Youku should be categorized as high risk, high reward, according to Menlow, who thinks many investors are star-struck by China's robust GDP and growing middle class.

American investors usually don't have much information about new Chinese companies, and the country is not known for its regulatory oversight of corporate activity and reporting.

"That is what looms in the shadows," Menlow says. "When one of these deals unravels because of accounting problems, restatements or anything that is going to eviscerate the foundation of the financials in a company, then we may end up having somewhat of a mini tsunami effect with the rest of the Chinese deals that are out there. It will be like dominoes that will fall."

News & Related Story Links:

• Ernst & Young:
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• New York Times:
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Contracts held by investors rose 12% this year through October and are 17% higher than June 2008, according to data compiled by The Wall Street Journal from the Commodity Futures Trading Commission (CFTC), the market regulator.

Speculative investors now make up a significantly larger proportion of the market than they did in 2008 in several commodities, including the $200 billion crude oil market, The Journal reported.

Investors have boosted their bullish bets on crude oil by 24% since June 2008, and now control 16% of the market, up from 13% little more than two years ago. Bets in the copper market are up 58% and have climbed 52% for silver, according to the CFTC data.

Meanwhile, prices for commodities have surged to new records. Gold is up 29% this year hitting a record just this week. Copper is up 22% and trading near its record high of $4.0775 per pound. Oil busted through the psychologically important barrier of $90 on Tuesday and silver prices are at 30-year highs.

Regulators take a dim view of excessive speculation in commodities markets, arguing that it can distort prices and make it harder for producers and users of commodities to manage their risk.  They say it also may negate fundamental investment factors like supply and demand.

Traders point out that there is no data to prove such activity can artificially inflate prices in the commodity markets.

The Dodd-Frank Wall Street Reform and Consumer Protection Act imposed a January deadline for the CFTC to set limits on how many commodity futures contracts in energy and metals a speculator can own. A similar regulation for agriculture markets must be in place by mid-April.

The agency has been collecting data on the over-the-counter market to piece together a framework for the new law, but has yet to announce a firm position on trading limits.

CFTC Chairman Gary Gensler has been pressuring other commission members to take a tough position on excessive speculation and told The Journal the position-limit plan could be considered at a meeting scheduled for Dec. 16.

"Speculative money from the likes of hedge funds, index funds and pension funds is coming into the commodity markets at a blistering pace," CFTC commissioner Bart Chilton said in a speech he made yesterday (Wednesday) at a conference in New York.

"If prices are skewed in a manner that is not fair by speculators, consumers can pay more than they should," he added, noting that while speculation may not drive up prices, it can distort them.

In 2008, riots broke out over food prices and the lack of available and affordable food.  The United Nations Food and Agricultural Organization (FAO) estimates that in 2007, 75 million people were added to the 850 million already defined as under-nourished and food insecure.

"Amidst the food price crisis, speculation is a major contributor to extreme price volatility, which is skewing agriculture commodity markets to such a degree that both farmers and consumers are losing out," the Institute for Agriculture & Trade Policy said in a report on the 2008 food crisis.

The European Commission (EC) yesterday followed in the footsteps of the United States, floating its own proposal to limit speculation in the markets, The Journal reported. The proposal is among a number of measures springing from a review to tighten trading regulations under the Markets in Financial Instruments Directive (MiFID), the EU's main securities trading law.

"I don't think there's any reason why we Europeans should be less rigorous than the Americans," Michel Barnier, the EU commissioner in charge of financial regulation, said at a press conference.

Among other proposals the MiFID review will include an examination of so-called "dark pools," or trades executed outside the regulated markets, and high-frequency trading systems, where hedge funds and traders make money on tiny discrepancies between the prices of different securities.

The commission said it may require the trading platforms to be fully regulated under MiFID, have "robust risk controls" and automated "circuit breakers" to prevent trading algorithms from causing market crashes, The Journal reported.

High frequency trading was widely blamed for last May's "flash crash" which caused markets to suddenly tumble precipitously.  But a report released in October by U.S. regulators blamed the slide on the sale of a large block of stock futures by Waddell & Reed Financial Inc. (NYSE: WDR), a mutual fund based in Overland Park, Kansas.

News & Related Story Links:

• The Wall Street Journal:
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• Wikipedia:
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• Institute for Agriculture & Trade Policy:
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• Wall Street Journal:
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• Money Morning Archives:
  Regulatory Reform
  
• Money Morning:
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The president said he agreed to the temporary, two-year extension of cuts for all income levels, because the country could not afford a political deadlock.

If the Congressional stalemate continued and led to a broad tax increase, "that could cost our economy well over a million jobs," President Obama said.

Republicans, such as Senate Minority Leader Mitch McConnell from Kentucky, welcomed the compromise, but several Democrats remain uncommitted to the plan and leftist activists initiated campaigns to kill it.

"House Democrats have not signed off on this deal," Maryland Rep. Chris Van Hollen, a member of the House Democratic leadership, told Bloomberg Television yesterday (Tuesday). "I have some serious reservations."

House Speaker Nancy Pelosi said Democrats "will continue discussions" with President Obama. She criticized some parts of the plan demanded by Republicans, especially extending the breaks for high-earners.  But she stayed away from saying she’ll lobby House Democrats to scuttle the deal.

Meanwhile, Republican leaders portrayed the deal as a positive for the economy and unemployment. 

"No one gets everything they want in a deal, but our top priority is to restore certainty to the private sector so that businesses small and large can start hiring again," House Whip Eric Cantor, R-VA, said in a statement.

Sen. McConnell also praised the deal and asked that Democrats in Congress now "show the same openness to preventing tax hikes the administration has already shown."

White House officials will descend on Capitol Hill to persuade Democrats to back the agreement, but without support from the left the president will need to call on Republican troops to get the bill passed before Christmas. The current tax rates were enacted in 2001 and 2003, and will expire at yearend, allowing higher rates to take effect for all taxpayers on Jan 1.

Besides extending lower rates on high earners’ income, the deal also sustains lower rates on dividends and capital gains for the next two years.

Other elements of the deal include a temporary reinstatement of the estate tax at 35% with an exemption for the first $5 million, cutting the payroll tax by $120 billion for one year, and letting companies claim 100% deductions on purchases of equipment and other investments.

"This compromise is an essential step on the road to recovery," said President Obama, who criticized Republicans for insisting on permanent tax cuts for the wealthiest Americans "regardless of the cost of impact on the deficit."

Altogether, the bill could add as much as $750 billion to the deficit over the next decade, according to data compiled by Bloomberg.

In order to get the bill passed, Democrats and Republicans would have to set aside budget constraints that they passed in February under a "pay-as-you-go" law.  The law was aimed at limiting Congress’s ability to expand the budget deficit with higher spending or tax reform.

Lawmakers are prepared to declare a budget emergency that would override the so-called "pay-go" law to finance about $300 billion contained in the bill that the law would not allow.

Despite all the political talk about deficit reduction and tough talk from a bipartisan budget commission, Washington insiders say the "pay-go" law won’t be a procedural or political obstacle to extending the tax cuts even without the required offsets in spending.

"I never think paygo is out the window, in my own personal view," Rep. Baron Hill, D-IN, told Bloomberg. "But any rate, that’s what’s going to happen."

Hill, who lost in a campaign for re-election last month, co-chairs the Blue Dog Coalition, a group of House Democrats that championed the pay-go law.

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"Developing clean, low-carbon energy is an international priority," Zhao Chengkun, vice-president of the China Nuclear Energy Association told Bloomberg. "Nuclear is recognized as the only energy source that can be used on a mass scale to achieve this."

And China's not the only country eager to join the nuclear party. The list of nations with the largest number of planned and proposed reactors includes India with 60 on the drawing boards; Russia with 44; the United States with 31; Ukraine with 22; and South Africa with 15.

The new plants will consume 32,900 tons of nuclear fuel according to a Morgan Stanley (NYSE: MS) report. That's almost half of the demand from the world's 443 commercial reactors.

China Stockpiles Uranium

For its part, China will be importing a lot more uranium. China will boost its imports by a factor of four to 50-60 million pounds a year by 2020, or 25-30% of total global demand, which stands at 190 million pounds in 2010, according to forecasts from UxC Consulting.

China only produces about 2 million pounds a year domestically, forcing the country to move aggressively to secure uranium supplies. State nuclear groups China National Nuclear Corporation (CNNC) and China Guangdong Nuclear Power Corporation (CGNPC) have signed long-term supply agreements with foreign miners, as well as pursuing joint ventures.

• France's Areva (PINK: ARVCF) will supply 52 million pounds to CGNPC by 2020.
• Canada's Cameco Corp. (NYSE: CCJ), the world's larges miner of yellowcake, will sell CGNPC 25 million pounds along with 23 million pounds to CNNC over the next 10 years.
• The state-owned nuclear power company in Kazakhstan will supply CGNPC with 63 million pounds by 2020.

China has stockpiled 17,000 tons of uranium over the last five years and may buy at least 35,000 tons more over the next decade to ensure the country has adequate supplies, Max Layton of Macquarie Bank Ltd. told Bloomberg.

China has been buying on the spot market, as well. Its imports so far this year have been equivalent to 20-25% of global uranium consumption, Layton told The FT.

These contracts will tie up considerable quantities of uranium, meaning there will be even less uranium for the rest of the world players.

"What seems to be happening is that it seems China is getting ahead of anybody else and building up a strategic stockpile before the Americans, Japan or Korea need to do their restocking," Ralph Profiti, an analyst at Credit Suisse Group AG (NYSE: CS) in Toronto, told The FT.

China's buying binge has contributed to a sharp rally in spot uranium prices. Spot uranium is now sitting at $61 a pound, a 50% improvement since June when it hovered at just over $40 a pound

"The Chinese bumped long-term forecasts for their nuclear build-out and although there is actually no physical demand it has totally changed the psychology," Laramide chief executive Marc Henderson told Bloomberg. "There has been a major movement in the spot price since September and I don't think anybody foresaw it."

Production shortfalls, which have forced miners to buy material on the spot market to meet their long-term contracts, have also tightened the market.

Supplies Boosted by Megatons to Megawatts

The supply profile for uranium is unique. In the short run, there appears to be plenty of uranium to go around. The long run, though, is another question entirely.

Since peaking at $136 a pound in July 2007, uranium prices tumbled 69% as companies boosted production, according to Saskatoon, Saskatchewan-based Cameco. At least 27 mines in nine countries began operating in the past 10 years, adding as much as 65 million pounds a year to global output, according to the firm's data.

But current uranium demand outstrips mined production by about 100 million pounds per year. The balance of the uranium comes from aboveground supplies - utility stockpiles, nuclear breeders and surprisingly, nuclear weapons.

After the Soviet Union imploded, the U.S. - under a pact known as Megatons to Megawatts — agreed with Russia to turn weapons-grade material from 20,000 warheads into nuclear fuel for use in commercial reactors.

The military materials supply about 50% of U.S. reactor fuel, according to the WNA.

"The United States is dependent on Russia for a significant portion of [its] nuclear energy. I don't think a lot of Americans know that," Robert E. Ebel, a nuclear analyst at the Center for Strategic and International Studies told the Council on Foreign Relations.

World uranium supplies were more than adequate as the Soviet-era warheads were scrapped, contributing to the drop in prices. But the agreement will run only through 2013 and soon after that, a serious supply shortage could develop.

Barring a disruption in production, supply is going to be in balance with demand until 2015, Russell Fryer, of Greenwich, Connecticut-based Baobab Asset Management whose investments include miners of the metal, told Bloomberg in an interview.

"After that, there will be a deficit because there won't be enough mines and current supply will diminish," he said.

In addition to the finite Cold War supply, uranium has its own version of peak oil. Virtually all the cheap and easy uranium deposits have been tapped. What's left are the hard and dangerous deposits located in politically unstable parts of the world, like Kazakhstan and Niger.

All of this is complicated by a flood at Cameco's Cigar Lake mine - the world's largest undeveloped high-grade uranium deposit with 232 million pounds of yellowcake. Damages from the flood will halt the start of production until 2011 - at the earliest. A fire at Australia's Olympic Dam mine is further constraining supplies.

Based on demand forecasts, mines will need to pump out 144 million pounds of yellowcake per year by 2020, nearly double current output. That's not going to happen, except at much higher uranium prices.

It's likely prospectors will redouble their efforts to find new deposits if prices continue to rise. But it typically takes up to 10 years from discovery to production to bring a large sized mine on line.

As Uranium Goes, So Go Miners' Stocks

All together, these factors are likely to push up the price of long-term uranium supply contracts, which account for the large majority of trade in the commodity.

Paladin Energy (PINK: PALAF), a uranium producer with mines in Namibia and Malawi, said in a filing that "initial base prices" for new long-term uranium contracts had "risen markedly," currently standing "at or above $80 per pound," according to The FT.

Also, refined uranium is only a minuscule part of a power plant's overall cost. It takes an upfront investment of about $2 billion to build a new nuclear power plant.

When you add in the maintenance and labor costs, laying out $100 a pound for uranium to keep your plant running is a really a drop in the financial bucket. Indeed, some analysts estimate that the price of uranium could skyrocket to $2,000 a pound and still be viewed as a viable energy source for plant operators.

And history shows that as prices for uranium go up the prices for the stocks of uranium companies go along for the ride.

If you want a pure play on an increase in the price of uranium itself, Cameco might be worth a look. It's the largest producer of uranium in the United States. The blue-chip miner announced recently that it had approved a 43% increase in its annual cash dividend and that it remains confident in the long-term potential for uranium.

If you're looking for more safety and diversification, there is a uranium exchange traded fund - Uranium Participation Corp. (TSE: U) - trading on the Toronto Stock Exchange.

Rio Tinto PLC (NYSE ADR: RTP) and BHP Billiton Ltd. (NYSE ADR: BHP) could also fill the bill. Both have huge mining operations with large uranium deposits. Both have skilled management teams and offer engineering savvy. And both stand to reap substantial profits from any price surge in yellow cake.

News & Related Story Links:

• Bloomberg:
  Nuclear Boom in China Sees Reactor Builders Risk Their Know-how for Cash
• Market Oracle:
  Investors are Making Huge Gains from Uranium
• Financial Times:
  China's reactor plans power up uranium
• Bloomberg:
  Uranium Hits Highest Since Aug. 2008 on China Demand
• The Australian:
  Expectation of Chinese demand drives up uranium price
• Council on Foreign Relations:
  Global Uranium Supply and Demand
• Bloomberg:
  Uranium Supply to Fall Short of Demand After 2015
• Money Morning:
  China Stockpiling Uranium in Rush to Build More Nuclear Plants