Buy, Sell or Hold: Buying Into Brazil by Betting on Vale (NYSE: VALE)

On Oct. 27, 2008, I strongly recommended that Money Morning readers invest in the Brazilian stock market through the iShares MSCI Brazil Index Fund (NYSE: EWZ).

It was a momentous decision. The U.S. economy and the global financial system seemed to be coming to a precipitous end.

The day before Money Morning published my lengthy analysis and recommendation, The New York Times published an editorial by the newly anointed economics Nobel laureate Paul Krugman, entitled "The Widening Gyre." Krugman in that editorial criticized those of us who believed emerging economies would decouple from the financial melee that was wrought by the over-leveraged and imbalanced developed economies.

"The really shocking thing, however, is the way the crisis is spreading to emerging markets - countries like Russia, Korea and Brazil," he wrote. And he derided the notion of "the supposed ability of emerging market economies to keep growing even if the United States fell into recession.... Now the emerging markets are in big trouble."

However, the Friday prior to his article, I was jumping out of my seat feverishly writing the article for Monday recommending Brazil, and especially its two flagship stocks: Vale (NYSE ADR: VALE), and Petroleo Brasileiro SA (NYSE: PBR), more commonly known as Petrobras. EWZ surged 31% in the three days following my Brazil recommendation. One year later, I recommended taking profits by selling 50% of the position, which had run up 110%.

China on Monday revealed that Vale is a core holding in it's the portfolio of its $300 billion sovereign wealth fund, China Investment Corp. (CIC). In fact, CIC last year took a $498 million stake in the U.S.-traded stock of the Brazilian miner. And it is unlikely to let any of that go for many years.

That's because China not only seeks to diversify its vast U.S. dollar reserves, but also because of its strategic need to gain access to natural resources. Each year the growth in Chinese demand for steel equals about the combined entire production of Mexico and Canada. And Vale is the largest producer of iron ore in the world.

But that's not all. With its acquisition of Canada's Inco - the world's largest producer of nickel - Vale has become a one-stop shop for steel producers.

Prior to the financial meltdown the world was enjoying unprecedented economic growth that, which I called "global synchronic growth." I could not think of a time when all of the world's major economic blocks and emerging economies grew at such a strong pace simultaneously. And that growth resulted in a huge increase in demand for raw materials across the board, from copper to iron ore.

Moreover, China's emergence as an economic power, with growth rates north of 10% per annum, was like a huge vacuum sucking up commodities from around the globe. And in addition to driving up demand for steel, China transformed its whole society. Millions of Chinese people fled the countryside, and poured into cities looking for a better future.

About 18 million people - a number larger than the entire population of Chile - enter the workforce in every year in China. And these people demand housing, buses, trains, cars and appliances. China is already the largest car market in the world, and with its massive infrastructure push, the country's steel demand is advancing at double digit percentages.

This year, going into national presidential elections on Oct. 3, Brazil's economy will accelerate even faster, despite some measures from the government to try to reduce "bubble-making" capital inflows.

Now, every year a strange dance occurs: Vale sits down with the largest steel customer in the world and sets the contract price for iron ore for the year. Once this price is announced, the rest of the producers reach agreements with their buyers.

BHP Billiton Ltd. (NYSE ADR: BHP) and Rio Tinto PLC (NYSE ADR: RTP), who ship from nearby Australia, typically demand, and get, a premium price based on their lower shipping costs. But Vale is already starting to counter this by building eight huge iron ore ships and a mammoth distribution center in Qingdao, which will cut its shipping costs by 30%. The company also is signing some long-term agreements with the Chinese at undisclosed prices.

Going into negotiations that should be in place by April 1, and with strong demand, contract prices could increase strongly. Already, the main iron ore producers have cut back on deliveries to the spot market. This, coupled with the surge in demand, has resulted in a spot price of more than double the contract prices of 2009.

So, we should expect strong gains in price negotiations this year, which will favor Vale. And the reacceleration of the global economy should continue in 2011.

So, given that the recent Greek crisis has provided a very nice dip in the stock, taking it to oversold levels, I am ready recommend Vale once more.

Recommendation: Buy Vale (NYSE ADR: VALE) at market (**).

(**) Special Note of Disclosure: Horacio Marquez holds no interest in Vale.

[Editor's Note: Success as an investor isn't based on what's hot today.

It's really based on the anticipation of what will be hot tomorrow.

Gold is one of the hot commodities of today. But the shrewdest investors will look toward the horizon, and try to project just what the commodity profit plays of the future will be.

If you need help, just ask Money Morning's Horacio Marquez.

As worries about oil escalate - whether those worries are about future supplies, future prices or global-warming - more and more muscle is being placed behind alternative power technologies. That's especially true in the hybrid vehicle market, where a specific technology has emerged as the clear leader.

The technology is lithium-based rechargeable batteries, and its emergence is sending lithium demand skyrocketing.

The profit potential of this market is stunning - but only for investors who can figure out the right way to play it.

Here's the thing: Marquez - a Money Morning contributing editor who also edits the Money Map VIP Trader - has uncovered the lithium-tech leader. This company is a global player with a solid market cap and is well known within the hybrid industry. But surprisingly few investors know about the company, or have ever even heard its name.

To learn more about this company - to get in ahead of the masses - and to find out more about Marquez's Money Map VIP Trader, please click here.]

News & Related Story Links: