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Why Aggressive Investors Need to Revisit Basic Materials

Huge upside, minimal downside

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We’ve now arrived at a critical juncture in the investing road. Aggressive high-yield investors must now hold their noses and take the plunge into what has been forbidden territory during the past year: The basic materials sector.

This is the deepest of cyclical sectors and is made up of the companies that have some of the ugliest charts around. But if you like a Cinderella story, then this is the place for you.

Earnings season, which is now under way, always is ushered in by Alcoa (NYSE:AA), the global aluminum maker and Dow component. It missed earnings estimates by 1 cent but beat revenues estimates handily, and money poured into companies, such as AA, that are most leveraged to a global economic rebound. That’s where some of the biggest potential gains can be captured if the economy is really turning up and not just giving us another false start.

Not to be outdone, shares of potash fertilizer maker Mosaic (NYSE:MOS) pushed higher after cruising through earnings estimates last week. Institutional investors saw these reports as investment-worthy news — subsequently buying related companies and assets that also could surprise to the upside on earnings.

Is this a trend? There’s no way to tell yet, but the early indications are quite positive. Let’s take a look …

For starters, optimism is growing that China will orchestrate a soft landing from its torrid growth rate of 10%-plus, to a more sustainable 8% GDP in 2012. Also, Chinese interest rates and incentives for lending by banks are easing, just in time for a pivotal election year for the communist party.

That tight-fisted government needs to add this splash of capitalism to remain in power while seeking the perfect balance of growth and inflationary pressures within the world’s largest emerging market.

So far, it looks like the Chinese Finance Ministry will pull it off. The government has no debt, $3.2 trillion in cash and $6 trillion of OPM (that’s “other people’s money,” as in U.S. Treasuries) to stimulate the economy and secure currency leverage at the first whiff of trouble.

The bottom line: China has the ball and can do what it wants with whomever it wants at this point.

But you’re probably wondering what China has to do with any of this. Well, I’ll tell you …

Article printed from InvestorPlace Media,

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