As industrial markets have fallen over the past two years, companies previously bought hand-over-fist due to strong international presence have been put in their place; diversified product portfolios have become recession backfires; cost-restructuring plans and management shakeups have become costly uncertainties and cash has become the world's most valuable commodity. Despite the negativity, markets over the past few months have shown major signs of improvement as economic indicators from construction spending to consumer confidence continue to get “no worse.”

When we consider economic troughs, it is important to invest in companies with major exposure to the early-cycle. Our greatest conviction buy from the industrial sector of the market has been in 3M Corp.(MMM), an industrial conglomerate that manufactures everything from Post-It Notes to eco-friendly plasma television components. Companies like 3M with order books typically running a short 30-day time span will have major success through recovery periods, periods that typically propel equities higher for 3-4 months. To fully capture gains, it is prudent to look to companies like 3M for exposure to upside momentum in trading.

Invest When No News Is Bad News

Today’s markets maintain a level of anxiety that another leg-down is coming, namely the notion that we may revisit our former lows of March. As the more bullish investors continue to invest in financial and IT names, it would seem that the vast majority of market movers are taking profits off of the table in the industrial sector of the economy. But while the money seems to be rotating out of the early-cycle names that seem to have gotten ahead of themselves, many of which are up considerably from the bottom, I reiterate that there remains significant opportunity in cyclical-aerospace.

Over the length of the past stock market rally, industrial names enjoyed tremendous gains from the March lows. As one of the sectors to bounce back the strongest, many names like 3M (up over 40% from its lows) (MMM), General Electric (popped over 115%!) (GE) and Caterpillar (over 80% increase) (CAT) have been the darlings of the bulls. Some of the largest gains off of the 2-month stand have been made in industrial names… while similar gains were to be had in financials, information technology, energy and materials. If all of these groups have momentum, why has a shadow been cast on industrials?

After a recent market rally to new short-term highs in the Dow Jones Industrial Average, investors should start shifting their strategy to position for future growth in the international economy. Clearly, if the recent rally has shown us anything, it is that investors still believe that there is a fundamental reason to hold equities despite horrendous conditions. As bad news continues to pour in, we should concentrate on re-positioning for an eventual global recovery. To do this, I turn your focus to some historically strong global conglomerates that are at attractive levels in a suppressed market.

The Thesis for Investing in an Anticipated Recovery

On Tuesday, options trading on General Electric was very hectic. Recently, we’ve seen investors continue to bet on the untimely demise of this American industrial bellwether. According to OptionMONSTER, we saw a flurry of activity toward June 2.50 put options on Tuesday, March 3rd. Moving deeper into this figure, normal levels would yield volume of 41,963 contracts, but we saw a staggering volume of 81,740 contracts traded on the day. As GE (GE) leads the financial sector lower, the question remains… should GE be leading the financial sector lower!?

There are no two ways about it, General Electric is far off of its historic highs in the low $40s, as shares closed Tuesday at a mere $7.01 (after falling to a low of $6.85 intraday). Perhaps we can admit that much of the sell-off was for good reasons. Heck, we can fairly classify the company as a sub-$15 equity holding in this environment. But is GE under $10 a case of severe pessimism that should be largely regarded as a buying opportunity and a blessed valuation from a pained market? Or are we simply facing yet another value trap?

One of the major themes of 2009 to this point has been investor speculation on global infrastructure. With the recent $787 U.S. stimulus package signed into law by President Barack Obama, analysts are at a crossroads in looking where to invest to get the best exposure to bailout money. But where exactly is the money going to be? After digging into the stimulus, it seems to me that all signs are pointing to the road and water infrastructure as leading areas of the package.

If you want the “pure play” on this plan, one needs to look beyond the larger companies and focus on the smaller market cap, more niche, investments in infrastructure. Having a look into the “water” space can yield some big winners as the global water shortage scare starts to take effect in the face of huge capital injections into deserving companies. Small market cap companies in the stock market could have big advantages as money starts to pour into the system.

With the S&P Industrial sector down 38.5% for 2008, investors have for the most part steered clear of this manufacturing-driven area of the market. With housing companies relying on things like transportation, volume, government spending and fresh construction projects, it’s hard to imagine that there is high confidence in the the air.

Many made the mistake of overweighting industrial companies on a valuation basis in the fall of 2008, and major losses were incurred as a result. Now, in the new year, is the global picture really as bad as it has been made out to be? I believe the answer is “probably not,” and encourage you to consider industrial companies in 2009.

One of the most pressing issues facing the United States centers on defense spending amid a global meltdown and a national deficit that has literally become out of control. With capital injections coming on an almost daily basis, can America continue to spend on defense? Will the new political party thwart all hope of military expansion? Fourth quarter earnings are coming in now, so it’s time to find out how we fared.

The top-tier defense companies are all tied into different markets. As such, the risks are different across the board and we have far-ranging estimates to the upside and downside on these companies… depending on where they are. I want to highlight the recent earnings from United Technologies and Lockheed Martin, and then get into a forecast of General Dynamics, Raytheon and Northrop Grumman.

In the transportation business, the primary concern has been fuel costs for the past two years. This situation has changed. With a renewed focus on volume strength (level of material shipped around the country) in this depleting macroeconomic environment, many of the same rails that saw buying momentum from the 2008 commodity spike are being absolutely "de-railed" by renewed concerns amid collapsing volumes. While the major railroad companies have been able to beat expectations for the year, is there any reason to be optimistic going forward?

Every week, the Association of American Railroads ((AAR)) releases updated volume trends in the form of a weekly carload report. While many of the readings have been sporadic (to say the least), the overall theme is of disappointment. Most recently, on December 11th, the AAR announced that carload freight was down 8.5 percent from the same week in 2007, with intermodal shipments bucking the downward trend at 9.8 percent in the red. This comes somewhat as a surprise from companies that were, for the most part, bullish on the future of volumes from just under a month ago. Clearly, the global slowdown is putting downward pressure on carloads… but let’s not panic; to this date, shipments are only down 1.5 percent from last year’s period.

Take what you’ve heard about the effects of a Barack Obama U.S. Presidency… and throw it away. The defense contractors are in the best spot that I have seen them in years, yet still-cautious investors are making all the wrong moves. The recent turmoil in the sector has led to some unbelievable valuations in the face of a global arms race, a continued surge in national security spending and regional conflicts that should continue to form opportunities for all of the major defense names.

Looking at a Year-to-Date comparison between the S&P 500 Index (SPY) and the SPADE Defense Index yields a difference of about 6%, in favor of the S&P. Why? Investors have historically flocked to the defense names because of their steady and weather-resistant revenue streams during hard times. We are actually in a war. Yes, in a war. Also, we get news every day of events like the Mumbai attacks, which should naturally support a defensive thesis, as it did post-9/11. As big-name contractors like General Dynamics (GD) and Raytheon (RTN) continue to produce estimate-topping earnings numbers, while raising guidance (despite big headwinds), the market has largely ignored their success… and I believe it’s time for a pop.

If you have been an active investor in the markets, chances are you have come across the insane volatility surrounding the bulk shipping companies of the world. As an industrial-minded investor myself, it’s hard to look away when you see a fundamentally strong company 60% off its highs, and offering a 25% dividend yield (or more!). It might come as a bit of a shock when I say: stay away from the bulk shippers!

Expect Third Quarter Earnings to be a Mixed Bag

Sometimes in the stock market we find a company that has been absolutely dismantled just for being in the wrong place at the wrong time. As the housing market has slipped, the “heavy construction” industry has been hammered by false accusations of an involvement with residential building projects. One of the more profitable long-term investing strategies is to buy a best-of-breed stock in a beaten down industry. Foster Wheeler (FWLT) [38.30, (0.00%)] is my ace in the hole.

We all know of the run-up from the commodity / crude oil bubble over the first half of 2008. Now that many investors and traders are giving up hope, the entire energy and commodities sectors have been crushed. So here’s where Foster Wheeler fits into the equation. FWLT specializes in the construction and engineering of oil & gas, oil refining and liquid natural gas plants. In addition to this, they have a strong hand in some high-flying industries, building complex plants and specialized buildings for companies in petrochemical, chemical, bio-pharma, pharmaceutical and power generation businesses.

Chances are, when you think of Precision Castparts (PCP), you are reminded of the recent 8-month slide brought about by the fear of Boeing’s (BA) “Dreamliner” 787 delays, a gut-wrenching crude oil pricing environment and a supposed slow down in the aerospace cycle. Investors have been quick to lump Precision Castparts in with the fall and subsequent consolidation found across all major airlines, as well as problems among Industrials companies in handling higher oil costs. In reality, PCP cannot produce its product fast enough to meet order demand and is seeking further expansion.

Before I launch into an investment rationale for Precision Castparts, I want to discuss briefly what it actually does. Precision Castparts is best known for manufacturing metal components for large finished products like jet engines, industrial gas turbines, pumps, compressors and even artificial hips. Its revenues come primarily (50-55%) from the aerospace market with the sale of its forged products for plane engine components.

Shares of industrial crane powerhouse Manitowoc Co. (MTW) [27.02] have been on a slippery slope ever since rumors of a deal to acquire Enodis surfaced. Following confirmation of the rumors, and an announced deal at $2.4 billion, Manitowoc shares are 47% off of their 52-week high. Despite all this, Manitowoc had been reaffirming guidance throughout the decline… insisting that higher input costs would be offset by surcharges on shipments dated after June 1st. But investors simply never regained confidence in the company.

Manitowoc completely silenced all fears with a record-breaking earnings release on July 28th, 2008. Despite less than stellar showings from industry peers Oshkosh (OSK) [18.77] and Rockwell (ROK) [45.42], Manitowoc managed to blow away consensus estimates of $0.89 with a second quarter showing of $0.99. Earnings were up 37%, lifted by surging oil prices that prompted increased spending on projects requiring Manitowoc cranes. To go along with impressive numbers, MTW raised the midpoint of their full year earnings forecast by $0.10.

In a week marked by a furthered short-term collapse of oil and a stronger U.S. dollar, the gold market saw prices drop off by $40 to settle near $925 an ounce. Investors seem quick to point the finger at the commodities market, using any sign of weakness as a cause for a stock market rally, but is the gold rush of late actually winding down?

It’s been a roller coaster ride by all means in the U.S. economy over the first two quarters. With the stock market sent into bear market territory, precious metals like gold and silver have soared to new highs before experiencing a recent correction ranging from 10% to 20%. Since hitting an intraday high at $1,033 an ounce on March 17th after a horrific Bear Stearns bailout, things have been range-bound in the gold market as prices have drifted in the mid-$800 to mid-$900 levels. I believe this trend is bound to break to the upside very soon, and I want to be invested when that inevitably happens.