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Small-Cap Commodities Ready to Reinflate

OTD, PEIX, CPRK On Launching Pads

Here we are, amid another round of reinflation efforts by governments across the globe, and people are beginning to buy into it…so don't let the 4% sell-off in crude and gold's drop to two-week lows catch you offguard.

Even though many economies continue to struggle, investors are looking ahead to a time when the massive rescue efforts by central banks and governments gain traction.

In fact, the shift from traditional recessionary positions to raw materials and commodity-related stocks has already begun.

Until a few weeks ago, investors weren't even thinking about preparing for a recovery, hoarding cash and U.S. Treasury bonds and defensive stocks that would perform better than most in a recession.

Energy stocks are part of the reflation trade thesis and – down the road -- offer a hedge against inflation. After all, oil is priced in dollars, meaning that as the greenback falls, black gold rises.

Hopes for a second-half recovery have already lifted the price of a barrel of oil to around $69. Just a few months ago it struggled to break past $40.

While crude-oil prices are half of what they were last summer after setting an all-time record of $143 a barrel, they are up 100% from their low of $33 hit on Feb. 12 and certainly go much higher.

Think about this:  If worldwide GDP momentum recovers to its normalized rate of 4.5%, you tap into OPEC's reserve margin of 3 to 4 million barrels a day by at least 1 million barrels a day per annum. China could take up to an additional 500,000 barrels annually. Non-OPEC oil supply has peaked, and right now, exploration budgets stand far below a year ago when oil was pushing $150 a barrel.

As the rally moves forward, that fuels continued optimism in the economy. As we relax through summer and vacation season, energy use grows and that bodes well for energy stocks.

SPDR Energy Select Sector (NYSEARCA:XLE), whose top holdings include ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX) and Schlumberger (NYSE:SLB), offers broad exposure to the energy business. It’s up 13% over the past three months. Any falloff will offer a more compelling entry point.

After being hammered in 2008 emerging markets are back on a tear -- the MSCI Emerging Markets index is up about 50% since early March, moving under the assumption massive stimulus plans from the U.S. to China will re-inflate the global economy.

Every portfolio needs to have exposure to the reflation trade, and emerging markets, especially Brazil and China.

Also, long considered a global power in agriculture and natural resources, Brazil has added a key ingredient that had eluded it: a currency with staying power. As a result, the greatest burst of prosperity the country has witnessed in three decades has been unleashed, attracting foreign investors by the score and providing a growth engine for a flagging global economy.

Try on a couple of these ethanol industry stocks for size:

02Diesel Corporation (AMEX: OTD) began operations in Brazil in 2004 through its 75%-owned subsidiary, O2Diesel Químicos Ltda. It develops additive products that help fuels burn cleaner by adding ethanol. 02Diesel’s main product is called O2D05 — a fuel additive that can be made from soybean oil, vegetable oil or animal fats. It is designed to stabilize blending of fuel grade ethanol with diesel fuel, with the end result being a clean burning fuel called 02Diesel.

Pacific Ethanol Inc. (NASDAQ: PEIX) makes corn-based ethanol, and also sells products generated from the manufacture of ethanol, such as grain and carbon dioxide. Pacific sells its ethanol through its fuel-marketing subsidiary, Kinergy Marketing.

There is no bigger piece of the reflation-trade puzzle than basic materials. The rise in copper, steel and other metals were partly driven by China, which had pledged nearly 75% of its $586 billion fiscal package to infrastructure development.

China’s efforts have rippled through to the markets for at least a few metals. Prices for copper, commonly used in power generation and construction, are up 44% from the low hit in December. Zinc, needed for producing galvanized steel used by utilities and the auto industry, is up 24% from its low.

China’s refined-copper imports soared 99% in February from a year ago, perhaps indicating that “they want to have the material available” when infrastructure projects start.

How’s this for a copper play? Copper King Mining Corporation (CPRK) and its wholly-owned subsidiary, Western Utah Copper Company, have just announced that they have entered into a tentative agreement with RBS Sempra Metals & Concentrates, LLC on behalf of The Royal Bank of Scotland PLC, to sell 100% of the copper concentrates produced at the WUCC Milford project. This agreement, when fully executed, will supersede or replace any other prior sales agreements relating to copper ores or concentrates.

Copper King controls over 59,000 acres of advanced-stage and development-stage mineralized acreage in Western Beaver County, Utah. The Company is ramping up production at a 5,000 ton per day capacity flotation mill for processing high-grade ores from its Hidden Treasure copper-gold-silver mine and other controlled properties under its control..

A relative newcomer to the copper scene, it traded up 22% today to $0.92 on volume of 30 million shares.

Also, in breaking news Monday, Calgary-based Antrim Energy (TSX: AEN.TO) announced that it has been offered Block 21/24b in the UK North Sea as part of the 25th Seaward Licencing Round.

The block was awarded to Antrim on a 100% working interest basis, and is in the company’s core area around the Fyne Field in the Central North Sea. Antrim was previously awarded five blocks in the 25th Round, three of which are in the Fyne area.

The company says Block 21/24b will add approximately 36,000 acres to its asset portfolio in the area, and seismic processing will be completed and a contingent well will be drilled during the initial four year term.

The commodities storm may not have hit yet, but when it does, you will benefit from the four stocks above.

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