CHART OF THE WEEK: A MAJOR NEW LOW FOR COPPER

Our chart of the week displays the past six month's action in the July 2010 NYMEX copper futures. This is the most liquid futures contract trading in America right now.

We watch copper because it's a major ingredient in cars, houses, appliances, electronics, and power grids. This "in everything" attribute makes the copper price an excellent indicator of what's happening in the global economy.

Copper enjoyed a huge "stimulus" rally in 2009. Then, as you can see from the chart below, the metal suffered a correction along with most all assets in January (A). This correction took copper down to $2.88 per pound. Copper then staged a rally into the $3.60 area (B). But in the past month, copper has sold off heavily… and just yesterday, it violated that past low (C). Trend traders call this action a "downside breakout."

As we mentioned on Wednesday, the great investment question of the summer is: "Was the May selloff in stocks and commodities the start of hard times to come? Or just a correction to the intact rally?"

We don't like being the bearer of bad news, but we must note that further weakness here answers that question with, "There may be hard times to come."

Debt crisis spreading: Hungary in "very grave situation"

Hungary’s economy is in a “very grave situation,” a government official said, adding to concern about Europe’s sovereign debt crisis, weakening the euro and pushing the forint to a 12-month low.

“It’s clear that the economy is in a very grave situation,” Peter Szijjarto, spokesman for Prime Minister Viktor Orban, said today in Budapest. “I don’t think it’s an exaggeration at all” to talk about a default.

The comments sparked concern that Europe’s debt crisis would spread to eastern Europe. European governments crafted a 750 billion-euro ($904 billion) financial backstop for the euro area last month after Greece’s widening budget deficit threatened to shatter confidence in the single currency.

Hungary is “in no way near default,” former Finance Minister Peter Oszko said today. Public debt was 78 percent of gross domestic product last year, compared with 115 percent for Greece. The new government’s communication is “part of short- term political tactics,” and loosening fiscal policy “would escalate panic” among investors, Oszko said in an interview.

Orban, who took office May 29 after winning elections with pledges to cut taxes and stimulate the economy, yesterday failed to get European Union approval to widen the budget deficit.

“I’m staggered by these comments,” said Tim Ash, global head of emerging-market research and strategy at Royal Bank of Scotland Group Plc, referring to Szijjarto’s statements. “It’s ridiculous, remarkable and extremely dangerous. What message does this send to foreign bondholders? You will look to protect your investments.”

Forint Falls

The forint fell as much as 2.8 percent and was down 1.8 percent at 286.71 per euro as of 5:06 p.m. in Budapest. The currency dropped 2.5 percent yesterday after Lajos Kosa, a deputy chairman of Orban’s Fidesz party, said Hungary had a “very slim” chance to avoid a Greece-like situation. The benchmark BUX stock index fell 4.4 percent, and credit-default swaps on Hungarian government debt rose 69 basis points to 391.5, according to CMA DataVision.

Societe Generale SA, Unicredit SpA and Raiffeisen International Bank Holding AG led European banks lower on concern the sovereign-debt crisis may spread to Hungary and other central and eastern European countries.

Societe Generale fell as much as 9.1 percent and traded down 7.7 percent at 31.54 euros by 4:54 p.m. in Paris. Raiffeisen dropped 8.4 percent to 31.12 euros in Vienna, and Unicredit declined 4.9 percent to 1.572 euros in Milan.

The previous government, which pledged to narrow the budget gap to 3.8 percent of gross domestic product this year, “manipulated” figures and “lied” about the state of the economy, Szijjarto said.

‘Moment of Truth’

A fact-finding panel appointed by Orban’s government will probably present preliminary figures on the state of the economy this weekend, Szijjarto said. The government will prepare an action plan within 72 hours after the report, based on its findings, he said.

“The moment of truth has already arrived in Greece and it has yet to come to Hungary,” Szijjarto said. “The government is prepared to avoid the road that Greece has been down; in other words, we won’t hesitate to act after the truth becomes known.”

Hungary, which needed a bailout to avert a default in 2008, is in its fifth year of cost cutting and reduced the deficit to 4 percent of GDP last year from 9.3 percent in 2006, the EU’s widest at the time.

‘Uncomfortable Measures’

Orban has vowed to end austerity and cut taxes to accelerate economic growth after the worst recession in 18 years. He pledged to “fight” the deficit after meeting European Commission President Jose Manuel Barroso yesterday.

The government may be preparing to backtrack on earlier commitments, said Zoltan Torok, an analyst at Raiffeisen Research in Vienna.

“The doomsday words of Fidesz politicians about the dire state of the budget are designed to cool down the expectations of the voters and to prepare them for potentially uncomfortable measures,” Torok said in a note to clients.

Hungary’s debt level may reach 79 percent of GDP this year, on par with Germany and making it the most indebted eastern EU member, according to the European Commission. The forecast compares with 80 percent for the EU as a whole, 86 percent for Portugal, 118 percent Italy and 125 percent for Greece.

“Investors are losing their patience,” Gyorgy Barta, a Budapest-based economist at Intesa Sanpaolo SpA, said in a phone interview. “This is part of a communications strategy that wants to tell voters one thing and the markets another. It’s getting too complicated, and the government now needs to come clean and present a convincing plan of fiscal consolidation.”

Szijjarto said Hungary will seek to improve the fiscal balance and boost the economy’s competitiveness at the same time. The government won’t give up plans to lower taxes, even if the budget deficit is about 7 percent of gross domestic product, as State Secretary Mihaly Varga indicated earlier.

“The directions are clear: tax cuts, simplifying the tax system, supporting economic growth and boosting competitiveness,” Szijjarto said.

CHINA'S STOCK MARKET IS IN THE DANGER ZONE

On Wednesday, we looked at diesel engines for clues regarding the global economy. Today, we look at the world's manufacturing engine: China.

Since freeing up its economy in the early 1980s, China has become world's workshop. Last year, it surpassed Germany as the world's top exporter of goods. This manufacturing growth has vaulted China into the No. 2 spot in crude oil consumption and the No. 1 spot in copper and iron ore consumption.

All of these "world's top" titles make it a critical market to monitor. As we detailed last month, worries about China's overheated economy and real estate malinvestment sent the "Dow Industrials of China," the Shanghai Composite index, below its September 2009 low and into bear market territory.

Since that horrible stretch, the Shanghai index has held steady in the 2,600 range. The bullish crowd needs this small "toehold" level to hold up under the selling pressure. A break below 2,600 and into the low 2,000s will be an awful signal of what's to come for the world's workshop.

North Korea: War could begin "at any moment"

A North Korean diplomat today said war on the Korean peninsula could begin at any time over accusations that the government in Pyongyang ordered the sinking of a South Koran warship.

“The present situation is so grave that a war may break out at any moment,” Ri Jang Gon, North Korea’s deputy ambassador to United Nations offices in Geneva told a conference on nuclear disarmament there, according to a text of his remarks provided by the UN.

He said South Korea’s accusation was the “sheer fabrication” of “authorities who are in desperate need of creating a shocking incident” to block North Korea’s development.

South Korea has blamed North Korea for the March 26 sinking of the Cheonan, which killed 46 sailors. The two nations have traded accusations and threats of military retaliation since an international panel that included experts from the U.S. Australia, the U.K. and Sweden concluded that the North was behind the sinking.

Threats of war by North Korea carried by the state-run Korean Central News Agency are common. A March 26 report warned of “unprecedented nuclear strikes” against enemies while a June 9, 2009, bulletin warned of “merciless strikes” using the country’s nuclear deterrent.

THIS STOCK WILL BE A GREAT TRADE SOMEDAY

One of the best friends a trader can have is the "blood in the streets" selloff in a given asset class.

After that kind of devastation, a trader can buy low… and sell much higher during the explosive move when things finally go from "bad to less bad." It's a phenomenon that allowed us to go three-for-three in picking 100%+ winners with our December 2008 rebound-trade series (gold stocks, infrastructure, and emerging markets).

We bring up "blood in the streets" today because this is the situation in the oil drilling sector right now. A general decline in oil prices, plus the Deepwater Horizon explosion, has hammered even the bluest of blue-chip oil drillers. Most are down 30% to 40% in the past month.

One driller we'd like you to add to your watch list is Transocean (RIG). RIG is the world's largest offshore drillship operator… and the Deepwater Horizon was RIG's ship.

As you can see from today's chart, the stock has suffered a huge fall in the past month, down from $90 per share to less than $50. According to analysts who follow the stock closely, RIG has no "company killer" legal exposure to the Gulf debacle. And while the U.S. may ban offshore drilling, over the long term, we know China, India, and Brazil would love to see those drillships working for them. Now if that knife would just stop falling…

THE HIGH-HORSEPOWER RALLY IS LOSING STEAM

The great investment question of summer 2010: "Was the May selloff in stocks and commodities the start of hard times to come? Or just a correction to the intact rally?"

Our take: Chances are it's a correction in a bigger uptrend. But we can't know the future… So we're looking for clues from "real world indicators" like Cummins (CMI).

Longtime DailyWealth readers know we follow CMI because it's the world's leading manufacturer of high-horsepower diesel engines… the kind that power long-haul trucks, bulldozers, mining equipment, and generators. These are the machines that build the world. And since CMI powers them, its profits and share price are extremely sensitive to global economic activity.

In response to the huge government stimulus efforts, CMI shares skyrocketed from $20 in March 2009 to a recent high of $75. But this rally is losing steam… and CMI has bounced between that high of $75 and lows in the mid-$60s.

The stock market tends to look ahead by several months… so keep an eye on the new mid-$60s, mid-$70s "box" for CMI. A break below the mid-$60s signals the global economy is getting weaker. A break above the mid-$70s signals things are still humming along.

STAY LONG GOLD STOCKS

You could call today's chart "great news for owners of gold stocks."

Last month's market decline smashed nearly every kind of resource stock you can think of… oil stocks, copper stocks, iron ore stocks, coal stocks, and agriculture stocks all sold off heavily. Gold stocks, however, have held steady.

Today's chart shows the past two years in the big gold stock fund, GDX. It's one of the largest and most diversified ways to take a position in gold stocks. Big miners Goldcorp, Newmont, Barrick, and AngloGold Ashanti are major holdings in the fund.

This fund suffered a huge decline during the 2008 credit crisis. Then, as predicted in our December 2009 "rebound trade" series, GDX staged a huge rally. And in the upper right of the chart, you'll notice GDX barely budged last month as stocks of all stripes were taken to the woodshed. When an asset as volatile as a gold stock holds steady in the face of widespread selling, it's a bullish sign for the future. Stay long gold stocks.