Our outlook for the machinery sector is increasingly one of caution. We are beginning to see U.S economic weakness and the credit crunch negatively impact International markets.

Japan's machine orders have fallen for two consecutive months, with a huge 14.5% decline in August. China Petroleum & Chemical Corp., or Sinopec (SNP) plans to cut its oil imports for the fourth quarter of 2008, which portends of slower manufacturing activity ahead.

As foreign economies deal with weaker exports to the U.S and Europe, industrial customers are cutting back on capital spending. Equipment orders are decelerating in almost every end market -- from machines used in construction, infrastructure, agriculture and base metal projects.

Over the next 6-12 months, we believe the biggest potential problem area is global construction spending. Investors should realize the conditions that created the U.S. housing crisis existed in various markets outside the U.S. Excess liquidity and easy money played a pivotal role in driving housing bubbles in the U.K, Spain, France, Ireland and Australia, as well as a commercial boom in China and in certain Middle East economies. The piper must be paid. Home prices are now falling in several cities within the U.K., China and Spain.

Residential inventory is rising. Mortgage credit is scarce. Given this negative feedback loop, a global construction slowdown appears to be with us for the foreseeable future. This means fewer orders of mini-excavators, cranes, drilling machines, forklifts and front loaders, which has negative implications for construction-machinery suppliers, such as Caterpillar Inc. (CAT).

Amid a negative global backdrop, there is a silver lining. Central bankers have gone from raising interest rates and fighting inflation to slashing rates and flooding the system with liquidity. We believe reflation measures could lead to an appreciably higher gold price. In addition, China has a large reserve of U.S. dollars, which can be tapped to stimulate domestic growth.

Over the next few years, the Chinese government may end up allocating $200 billion (or more) on infrastructure spending.? Copper will be a key input in the buildout. Freeport McMoRan Copper & Gold Inc. (FCX) is a stock that could benefit from these positive market themes, and we look to become more constructive on the stock in the future.Key points on FCX:

• The second largest copper producer in the world
• A major gold producer with annual output at 1.4 million ounces
• Huge reserve base with which to expand future production. FCX holds 41 million ounces of gold and 93.2 billion pounds of copper
• The recent decline in energy prices should reduce operating expenses. Freeport said over 30% of their total costs is energy-related
• The market appears to be pricing in a worst-case scenario of $1.50-1.75/lb copper
• Attractive dividend yield of 8.2%