WHy Gold is looking better every day

Dear friends and readers,

My dear friend JP has offered a sensational piece which shows some insight on why you need all the gold you can get your hands on. A good friend said that Wal-MArt was running out of personal safes as Americans are hoarding the metal. I deplore the Chinese's thinking that they need to keep a couple of trillion fiat dollars to keep their economy going. BIG MISTAKE! So without any more gibberish on my part , please read on the dire predictions of our esteemed colleague JP. ( name witheld by request)

I Took the $7.7 trillion of bailouts. donations or guarantees and with the help of my trusted abacus, calculated that the US currency was backed with Gold sitting at Fort Knox and West Point (if there actually is any) but only if gold traded at $35,000 an ounce.
--
At current prices concensus seems to be China's Gold hoard is worth approximately $3billion. In total reserves of $1.9 trillion at last official count. It would seem China is seriously - if not imprudently - underweight Gold.
---
The only reason the USD isn't trading at new lows it is because China and Japan still continue to hold on to it. According to IMF (http://www.imf.org/external/np/sta/ir/802P816.pdf)
----
Obama - with Geitner appointment - does not seem to understand that he needs to deal with the CDS (Credit Default Swap) ponzi scheme and exterminate it. An honest solution would be to allow companies to go into bancruptcy, payoff the CDS at face value and outlaw speculators and be made thankful they are getting out alive. Obama appointing the likes of Geithner is a signal of more of the same. President-elect Obama has choice:

a) adopt financial sanity, safety and soundness by deflating the remaining (and biggest) speculative bubble by letting free-market bancruptcy mechanism do its function.

b) elongate and deepen the economic stagnation (à la Japan method) wading pool for the next 5-10 years by continuing the Paulson / Geithner method of hiding true value of assets and nationalize the banking system and allow the CDS to persist waiting for the inevitable day of reckoning.
-----
US Code
§ 3910. Audit authority of Government Accountability Office
http://www2.law.cornell.edu/uscode/12/usc_sec_12_00003910----000-.html

is forbidden from:

(3) Audits of the Federal Reserve Board and Federal Reserve banks may not include—

(A) transactions for, or with, a foreign central bank, government of a foreign country, or nonprivate international financing organization;

(B) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, or open market operations;

(C) transactions made under the direction of the Federal Open Market Committee; or

(D) a part of a discussion or communication among or between members of the Board of Governors of the Federal Reserve System and officers and employees of the Federal Reserve System related to subparagraphs (A) through (C) of this paragraph.

JP

I bought Physical gold today

I keep reading all these articles about governments printing billions of fiat currencies in the hope of preventing a depression. $700BB, Tarp, $600BB China, ECD , France, Britain. The list includes all the usual lemmings. I believe that all this printing will create a horrible inflation spiral in 2009. It's simply because governments are reading terrible accounts of previous economic cycles.
Just as doctors killed many more patients a hundred years ago because of lack of good diagnostic equipment, today's economic advisers are giving the press and government officials, a terrible diagnosis of what is ailing global economies and subsequent terrible economic stimulus.

FIRST of all STOP calling it ALARMING, AILING, DIRE!

We are simply deleveraging investment banks and hedge fund madness. THAT's a good thing!
Printing money and giving it right back to these people. THAT's a bad thing!

DE LEVERAGING CONTINUES
Banks balance sheets have to clean up and because they can't leverage 30:1 , it's pretty normal that their ROE will fall by an order of magnitude. Citicorp loses $100BB YTD in market cap. That's normal. They grew by dumb acquisitions, bad management and bad oversight from a purely incompetent Board of directors. Let the chips fall... Citicorp fires 53,000 employees and the stock still goes down. Poor Pandit, he has one heck of a mess on his hands. Stock going to 5 and hopefully no lower...
Goldman Sachs, now a federally regulated bank cuts 10% STAFF and bonuses to guys who racked in over $500MM a year ago in bonus...

Printing Money is NOT a long term solution
Printing money will not convince baby boomers to either save, invest or spend. So why are governments hell bent on repeating the mistakes of Germany of the late 1920s?
If you read history, the Germans had to pay exorbitant war reparations bills after they lsot WWI and after 10 years of crippling payments they just got fed up doing it for real so they started printing money. By 1933, you needed a barrel full of Deutsche marks to buy a loaf of bread. You know what happened next.


I bought my first ten ounces of a planned 400 ounces buy as a goal today. The local dealer was out of 10oz bars so I had to pay more for 1 ounce coins. For $60, the stuff gets delivered to the house. Don't get any ideas. Stuff is going straight to my bank safety deposit box. ( That gives me an idea... if banks are not to be trusted, should a non deposit business be started to offer vault services?) My local gold Dealer, http://www.kitco.com , says that since gold fell $300 , his business had the best month EVER in 20 years! It seems smart people have been converting their USD into bullion? They are not leasing or buying into pooled funds. Leasing gold from institutions that will never deliver is not wise. Pooled funds can always have a run and default so your are at risk. The only safe way is to hold the metal in YOUR hands. SO THEY ARE TAKING PHYSICAL DELIVERY.
With all the mining companies hard pressed to get their 2009 financing in place, I can safely say the coast is clear to 2010.
The recent pullback in gold is a tremendous buying opportunity. Remember I told you this less than a month ago. Hedge funds redeem their foreign holdings BACK to USD. That explains the drop in the British Pound, the Euro and countless currencies. The USD is a currency of last resort. Not much longer folks!

Even though, I also predicted a bad 2009 for the Euro, my call is for selling that gold at a significant profit in late 2009-2010 which will allow for nice purchase of real estate in EUROPE in 2011.

Stay tuned

DCW









Green tech is dying yet again after a two year sucker's bet.

Not Convincing, nor hopeful, dreary at best!

It must be my neurotic tendencies that seem to always look for the under dog in the face of overwhelming odds.

With Rabid Democrats jockeying for position in Washington, getting their kids in the best schools, where will Michelle decide to send her daughters, the new FIRST dog etc. How trivial, how mundane, how scary!

Oil at $58... shouldn't we be saying: "Finally relief?"
PACs are still intact. I haven't seen Washington office space prices fall. I would suggest that for 22 Republicans that needed to find other employment, 25 Democrats have already found a spot.
So this is going to be same old, same old, or is it going to be worse?
DJIA is telling you worse: Why?
Simple: Toxic investments are still out there contaminating a shrinking pool of clean capital.
Current and future Government solution: Keep pumping new money in a tank of rapidly growing E-coli infested water and telling banks, corporations and consumers to drink from.
"DRINK UP DRINK UP" says the government!
Right, the banks are asking for clean water but refuse to lend it out.
Corporations are drawing down the credit lines and using up the clean water, the banks are desperately trying to hold on to. Treasury reacts by offering to invest clean money into bank capital but does little to fix anything as the toxic waste is deep inside the banks' books.
Consumers have no access to clean water and are trying to have the government sponge up their swamp upside down mortgage money...
Government has to stop trying to fix everything. It's not its job. If anything it has to reassure the people that the toxic stuff is segregated and keep putting it back in our taps!
OK enough with the imagery!

ENEMY NUMBER ONE
CDS, CREDIT DEFAULT SWAPS , are the number one enemy of all. I, for the life of me, cannot understand why they are not made illegal like crack cocaine. The right to buy a death warrant on a corporation should be rendered illegal and anybody owning them or issuing them past a set date is liable for prosecution, jail terms and destitution... Explain to me why American taxpayers need to shore up AIG? IS that really doing much... DJIA will go to 5K on its own, the quicker the better...

ENEMY NUMBER TWO
PEOPLE WHO DO NOT FOLLOW THE RULE OF LAW: Nobody in Washington respects the laws. You can't get half the members of the administration to uphold the laws of the constitution they were sworn to uphold. Treasury doesn't answer the press which implies taxation without representation. Justice set a partisan agenda. Covert operations of dubious merit get secrecy seals. PACS will fund almost anything in 2009 , unchecked and undeterred


ENEMY NUMBER THREE
USING TAX MONEY TO KEEP DEAD COMPANIES ON ALF (Artifical Life Support): I listened to CNBC yesterday morning. The anchors were all saying that they needed their big SUVs to get their kids to school. They were all too happy to drive their gas guzzlers and lamenting that nobody wanted to buy a small car made by GM. Conveniently forgot to mention that Mercedes Smart car is on triple shift production. The ego of financiers are the worst enemy of taxpayers.
Meantime Corrupt Washington will write even dumber checks that will end up 30% inflation next year.

THE REMEDIES
Come on guys, have some cojones!

PICK THE LOSERS NOW! ANNOUNCE THE LOSERS EVEN SOONER!

STICK TO A GAME PLAN, KILL OFF THE BAD WEEDS

A ray of hope Paulson said something today tht made sense ( bet you he repudiates it tomorrow)

http://www.globeinvestor.com/servlet/story/RTGAM.20081112.wpaulson1112/GIStory/

PREPARE A POOL OF CLEAN WATER


PROVE TO THE PEOPLE that in 2009, they will be richer, that their currency will be worth something and EVEN if their houses are worth less, they will feel secure and that they will not have to hear partisan fear rhetoric at every turn. 8 years of fear mongering is enough!

Maybe in 2009 we can go for a nice swim with some friendly sharks!

DCW

Sobering facts

The older you get the poorer you get…

Nikkei hit 1982 low today.

Meaning someone who had bought a low MER Index fund would have seen his purchasing power eroded by 90% today with any appreciation of the last 25 years pretty much wiped out! On the other hand with a 25% rise in the Yen, you can probably afford to go 25% further to nowhere!

An interesting note would show that the older the population gets the worst the stock does over time…

QUEBEC, CANADA Socialism, debt and health care …

This would make for very interesting coverage for socialized medicine and welfare over all. As Quebec has the largest per capita aging population and the unions calling for a bigger piece of the pie next year…With a $110BB debt, this place is starting to scream get the F)()(&)& out!

Canada is not much better with a loss of 350K manufacturing jobs in the last 6 years…

Canadians might have voted a Conservative government but it is not morally, ethically or strategically equipped to deal with the Tsunami coming.

Condensed History… 1830-2007

There was:

The industrial revolution

Exploitation of the masses

Union Labor

The car revolution

Sundays off

Development to Suburbia

Speculation

Great depression

Soup kitchens

Election by the masses

The New Deal

The introduction of the weekend

Fascism

WWII

The GI Bill (Education and mortgages)

the introduction of statistical issuance of Consumer credit

Pursuit of the American Dream with imported credit

Leverage finance

Carry trade hedge funds

Failure to create value

After WWII, you might still have had gender and race movements but pretty much all of Middle America was defined by a credit score, Chevy vs. Caddy, jeans vs. plaid, College tuition and your type of holiday plans. All of this availability to 80% of the population with the ability to consume now what you would agree to settle over the next 30 days to 30 years.

Now nobody wants or can pay what is owed let alone buy for tomorrow. Politicians think that by printing more paper the problem will go away. THEY ARE JUST PROLONGING AGONY!

WHAT YOUR FUTURE HOLDS

2008-2010

Now

There is no more credit of any kind:

Business loans, Credit cards, mortgages, car loans, store cards.

So you are asked to live within your means! What a novel idea…

If we think that 63 years of social and economic fabric can all of a sudden reversed, you have something else coming.

Imagine a world where credit is granted to corporations, governments and individuals who can actually pay back their loans.

A yearly house rate of appreciation of is less than then interest rate of the mortgage on it.

Car sales will have to be profitable to the remaining manufacturers

Wall Street will go back to clipping coupons

Hedge fund managers will go back to flipping burgers, cleaning stables and shinning OP boat decks

DE-LEVERAGING IS ENDING SOON

Just a salmon hurling itself to its spawning grounds, The USD is having its last hurrah until Xmas and then it will be bringing with it 20% stagflation!

Are all fiat currencies about to get their place besides the throne of a port-a- potty?

WHAT TO DO?

Hold on to gold bars as the Bond market is next and then the state of Champlain bridge will be the least of your worries!

On this cheerful note, have a good one!

The latest

McCain Sounded tired... you can't run this kind of schedule and hope to come out strong!

Anyway both candidates missed the point in this final debate. They were trying to tell voters that things will be better and tried to appeal to Nostalgia. A friend of mine said Nostalgia is a terrible driving tool. It's like using your rear view mirror to figure out where you're going. The last time I checked, this only works if you are going backwards or trying to park on a road to nowhere.

I found this troubling 2007 4 part report from Fox news ( not that I usually would call their reporting very useful) that investigated a failed 1997- 2001 multi-layered LA/Miami/Las Vegas/ Canada/ Egypt/ Israel drug ring investigation. It seemed that the criminals using inside info from two compromised Israeli firms were able to wiretap authorities and knew what the Secret Service, CIA, DEA, FBI, LA Police and a whole series of GVMT agencies were up to and used that info to send them on wild goose chases probably on a fleet of well stacked G IVs . How easy was it? Scary! One firm (Am-Docs) had the phone data of every member of every agency, cells, home , office, cottage, kids etc. The other firm (Comverse) had all the wiretap info with back doors that anybody could access and listen to all the recordings. How perfect is that for a criminal? You know when , where and who is wiretapping you. You can listen to what the cops heard and you can plant anything you want or erase compromising info held on the data banks.

So much for solving inter-agencies turf wars with Homeland Security! It seems the turf wars made sure that no one except the crooks had a complete picture. Many agencies complained but because the firm was heavily lobbied in Washington, Congress continued funding and forcing agencies to used the compromised equipment. It took FIVE years for the process to STOP. The scariest part of the video is it keeps getting jewish anti-defamation leagues constantly telling Google to remove it from Youtube and others. I read the letter that Fox News got as JADL tried to make its case.

Trying to suppress the story because Jewish based companies were involved rather than to air the stories so that more people demand that the problems get fixed is like a car manufacturer suppressing crash information from the NHTSA to prevent car sales decline in order to save jobs.

You do learn that the US system is all about turf wars between 2 dozen agencies, thousand of field offices,and a bunch of fat civil servants waiting for a pension while not risking thier necks on much.

The US, once a world standard for the concept of economic unions, is now spending way too much money ( it doesn’t have) on services it can’t afford, making most Americans poorer with a worse quality of life to show for it. Now mind you, American Baby Boomers have been living high on the hog since the GI bill and moved into the 1960s with Other people’s money with the repeal of the Gold standard. General de Gaulle, that shrewd Frenchman, always wanted to convert his Yankee dollars back to nice shiny gold bars. Nixon had to put a stop to that!

Now today as the world savers have lost several trillions of their savings, the lending to America is gone and no amount of government printing of fiat dollars will keep the whole pie from getting smaller. SO America, don't listen to those candidates, they won't give you back what was never yours in the first place. It was BORROWED time in the form of material possessions. Learn to eat frugal, drive down, eat less animal protein and learn to live responsibly not always wearing two baseball mits and always asking for stuff to fall into your open hands.

With either running candidate and a totally corrupt congress, millions of civil servants, government sub-contractors will continue to abuse the system because they first tell you they will give YOU stuff when in fact they will take for themselves 100x times more stuff.

NEVER seen a poor guy stay that way once elected and moving to Washington. If the Executive branch tries to change anything, the agenda grinds to a halt. Because once elected to Washington you are there for 4 or 6 years minimum. When your re-election come up a couple of pork barrels deal and there you go again... Very low turn-over there!

My four point solution:

1) US Tax code goes from 125,000 pages to 25

2) Tort Reform. Every person who plans on exercising as an injury lawyer has to serve 5 years in a combat unit just to get a limited license. Awards are limited to Quebec numbers. http://www.justicecontresaaq.com/ ( after you read this you gonna leave your practice all together)

3) US Defense is set at a % of 5 year trailing GDP

4) If you are a member of congress and the budget isn’t balanced over your first term, you cannot come back for another term to pork barrel your buddies!

Give that a spin Washington!

By the way WHEN you balance all of :

your balance of payment deficit

your trade deficit

your federal government deficit

WHEN HELL FREEZES OVER OR THE LEAFS WIN THE CUP,

You American crybabies , can then feel altruistic and go and ask if YOUR GOVERNMENT has the money and the Will to start offering coverage to your 38MM fellow Americans currently without any form of health insurance always at risk of total bankruptcy should an emergency arise.

FInally, $308BB have just been washed off Citi's books... nice jobs captains of Finance! we salute thee!

By my calculations, there were 106 trillion dollars of fake bets created with derivatives as nasty as my personal idea of Armageddon: the Credit Default Swap. It only takes ANOTHER 344 write-offs like this one and we will finally say goodbye to this nasty leverage of awful bad bets.

Well Until the new new finance guys come in with the proverbial: " well this time this is foolproof "!

Hopefully I will be in Curmudgeon heaven when that happens.

Cheers

P.

TED Spread at one year low... YET!

Amazing the equity market rebounded so high as Euro grids are showing the bank lending is still not functioning.

U.S. Treasury prices are off sharply. Note 2yr spread U.S-EZ has risen (less negative). A move closer to parity would be a positive for the USD, but not at the moment.

3M lbr 4.635 -11.8 -6.5
US-2Y 1.951 35.3 -109.9
US-5Y 3.072 31.0 -95.8
US-10Y 4.058 17.8 2.8
US-30Y 4.316 18.6 -14.5


Now governments on the HOOK for THREE years for inter-banking loans… Just in the middle of a ursidae family recession, it becomes interesting how governments might just have coerced investment banks to let program trading give the markets a shot of crack cocaine. I can imagine Paulson saying to Goldman CEO: “: Heck I got Bush to pony up another $250BB. Just go out there, get your program trading boys to run wild. Buy every equity index you can. Here is the list of banks to buy up and I guarantee you that if you were to lose money on these trades, I would buy equity in your bank without any significant dilution to your team…”

WHAT SCARES ME IS THAT THIS AGAIN WAS ALL DONE ON LEVERAGE!!!!!!!!!!!!!!!!!!!!!!!!!


Hubris or just great opportunity to make some quick coin and leave with your tail between your legs?
Alot of hedge funds will be dead this year so the pie of leverage plays dying
Who would have guessed the US government under Bush would socialize banking to Swedish standards?
I love history in the making!


Below 800 I am buying Gold bullion!


Cheers


P

Don't be Short

The mood is too dark…

Are those headlights in the tunnel?




Negatives:
- Hard Asset deflation is creating havoc for investors’ ability to survive leverage: if you can’t unload the buildings, the banker is forcing liquidation of your blue-chip portfolio stocks accelerating the fall for everybody including themselves!
- No liquidity at the individual banking level prevents anybody from picking up the pieces. Buffett won't take too many body blows before he moves aside.
- Banks still cannot get a hold on the market perception that they are increasingly becoming insolvent
- Currency runs are forcing the USD and the Yen as refuge currencies which are not useful as those economies are not motors of consumption right now!


Positives:
- Market might now finally be willing to discount the Obama administration program costs… Is there money for his programs in the first place?
- Oil looks like it wants to go to $60: somebody should win at this
- Rising USD gives Fed room to lower Fed rate. Squeeze the shorts!



Option:
-A coordinated rate cut is going to be tough to cover… If Feds lead the dance with 50 bps cut and the Germans put on a modicum of a thinking hat ( if that remains an option), it would not be a good time to be short indices…
- Central banks should also buy into good stocks and not only the sick banking stocks otherwise you cross contaminate

Let’ see what the week reserves.

Don’t be short, you are going to regret it before month is out!


My 2 cents

Ben o Ben ! Food for thought: Grains, fresh Meat and Pie

Sometimes it's better to roll your tongue than to come out with an academic response.
We find that there are too many people in America today who fail to read and apply the lessons of history.

Inflation in consumables served on the foundations of deflation in hard assets = Recipe concocted by Greenspan and served in a dish prepared by Chef Ben.




We recently addressed the issue of the plight of Suburbia. Today we would like to acknowledge the image of the "man about town", your local successful scrappy, hard working entrepreneur.


The entrepreneurs
The USA is inescapably leading the world into a long overdue credit rationing process which ends up with money out off everybody's hands but especially the entrepreneurs who have to scramble and readjust their plans back to the pre 2001 era.
First is to call the money jockeys: "Hey MJ , I need cash, my bank is calling in my lines, so sell everything, I want a check on Friday = 24% drop in DJIA.
Second call: "Hello DDD Wide Berth Marina?, I am Mr. SoNso, I am calling to cancel my berth reservation. Looks like I won't buy that gas guzzling floating palace, condo in boca, RV etc... . Will call you next year (maybe!). Hard goods index down 44%
Third Call: "Hi Honey, listen just spoke to OUR accountant. Seems we gonna have to tighten our belt somewhat, so we need to postpone our travel plans until next spring. Hopefully things will pick up. By the way, I canceled your new Mercedes order; you can keep your old one for another year." Car manufacturing index down 77%, Airlines down 84%

Our little example can be repeated all over coastal towns in Europe, North America and the once booming Asian stock markets.

If the hard working entrepreneurs get squeezed , you are taking out a lot of growth potential out the window. For the easy going crowd ( if not to call them lazier ), the declining value of their properties is killing their ability to pull out equity or refinancing jumbo equity loans. Another 25MM mortgages are 20% away from being upside down in the US Alone! So you can see the economy contracting even though Bernanke, Bush and Paulson have to continue to lie about the state of the economy for the "greater good!"

Remedies: STILL THE SAME
We believe that oil must fall, recent commodities price increases inexorably will come down to manageable levels, 10Yr Treasuries must trade over 5% and eventually over CPI inflation for the USD to have any hope of recovering. With the Fed intent on preventing any sane foreigner from buying US fixed income products at current negative real return rates, you have this stalemate among national institutions who are unable to move. If anything, Investment Bankers tried to ship out their access to cheap money and play carry trade suppliers a la Japanese. We believe that went to China but it will not turn out well for the bettors or their bankers.

In the USA, with less RVs, boats and cars sold in 2008, we can expect the prices of metals and resins to decline. We laughed when we saw DOW Chemicals try to increase the price of their products just about the time their order book was going to be chopped off! Unfortunately. none of these big items drops will help the average consumer which will have to contend with horrendous food price increases and his energy bill. The farmer paid Monsanto top dollar for his seeds, he also paid Potash top dollar for his fertilizer stock, and Exxon top dollar to power his Caterpillar and John Deere. Hell if he is going to lower his prices unless he has a record crop which collapses his prices ( with silos empty, VERY doubtful this year!)


CATTLE vs. the GRAIN FARMER
Cattle prices are in a fire sale as cattle ranchers are losing money on practically every head of cattle they raise if they have to buy grain on the open market. By Christmas, the reverse will be true. You better get in the habit of buying frozen meat or get ready to absorb another major shock at the cash register when you will try to buy fresh meat by then. Cut out this week's meat specials and put it in an envelope to be opened Dec 23rd...


As AMERICAN AS Apple or Gulliver PIE
De-leveraging hurts everybody. It creates huge dislocations in every society. We love to use the analogy of Gulliver and his fellow travelers sitting in a pie on the counter. When you put it in the oven, it can be pretty toasty but if the pie gets smaller, you get more people trying to move towards the center and the odds increases that you may be get displaced towards the edges and its scorching sides. This economic pie started contracting as well as cooking in July 2007 and we don't think Gulliver will come out of the oven anytime soon with the current cooks in the kitchen! First of all the cooks refuse to admit that the pie is contracting and second they don't think the heat is anything to worry about.

OUR ADVICE
With Paulson and Bernanke set on using financial stocks short sellers as temporary scapegoats, To stay cool, Keep looking towards energy efficiency, transport efficiency (rapid transit, electrics etc.) as two global phenomenons that will create the next generation of super "cool" companies. Please also invest in a large freezer, you don't know when it will come in handy!

July 4th 2008: A sad day indeed ... when a Tank of a gas is worth more than a meal for four !

We always like the 4th of July in Canada. Markets are in mid summer hiatus, with a bit of luck it's warm and sunny in Montreal, the Jazz festival is in full swing and we just had our Quebec provincial holiday and seven days later our Canada day on July July 1st. 3 legal holidays in less than 2 weeks makes us feel like every week in May in FRANCE! We use this time to review portfolios and we try to determine if we can find better trading ideas until the end of the year.
It also marks the starting date of what I call the race to the TWO Thanksgivings. The Canadian TG is celebrated on the third Monday in October ( while things haven't frozen rock solid just yet) and the American TG in November.


PAUSE FOR REFLECTION: Fill her up or RUN on FUMES?
2007 vs 2008
In the first half of 2007, we had stellar results with a boom in commodities so we decided to keep a lot of cash (55%) and coast to the end of the year reasoning no need to blow our brains out. AS we all know now, July 2007 pretty much was a top even though there was a crazy rally in November which mostly benefited momentum players.
For 2008 it's a whole lot different. At the half way mark, most equity markets on the planet have skirted with multi month lows, with the notable exception of the TSE which was trading on another planet. Fear not! it will join its cousins soon enough. Yet with this backdrop of gloom and doom, we have had several successful DAY trading profits but most our core holdings have been getting cheaper by the week...
Our leverage shorts ETFs have brought in spectacular 66% return in less than four months, our GM shorted at $31 was an easy pick, Bear Stearns was lucky.
On the other side of the coin though, our mining stock, Gobimin is trading at 4.3x 2009 earnings, Couche-Tard and Gildan are choking on the slowing economy.
So we are sitting on 70-80% cash position knowing full well that inflation is in the high single digits so we a paying a price just to stay in cash.

WHAT to DO for REST OF YEAR?

THE SHORT SIDE
1)We believe the commodity boom is going to go through a huge correction. Steel prices will implode and the big players will loose 25-50% of their values from today. Fertilizer stocks will also back off at least 25% from their highs. Pick them all out and you should have a nice run.

2)BRAZIL: We started shorting the Bovespa and we think it will follow in line with INDIA and CHINA exchanges ( i.e a 50% retracement form top). It has already lost 25%. When you look at Bloomberg you see 5 yr GVMT bonds yielding 12.5%!!! That is scary. Yet we saw an interview with first time homeowners getting 6.5% mortgages. Are we seeing another set of teaser rates?

3)RETAIL: American consumers have now spent their rebate checks ( which are not rebates as the government printed fiat money to fund this useless exercise in the hope of getting the Republican nominee at least half-alive to the election). Consumer stocks will all get bashed so if you own eight, three will blow up. CNBC will try to drum up support with anecdotal evidence but for the ONE trendy outfit with the right priced good, the pie will have gotten smaller for ALL the others... Short the sector!
Cover between the Thanksgivings

4)BANKING: Bill Bonner and the gang of pundits gave us numbers of over ONE TRILLION in loans to real estate gone bad. How much money do you need to cover that? UBS at $29BB of new capital is leading the pack but many players have not gone to the wicket just yet.

5) OIL STOCKS: They are way over valued with their market capitalization exceeding reasonable reserve estimates. The bigger players seem to enjoy a valuation based on the future price. Government are trying to rein in the speculation of people issuing futures contracts on crude with no intention of supplying let alone taking physical delivery. That of course is the nature of a futures markets but its intent originally was to let producers and consumers get the best price for their commodity. This has gone terribly wrong as large investors have resorted to manipulating the market and make the whole process a joke. As in criminal law cases, you prosecute on intent to get the most severe penalty. If governments become INTENT on restraining the speculative nature of these futures markets, they should make sure that suppliers and consumers trade for real delivery. We believe that is quasi impossible as Investment banks in a heartbeat will rush to buy store fronts and physical infrastructure to bypass ill faithed regulation. Petrochemical stocks are also in for a rude awakening as they will see a serious downside effect in the form of falling demand in response to their recent price increases.

6) SHIPPING: One of the biggest consequences of the meteoric rise of energy costs will affect the trans-oceanic movement of goods. We believe carbon footprints will force a major change here and volumes in and out of America will suffer displacements in the next two years. Trade CAREFULLY here!

NEUTRAL
We would stay away from RUSSIA. Too difficult to figure out how the government will take away your profits.

LONG
BUY a LIGHT HYBRID
WE have been driving 3 Acura MDXs for the last 8 years. Our four year lease is up on our 2004 model. We rented a 2009 Camry Hybrid and on ONE TANK we did THREE TIMES the distance (891KMS)than with the SUV on REGULAR GAS. So bye-bye Honda we are going to Hybrids and Toyota for now will be a good deal. Instead of 114 fill-ups at $105 =$12,000 we are going to 52 fill-ups at $79= $4100 or a $8000 a year savings!!!
Don't get fooled and buy a heaving 5000lbs hybrid ... those won't work ... LIGHTWEIGHT is the key here!

BATTERIES
VOLUME Hybrid car Batteries are mostly made in Japan right now. We consider this to be the new black gold. We believe this industry is at its HALF-WAY mark of its twenty year window. With one million Prius on the road today, the industry sales will sky rocket for the next five years and then start to decline. We do not believe the carbon footprint of the manufacturing process of ANY battery solution is viable at the present time whether it uses lead, nickel or lithium-ion based solutions. We stand on record that using hydrogen as a transport mechanism in a fuel cell is the ultimate best solution. We are not sure that the current nanotechnology advancements can deliver an elegant solution on this platform but we believe that it our best hope. This overall area will probably displace solar and fertilizers as the new IPOs darling sector. A123 if it has an IPO should do well this fall.

NUCLEAR vs SOLAR
THE CASE FOR NUCLEAR
We believe the NUKES are about to have a second run if and when a discount of $20 per pound of U308 between cash and term prices disappears. With people hoping to PLUG in their Prius or Volt as early as 2010, the grid is going to need a lot more juice and as the old pun says: "The future is glowing for the NUKES". We also believe that nuclear energy is the best way to reduce carbon emissions from the mother of all polluters: the Alberta Tar sands. We have been looking to buy into a fund which buys physical U308 in the $40-$60 range and starts accumulating stockpiles over the next 2 to 5 years years when new consumers enter the market.

THE CASE FOR SOLAR
With the current 135 projects for solar projects on US federal land before Congress, we are appalled at the level of mounting pressures to rubber stamp their approval based on CURRENT technology. We believe solar productivity enhancements will follow Moore's law and that it is foolish to approve every possible project at the same time. Greed yet again overtakes common sense tot the detriment of the environment. If there was A TIME AND A PLACE to BOTTLENECK permits WE ARE THERE! We fear taxpayers and utilities are going to pay a still penalty if they rush into the market place with technology than can vastly improve over the next decade. With less than 5% of US energy production, it is foolish to spend money ans use up scarce water resources to produce silicon wafers for solar with a technology which will double in efficiency every two years. EXPORT IT DON'T CONSUME IT all in the first three years! You need to figure out where you want solar to be in 20 years and work your way back and issue the permits on a sliding scale. Better benefit/cost studies need to circulate! In the meantime, make sure politicians install the same solar cells on their own rooftops that they are trying to install on federal land. That should slow the process somewhat!
Don't forget the gorilla in the room! With COAL still supplying more than 50% of US production, GVMT can do much more to promote clean coal technology. Give huge incentives here. Yet our issue remains with open pit coal mining and its disastrous effects on the environment.

Gaz de FRANCE /SUEZ
Moving from a government institution to a public entity with Albert Freres and the Desmarais family, we think this will be a great way to play a monopoly. Tougher to find HOW to play it but we are bound to invest in it somehow.

BANKS
Next three months will see terrible stories from Q2 numbers. We believe C at $10 looks like a number we could dip in our toes. BAC at $20 depending on the Countrywide resolution and some Chinese backed by GS or JPM to form a conglomerate of some kind could appeal to us.
In Canada we were pleasantly surprised on the resiliency of National Bank. As a regional player, we are worried that Recent Union activity is coming back as a scourge of the troubled 1970s. We believe this will have a detrimental effect on the overall local economy and are avoiding local investments.

US MANUFACTURING
We repeat this theme. We believe that high transport costs will open a new era of prosperity in AMERICA. BRAND NEW low energy plants close to markets will see a resurgence for buyers like Wal-Mart. Spending on infrastructure is key though to replace an aging trucking fleet ill equipped to meet the needs of the 21st century

CONCLUSION
We will be spending the next few months at several VC conferences and trying to align ourselves with other investors that share this vision of the future.


Happy 4th

DEAR MR. KUDLOW,

Dear Mr. Kudlow,

While your current focus seem to focus on the plebeian costs of high energy prices, you fail to warn your listeners that it will make living in Suburbia a living hell for many and some should entertain the idea of getting a bad bid now rather than wait for a worse one next year.

“IF AMERICA WAS AS EFFICIENT AT MOVING PEOPLE AS IT IS WAS AT MOVING GOODS, GM would be at $100 and Toyota at $13!”

LEAVING SUBURBIA
Once people have ditched their Suburbans SUVs(an appropriate name if there ever was one!),insulated their homes, put a couple of solar panels on the roof top and living on a severely restrained budget, they are going to ask themselves; "NOW WHAT?" by then they are going to realize that their local municipal government will have to contend with tough BUDGET choices if they are not ALREADY SKIRTING WITH BANKRUPTCY. Gone will be the days of “free” bus service to school, new artificial turf and increased public security. Petty crime will increase probably as employment becomes scarce and budgets cut police coverage. Next the infrastructure will start to crumble. Water Mains, bridges and levies will be left neglected. People will take refuge back to higher density areas.

MOVING BACK TO THE CITY
AS they soon realize that suburbia is not so hot anymore, more Americans will try to move to localities which are geographically closer to work or at least with better access to public transport and services. The logical step in this exodus is to go back to an urban center that offers the services that Suburbia had to curtail.
The problem with cities is unionized employees. They are a force to contend with. Their leaders will come up with a series of statistics on REAL living costs increases ( not of the doctored US government issue which are tragically corrupt). Soon enough, there will be a resurgence of union demands and many cities will have to deal with.
This will be an exact copy of the end of the Vietnam War back in the 70s! Stagflation, war vets roaming the streets and graffiti galore!


THE FED TODAY:
A MERE SHADOW OF ITSELF
Twenty years ago, as a junior VP in an investment bank, I had the privilege of having a private lunch with a former Fed governor who had worked along side MR. Vockler. I remember to this day his admonishments: “ONLY the FED has the power to deliver a target price for either OIL or GOLD”. Today, we live in a very different world where the FED is but an extension of the Federal government and rarely goes against policy. THE US owes more than it has on the books. Bernanke is no Vockler. The former wants to last a term and just go on the circuit like Mr. Greenspan and build a nice nest egg composed mostly of Huans or Euro term deposits. Saving Wall Street is such a useless Endeavour because the flight of capital at this point cannot be stopped with low rates. It can only happen with HIGHER RATES! As we wait until the next FED meeting. It reminds me of the old star hoping that the attendance will increase if times only got better… They rarely do!


So a simple recipe: "Keep what makes you strong, reform what makes you ill and avoid backing losers"


WHAT IS WORTH SAVING IN AMERICA
World’s best example of a free market economy
World’s best example of movement of goods
Leadership position in High Technology, entertainment and communications
Access to the world best and brightest through Higher Education opportunities


WHAT AMERICA CAN NO LONGER AFFORD
- Espousing Sprawling suburbia as an ideal
- Obesity and Diabetes
- Ineffectual centralized government, Legislative (lobbyists interference and partisanship, Executive ( 4 yr agendas) and Judicial (tainted by partisan appointments)
- Massive trade, balance of payments and budget deficits
- Fiat Dollar
- A tax code that favors circumvention over fair share
- 38 MM people without access to Health care
- Tort law which undermines competitiveness
- Defense budgets fueled by generating perpetual paranoia
- Global military presence as if the USA still needs to retain image as the world cop


Anecdotal evidence from Town of Mounr-Royal, QUEBEC
-In 2003, we got rid of FOUR of our FIVE CARS. Public transport is great. Everybody in the house has access to taxis chits. I haven't found ONE car that is cheaper to own than UNLIMITED TAXI USE... why? Parking is the COST of ONE-WAY to downtown.

- Our house price has quadrupled in twelve years and a 4 minute walk puts us on a 8 MINUTE TRAIN RIDE to the financial and commercial center of the city. Our property taxes went up SIX fold in the same period… Whether oil goes to $200 or $50, I doubt the value of our house will change as the value of the train pass is set yearly. I would expect the same for residents of Brooklyn Heights.
- We have universal health care. Compared to Florida, we have less reported cases of gross negligence PER CAPITA yet we have more lawyers challenging the professionals without no limit awards. We do wait more to see a doctor but you can always get somebody on the phone 24 hours a day to deal with emergencies.

Finally Mr. Kudlow,

VOTING FOR REPUBLICANS THAT SELL YOU THEIR EVERYTHING FREE FOR THE BACKBONE RICH OF AMERICA AGENDA AND PUT YOUR NATION IN DEBT FOREVER IS ABOUT AS UNCONSCIONABLE AS YOUR PROMISE in 2003 TO THE PEOPLE THAT THERE ARE NET BENEFITS OF WAGING WAR AND SENDING YOUNG PEOPLE TO DO YOUR FIGHTING TO GET $35 A BARREL OIL...

Nice going!

Humpty Dumpty up on a wall

If you think of the US based global investor as Humpty Dumpty (HD), high on a wall of "bric" investments, HD is sitting on a mounting wall of worry and the ledge is starting to crumble as quickly as a NYC crane.

Look at the Shanghai and India indices... they make the S&P look a rock solid index...

Now BIS in its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.

According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.

The report points out that between March and May of this year, interbank lending continued to show signs of extreme stress and that this could be set to continue well into the future.

Add to this RBS post of this morning calling for 1050 on the S&P , the FEDEX warning,and the pre-open ominous ...

Interesting times


DCW

The baby boomers soon to be called Busted?

TWO themes today:
I) The WAR of WORDS: POLICY in action
II)POLICY FOR A TOMORROW



I) The WAR of WORDS: POLICY in action
(How to profit from it)

EUROPE and USA
- Interesting discussions over the pond...
Trichet freaking out on inflation, discussions about an ECB rate raise this summer as imports prices rose 6.1% in Europe.
- ANYBODY holding 2yr-10yr BONDS NOW is a complete fool!
- Boomers holding bonds give them the right name " boomers!"...
- If in March, keeping the US banking system alive by humongous rate cuts was the order of the day, by June Trichet and Bernanke were changing their tunes to Super Hero Captains of inflation fighters. That MAY have come about as they realized that for one BSC saved, there are dozens ready to drop dead and that neither the ECB or the FED can really win the fight against the global credit crunch in the Western Economies. China and other emerging economies have started to restrain credit to limit their fight against imported inflation. Metal prices charts are screaming this! While the Fed has won reprieves by attracting sovereign funds on a per case basis, dozen of banks/brokers if not hundred will need to merge or fail or part of the cleansing process. After the boom alas come the bust!


ASIA
CREDIT CONTRACTION IN CHINA
- If China decides it is not going to import inflation, well it won't either keep exporting deflation.
- Metal price have already shown this! The credit machine in Asia which brought us all the boom of the last 15 years is also generating all the bust!


FOOD FOR THOUGHT
As credit contracts, Metals are crashing fast and the last refuge of the speculators looking for suckers is in food based commodities. They may really implode any time if we have good harvests. It reminds me of those late night parties when most of the guests have left, there are always those staying around the buffet. In reality, the rich with leverage will decide soon enough what the price of A September Chicago delivered bushel of wheat is going to be worth but I doubt brokers,economists , anthropologists or African famines will have much influence on the outcome. I don't want to be on either side of that bet, same goes for soybean, rice etc. I think that it is immoral and I would rather invest in a campaign that destroys farm subsidies to millionaire farmers!

So where do YOU put your money?

Cash? A depreciating asset

Real Estate in NA? Still at risk

Bonds? As Don Coxe said in his MAY edition of Basic Points "My advice for investors back then was (in the 70s stagflation era)“The proper period for holding a long-term bond in this inflationary period is the amount of time you hold a hand grenade after pulling the pin.”)
Still applies today...

Now let's look ahead to the next year!!! Imagine we are in JUNE 2009!!!!!


II) POLICY FOR A TOMORROW

BERNANKE's JOB (HINT: Maintaining purchasing power is good for the US stock market)
Cheap Chinese imports fueled low inflation for more than 15 years in the USA. That allowed Greenspan to print dollars galore and fuel America's addiction to cheap credit. Ben, his successor, now is the cleaner upper after the party and will be incapable of changing consumptions patterns with his localized FED rate policy on a global scale. The US was the home of 45% of world equity markets. That number is going to be 20% in the next ten years. US monetary policy will not affect the decisions of an Indian buying a Tata or the Chinese buying an Internet Sub-zero looking Fridge. So Mr. Bernanke MUST fight US inflation and let the world fight its own demons. That in turn will make the US dollar a stable currency and the US bond market, an investment vehicle, rather than a depreciating asset. The federal Reserve cannot do it without the next administration and a responsible Congress (Oxymoron intended).

THE NEXT ADMINISTRATION AND CONGRESS: THE FED'S NEW BEST FRIENDS OR FRESH FOES?

Assuming Mr. Bernanke REALLY becomes an inflation fighter a la Volcker, meaning he lets the banks fix themselves rather than trying to push on a rope, sink or swim style, the US stock market is going to continue to rally IF and only IF the next administration is committed to improving the economics behind the dollar. As the Bush administration can attest to: You can't fight THREE wars ( two physical and on on the middle class) and hope to win your party's next election. BUSH has all but lost major voters in the middle class. With approval ratings below 28%, I sure would like to listen to his remaining supporters explain to me what he has done besides watching 9-11s disasters crop up in Europe rather than in the good old USA. No more rights and freedom, that has been Bush's price for security...

ON to YOU LEADER OF THE FREE WORLD!
OBAMA PLATFORM: You have NO platform in the USA unless you get everybody on board. Words, as Mrs. Clinton once said, can ring as hollow as Bosnian deeds, if they are not put into the fire of the action! Is this going to be another lame presidency? just Lots of applause at the State of the Union Address with lots of clapping but NO real change except announcing that we now have a working russian made $16MM dollar space station toilet?
Can OBAMA really get Congress to vote the will of the people? Can OBAMA really mend the trigger happy appropriation ways? Can the Pentagon go back in its Genie box and lick its wounds? Can OBAMA propose a trade-off to the health care for all lobby ( first we balance the budget and THEN we cover you)?

With the Word Change used by McCain and OBAMA on average 30 times a speech, I am not sure if Washington CAN change... PROVE ME WRONG!

THE WORLD BELONGS TO OPTIMISTS ( WHY? Because the pessimists give up at the onset!)
POSSIBLY the dollar could come back in the next twelve months. Why? because the Chinese hold US reserves of $1.3 trillion and the petro-dollars WANT to come home and grow. Sitting in a foreign bank, eaten up by inflation is not doing ANYBODY good! IF instead of weapons appropriation bills and military budgets, the world see a US balanced budget over the next 3 years,and US taxes are spent on infrastructure, retooling and new energy policy geared towards efficient manufacturing plants where LABOR is BUT a fraction of the cost of goods. BUILD it and THEY will COME! The recent rise of oil made thousand of plants worldwide as useless as bomb destroying plants in Japan and Germany in WWII. Call ENERGY DRIVEN OBSOLESCENCE! Maybe millions of jobs are going to be lost in the retooling effort, but I believe the US economy will continue to transform itself and it will bring about a new era of prosperity. Nobody has easier access to capital than the Americans so they should be the first to see the benefits of retooling to energy efficient manufacturing. Continued major advancements in transportation are going to be key and America will have to give up the love of its cars. THAT might be too much to ask for but we can all dream now, can we? ... Now how do I get from Montreal to NYC without a car or a plane... Bombardier got any ideas?

In the meantime:

- Continue to short The Loonie over the USD ( until 90 cents)
- Cover your shorts on XEG, keep your XGD...
- WHEN SKF drops $4 in a DAY buy another couple of lots... Global Credit contraction cannot help over leveraged US banks and brokers until next year.
- Short GS over LEH.`
- Buy GE... Energy efficiency is key !!!

Until then!

Cheers!