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Words from the (Investment) Wise for the Week That Was (May 19 - 25, 2008): Part II

Bill King (The King Report): Top could be forming in oil price
"A very significant top in oil and energy could be forming and fundamentals appear to be changing. Crude oil and gasoline are rallying now on the strong seasonal tendency to rally into the start of 'drive season', which is Memorial Day Weekend. Then there is usually a retrenchment and another rally.

"The past few years, gasoline has topped after the 4th of July. In 2006 Goldman sharply cut the weighting of gasoline in its commodity indices, which forced funds to sell.

"Last year, gasoline soared after the Labor Day weekend, which is the end of drive season and the strong seasonal gasoline bullishness. This was short covering and reacquisition of long positions because of the underlying fundamental strength in energy. But the global economy is much softer this year.

"Media accounts have Iran and China stockpiling crude oil in tankers and elsewhere. Iran fears that either Bush or Israel might strike before Obama takes over.

"China is stockpiling energy and food for the Olympics. At some point during the Olympics in August, China should know if it has surplus inventory above Olympic demand and possibly earthquake-induced demand. Then China might start dumping surplus commodities - not only to lessen inventories but to push commodities lower to generate better buying opportunities later.

"China has been very adroit in hammering copper and key commodities when prices get too exuberant. Then they buy after the collapse and enter into long-term contracts with producers at the better prices.

"Ergo, there could be short-term tops in oil and gasoline next week and near the 4th of July and then a more significant peak near the Olympics and/or Labor Day."

Source: Bill King, The King Report, May 20, 2008.

David Fuller (Fullermoney): Gold - where are we in the cycle?
"At Fullermoney, we became born-again bulls of precious metals in 2001. After all, gold had experienced a 21-year bear market; the price action resembled base development; everyone hated the yellow metal except for the much ridiculed gold bugs; Gordon Brown had sold over half the UK's reserves of bullion at the bottom; we lived in a fiat currency world and central banks had been printing money with abandon for years.

"There have been plenty of other reasons to be bullish of gold, discussed by this service, but the present outlook review is mainly concerned about what happens next.

"We have often pointed out that platinum was usually the lead precious metal, both up and down. Since its early March peak, platinum has seen a sharp correction to nearly $1800, successfully tested that low earlier this month, and rallied above some lateral resistance. Consequently, platinum would now need to fall back beneath $2000 to reaffirm resistance from the year's earlier high.

"This is an impressive performance, reasonably consistent with earlier support building phases following accelerated peaks, although they continued for much longer. This was also true for gold and silver.

"I recently pointed out that gold had approached an area of potential support from the mid-$800 region and the moving average. It has subsequently rallied from this level and a close beneath $845 is now required to suggest further easing rather than a period of support building at sideways to higher levels.

"Silver tends to lag platinum and gold in the earlier stages of an advance, before finally attracting strong speculative support which causes it to perform like high-beta gold once again. Nevertheless, silver is now technically interesting as a recovery candidate, following its decline to nearly $16, and would have to close beneath this price to suggest further weakness rather than the sideways to higher support building presently indicated.

"In summary, technical action for precious metals indicates that they are now in accumulation zones, although historical action suggests that they are best purchased on easing during these phases, as ranging can be lengthy. This remains a real prospect, of some concern to me, not least because this is not usually a bullish period seasonally, as I have mentioned before. We are likely to see some central bank selling and perhaps also from the IMF. The traditionally bullish buying in anticipation of Christmas, the Chinese New Year and Indian wedding season occurs between 4Q and 1Q.

"Could it be different this time? If precious metals have a shorter support building phase before retesting their highs and extending the overall upward trends, what would be the catalyst?

"I can think of two factors - liquidity and inflationary expectations. Central banks have pumped plenty of liquidity into the system, as we know, and many investors are currently sitting on historically high levels of cash. Today, few investors remain in denial regarding inflation.

"In conclusion, I think precious metals are in accumulation zones. Given the possibility of further support building, I favour the 'baby steps' tactic of nibbling on easing and for traders, lightening on rallies."

Source: David Fuller, Fullermoney, May 19, 2008.

Financial Times: Food prices forecast to stay high for 10 years
"Food prices have undergone a paradigm shift and will not drop back to pre-crisis levels for at least the next 10 years, putting long-term pressure on governments facing the food crisis, according to a forthcoming report.

"The report, by the Organisation for Economic Co-operation and Development and the UN's Food and Agriculture Organisation, will say food prices have moved to a 'higher plateau' because of rising demand from the biofuels industry and developing countries such as China.

"But the Agricultural Outlook 2008 to 2017, due to be published next week, does offer a respite in the short term, forecasting prices will ease from this year's record levels, according to a summary seen by the Financial Times.

"'Food prices would be considerably higher in nominal terms than in the past but below the current records,' said an official familiar with the report. "Compared with average prices for 2005 to 2007, the report forecasts that in 2017 the price of wheat, adjusted for inflation, will be 2% higher, rice 1% higher and corn 15% higher. Oilseed prices are expected to be up 33%.

"The price projections imply falls from the current records but suggest that food inflation will continue to be a long-term problem, particularly for poor countries."

Source: Javier Blas, Financial Times, May 21, 2008.

BCA Research: Bank of Japan on hold
"The Japanese economy remains fragile and will keep the Bank of Japan (BoJ) on hold this year.

"The BoJ opted to leave policy rates unchanged at 0.5%, as expected. Despite the bounce in Q1 GDP, our central bank monitor suggests that economic conditions are sufficiently weak to prevent any monetary tightening this year. In the comments which followed the policy decision, BoJ Governor Shirakawa acknowledged that rising oil and raw-material costs are likely to have 'a negative effect on capital spending and consumption'.

"Indeed, Japan's terms of trade has a highly negative correlation with crude prices: the business sector is heavily geared towards manufacturing and industrials and contains no resource companies. In turn, rising commodity prices have presented a significant drag on growth and have helped contribute to the dramatic collapse in both business and consumer sentiment over the past several months.

"Bottom line: We remain bearish the yen and overweight JGBs within a global hedged fixed income portfolio."

Source: BCA Research, May 21, 2008.

Financial Times: Protracted UK slowdown looming, says Bank of England
"The economy is heading for its most protracted slowdown since the early 1990s, according to detailed growth forecasts from the Bank of England that show a sharply widening gap between its and the government's outlook.

"The central bank's forecast for economic growth is significantly below that of the Treasury for the first time since 2005. But with inflation rising and expected to stay high, the bank's Monetary Policy Committee (MPC) made it clear that a long period of weakness was needed to bring inflation back under control.

"The Bank of England's central forecast - issued on Wednesday - is for economic growth to slip from 3.3% in 2007 to 1.5% in 2009. The MPC also thinks that in 2010 - likely to be an election year - there is an even chance growth will be below 2.4%.

"This contrasts with the Treasury's most recent forecast from March, which expects growth of 2.25-2.75% in 2009 and 2.5-3% growth in 2010.

"The chancellor still sees the growth picture as much rosier than the Bank of England. He told the CBI employers' organisation dinner on Tuesday: 'While the global outlook remains uncertain, I remain optimistic about the underlying strength and resilience of the British economy.'

"The Bank of England also published minutes from the May MPC meeting. The committee voted 8-1 against a rate cut ...

"Despite what the minutes described as 'subdued [growth] for much of the forecast period', the MPC noted the inflation outlook had also deteriorated in recent months. With bad news on both growth and inflation, the majority of the MPC thought a slowdown 'was likely to be necessary for inflation to settle close to the target around two years ahead'. Any cut in interest rates would create the impression it cared more about growth than hitting the 2% inflation target, the members worried.

"With markets less confident than at any time in the past decade in the Bank's ability to control inflation, the MPC added that 'the committee's behaviour was likely to have a material influence' on inflation expectations."

Source: Chris Giles, Financial Times, May 21, 2008.

Financial Times: UK commercial property
"Foreign buyers could be the saving grace of the ailing UK commercial property market, says Jamie Dannhauser at Lombard Street Research.

"He notes that commercial property values continued to fall last month - although the pace of decline has clearly slowed. He adds that confidence and activity remain fragile, notably amongst debt-funded buyers who are largely shut out of the market.

"But Mr Dannhauser believes that with capital values now 17% below their peak of last year and initial yields at 5.5%, there is unlikely to be much more downside for the market as a whole.

"'The work-out in the commercial property sector should not be prolonged. Unlike the early 1990s, the problem is not one of excess supply, at least outside the City of London office market.'

"He goes on: 'There are clear downside risks from tighter credit conditions, banks' reduced willingness to lend and the closure of the commercial mortgage-backed securities market. Debt-funded activity is likely to be much reduced into next year.

"'However, with commercial property now looking fair-to-good value versus gilts, and UK institutions awash with cash, there could well be increased equity interest later on in the year.

"'Sterling weakness is also likely to be a boon for commercial property prices, as foreign funds plough money into the cheaper UK market.'"

Source: Jamie Dannhauser, Financial Times, May 21, 2008.

Gavekal: Germany facing a rough patch

Source: GaveKal - Checking the Boxes, May 21, 2008.

David Fuller (Fullermoney): ECB unlikely to cut rates as long as oil remains strong
"When looking at the potential movements of the ECB it would be wise to remember that they only have one mandate: to control inflation. This is unlike the Fed's numerous goals, such as to achieve high employment, protect the economy, maintain orderly markets and control inflation. All aims other than controlling inflation are considered the responsibility of individual member states.

"Even if it had a growth mandate, the size the of the German economy relative to the rest of the Euro zone means it would have a much greater weighting in any decision making than a country such as Spain.

"Inflation is presently making headline news as oil continues to push higher on an almost daily basis; however food prices have stabilized and are not currently contributing to increases in inflation.

"A stronger euro is one tool against the negative impact of higher inflation from imported commodities, but it is also having a negative effect on companies that consolidate foreign earnings in euros. If oil enters a medium-term correction then it is possible that the ECB will cut rates relatively soon after, but they are unlikely to do so as long as oil remains so strong."

Source: David Fuller, Fullermoney, May 21, 2008.

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