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Words from the (Investment) Wise for the Week That Was (September 1 - 7, 2008): Part II

David Fuller (Fullermoney): CRB trend has peaked
"There is little doubt in my mind that the CRB's trend has peaked, possibly for several years, although it would not be unusual to see some top extension.

"Also, individual commodities will experience some sharp rallies on supply concerns from time to time. However I would not expect too many new highs, especially where we have seen big upward accelerations. In this new environment, short positions following rallies are likely to outperform buys following dips, at least until the next big asset reflation commences.

"Commodity shares may perform somewhat differently, depending on valuations and earlier performance. Where they accelerated higher, we can expect sharp reactions. Due to stock market headwinds, some very profitable commodity shares lagged on the upside. They will probably fall less and outperform the actual commodities to which they are related, particularly as a broad stock market recover occurs. I would hold the best but be wary of the more speculative small-cap commodity stocks.

"Lastly, the good thing about significant shakeouts in secular themes is that if we keep a portion of our powder dry, we get to play the game all over again from a lower level."

Source: David Fuller, Fullermoney, September 3, 2008.

Bespoke: Look for bottom in TIP before committing to commodities rally
"The Lehman US Treasury Inflation Protected Securities ETF (TIP) is having one of its worst days of the year today, down a little more than 1.5%. As shown in the first chart below, the ETF has been in a downtrend since topping out in mid March. In the bottom chart, we compare the TIP ETF with the CRB Commodity index. The two are relatively correlated, since TIPS 'protect' against inflation, while the CRB index measures commodity prices.

"Interestingly, the TIP ETF has led the CRB index in their most recent rallies and declines. The TIP made a short-term bottom last June and rallied sharply through this March. The CRB index didn't really begin its spike until last August, and it didn't top out until early July. Both are currently declining, which means inflation concerns are subsiding. Based on recent trading patterns in the two, it may be worthwhile to look for a bottom in TIP before looking for a rally in commodities."

Source: Bespoke, September 3, 2008.

Richard Russell (Dow Theory Letters): Has gold bottomed?
"No tradeable item is more subject to emotional swings than gold. Because of this, gold often whips past supposed barriers, on both the upside and the downside. I've been thinking that the 800 level represented major support for gold, and sure enough, true to form, gold broke temporarily below 800 for a few days. Gold closed again today above 800.

"The following are words from the latest edition of my friends at Growth Fund Guide out of Rapid City, SD - 'We should also point out that in the middle area of the previous precious metals super bull market (it eventually peaked in 1980) a high point was reached in December 1974, from which gold declined 47% into August 1976, and then rose an additional 721% to its 1980 peak. The recent decline amounted to about 22%, so if the recent decline were to continue and end up closer to the large decline in the middle of the previous super bull market, gold and gold funds could decline quite a bit further. Our guess is that there is a better than even chance the lows for gold funds were witnessed on August 11th and 15th. But only time will tell.' Wise words - Russell."

Source: Richard Russell, Dow Theory Letters, September 4, 2008.

US Global Investors: Physical demand for gold has never been stronger
"Physical demand has never been stronger as we head into the strongest buying month of the year. Imports into India increased for the first time in nearly a year. Additionally gold jewelry sales in Abu Dhabi soared by 250% in August."

Source: US Global Investors - Weekly Investor Alert, September 5, 2008.

MarketWatch: Big jump in gold sales spurs manipulation talk
"Recent heat from Congress and regulators, along with public speculation, over whether commodity prices are being manipulated has also reached gold pits, where the debate was stirred by a surge in bets in August that gold prices would fall.

"Three unidentified US banks held 86,398 short positions, or bets that gold prices will fall, in the COMEX gold market as of August 5 - 10 times more short positions than a month earlier, a government report showed.

"The report by the Commodity Futures Trading Commission, which regulates US futures markets, also showed short positions held by three US banks in silver futures had increased more than four times during the same period.

"'The data in the bank participation report is so clear and compelling that it is hard to conclude anything but manipulation,' said Theodore Butler, a precious metals analyst, in a note.

"The sudden jump in short positions coincided with a slide in silver and gold prices, which fell $12.30 an ounce in July and another $89.20 in August, their biggest monthly loss since at least 1984, according to Factset. Silver has slumped more than $4 an ounce in August, also the biggest since 1984.

"'Congress is already investigating allegations of manipulation in the oil market, and it seems likely that it is only a matter of time before a similar investigation will be required in the precious metal markets,' said Mark O'Byrne, executive director at Gold and Silver Investment.

"The CFTC, in a report published in May on its Web site addressing the allegation that the silver market was manipulated, said 'there is no evidence of manipulation in the silver futures market.'"

Source: Moming Zhou, MarketWatch, August 29, 2008.

David Fuller (Fullermoney): Gold faced with period of support building
"Gold bullion and gold shares were among the last to break down in the global deleveraging cycle and some technical damage has occurred. Both bounced recently in response to short-term oversold conditions. However, a period of support building may be required before these patterns can sustain advances into the overhead trading ranges. Nevertheless gold bullion looks somewhat stronger against other currencies, as you can see with these examples of gold in euros and gold Australian dollars.

"I like gold for the long term, but as with many markets, we may be in this defensive period of uncertainty for a while longer before asset appreciation commences once again."

Source: David Fuller, Fullermoney, September 1, 2008.

Bloomberg: Pickens - oil to return to record by end of 2008

Source: Bloomberg, September 3, 2008.

Bloomberg: Ospraie to close Flagship Hedge Fund after 38% loss
"Management LLC, the investment firm run by Dwight Anderson, will close its biggest hedge fund after slumping 38.6% this year because of bad bets on commodity stocks.

"The New York-based Ospraie Fund fell 26.7% in August after a 'substantial sell-off' in energy, mining and resource equity investments, Anderson said in a letter to investors yesterday.

"Losses at Ospraie, once the largest commodity hedge fund firm, underscore how the sudden swing in commodities caught even experienced managers off-guard. The Morgan Stanley Commodity Related Index of 20 mining, energy and agricultural companies declined 13% in July and August as the slowing global economy cut demand for raw materials.

"'Commodities have been the story du jour, what with China's 1.2 billion population industrializing,' said Peter Rup, chief investment officer at New York-based Orion Capital Management, which invests in hedge funds. 'It's easy to find a trend and ride the train. The problem is, managers don't know when to get off it.'"

Source: Katherine Burton, Saijel Kishan and Christine Harper, Bloomberg, September 3, 2008.

BCA Research: ECB - still hawkish
"The ECB opted to leave policy rates at 4.25% as expected. However, monetary policy should slowly begin to ease.

"For the last year the central bank has talked and acted tough on monetary policy. Yesterday's rate decision and the announcement that it would apply a 12% 'haircut' to collateral offered from next February continues this trend, unnerving investors. However, the next move will be towards more accommodative monetary policy, beginning early next year.

"Headline inflation is peaking and price pressures will ease further in the months ahead as the economy weakens. Indeed, external demand is slowing and this week's retail sales and PMI services releases painted a very bleak picture.

"Still, policymakers will be slow to shift their rhetoric. As we highlighted in the past, the ECB remained concerned about inflation risks even as it eased policy in 2001. Bottom line: Rates will fall 100 basis points next year. Stay overweight 10-year bunds versus Treasurys and use any relative weakness from yesterday's announcement to add to positions."

Source: BCA Research, September 5, 2008.

Victoria Marklew (Northern Trust): ECB's economic projections
"Alongside today's policy meeting, the ECB staff economic projections were released. As expected, the inflation forecast was revised up while the growth forecast was revised down. The annual rate of EU-harmonized inflation is now expected to average 3.4% to 3.6% this year, slightly up from the June outlook of 3.2% to 3.6%, with 2009 inflation at 2.3% to 2.9% (1.8% to 3.0% previously). Real GDP for this year has been revised down to just 1.1% to 1.7% (1.5% to 2.1% in June), and 0.6% to 1.8% next year (down from the earlier 1.0% to 2.0%)."

Source: Victoria Marklew, Northern Trust - Daily Global Commentary, September 4, 2008.

Edmund Conway (Telegraph): ONS called to account as doubts over figures start to stack up
"It all started when the Bank of England Governor warned that he suspected the Office for National Statistics' first estimate of gross domestic product growth was unrealistically high - a fear later borne out as the ONS cut it from 0.2 per cent to zero. Humiliatingly, the Bank has started publishing 'back-casts' alongside its forecasts to indicate whether it feels recent ONS numbers properly reflect past economic growth.

"Then came the retail sales controversy. The ONS reported a record rise in May, a record fall in June, then an entirely unexpected rise in July. The British Retail Consortium, the Confederation of British Industry, the Bank and many economists were sceptical.

"The final embarrassment came earlier this month when, on the advice of the ONS, the Department for Communities and Local Government withdrew three years' worth of housing data after discovering 'inconsistencies'."

Source: Edmund Conway, Telegraph, September 4, 2008.

Bloomberg: Spanish retail sales fall for eighth month as "crisis" deepens
"Retail sales in Spain fell for an eighth month in July as record oil prices and higher interest rates eroded consumers' purchasing power.

"Sales fell 6% from the year-earlier month, after adjusting for the number of days worked, the second-biggest decline since the series began in 2005, the National Statistics Institute said on its Web site today. That decline followed a 7.9% slump in June. Adjusted sales fell 0.4 percent on the month.

"'Spain has a crisis,' Nick Hayek, chief executive officer of Swatch Group AG, the world's largest watchmaker, said. 'Without any doubt that's the country in Europe that really gives us a headache.'

"Spain's economy has been battered by surging gasoline prices and the fastest inflation in 10 years just as the global credit shortage undermines the housing market. House prices fell for the first time in a decade in the second quarter as the European Central Bank pushed interest rates to a seven-year high in its bid to control price gains."

Source: Ben Sills, Bloomberg, August 29, 2008.

Financial Times: Fukuda quits as Japanese PM
"Yasuo Fukuda, Japan's prime minister, on Monday night shocked even his own party by abruptly resigning after less than a year in office, paving the way for possible snap elections in the world's second-largest economy.

"Mr Fukuda, the second prime minister to quit in a year, said he had resigned in the hope that a new leader could break the political deadlock that had plagued his term in office.

"The deadlock arose from a hung parliament in which the opposition Democratic Party of Japan blocked legislation needed to bolster Japan's flagging economy and realise its global diplomatic and security ambitions.

"Explaining his resignation to a hastily convened press conference on Monday night, Mr Fukuda said: 'In order to put priority on the people's livelihood, a political vacuum must be avoided and there should be no lapse in policies. We need a new team.'

"The 72-year-old leader, drafted in last September to take over a party reeling from the equally sudden resignation of Shinzo Abe, Japan's youngest post-war leader, added: 'I feel that it would be best to hand over the reins of power to a new leader.'

"The uncertainty comes just as Japan has slipped into an economic slowdown, triggered by falling exports and high food, energy and commodity prices. A recent contraction in gross domestic product ended more than six years of continuous growth, the longest, if not fastest period of expansion in post-war Japan. This prompted the government last week to launch an Y11,500bn ($106 billion) emergency fiscal stimulus package."

Source: Michiyo Nakamoto and David Pilling, Financial Times, September 1, 2008.

Bloomberg: China's manufacturing contracts for second month
"Manufacturing in China, the world's fastest-growing major economy, contracted for a second straight month in August, according to a survey of purchasing managers.

"The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.

"Since July, Chinese policy makers have put extra emphasis on sustaining the economy's expansion rather than cooling inflation. Growth has slowed for four quarters and Vice Commerce Minister Gao Hucheng said last week that weakness in global demand will weigh on China's exports for the rest of the year.

"'This suggests economic growth will continue to slow,' said Sun Mingchun, an economist at Lehman Brothers in Hong Kong."

Source: Nipa Piboontanasawat, Bloomberg, September 1, 2008.

Financial Times: Asian inflation pressures set to ease
"South Korea, Thailand and Indonesia reported slowing rates of growth in consumer prices on Monday, prompting suggestions that Asian inflation has peaked and probably monetary policy tightening with it.

"Tim Condon, head of Asia research at ING, said: 'The tightening cycle is over across Asia. A lot of this is an oil call, and if oil spikes again we will see upward inflationary pressures.'

"Although China has been reporting slowing price growth since May, inflation continued to rise in much of the rest of the region. Last week Japan reported that its core inflation rate hit a decade high of 2.3% in July from the same month in 2007, while Vietnam said consumer prices rose 28.3% in August, up from 27% in July.

"Falling commodity prices and a resultant slowing of food price inflation was a key factor in Monday's data reports. Robert Prior-Wandesforde, a senior Asia economist for HSBC, said: 'In Asia, food explains 60% of the overall inflation rate in the last year, with energy accounting for 15%.'

"The extent to which inflation drops across Asia will be limited by food commodity prices remaining relatively high, wage increases, exchange rates weakening against the dollar and monetary authorities' reluctance to tighten further."

Source: John Aglionby and Song Jung-a, Financial Times, September 1, 2008.

Bloomberg: Brazil's industrial output rises 8.5% versus year ago
"Brazil's industrial production expanded faster than forecast by economists in July, cementing expectations that the central bank will raise interest rates further next week.

"Output rose 8.5% from a year ago, more than the revised 6.4% increase in June and more than the 8% median forecast in a Bloomberg survey of 32 economists. After stripping out seasonal factors, output rose 1% from June, the statistics agency said in a statement in Rio de Janeiro.

"Today's report highlights the sustained domestic demand that is powering growth and consumer price increases in Latin America's largest economy. Policy makers next week will probably vote to raise Brazil's benchmark lending rate by three-quarters of a percentage point for a second time in as many meetings to slow inflation from a three-year high, Alexandre Lintz, chief strategist with BNP Paribas in Sao Paulo, said.

"'We see no room for the central bank to change its current tightening stance, given economic activity remains robust,' Lintz said. 'The bank needs to keep raising rates by 0.75 percentage point until there are clear signs that growth is slowing.'

"Inflation, running above the midpoint of the central bank's target range of 2.5% to 6.5% since January, fell in July for a second month, led by food. Consumer prices rose 6.37% in the 12 months to the end of July."

Source: Joshua Goodman, Bloomberg, September 2, 2008.

BCA Research: RBA cuts and adopts easing bias
"The Reserve Bank of Australia (RBA) lowered its key interest rate yesterday. The statement that followed suggests future cuts will be data dependant, but we suspect the central bank to ease again before yearend.

"The decision to cut interest rates by a quarter percentage point (to 7%) was designed to offset 'tight' financial conditions. Mortgage holders have seen interest burdens increase markedly, causing housing affordability to drop to a 22-year low and approvals to fall to the lowest level since 2006.

"Meanwhile, retail sales have slowed dramatically, the unemployment rate is rising and business and consumer confidence has plunged. In turn, household spending is expected to slow further. That said, labor scarcity is an ongoing issue for the commodity intensive parts of the economy and core inflation has not peaked.

"Furthermore, the country has booked its first trade surplus in six years, highlighting the hefty stimulus accrued by the positive terms-of-trade shock. Regardless, the central bank has adopted an easing bias, saying '... it is looking more likely that ... overall economic growth [will] slow over the period ahead.'

"Bottom line: Despite lingering price pressures, the RBA will be forced to ease policy further to avert a more serious domestic slowdown. Still, significant easing is already discounted by the market. Thus, we maintain a neutral weighting to government bonds within a globally hedged fixed income portfolio and are flat the Aussie dollar."

Source: BCA Research, September 3, 2008.

Financial Times: Russia announces "spheres of interest"
"Russia's president Dmitry Medvedev on Sunday announced Moscow's intention to preserve geographical spheres 'of privileged interest' on or near its borders as part of a five point foreign policy statement in a television interview.

"The announcement, in the wake of the recent conflict in Georgia, is likely to raise the political temperature in neighbouring states, especially those with significant Russian minorities, as they try to gauge Russia's appetite for future conflicts in the region.

"He said that Russia would defend 'the life and dignity' of Russian citizens 'no matter where they are located'. He was referring to Russia's intervention in Georgia with the declared aim of defending Russian citizens in South Ossetia against Georgian forces.

"Mr Medvedev announced that Russia would provide aid - including military help - to the enclaves of South Ossetian and Abkhazia.

"In the announcing his five-point foreign policy, he emphasised Russia's wish to avoid confrontation or international isolation as the result of the recent conflict, which has been widely criticised in the west. 'Russia does not intend to isolate itself. We will develop, as much as possible, our friendly relations with Europe and the United States, and other nations of the world.'

"He also focused on a commitment to international law, and again expressed Moscow's now familiar antipathy to a 'unipolar' world dominated by Washington, saying 'this type of world is unstable and threatens conflict'.

"Mr Medvedev's announcement that Russia has 'regions of priviledged interest' is likely to be greeted with concern in the west, where it might be interpreted as the announcement that Moscow has imperial ambitions in the former Soviet Union. It is also likely to resonate in Crimea, the province of Ukraine that is dominated by ethnic Russians, ethnically Russian northern Kazakhstan, and Baltic states with large Russian minorities.

"'Russia, like other countries in the world, has regions in which it has privileged interests' said Mr Medvedev. 'In these regions are located countries which have friendly relations ... Russia will work attentively in these regions' he said, adding these 'privileged' regions included states bordering Russia, but not only those."

Source: Charles Clover, Financial Times, August 31, 2008.

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