Interim Comment

None of us are enjoying the bear market in equities brought on by the collapse of the speculative investing done by hedge funds. On the other hand, it could be worse. You could have your money invested in a hedge fund. Or the worst case, you could be invested in a hedge fund that has frozen withdrawals, meaning you can not get your money out until they decide to give it to you.

Other good news is that about half the hedge fund liquidation is complete. From a high of about $2.3 trillion in assets they have fallen to about $1.65 trillion of assets. A reasonable guess is that this is about half the necessary liquidation for these funds. Since markets work off of second derivatives, strong negative price pressure may abate by end of December.

Other good news is in the top chart. Most important, the fundamentals are still solid for Agri- Food. Last we heard, people in China and India and Europe and Russia and wherever were still eating. Incomes are still growing in China, by about $200+ billion in the coming year. A goodly portion of that income growth will go to purchasing food.

As top chart shows, the fundamentals for Agri-Food continue better than those for the stock market, in this case the S&P 500. No loan losses. No need to raise capital in order to stay in business. The basic business of Agri-Food, people eating and trying to eat better, remains strong.

When world's equity markets exit this bear market, investors will be looking for investment sectors like Agri-Food. Few major investment themes exist on which investors can focus in the next bull market. Investors will be looking for investment themes that have not been worked over.

Encouraging news can also be found in the chart bottom of the preview page, which comes from Reuters daily commodity service. It portrays open interest in commodity contracts on futures markets. While not indicated, we assume it includes everything from oil to Gold to pork bellies.

For those not familiar with futures, open interest is the number of contracts existing, or representing, an underlying commodity. Unlike stocks and bonds, no commodity future contract exits till someone sell ones. Contracts do not exist till a buyer and seller create, or write, one.

The mad rush into commodities by hedge funds pushed up open interest from about 6 million contracts at the beginning of 2006 to about 8 million contracts in early 2008. With open interest rising by more than a third, prices were pushed above equilibrium.

Since the hedge fund driven liquidation started, more than 25% of those holdings have been sold. Open interest, in total, is now below 6 million contracts. At present total open interest is below that at the beginning of 2006.

Much, or most, of the hedge fund selling, both necessary and due to changed tactical thinking, could be assumed to be complete. As selling should moderate, pressure on prices should moderate. That should allow growing demand and weakening supply to push prices up. However, no mad rush as previously experienced should be expected for prices.

In the top chart we see that price for many Agri-Foods have bottomed. A bottom is a necessary precondition for a price to rise. That chart plots current prices relative to the 52-week low for Agri-Food commodity prices. If at zero, the commodity is selling at 52-week low. Wheat, for example, is up almost 20% from the 52-week low. The situation portrayed suggests that for many selling pressure has abated, and that possibility could indeed benefit Agri-Food investments.

Carnage in stock markets has been without mercy. Only way a stock does not go down is if it does not trade. But, here too we find some encouragement. In bottom graph is last six months of Shanghai Stock Exchange Index, along with a 50-day moving average.

This index has meaning for the Tier Two stocks as they are all Chinese companies. As can be observed in the graph, the SSEI has hit the 50-day moving average. That is something that has not been the case for a long time. And remember, prices have to move through the 50-day moving average before they move through the 200-day moving average, a popular measure.

The bottom in Chinese stocks may be in place, and that may spill over to help the Tier Two list. Now would be a good time to look at some of these stocks. Most have fully participated in the stock market carnage, and appear extremely cheap. A year from now the hedge fund liquidation will be history, and one might find that buying them requires paying a higher price.

Eat well and prosper,