The big moment has arrived – a new-look blog site for Investment Postcards from Cape Town! Since launching my international investment blog at the middle of last year, traffic has increased measurably, causing me to revamp the site.

But a fresh appearance is only one facet of the new site. Additions include features such an index ticker, stock market polls, a translator and video clips, and also sections on South Africa (where my investment management business has its headquarters) and Humor (for those moments when the weight of downmarkets becomes just a little too much to bear).

A very important change is the domain address (URL) of the blog, which is now: Please bookmark this address with your favorites. Also, delete any reference to the old URL ( as this post is the last one on the old site.

The principal advantage of an own domain is that it allows significantly more flexibility regarding site design, with the ultimate aim of providing readers with a compelling read in a pleasant blogging environment.

I hope you share my enthusiasm for this exciting project that has been immensely fulfilling and has enabled me to make so many new friends all around the world. Let’s raise a glass to memorable (and profitable) market moments!

See you at:


The past week witnessed an extraordinary set of events on the financial front, a rogue trader creating havoc at Société Générale, and wild swings on global stock markets as mounting concerns about a recessionary US economy and the implications for global growth continued to weigh on investor sentiment.

The week started off with sharp declines on European and Asian stock markets on Monday (when the US markets were closed in commemoration of Martin Luther King). This was followed by the Fed’s emergency 75-basis-point-cut of its benchmark rate to 3.5% before the opening bell of the US markets on Tuesday, aiming to help support the troubled financial sector and stabilize the economy. The move, which came before the Central Bank’s formal meeting next week and marked the largest cut in the Fed funds rate in more than twenty years, helped prevent a larger drop in US equity prices.


Although investors’ initial reaction was lukewarm, stability returned to stock markets as they took heart from a possible rescue plan for troubled bond insurers (so-called monolines). In addition, the unveiling of a $150 billion US fiscal stimulus package by the Bush administration was viewed in a favorable light even though it was criticized just a few days earlier.

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance chart.

The Fed’s interim interest rate cut resulted in a further steepening of the yield curve with the aim of enabling shell-shocked banks to start lending again, and to start making profits so that they might be able to grow their way out of the credit crisis over time. The following chart illustrates how the yield curve has steepened since the first reduction in the Fed funds rate in August, 2007.



As far as economic statistics are concerned, US jobless claims for the week to January 19 surprised on the downside, reflecting a situation not yet commensurate with recessionary conditions. The US housing market, however, remained mired in weakness, according to the National Association of Realtors’ report for December. Existing home sales declined by 2.2% while the median existing house price was down 6% from one year ago. The inventory situation was looking slightly better, with about nine months of available inventories.

The jury is out on whether the FOMC will announce a further rate cut on Wednesday. John Mauldin (Thoughts from the Frontline) argues as follows: “If I am wrong and the Fed was responding to the stock market [when cutting the Fed funds rate by 75 basis points on January 22], then we will likely not see a cut next week. But if we get another 50-basis-point cut, as I think we will, then it means the Fed is responding to concerns about the credit crisis. And we will get another cut at the next meeting and the next until we get down to 2% or below. A 50-basis-point cut takes the rate to 3%. It they had cut the rate by 1.25% next week, the market would have collapsed. Better to do it in two leaps is what I think they are thinking.”



Time (ET) Statistic For Actual Briefing Forecast Market Expects Prior
Jan 24 8:30 AM Initial Claims 01/19 301K 320K 320K 302K
Jan 24 10:00 AM Existing Home Sales Dec 4.89M 5.00M 4.95M 5.00M
Jan 24 10:30 AM Crude Inventories 01/19 2297K NA NA 4259K

Source: Yahoo Finance, January 25, 2008.

In addition to President Bush’s State of the Union Address on January 28 and the FOMC meeting on January 29 and 30, the next week’s economic highlights, courtesy of Northern Trust, include the following:


New Home Sales (Jan 28) Sales of new homes are predicted to have dropped by 5.0% in December to 645 000. Sales of new homes have declined by 53.4% from their peak in July 2005. On a year-to-year basis, sales have dropped by 35.2% from a year ago. Consensus: 645 000 vs 647 000 in November.


Durable Goods Orders (Jan 29) Durable goods orders are predicted to have risen in December (+0.4%) after a 0.1% increase in the previous month. In particular, orders of aircraft may have dropped and those of defense items have risen, reversing the performance seen in November. Consensus: +1.6% vs +0.1% in November.


Real GDP (Jan 30) – Real gross domestic product is expected to have risen by 1.2% in the fourth quarter. Positive contributions from consumer spending, non-residential fixed investment and exports are expected to be partly offset by a large drop in residential investment expenditures. Consensus: 1.2%.


Personal Income and Spending (Jan 31) The earnings and payroll numbers for December suggest a 0.3% increase in personal income. Auto sales posted a small increase in December, while non-auto retail sales were weak. Both of these suggest soft overall consumer spending (+0.1%). Consensus: Personal income +0.4%; consumer spending +0.1%.


Employment Situation (Feb. 1) Payroll employment in January is expected to show tepid gains (+25 000) after an 18 000 gain in December. Private sector payrolls fell by 13 000 in December, the first decline since June 2003. This report will be watched closely to evaluate the underlying fundamentals of the labor market. The jobless rate is predicted to have risen to 5.1%. Consensus: Payrolls +58 000 vs +18 000 in December; unemployment rate – 4.9%.


ISM Manufacturing Survey (Feb. 1) The consensus for the manufacturing ISM composite index is 47.0 after a 47.7 reading in December.


Other reportsCase-Shiller Price Index, Consumer Confidence Index (Jan 29), Chicago Purchasing Managers’ Index, Employment Cost Index (Jan 31), Construction Spending and auto sales (Feb 1).

The performance chart obtained from the Wall Street Journal Online indicates how different global markets fared during the past week.


Source: Wall Street Journal Online, January 27, 2008.

US stocks started the shortened week markedly lower on Tuesday, following a sharp sell-off in global stock markets due to growing concerns about the overall health of the economy and Société Générale’s clean-up operations of its rogue derivatives trader’s positions. Markets, however, managed to recover and reclaimed higher ground as the week progressed. By the close of trade on Friday the Dow Jones Industrial Index (+0.9%) and the S&P 500 Index (+0.4%) were both in positive territory for the week, but the technology-heavy Nasdaq Composite Index (-0.6%) was less fortunate.

Following the surprise reduction in the Fed funds rate, the announcement of the tax stimulus package and a mooted rescue plan for bond insurers, interest-rate- and economically sensitive stocks gained strongly. Examples include banks (+11.4%), REITs (+8.6%), retailers (+5.4%) and small caps (+2.3%).

Elsewhere in the world, stock markets closed mostly in the red. Emerging markets, in particular, had a rough ride and lost 2.2% for the week, including the Shanghai Stock Exchange Composite Index’s decline of 8.1%.

The lower stock markets at the start of the week helped drive the yields on government bonds lower, but the gains were given up as the week wore on, and prices closed the week little changed.

Currency markets also experienced a fairly volatile week and saw the US Dollar Index closing the week 0.7% down. The euro, on the other hand, gained 0.2% on the back of hawkish comments from the ECB. Risk considerations resulted in investors exiting risky carry trades early in the week, pushing the yen to a two-and-a-half-year high against the dollar. As markets calmed down, the yen declined again to end the week lower against both the US dollar and euro.

With most of the action concentrated on stock markets, commodities were somewhat out of the limelight during the past week. Base metals (-0.9%) and agricultural commodities (-1.9%) closed in the red, but crude oil (+0.9%) managed to claw back some of the previous week’s losses.

Precious metals, however, rallied strongly subsequent to the Fed’s rate cut, resulting in gold gaining 3.3%, platinum 7.3% and silver 1.7%. Both gold ($924.3) and platinum ($1 694.9) registered new all-time highs on Friday prior to some profit-taking setting in.

With the FOMC’s meeting on Tuesday and Wednesday, and Q4 GDP and January’s payroll numbers out on Wednesday and Friday respectively, another key week for financial markets lies ahead. Hopefully the words (and graphs) from the investment wise will assist in guiding us through the murky waters and keeping our investment portfolios in good shape.

US economy: Danger from all directions


Source: Slate, January 24, 2008.

Moody’s Survey of Business Confidence for World
“The global economy is stalling according to last week’s business confidence survey results. Sentiment is consistent with a contracting US economy, soft European and South America economies, and an Asian economy that is expanding at the low end of its potential. Expectations regarding the six-month outlook have never been as negative in the over five years of the survey. Confidence is weakest among real estate firms and financial institutions, but it has declined considerably in recent weeks among business service firms and even heretofore more optimistic manufacturers.”

Source: Moody’s, January 22, 2008.

International Herald Tribune: US in role of wounded giant at Davos
“The United States has filled various roles at the World Economic Forum over the past decade: dot-com dynamo, benevolent superpower, feared aggressor, and now, wounded giant. On the first day of this conference, a parade of bankers, economists, and political officials expressed deep fears about the faltering American economy, peppered with blunt criticism of its institutions, chiefly the Federal Reserve, which some accused of sowing the seeds of today’s crisis.

“George Soros, the financier who made a fortune betting against the pound, went so far Wednesday as to say that the downturn would put an end to the long status of the dollar as the world’s default currency. ‘The current crisis is not only the bust that follows the housing boom,’ Soros said. ‘It’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency.’

“Signs of a new economic order abounded in this Swiss ski resort: the minister of commerce and industry of India, Kamal Nath, noted that China had overtaken the United States as India’s largest trading partner – buttressing his view that India could largely sidestep an American recession. The head of the National Bank of Kuwait, Ibrahim Dabdoub, said Americans who opposed sovereign wealth funds like the one run by his government needed to come to terms with the new reality.

“Nouriel Roubini, an American economist, whose frequent predictions of a downturn have made him something of a soothsayer in Davos, predicted the United States would suffer a recession lasting at least a year. He foresees a flood of defaults on car loans and corporate bonds, as well as a prolonged bear market. ‘The debate is not whether we’re going to have a soft landing or a hard landing,’ he said. ‘The question is only how hard the hard landing will be.’

“The Federal Reserve ‘made bad judgments’, said Joseph Stiglitz, the Nobel Prize-winning economist. ‘It looked the other way when investment banks packaged bad loans in non-transparent ways.’ The rate cut this week, Stiglitz said, would be too little, too late, because monetary policy usually takes between six months and 18 months to be effective, and the United States is in distress now.”

Source: Mark Landler, International Herald Tribune, January 23, 2008.

Asha Bangalore (Northern Trust): Fed cuts rate in surprise move
“In a surprise inter-meeting move, the FOMC lowered the federal funds rate and discount rate 75 bps to 3.5% and 4.0%, respectively.

“The statement noted that (1) ‘weakening economic outlook and increasing downside risks to growth’, (2) ‘deepening of the housing contraction’, and (3) ‘some softening of labor markets’ were reasons for the easing of monetary policy. The statement did not mention equity markets explicitly but cited that ‘broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households’. After the January 21 drop in global equity prices when the US market was closed, a continued downward trend today in these markets and the sharp drop in US equity futures markets this morning before opening probably played a role in today’s Fed action.

“Further easing of monetary policy is on the table, but the magnitude and timing is less clear. There could be preference to wait until the March 18 FOMC meeting to assess the impact of the monetary and fiscal policy easing put in place. The futures market has priced a 50 bps cut for the January 30 meeting. For today, we maintain a Fed on hold at the January 30 FOMC meeting, with a small possibility of further easing.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, January 22, 2008.


The Chinese calendar proclaims this as the Year of the Rat. Based on the behavior of economies and financial markets over the past few months, investors would be forgiven for thinking that a plague has descended upon the financial system. But on occasion it is useful to step back from the day-to-day shenanigans of markets and take a bird’s-eye view of events.

When it comes to evaluating how well people “read” the macro picture of financial markets, it is important always to distinguish between skill and luck. And it is really only with the passing of time, or evolvement of a number of market cycles, that one can separate the wheat from the chaff.

Donald Coxe, Global Portfolio Strategist of BMO Financial Group, is one of a select group of analysts that have been remarkably right on the “big picture” outlook for many years. My market views essentially concur with Donald’s investment recommendations as published in the January edition of Basic Points, entitled “The Year of the Rats”. I have therefore deemed it opportune to share his words of wisdom with you in the paragraphs below.


The financial crisis is not centered in stock markets. Its primary locus is in financial derivatives, and in their impact on the stock prices of leading banks. Until the downward drift of bank stocks and the upward drift of derivative debt yields are reversed, the stock market will continue to slide. Keep overall equity exposure to minimums, and emphasize quality.


Bond investors face two risks: inflation and credit. Nominal Treasury bond yields are far too low, and quality corporates are too rare – with 71% of corporate debt junk-rated. Buy inflation-hedged sovereign bonds – preferably in major foreign currencies. Simplicity is good: avoid complex products that are subject to drastic rating writedowns.


Commodity stocks are at risk to the extent that the financial frauds and foolishness are able to abort the global economic recovery. A US recession would be good news only for gold stocks. It would be bad news for base metal and steel stocks, and negative news for oil stocks. Agricultural stocks should not be hurt, except that major bear raids will likely spew blood broadly across stock markets.


Any panic-driven selloffs in commodity stocks are unlikely to take them off the top-performers lists for more than a few weeks. They are not just fair-weather friends. Not only are most of the majors very cheap on a forward-earnings basis, but mining and oil companies that ordinarily search for resources in remote regions will take advantage of selloffs to acquire reserves in politically safe regions at bargain cost. Coming out the other side of this slowdown, these stocks will experience big increases in their absolute and relative PEs. Someday a big Sovereign Wealth Fund is going to decide that bailing out banks isn’t as profitable as owning matchless reserves of minerals.


Food price inflation should strengthen through the year. It could be offset by broad price declines across the US economy as it struggles with recession, but it is becoming embedded in the global economy and will be a challenge for many years. It will produce a full-blown crisis when a major crop failure occurs.


The Canadian dollar trades right around parity. It might not climb sharply higher if a US recession is confirmed, because of the impact on the industrial sector and tourism. It remains a fundamentally strong currency, and the greenback remains a fundamentally weak currency. Canadian borrowers should borrow in greenbacks.


Gold’s move has been dramatic, but retail investors in North America and Europe have not yet shown signs of true gold fever. That means there is still substantial upside. Soaring silver and platinum prices confirm that this gold move is no mere spastic twitch. The expression “as good as gold” in reference to Treasuries and other US debt instruments should be restricted to use as a warm-up joke at investment policy meetings.


Defence stocks have solidly outperformed the S&P for most of the Bush presidency. Iraq and Afghanistan have run down a wide range of Pentagon inventories and a new generation of fighter jets cannot be postponed much longer. No matter who wins the presidency, these companies should continue to prosper.


Sovereign Wealth Funds have been buying US banks. Wall Street cites these purchases as evidence of great value in bank stocks. For nations that are overweight Treasuries in their holdings and underweight influence in American politics, swapping Treasuries for bank equities and convertibles makes sense. That does not necessarily mean that the stocks are great value for investors who cannot get other – unspecified – returns on their investments.


Use panic days to strengthen your equity portfolio, buying the agricultural, gold and oil stocks you will want to own after the bear retreats to his cave – and selling stocks that are too dependent on US consumers. Retain your quality base-metal stocks: they may well be taken out by other mining companies, or a Sovereign Wealth Fund.


The US small-cap bear market may be overshooting because investors haven’t analyzed the likely improved competitive positions of companies whose principal competitors were bought by Private Equity or are Canadian or European companies hurt by the weakening dollar.


Be like all wise cottage owners: Protect your possessions from Rats.

Source: Victor Adair

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This week’s edition of “Words from the Wise” is briefer than most as I must answer the call of family to spend a last few days with them before putting shoulder to the 2008 wheel.

My kids have asked me to help them fly a kite, but the wind seems to be a bit too gusty to achieve this with much success. This makes me wonder how stock markets are going live through the various tailwinds and headwinds that will invariably come to blow during 2008.

In the words of market veteran Richard Russell, author of the Dow Theory Letters: “This market cannot make up its mind. The bullish case is strong, the bearish case is strong, and a lot of very big money is very divide on the outlook for the stock market. Thus – we have a very nervous, high volatility market with the Dow jumping over 100 points (up or down) every other day. It’s enough to give an honest man the ‘willies’.”

And in the spirit of the holiday period, David Galland of Casey Research observed: “… we have the US stock market, which, despite the energetic efforts of government on many levels, is stumbling along like a blind drunk after a long and well-lubricated holiday season party. One minute, Mr. Market has a big happy smile on his face, but the next he’s flat on his face. Struggling to his feet, he is barely able to whisper an ebullient toast before tripping over his own shoes and falling back to the ground.”

I will be watching the market carefully as 2007 fades out and the New Year comes in. The market action during the few days of December and January often provides hints regarding the rest of the year. For example, if the so-called “Santa Claus Rally”, which has one more trading day remaining in 2007 and two more in 2008, does not materialize, it typically is a harbinger of a sizeable correction or bear market in the coming year.

The “January Barometer”, stating that as the S&P 500 Index goes in January so goes the year, will also be watched with more than a cursory glance. 

Furthermore, the best years for stock market gains have been years ending in 5, with the second best years being those ending in 8. Since 1891 there have been only two years ending in 8 that were negative, namely 1948 when the Dow was down 2.1% and 1978 when the index declined by 3.2%.

Here’s wishing you a wonderful New Year. May it be truly joyful and exceptionally rewarding on all fronts.

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the market’s ups and downs on the basis of economic statistics and a performance chart.

The assassination of Benazir Bhutto, Pakistan’s former prime minister and opposition leader, weighed heavily on markets during the past week, raising the possibility of instability in a volatile region.

An international crisis could not have appeared at a worse time with the global financial system appearing to be an unpredictable black hole. Also, further evidence of worsening economic conditions came in the form of new home sale tumbling by 9% in November to the slowest pace in 12 years and durable goods orders rising a disappointing 0.1% in November. More reassuring data on US mid-west manufacturing activity were largely brushed aside.

All this was piled on top of mounting concerns about more banking write-downs, rising inflation and a deteriorating outlook for economic growth. 


Time (ET)




Briefing Forecast

Market Expects


Dec 26

10:30 AM

Crude Inventories 12/21




Dec 27

8:30 AM

Durable Orders Nov





Dec 27

8:30 AM

Initial Claims 12/22





Dec 27

10:00 AM

Consumer Confidence Dec





Dec 27

10:30 AM

Crude Inventories 12/21





Dec 28

9:45 AM

Chicago PMI Dec





Dec 28

10:00 AM

Existing Home Sales Nov




Dec 28

10:00 AM

New Home Sales Nov





Source: Yahoo Finance, December 28, 2007.

The next week’s economic highlights, courtesy of Northern Trust, include the following: 

Existing Home Sales (Dec 31) – Sales of existing single-family homes are down 31.0% from their peak in September 2005. The consensus is for a steady reading in November. Consensus: 4.97 million.

ISM Manufacturing Survey (Jan. 2) – The Manufacturing ISM survey for December is predicted to fall to 50.3 form 50.8 in November. Indexes tracking new orders, production and employment should be market movers. The employment index fell to 47.8 in November. Consensus: 50.3 from 50.8.

Employment Situation (Jan. 4) – Payroll employment in December is predicted to have risen 40,000 after a gain of 94 000 in November. The gradual upward trend of initial jobless claims suggests that hiring was probably slow in December. The unemployment rate should have risen to 4.8% in December following three monthly readings of 4.7%. Consensus: Payrolls +65 000 vs. +94 000 in November; unemployment rate – 4.8%.

Other reports – Construction Spending (Jan. 2), ISM Non-Manufacturing Survey, and Factory Orders (Jan. 3).

The performance chart obtained from the Wall Street Journal Online indicates how different global markets fared during the past week. 


Source: Wall Street Journal Online, December 30, 2007.

US stock market indexes declined modestly during the past week on the back of increasing economic woes and worries about the situation in Pakistan. The worst casualties were REIT stocks (-2.1%), small caps (-1.8% in the case of the Russell 2000 Index) and financials (-1.2%). Energy (+1.4%), however, brought investors some joy.

The MSCI World Index recorded a gain of 1.1% for the week as a result of the strong performance of emerging markets (+2.6%), and also a small positive contribution from the Japanese Nikkei 225 Average (+0.3%).

On the currency front, the US dollar had its worst week in a year as the poor economic statistics increased expectations of more interest rate cuts, resulting in the US Dollar Index declining by 2.0%. Similarly, sterling hit its lowest level in one-and-a-half years against a basket of currencies after a report of slower growth in house prices raised expectations of interest rate cuts early in 2008. On the positive side, the euro, the Swiss Franc and Chinese renminbi increased strongly.

As far as money markets were concerned, the three-month dollar Libor rate eased to its lowest level since February 2006 and the three-month euro rate was set at its lowest level since November 22. Government bond yields declined during the course of the week, benefitting from more safe-haven buying.

The oil price came within sight of its all-time high after US fuel inventories fell more than expected and in reaction to tension in Pakistan and northern Iraq. Gold, fulfilling its role as a safe-haven investment in times of political uncertainty and a hedge against inflation, jumped by 3.4%. Silver (+2.8%) was in hot pursuit, but platinum (+0.3%) lagged somewhat after having hit a record on Thursday.

Although agricultural and base metal commodities experienced some profit-taking, the Dow Jones-AIG Commodity Index still managed a 1% gain for the week.

Now for a few news items and some words (and graphs) from the investment wise that will hopefully assist to make sense of financial markets’ shenanigans during the shortened week ahead.

John Carney (Dealbreaker): Why Bhutto’s assassination is very bad news
“The reason it’s terrible news is that Bhutto was actually a source of stability for the country. She was a reasonable and relatively US-friendly alternative to Musharraf. With her out of the picture, it’s unclear what direction the opposition to Musharraf will take. But what is clear is that the opposition will most likely strengthen and act with a greater sense of urgency. The world is slightly more dangerous this afternoon than it was when we went to bed last night.”


Sources: John Carney, Dealbreaker, December 27, 2007 (text); and Bloomberg, December 27, 2007 (photo).

ABC News: US checking al Qaeda claim of killing Bhutto
“While al Qaeda is considered by the US to be a likely suspect in the assassination of former Pakistani Prime Minister Banazir Bhutto, US intelligence officials say they cannot confirm an initial claim of responsibility for the attack, supposedly from an al Qaeda leader in Afghanistan.   

“An obscure Italian Web site said Mustafa Abu al-Yazid, al Qaeda’s commander in Afghanistan, told its reporter in a phone call, ‘We terminated the most precious American asset which vowed to defeat [the] mujahedeen.’ It said the decision to assassinate Bhutto was made by al Qaeda’s No. 2 leader, Ayman al Zawahri in October. Before joining Osama bin Laden in Afghanistan, Zawahri was imprisoned in Egypt for his role in the assassination of then-Egyptian President Anwar Sadat.

“Bhutto had been outspoken in her opposition to al Qaeda and had criticized the government of President Pervez Musharraf for failing to take strong action against the Islamic terrorists. ‘She openly threatened al Qaeda, and she had American support,’ said ABC News consultant Richard Clarke, the former White House counterterrorism adviser. ‘If al Qaeda could try to kill Musharraf twice, it could easily do this,’ he said.”

Source: Brian Ross, Richard Esposito and R. Schwartz, ABC News, December 27, 2007.

Times Online: Main Bhutto suspects are warlords and security forces
“The main suspects in the assassination are the foreign and Pakistani Islamist militants who saw Ms Bhutto as a Westernized heretic and an American stooge, and had repeatedly threatened to kill her.

“But fingers will also be pointed at the Inter-Services Intelligence agency, (ISI) which has had close ties to the Islamists since the 1970s and has been used by successive Pakistani leaders to suppress political opposition. Ms Bhutto narrowly escaped an assassination attempt in October, when a suicide bomber struck at a rally in Karachi to welcome her back from exile.

“Ms Bhutto said after the attack that she had received a letter, signed by someone claiming to be a friend of al-Qaeda and Osama bin Laden, threatening to slaughter her like a goat. But she also accused Pakistani authorities of not providing her with sufficient security, and hinted that they may have been complicit in the Karachi attack.”

Source: Jeremy Page, Times Online, December 28, 2008.


I read a great many reports from investment strategists and other market gurus, but a firm favorite always remains Donald Coxe, Global Portfolio Strategist of BMO Financial Group. I largely share Donald’s investment recommendations as published in the December edition of Basic Points, entitled “Double, Double, Greed and Trouble, CDOs and Housing Bubble”, and have therefore thought it appropriate to republish these eloquently written paragraphs below.


Remain heavily underweight banks, particularly investment banks that have displayed monumental stupidity. Do not assume that a change at the top will automatically convert them into temples of wisdom (unless it is accompanied by demands for the departing to repay bonuses based on bets that turned out disastrously). Better to assume that, like subprime-based DOs, there are layers of rot that can make the entire product dangerous to your financial health.


Remain overweight Emerging Markets, emphasizing those that are oil, gas, and/or food exporters.


Soaring food costs threaten stability for some Third World economies. We have been ardently endorsing India since we returned from our leave of absence a year ago. We are now more cautious, because a weak monsoon could be politically and economically destabilizing at a time of $4 corn and $10 wheat.


Remain heavily overweight gold – both stocks and the ETF. Gold is almost as good a protection against banking problems as SKF – the UltraShort Financials ETF – a security which may not be a suitable investment in some portfolios.


We continue to believe that the Agricultural stocks are the pre-eminent investment class of our time. Farm incomes are rising rapidly and, in the US, farms and farm land are the real estate assets that are rising in value and are virtually immune to foreclosures. That means the leading Ag companies have great pricing power and minimal credit problems. We now hear suggestions that because food inflation has finally made it to the cover of The Economist, it is time to start moving toward the exits. Not so: We think that fine cover story could be the atonement – At Last! – for the magazine’s famous 1999 cover: $5 Oil.


Remain overweight oil and gas producers, including the Alberta oil sands producing companies. As disappointed as we are with the new royalty schemes in that province, Alberta certainly remains more attractive than Nigeria or Angola – and much more attractive than Russia, Kazakhstan or Venezuela.


We think it is time to begin accumulating the refiners that are equipped to handle heavy high-sulfur crude. The collapse of the crack spread has savaged refiners’ earnings, but that will eventually rebound. The Saudis have virtually turned out the Light, and less and less of the oil that the Gulf states will be lifting will be of the most desirable grades.


Retain the base metal stocks that have long-life unhedged reserves in secure areas. Even if there is a global recession caused by global collapses of subprime paper and LBO loans, it will not be deep enough to drive base metal prices back to 2004 levels – but would be worrisome enough to push further mine development even farther into the future.


When borrowing, borrow where possible in dollars. When investing, invest where possible in other currencies.


Stagflation is a bad backdrop for bonds – and for non-commodity stocks. The central bankers could have headed it off had Wall Street behaved with a modicum of morality, but the Fed and its brethren are forced into sustained reflation because of the global solvency crisis. Corporate earnings for most sectors will not meet current optimistic Street forecasts, and rising inflation will reduce the market’s P/E.

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I am spending a few days of the Christmas break at a village alongside the coastline of the Cape Town Peninsula. It is quaint, picturesque and simply an ideal location for enjoying quality time with the family. The only drawback is that it does become quite windy on occasion – at best not a highly predictable event. This reminds me of the erratic behavior of gold bullion – you just never know with what action the yellow metal is going to surprise you next, making it infamously difficult to predict short-term movements.

And true to form, just as traders were bargaining on a quiet Christmas period, gold again startled with a $15 jump, taking the price well clear of the $800-level. (The rally commenced more than a day prior to the assassination of former Pakistani Prime Minister Benazir Bhutto.) Interestingly, gold has never in its history recorded a month-end price above $800 and only closed above this level on two days during its 1980 surge, namely: $830 on January 18, 1980, and $850 on January 21, 1980. That, however, represented a blow-off with the price plunging to $737.50 a day later and falling further to $659 by the end of January.

It would seem that gold bulls may very well have reason to toast bullion next week, saying goodbye to 2007 having achieved the $800 month-end milestone. There is, however, quite an important difference between 1980 and the present situation. In 1980 gold was in a parabolic rise, whereas since the low of $250 in 2001 gold has been rising methodically, mapping out consistently higher lows as shown below.



The upside breakout from the pennant consolidation pattern is a bullish technical development and looks well supported by the rising momentum (top section of graph) and MACD (bottom section of graph) indicators.  

The gold price has not only strengthened in US dollar terms, but has in fact been appreciating in most currencies – an indication of increased investment demand. The following graph and table (not yet reflecting the post-Christmas rally) clearly illustrate this phenomenon.


Source: Plexus Asset Management (based on data from I-Net)


Gold price in various currencies



2007 (YTD: Dec 24, 2007)

Gold in US dollar




Gold in euro




Gold in British pound




Gold in Swiss franc




Gold in yen




Gold in Aus Dollar




Gold in Can Dollar




Gold in rand




Gold in renminbi




Gold in rupee




Gold in dinar




Source: Plexus Asset Management (based on data from I-Net)

The pressing question is how sustainable bullion’s uptrend is. Although the technical picture indicates a primary bull market, the fundamental situation offers both bullish and bearish arguments.

The arguments in favor of a rising gold price have been well documented and include: the possibility of ongoing pressure on the US dollar, increasing global inflationary expectations, a surging oil price, minimal new mine production, and the fact that central bank sales are capped through the Central Bank Gold Agreement (CBGA II).

The bears, on the other hand, point to: record long speculator positions that have in the past been strongly correlated with gold price corrections, potentially lower fabrication demand from India (as a result of the higher price), and a slowdown in producer de-hedging as the global hedge book diminishes. Additionally, a seasonally weak period is approaching from February to April as illustrated by the graph below.


I have over the past few months often conveyed my bullish stance on gold bullion. Examples of these articles include: “Gold: forwards and upwards” (September 14, 2007) and “Smart money bets on surging gold price” (September 4, 2007). I see no reason to change this position, from both an absolute and safe-haven point of view. I would, however, caution that one should not chase a surging gold price in an attempt to stock up on the various gold-related instruments. Rather bide your time and wait for the short-term corrections that occur regularly, perhaps coinciding with the advent of seasonal weakness in a few weeks’ time.

The final word goes to George Bernard Shaw who said: “The most important thing about money is to maintain its stability… You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.”

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Here’s wishing you a great festive season full of fun, laughter and joy. It has certainly been an eventful year, especially as far as financial markets were concerned.

Thank you for your friendship and support in making Investment Postcards such a fulfilling experience, and here’s to a wonderful 2008.


And now for a good laugh. In the spirit of the festive season, click here to see what happens when an investment manager gets “elfed”. This is elfin’ funny!


Source: Elf Yourself

The last word goes to the subprime debacle. As if it has not dominated the investment world enough, it is now also playing havoc with Santa’s activities.


Hat tip: Barry Ritholtz’s Big Picture

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