Big Picture

The Bull market in Natural Resources is going strong and I expect this situation to go on for a couple of years. The rising demand from the increasing mass of consumers in China and India and at the same time a tight situation on the supply side should lead to much higher prices in most commodities. Although some people do expect a negative impact on commodities prices from a slowing down in the US and especially in the US Housing market, I do not believe that this will have an important negative impact on the commodity prices. Already today, the increasing masses of affluent consumers in Asia (more than 40% of the world population lives in China and India) do consume more than 50% of important commodities such as coal, steel and so on. Only approximately 20% of China’s exports go to the US. So also the US might slow down it will not have a major impact on China’s consumption. Furthermore the industrialization of the Asian countries plus lately as well several Latin American countries will keep the demand on commodities high for some time. In that sense whatever is positively related to higher commodity prices does makes sense from an investment point of view for the time being

Subprime mess/write offs
In my last musings I mentioned that I do expect that more banks will have to write off some of credits/investments on their books. Last week we got information from several banks informing us that they will have to write off substantial amounts (up to 5 billion USD). This does not come as a surprise. I do expect more banks to let us know about similar actions soon. Furthermore if one analyzes the information given it could very well mean that more write off’s could be possible in the future. The write offs are basically the papers/credits with almost Zero chance of recovery because there is actually no market for these papers. Of course if the market situation improves considerably it could very well mean that some of these papers could be recovered and this would lead to a profit in the future. However I do not expect the market to improve quickly if at all. On the contrary it would not surprise me if we would see more of these papers without demand which of course would lead to more write offs.
Although, of course, I do hope that this will not happen the chances remain high for the moment being. According to Reuters, a source close to the Basel Committee on Banking Supervision said that the global credit crisis is far from over and may come in waves. According to the source, “liquidity hasn’t played a big role so far but now we can see that we have a hard-core liquidity crisis”. “This is something that has very rarely happened before… were banks don’t trust each other anymore”
Well that definitely does not sound well.

FED
Some people do expect a rate cut this month (Trades bet on a 70% chance). However I do not believe we will see one. On one side the FED has to help the falling USD in some way (lowering the rates would not help the USD at all) and on the other side if they would go down 25bps or more, they would use their munitions now and would not have it anymore when really needed. A new outburst of the crisis can arise at any moment in such a leveraged environment.

Money supply
According to John Williams from http://www.shadowstats.com/, the growth this year of the M3 in the US is at 14.6% so far. This combined with the liquidity injected by other central banks (up to the range of 20%), is certainly inflationary.

Schulz
http://www.marketwatch.com/news/story/golden-years-harry-schultz/story.aspx?guid=%7B36C4B092%2DECD7%2D421C%2D8D1B%2D824500C76BE0%7D
Stocks surge, but so does gold (again). And a veteran letter editor says the latter is what matters.
And Shultz's focus on gold is right on the news. He writes: "With an election coming, the Fed went for bandaging a slipping economy which affects votes and sacrificing the dollar, which is harder for the public to measure. Big rate cuts, like this 50 points, are always an act of desperation. Such cuts have usually been followed by recessions. More cuts will follow. It set the future in cement for the U.S. dollar. Cement overshoes. Currency debasement never produces wealth. Fed knows this, but took a political decision. Nothing new about that. Much higher inflation now guaranteed ... My tentative targets (by end of 2008): 14% (inflation), $1,600 (gold) and $45 (silver)."
Elsewhere, Schultz writes: "Gold is starting into the most exciting part of its long-term bull market, the so-called second (and monetary) phase. Herein we normally see the biggest percentage gains, matched by biggest corrections as we saw in the '70s gold rush: in 1974, gold corrected 25% in 4months (most gold shares fell 50-70%); in 1975-76 gold fell 50% (most shares fell 70-90%) and took 21/2 years to get back to old high before then rocketing to new highs. But that makes for great trading opportunities. This is the phase where the BIG money is made, by those who go with the tides. In and out, in and out ..."
In contrast, Schultz only recommends 10%-15% exposure to non-gold stocks and his favorite sectors are oil and alternative energy, uranium and commodity shares.


Gold
Gold closed September with the highest monthly close in history. This together with several closings above the USD 700 mark is very positive.
Well gold to me, certainly looks fine the way it behaves. However there are always some dubious commentators who really have no idea about the fundamentals of the Gold market. To have an idea of the “crap” (sorry the word) printed on paper read article on below link
http://www.bloomberg.com/apps/news?pid=20601039&sid=a5TPikM1zf1Y&refer=home
Gold Support for the December contract is now at 724 and resistance above 800 USD ounce.
Although gold looks fine to me, we have to have always in mind that gold and silver markets are manipulated/managed. Please have a look at the picture http://news.silverseek.com/TedButler/1191951410.php
which speaks for itself. Of course these shorts might have to be covered at some point in the case prices move up. A short squeeze will accelerate the up move considerably

Currencies
CAD made a few days ago a 3 decade high. AUD is moving up slowly but steadily. The USD still is not me preferred currency and it really seems that a much lower USD is still the most probable outcome.

Hedge Funds
According to Market Watch Hedge Funds pulled in almost USD 9 billion in New Money in August. Total industry assets fell to USD 1,74 trillion from 1.76 end July as many managers lost money. Well I do not doubt that there are some fine managers with an excellent long term track record. However the huge amount of funds, often chasing the same trades, makes it more and more difficult for any of the managers to achieve outstanding results. Most of the hedge fund managers did not outperform the performance of Gold over the past 6 years. Therefore I do not see much sense to run the risk that any of these managers makes mistakes that could cost considerable amounts of money. Even Commodity Hedge Funds lost money lately. If they would have been simply on the long side, they would have made nice performances. But it seems that some managers do not look at the fundamentals at all.
What really surprised me a lot is that investors poured 9 billion new funds into Hedge Funds. It seems that some people can not be enough in a hurry to loose some money.

Equities
Well markets are moving up. The performance this year looks nice. The PPT certainly will be vigilant and will support the market with purchases of futures once corrections might occur. So it very well could mean that we will see even higher markets. I still like those companies producing real things. Furthermore it seems that companies producing anything that the Chinese and Indians will consume will do OK.

Fixed Income
Please check my previous post

Oil
Long term picture has not changed at all. The only difference is that more and more agencies do talk about Peak Oil and revise their too optimistic forecasts. Towards the winter months I do expect higher prices (although for the moment being some refineries are closed for maintenance and therefore short term demand from these refineries might keep the oil price at the present level). Asia’s appetite for more resources, including of course oil, is still increasing and I do not expect this to slow down. So the gap between production (extraction) and demand will widen more. If you like to be updated about what is going on regarding oil please check from time to time
http://www.energybulletin.net/

Food
Are you growing your own food already? If not it might be a good time to start looking at that possibility. Of course this year the food prices did increase considerably due to various factors. Some of them are there to stay such as for example higher oil prices which do have an effect on food production. Others like the drought situations or too much rain might not be the case next year and therefore might not have the negative effect as this year. However the oil fundamentals and harsher weather conditions in general, will most probably keep food prices high. To prepare oneself not only for high food prices but for a substantial increase is in my opinion not a bad idea. So if you have a chance to own arable land or grow your own food you are certainly better off than many others.
http://www.msnbc.msn.com/id/21195621/