Words from the (Investment) Wise for the Week That Was (June 9 - 15, 2008): Part II

By: Prieur du Plessis | Sun, Jun 15, 2008
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Ambrose Evans-Pritchard (Telegraph): Iran's switch good news for gold bulls?
"Good news for long-suffering gold bugs. Iran is switching a chunk of its $80 billion reserves into bullion.

"When I asked Barrick Gold's Peter Munk in Davos whether it was significant that Vladimir Putin had ordered his central bank to switch 10% of Russia's reserves into gold, he just laughed. "That must mean Putin wants to sell gold," he said.

"Nothing is ever what it seems."

Source: Ambrose Evans-Pritchard, Telegraph, June 10, 2008.

David Fuller (Fullermoney): Commodity supercycle is alive and well
"Since resources have been an early and crucial investment theme at Fullermoney over the last seven years, during which we have repeatedly expressed our view that this is a commodity supercycle, I have plenty of sympathy for the pension funds and other long-term investors who wish to buy and hold essential resources, from crude oil to agricultural commodities. After all, there is supply inelasticity, rising demand and we live in a fiat currency world which all but guarantees that the environment is inflationary more often than not.

"However these commodities were never meant to be asset classes. Does anyone seriously believe that many billions of dollars invested in futures contracts, on a long only basis and rolled forward for the indefinite future, does not cushion downside risk for prices and often propel them higher?

"The good news is that this will make many farmers richer, particularly where they can sell their produce on the open markets. This will reduce the need for expensive government subsidies to the agricultural sector. The bad news is that it will also increase the cost of food for many people around the world who are least able to afford the higher, inflated prices. To the extent that it is a boon to commodity exporting countries, including oil producers, for importing countries it has the financial impact of a tax, albeit with the revenue flowing to another country.

"Obviously the Commodities Futures Trading Commission (CFTC) faces a dilemma, probably too visibly tempting for politicians not to become involved. Should the CFTC, to the extent that it has a free hand, declassify long-only investors in trackers as 'commercials' and risk driving them to other exchanges? Or should they accept the political flack, take a long-term view and embrace the investors as new stakeholders who will help the supply of commodities to increase, where possible, over the longer term? This should be feasible for foods and if not for oil, then for other forms of energy, including renewables.

"What are the other investment implications?

"To the extent that pension funds and other long-term investors have been buying commodity trackers as a hedge against inflation and / or because of rising demand from increasingly prosperous developing countries, these arguments apply equally to precious metals. For anyone deterred from holding agricultural commodity or crude oil trackers, at least until current uncertainty regarding the CFTC's policies is resolved, a switch to gold and other monetary metals would seem obvious.

"I maintain that the long-term investment outlook for this sector remains compelling. Gold remains real money, for anyone with a sense of monetary history, and unlike agricultural commodities, supply is limited."

Source: David Fuller, Fullermoney, June 11, 2008.

Bloomberg: OPEC's El-Badri says worldwide oil market well supplied
"OPEC Secretary-General Abdalla El-Badri talks about the impact of speculators' moves on oil prices, global demand and the OPEC's spare production capacity. OPEC, the supplier of more than 40% of the world's crude, will meet oil-consuming nations on June 22 in Jeddah, Saudi Arabia, to discuss the effect of rising oil prices on their economies."

Source: Bloomberg, June 11, 2008.

BCA Research: Oil continues to threaten growth
"Crude oil prices surged by over $10/bbl on Friday, hitting a new record high and presenting a significant headwind for the growth/earnings outlook.

"Oil prices appear to be undergoing a blow-off phase. While longer-term fundamentals remain bullish, our Commodity & Energy Strategy service expects crude prices to undergo a setback in the coming weeks, followed by a consolidation phase at historically elevated levels. Almost all momentum measures are stretched and bullish consensus is at a cyclical extreme. At the same time, the US has stopped filling its Strategic Petroleum Reserve and many emerging Asian countries are reducing or removing energy subsidies, which should help curb demand. Still, it will be critical for risky assets that the blow-off phase does not persist much longer. Energy costs are rapidly siphoning off US consumer incomes which are already under strain from declining real estate prices and a softening job market. Moreover, past spikes in oil have historically coincided with significant economic slowdowns.

"Bottom line: We maintain our modest long/overweight allocation in global equities but acknowledge that rising oil prices is the primary threat to this call (via the drag on earnings). In contrast, we are less concerned about the inflationary implications of rising energy costs."

Source: BCA Research, June 10, 2008.

Herald Tribune: ECB chief warns against oil shock
"The president of the European Central Bank, Jean-Claude Trichet, on Monday called on oil producers and consumers to learn from past mistakes if Western economies were to avoid a repeat of the high inflation and unemployment that followed the first global oil shock in 1973.

"That year is widely acknowledged as an economic watershed, a time when an OPEC oil embargo led to a spiral of higher prices, recession in Western economies and a wrenching contraction in the early 1980s that finally put an end to a decade of sharp inflation.

"No one, whether Western consumers or oil suppliers, should want to repeat that history, Trichet said. 'There is a joint interest in behaving as properly as possible,' he said."

Source: Carter Dougherty, Herald Tribune, June 9, 2008.

Financial Times: ECB damps speculation on rate rise series
"The European Central Bank moved to damp down market expectations of a flurry of interest rate rises in the coming months by signalling on Wednesday that a planned rise in eurozone rates next month was likely to be a one-off.

"Comments by ECB governing council members sought to correct financial markets' impression that July's expected hike would mark the resumption of a monetary policy tightening cycle - an expectation that has depressed bonds and the dollar while possibly helping to inflate oil prices.

"They suggested the ECB was nervous that its hardline anti-inflationary stance - which has raised concerns in Washington - had been overstated.

"Jean-Claude Trichet, ECB president, last week described a quarter percentage point rise in the bank's main interest rate to 4.25% as 'possible' although not a certainty.

"But on Wednesday Christian Noyer, the governor of the Bank of France, said he did 'not see a clear link' between Mr Trichet's comments and financial markets' expectations of further rises later in the year. Earlier, Jürgen Stark, an ECB executive board member, was even blunter, telling Bloomberg agency that while markets had understood last week's message, 'we are not talking about a series of rate increases'.

"The ECB's move last week followed its mounting concerns about the surge in eurozone inflation, which has been driven higher by soaring oil prices. The ECB expected the rise to be temporary but feared that without pre-emptive action, expectations about future inflation rates in coming years would also rise - and become self-fulfilling."

Source: Ralph Atkins, Financial Times, June 11, 2008.

Financial Times: Irish voters reject EU treaty
"José Manuel Barosso, European Commission president, called on EU member states to continue ratifying the Lisbon treaty after more than half of Ireland's 43 constituencies rejected the European Union's new reform treaty.

"The European Union was braced on Friday night for one of the most critical weeks in its 50-year history after Irish voters delivered a decisive rejection of the bloc's Lisbon treaty - a document designed to make the EU a stronger global force.

"Although the result plunged the EU into turmoil, its leaders insisted that other states continue to ratify the bloc's Lisbon treaty and said they would try to address the crisis at a summit in Brussels next Thursday and not Friday.

"The treaty's provisions, which cannot now come into force as planned at the beginning of next year, include the appointment of the EU's first full-time president, a strengthened role for the EU's foreign policy chief and increased powers for the European parliament and national parliaments.

"Brian Cowen, the Irish premier, said he saw 'no quick fix', adding: 'In a democracy, the will of the people as expressed at the ballot box is sovereign. The government accepts and respects the verdict of the Irish people.'
"Thursday's vote against Lisbon - officially put at 53.4% to 47.6% - plunged EU leaders into a crisis almost identical to that generated by Dutch and French voters when they threw out a proposed EU constitutional treaty in 2005.

"The result was a kick in teeth for the Irish political and business establishment. All the main parties were united in support of a Yes vote and had the backing of big companies and small business associations alike.

"Government ministers blamed the outcome on 'scare-mongering' by No campaigners who raised fears the treaty threatened Irish sovereignty and the Irish way of life on issues such as taxation, neutrality and abortion."

Source: Financial Times, June 13, 2008.

GaveKal: Asian consumer prices strongly higher

Source: GaveKal - Checking the Boxes, June 12, 2008.

Bloomberg: India raises interest rate to rein in inflation
"India's central bank unexpectedly raised interest rates for the first time in 15 months, joining a global wave of monetary tightening to combat a surge in inflation sparked by food and energy costs.

"The Reserve Bank of India increased the repurchase rate to 8% from 7.75% from today, according to a statement in Mumbai. The move came seven weeks before the bank's scheduled monetary policy meeting on July 29.

"Governor Yaga Venugopal Reddy joins central bankers in Brazil, China and Russia, the so-called BRIC nations, in raising borrowing costs. The urgency signals Reddy's concerns after India raised fuel prices at the sharpest pace in at least six years.

"'It would have been impossible for the central bank to ignore that,' said Robert Prior-Wandesforde, senior economist at HSBC. 'Particularly with inflation being so sensitive a subject politically in India.'

"Rising prices have eroded the popularity of Prime Minister Manmohan Singh's Congress party, which has lost ground in nine of 11 state elections since January 2007. Singh's main ally, the communist parties, and the opposition Bharatiya Janata Party have staged nationwide protests in the past week, blocking trains and roads ..."

Source: Cherian Thomas, Bloomberg, June 11, 2008.

Jim Sinclair (Mineset): Total notional value of derivatives surpasses one quadrillion
"The notional value of all outstanding derivatives now totals approximately $1.144 QUADRILLION.

"This appears to be Bank of International Settlement spin to announce the largest gain in derivatives outstanding since they started to report. As of the last report it appeared that both listed and OTC derivatives was under $600 trillion. Now listed credit derivatives alone stood at $548 Trillion. The OTC derivatives are shown as $596 trillion notional value, as of December 2007. One can only imagine what number they are at now.

"Well we hit a QUADRILLION. We have more than $1,000 trillion dollars in all derivatives outstanding. That is simply NUTS because notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. $548 trillion plus $596 trillion means $1.144 quadrillion.

"This means that no OTC derivative house can be allowed to go broke. This means that whatever funds are required to rescue failing international investment banks, banks and financial entities will be provided.

"Keep this economic law in mind. Monetary inflation proceeds price inflation and is its primary cause in economic history from Rome to present.

"Nothing can stop the juggernaut of price inflation heading towards every nation like a runaway freight train down a mountain."

Source: Jim Sinclair, Mineset, June 9, 2008.

CNBC: Sex and the stimulus package - "More bang for the buck'?!

"It seems the down economy is hurting every business, even the oldest profession. The Moonlight BunnyRanch in Carson City, a legal brothel featured on HBO's 'Cathouse', is offering the first 100 customers who show up with their stimulus rebate checks twice the 'services' for the same price.

"They're calling it, (this is where I clear my throat uncomfortably), 'more bang for your buck'. The BunnyRanch is a place Larry Flynt calls 'America's Hottest Cat House', and he oughtta know.

"As for the stimulus offer, a guy who brings in an entire $1,200 check gets a special deal: three women and a bottle of bubbly. Anyone notice that a guy with a $1,200 check is married to qualify for that amount?

"But wait, there's more! The legal bordello plans to have all 100 customers, plus some of the Bunnies, sign a thank you card and send it to President Bush. Oy."

Source: Jane Wells, CNBC, June 12, 2008.

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Prieur du Plessis

Author: Prieur du Plessis

Dr Prieur du Plessis

Dr Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

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