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MORE FOR 2010

MORE FOR 2010

“If a man empties his purse into his head, no man can take it away from him. An investment in knowledge always pays the best interest.”

– Benjamin Franklin

LOOKING AHEAD AT 2010

We believe that 2010 will hold many opportunities for the global investor as the continued improvement of business conditions will translate into higher equity and commodity markets. Expectations of rising inflation will drive capital into commodities and into fast growing countries, industries and companies.

As people become more confident of economic recovery, they become commensurately more frightened about inflation. As inflation fears escalate, desire to hold dollars dwindles.

We are adding to our positions in the following areas: producers of food, gold, and oil; exporters of high tech products and services; manufacturers of machinery used to produce commodities, such as mining, farming, and oil drilling equipment and services; and producers of machinery used to build manufacturing facilities; and machine tools.

The same macroeconomic conditions that create opportunity also create risk. As the markets begin to discount higher inflation and higher interest rates, some investment choices are better to avoid, such as long term bonds.

U.S. Dollar

Unless the U.S. takes strong action to reassess their priorities, the U.S. dollar will decline over the long term.

Bloomberg has reported that according the data from the International Monetary Fund, the U.S. dollar’s share of global currency reserves at the end of Q3 2009 was 61.1 percent

versus 64.5 percent a year earlier. This statistic clearly shows that foreign central banks are holding less U.S. dollars as a percentage of their currency reserves.

Investors Must Think Globally

Investors are always on the lookout for new ideas, innovations, and technologies that create investment opportunity. The U.S. market has been an engine of innovation and change and top companies have traditionally courted U.S. consumers. Consumers in Asia, Eastern Europe, and South America are receiving more and more attention from the leading technology companies and this is a growing market for U.S. technology companies.

Over the course of the last decade, we have moved from a tri-polar investment world where the U.S., Europe, and Japan dominated global investment attention, to a multi-polar investment world. Today, China,India, Southeast Asia, and the commodity-producing nexus of Australia,Brazil, and Canada represent 4 new poles in the investment world. A wise investor must be aware of the opportunities in all of these regions.

Our Friends Fannie and Freddie

Fannie Mae and Freddie Mac are two U.S. government-sponsored enterprises that invest in residential mortgages. Last month, during the Christmas holidays, Fannie Mae and Freddie Mac had their borrowing limits removed. As a result, there are no longer any limits to the amount of money that these two organizations are allowed to borrow from the public. This was done quietly and without much publicity. Since the activities Fannie and Freddie created much of the problem that culminated in the banking collapse of 2007-2008, it does not reassure one that they are given a blank check to expand their operations.

In a Reuters article titled “Unlimited Credit for Fannie, Freddie seen as backdoor U.S. Bailout”, Dean Baker, co-director of the Center for Economic Policy Research in Washington, explains that giving Fannie and Freddie unlimited credit could have the same effect as the $700 billion dollar TARP program, which is set to end in the coming months.

“The original bailout program, devised by former Treasury Secretary Henry Paulson, ‘was a plan to help the banks restore their capital position by buying bad assets at an above market price, and that looks like what Fannie and Freddie will be doing if they are incurring losses of this magnitude.’”

In the article, Baker adds “that it is hard to imagine that Fannie and Freddie would have losses of more than $400 billion from mortgages originated before September 2008, suggesting that agencies are incurring losses on what they have bought since 20008, ‘which should raise a lot of eyebrows.’”

Their new, unlimited borrowing potential will give Fannie and Freddie the opportunity to purchase mortgages and mortgage bonds after the Federal Reserve is scheduled to stop purchasing them in March 2010. This will help keep interest rates down on home mortgages…which appeals to politicians seeking re-election in 2010. It also allows the government to continue intervening in the housing market long after it is supposed to have stopped.

Fannie and Freddie’s manipulation of mortgage rates might give the housing market a boost, but it increases the risk that the bad loans will not be cleared from the system. The clearing of bad debts is essential for a long term recovery. In addition, Fannie and Freddie’s charters allow them to buy mortgage bonds from banks, further bailing out the banking system at taxpayer expense.

This kind of sneaky behavior does little to build confidence that our government overseers have the taxpayers’ best interest at heart. In fact, it reinforces the view that many politicians are beholden to the financial services lobby.

For those who are interested please click this link to read the entire Reuters article:

http://blogs.reuters.com/financial-regulatory-forum/2010/01/05/unlimited-credit-for-fannie-freddie-seen-as-backdoor-u-s-bailout/

OIL

We have previously mentioned our view that commodity prices will rise in 2010. The basis of our oil thesis is as follows:

Global crude oil production has peaked. The peak range was 84 million barrels per day in 2005. Emerging market demand is growing more rapidly than people anticipated. According to the International Energy Agency non-OECD (Organization for Economic Co-operation and Development) demand grew by 700,000 barrels per day in 2009. The OECD is made up of the major developed countries, whereas non-OECD countries are considered developing.

This year, non-OECD demand is expected to grow by about 1.4 million barrels a day. International Energy Agency further forecasts that OECD consumption will be flat in 2010. Thus, total global demand could grow by about 1.4 million barrels a day this year.

GEOPOLITICAL AND SEASONAL FACTORS ON ENERGY PRICES

Of continued concern is of the impact of geo-political events on the price of oil. Based on the continuing threat of instability in the Middle East region, it is quite conceivable that 2010 could see much higher oil prices. Iran is a big oil producer located at an important juncture for the transportation of oil in and near the Persian Gulf. Should fighting develop between Iran and its neighbors and the shipping lanes become blocked, the price of oil could go much higher. A second potential problem is a terrorist attack on oil production in Saudi Arabia, causing the production of crude to slow.

Additionally, seasonal pressures would argue for a decline in oil prices in the shoulder season between the heating demand during winter in the Northern Hemisphere and the summer driving gasoline demand, and then again in the autumn after driving activity lessens and before heating demand accelerates.

We expect oil to trade in a range between $65 and $95 per barrel in 2010, assuming there is no major geopolitical problem.

SUMMARY

In our view, investors with a global view, access to international equity, currency, and commodity markets and experience investing in these markets are at a clear advantage. We believe strongly that flexibility to target specific areas of opportunity and to reduce exposure by rapidly cutting positions – to preserve capital during declines – is a key to maximizing profit and minimizing risk in the current marketplace.

Thanks for listening.


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