Ben o Ben ! Food for thought: Grains, fresh Meat and Pie

Sometimes it's better to roll your tongue than to come out with an academic response.
We find that there are too many people in America today who fail to read and apply the lessons of history.

Inflation in consumables served on the foundations of deflation in hard assets = Recipe concocted by Greenspan and served in a dish prepared by Chef Ben.




We recently addressed the issue of the plight of Suburbia. Today we would like to acknowledge the image of the "man about town", your local successful scrappy, hard working entrepreneur.


The entrepreneurs
The USA is inescapably leading the world into a long overdue credit rationing process which ends up with money out off everybody's hands but especially the entrepreneurs who have to scramble and readjust their plans back to the pre 2001 era.
First is to call the money jockeys: "Hey MJ , I need cash, my bank is calling in my lines, so sell everything, I want a check on Friday = 24% drop in DJIA.
Second call: "Hello DDD Wide Berth Marina?, I am Mr. SoNso, I am calling to cancel my berth reservation. Looks like I won't buy that gas guzzling floating palace, condo in boca, RV etc... . Will call you next year (maybe!). Hard goods index down 44%
Third Call: "Hi Honey, listen just spoke to OUR accountant. Seems we gonna have to tighten our belt somewhat, so we need to postpone our travel plans until next spring. Hopefully things will pick up. By the way, I canceled your new Mercedes order; you can keep your old one for another year." Car manufacturing index down 77%, Airlines down 84%

Our little example can be repeated all over coastal towns in Europe, North America and the once booming Asian stock markets.

If the hard working entrepreneurs get squeezed , you are taking out a lot of growth potential out the window. For the easy going crowd ( if not to call them lazier ), the declining value of their properties is killing their ability to pull out equity or refinancing jumbo equity loans. Another 25MM mortgages are 20% away from being upside down in the US Alone! So you can see the economy contracting even though Bernanke, Bush and Paulson have to continue to lie about the state of the economy for the "greater good!"

Remedies: STILL THE SAME
We believe that oil must fall, recent commodities price increases inexorably will come down to manageable levels, 10Yr Treasuries must trade over 5% and eventually over CPI inflation for the USD to have any hope of recovering. With the Fed intent on preventing any sane foreigner from buying US fixed income products at current negative real return rates, you have this stalemate among national institutions who are unable to move. If anything, Investment Bankers tried to ship out their access to cheap money and play carry trade suppliers a la Japanese. We believe that went to China but it will not turn out well for the bettors or their bankers.

In the USA, with less RVs, boats and cars sold in 2008, we can expect the prices of metals and resins to decline. We laughed when we saw DOW Chemicals try to increase the price of their products just about the time their order book was going to be chopped off! Unfortunately. none of these big items drops will help the average consumer which will have to contend with horrendous food price increases and his energy bill. The farmer paid Monsanto top dollar for his seeds, he also paid Potash top dollar for his fertilizer stock, and Exxon top dollar to power his Caterpillar and John Deere. Hell if he is going to lower his prices unless he has a record crop which collapses his prices ( with silos empty, VERY doubtful this year!)


CATTLE vs. the GRAIN FARMER
Cattle prices are in a fire sale as cattle ranchers are losing money on practically every head of cattle they raise if they have to buy grain on the open market. By Christmas, the reverse will be true. You better get in the habit of buying frozen meat or get ready to absorb another major shock at the cash register when you will try to buy fresh meat by then. Cut out this week's meat specials and put it in an envelope to be opened Dec 23rd...


As AMERICAN AS Apple or Gulliver PIE
De-leveraging hurts everybody. It creates huge dislocations in every society. We love to use the analogy of Gulliver and his fellow travelers sitting in a pie on the counter. When you put it in the oven, it can be pretty toasty but if the pie gets smaller, you get more people trying to move towards the center and the odds increases that you may be get displaced towards the edges and its scorching sides. This economic pie started contracting as well as cooking in July 2007 and we don't think Gulliver will come out of the oven anytime soon with the current cooks in the kitchen! First of all the cooks refuse to admit that the pie is contracting and second they don't think the heat is anything to worry about.

OUR ADVICE
With Paulson and Bernanke set on using financial stocks short sellers as temporary scapegoats, To stay cool, Keep looking towards energy efficiency, transport efficiency (rapid transit, electrics etc.) as two global phenomenons that will create the next generation of super "cool" companies. Please also invest in a large freezer, you don't know when it will come in handy!

July 4th 2008: A sad day indeed ... when a Tank of a gas is worth more than a meal for four !

We always like the 4th of July in Canada. Markets are in mid summer hiatus, with a bit of luck it's warm and sunny in Montreal, the Jazz festival is in full swing and we just had our Quebec provincial holiday and seven days later our Canada day on July July 1st. 3 legal holidays in less than 2 weeks makes us feel like every week in May in FRANCE! We use this time to review portfolios and we try to determine if we can find better trading ideas until the end of the year.
It also marks the starting date of what I call the race to the TWO Thanksgivings. The Canadian TG is celebrated on the third Monday in October ( while things haven't frozen rock solid just yet) and the American TG in November.


PAUSE FOR REFLECTION: Fill her up or RUN on FUMES?
2007 vs 2008
In the first half of 2007, we had stellar results with a boom in commodities so we decided to keep a lot of cash (55%) and coast to the end of the year reasoning no need to blow our brains out. AS we all know now, July 2007 pretty much was a top even though there was a crazy rally in November which mostly benefited momentum players.
For 2008 it's a whole lot different. At the half way mark, most equity markets on the planet have skirted with multi month lows, with the notable exception of the TSE which was trading on another planet. Fear not! it will join its cousins soon enough. Yet with this backdrop of gloom and doom, we have had several successful DAY trading profits but most our core holdings have been getting cheaper by the week...
Our leverage shorts ETFs have brought in spectacular 66% return in less than four months, our GM shorted at $31 was an easy pick, Bear Stearns was lucky.
On the other side of the coin though, our mining stock, Gobimin is trading at 4.3x 2009 earnings, Couche-Tard and Gildan are choking on the slowing economy.
So we are sitting on 70-80% cash position knowing full well that inflation is in the high single digits so we a paying a price just to stay in cash.

WHAT to DO for REST OF YEAR?

THE SHORT SIDE
1)We believe the commodity boom is going to go through a huge correction. Steel prices will implode and the big players will loose 25-50% of their values from today. Fertilizer stocks will also back off at least 25% from their highs. Pick them all out and you should have a nice run.

2)BRAZIL: We started shorting the Bovespa and we think it will follow in line with INDIA and CHINA exchanges ( i.e a 50% retracement form top). It has already lost 25%. When you look at Bloomberg you see 5 yr GVMT bonds yielding 12.5%!!! That is scary. Yet we saw an interview with first time homeowners getting 6.5% mortgages. Are we seeing another set of teaser rates?

3)RETAIL: American consumers have now spent their rebate checks ( which are not rebates as the government printed fiat money to fund this useless exercise in the hope of getting the Republican nominee at least half-alive to the election). Consumer stocks will all get bashed so if you own eight, three will blow up. CNBC will try to drum up support with anecdotal evidence but for the ONE trendy outfit with the right priced good, the pie will have gotten smaller for ALL the others... Short the sector!
Cover between the Thanksgivings

4)BANKING: Bill Bonner and the gang of pundits gave us numbers of over ONE TRILLION in loans to real estate gone bad. How much money do you need to cover that? UBS at $29BB of new capital is leading the pack but many players have not gone to the wicket just yet.

5) OIL STOCKS: They are way over valued with their market capitalization exceeding reasonable reserve estimates. The bigger players seem to enjoy a valuation based on the future price. Government are trying to rein in the speculation of people issuing futures contracts on crude with no intention of supplying let alone taking physical delivery. That of course is the nature of a futures markets but its intent originally was to let producers and consumers get the best price for their commodity. This has gone terribly wrong as large investors have resorted to manipulating the market and make the whole process a joke. As in criminal law cases, you prosecute on intent to get the most severe penalty. If governments become INTENT on restraining the speculative nature of these futures markets, they should make sure that suppliers and consumers trade for real delivery. We believe that is quasi impossible as Investment banks in a heartbeat will rush to buy store fronts and physical infrastructure to bypass ill faithed regulation. Petrochemical stocks are also in for a rude awakening as they will see a serious downside effect in the form of falling demand in response to their recent price increases.

6) SHIPPING: One of the biggest consequences of the meteoric rise of energy costs will affect the trans-oceanic movement of goods. We believe carbon footprints will force a major change here and volumes in and out of America will suffer displacements in the next two years. Trade CAREFULLY here!

NEUTRAL
We would stay away from RUSSIA. Too difficult to figure out how the government will take away your profits.

LONG
BUY a LIGHT HYBRID
WE have been driving 3 Acura MDXs for the last 8 years. Our four year lease is up on our 2004 model. We rented a 2009 Camry Hybrid and on ONE TANK we did THREE TIMES the distance (891KMS)than with the SUV on REGULAR GAS. So bye-bye Honda we are going to Hybrids and Toyota for now will be a good deal. Instead of 114 fill-ups at $105 =$12,000 we are going to 52 fill-ups at $79= $4100 or a $8000 a year savings!!!
Don't get fooled and buy a heaving 5000lbs hybrid ... those won't work ... LIGHTWEIGHT is the key here!

BATTERIES
VOLUME Hybrid car Batteries are mostly made in Japan right now. We consider this to be the new black gold. We believe this industry is at its HALF-WAY mark of its twenty year window. With one million Prius on the road today, the industry sales will sky rocket for the next five years and then start to decline. We do not believe the carbon footprint of the manufacturing process of ANY battery solution is viable at the present time whether it uses lead, nickel or lithium-ion based solutions. We stand on record that using hydrogen as a transport mechanism in a fuel cell is the ultimate best solution. We are not sure that the current nanotechnology advancements can deliver an elegant solution on this platform but we believe that it our best hope. This overall area will probably displace solar and fertilizers as the new IPOs darling sector. A123 if it has an IPO should do well this fall.

NUCLEAR vs SOLAR
THE CASE FOR NUCLEAR
We believe the NUKES are about to have a second run if and when a discount of $20 per pound of U308 between cash and term prices disappears. With people hoping to PLUG in their Prius or Volt as early as 2010, the grid is going to need a lot more juice and as the old pun says: "The future is glowing for the NUKES". We also believe that nuclear energy is the best way to reduce carbon emissions from the mother of all polluters: the Alberta Tar sands. We have been looking to buy into a fund which buys physical U308 in the $40-$60 range and starts accumulating stockpiles over the next 2 to 5 years years when new consumers enter the market.

THE CASE FOR SOLAR
With the current 135 projects for solar projects on US federal land before Congress, we are appalled at the level of mounting pressures to rubber stamp their approval based on CURRENT technology. We believe solar productivity enhancements will follow Moore's law and that it is foolish to approve every possible project at the same time. Greed yet again overtakes common sense tot the detriment of the environment. If there was A TIME AND A PLACE to BOTTLENECK permits WE ARE THERE! We fear taxpayers and utilities are going to pay a still penalty if they rush into the market place with technology than can vastly improve over the next decade. With less than 5% of US energy production, it is foolish to spend money ans use up scarce water resources to produce silicon wafers for solar with a technology which will double in efficiency every two years. EXPORT IT DON'T CONSUME IT all in the first three years! You need to figure out where you want solar to be in 20 years and work your way back and issue the permits on a sliding scale. Better benefit/cost studies need to circulate! In the meantime, make sure politicians install the same solar cells on their own rooftops that they are trying to install on federal land. That should slow the process somewhat!
Don't forget the gorilla in the room! With COAL still supplying more than 50% of US production, GVMT can do much more to promote clean coal technology. Give huge incentives here. Yet our issue remains with open pit coal mining and its disastrous effects on the environment.

Gaz de FRANCE /SUEZ
Moving from a government institution to a public entity with Albert Freres and the Desmarais family, we think this will be a great way to play a monopoly. Tougher to find HOW to play it but we are bound to invest in it somehow.

BANKS
Next three months will see terrible stories from Q2 numbers. We believe C at $10 looks like a number we could dip in our toes. BAC at $20 depending on the Countrywide resolution and some Chinese backed by GS or JPM to form a conglomerate of some kind could appeal to us.
In Canada we were pleasantly surprised on the resiliency of National Bank. As a regional player, we are worried that Recent Union activity is coming back as a scourge of the troubled 1970s. We believe this will have a detrimental effect on the overall local economy and are avoiding local investments.

US MANUFACTURING
We repeat this theme. We believe that high transport costs will open a new era of prosperity in AMERICA. BRAND NEW low energy plants close to markets will see a resurgence for buyers like Wal-Mart. Spending on infrastructure is key though to replace an aging trucking fleet ill equipped to meet the needs of the 21st century

CONCLUSION
We will be spending the next few months at several VC conferences and trying to align ourselves with other investors that share this vision of the future.


Happy 4th