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Good news for Peru (as long as you don't look too hard)

Yesterday, President Twobreakfasts signed an executive order to lower the prices of 90 octane and 84 octane fuels by 9% and diesel by 4%. That means the benchmark 84 octane sells for a maximum price of S/10.50 per US gallon in Lima (transport costs can raise the price for some of the harder to get at corners of've seen the map with the bigass mountain range running through the country, haven't you?).

So now that Peru has cheaper fuel, time to rejoice, no? Hmmmmmm...let's put it in a bit of context. Here's a chart that shows the current prices for the same US gallon of fuel in the USA and Peru in US dollars (I got the US national average from gasbuddy dot com tonight, though I do understand that for example Missouri has $1.80/g fuel and California has $2.40/g fuel right now).

Big difference, no? Well, the 50% difference in average pump prices between the two nations isn't even half the story. According to the CIA World Handbook, GDP per capita in the USA was U$45,800 for 2007 (PPP) and GDP per capita in Peru stood at U$7,600 (also PPP). So this next chart shows just how much fuel the average per capita GDP can buy in its own country.

Yep, that's nine and a half times as much in the States as it is in Peru. Thought of in basic terms, it hurts the pocket nine times more in Peru to fill your car up than it does in the States. So no more whining up there, please........

A couple of interesting* charts on silver

As part of a report I'm preparing in the non-blog real world, today I've been looking at the state of play in the silver industry. The research pointed me to quite a few datasets and here are two of them in graphic form. Click on either chart to enlarge of necessary.

First, this chart shows the total world silver production in the years 1900 to date. The source is the ultra-reliable United States Geological Survey (USGS) and the figures show production in Metric Tonnes.

Interesting to note the big recent surge in silver production. This differs from gold production that peaked somewhere between 1999 and 2001 (depending on which source you believe). I'm not a fan of straight supply and demand metrics to explain gold (and silver I suppose) price fluctuations, but it has set me thinking and I've mentally bookmarked the subject today as "in need of a revisit".

Next this chart that shows the fractured nature of world silver production. Here we have the 20 largest producers of silver in 2007. Source is the World Silver Institute 2008 Silver Survey (published May this year).

Note that the largest players, BHP and Peñoles, only manage 7% each. Also note that the top 20 between them produce only slightly over half the world's silver. Finally, check out the names and note just how many of the companies produce silver as a by-product and not as the primary (or even secondary) target metal.

This post is a bit of a non-sequiter as there's no real reason behind blogging on it; I just thought I'd share. Enjoy the rest of your weekend.

*interesting for wonks like me, anyway

Radio Muffin and Ecuador debt

Bizarrely I sing the praises of Bloomberg again today (wouldn't it be nice to do this every day?), as they sum up the Ecuador debt situation and the radio address of Presiden Studmuffin very nicely with just the title line of Matthew Walter's note:

We all know by now that Correa has a M.O. going on; just look at how he handled Carlos Slim and even brought Repsol to heel with the same tactic. If it ain't broke, don't fix it, right?

So read that headline again, use your brain, think about how Correa works and think about what it means. Then click on it and read the note.

Good weekend reading from respected sistasites*

Bina had a couple of drinkies last night, decided to get a few thoughts about a few famous faces off her chest and in this post we have the evidence. Do not click through if the F word offends (because if it does she has a message for you, too).

The editor of a newspaper in Latin America was forced out of his job yesterday. The reason was that he criticized a local politican and friend of the President (quite rightly, too) and the owners of the newspaper got upset. Guess which country? WRONG! Susana Villarán is on the case.

The Mex Files explains why his blog is needed by society. And my stars, is he ever right.

For those of you with a deeper understanding of Venezuelan politics, this post from the awesome Chiguire Bipolar is unmissable. Spanish language and funny as hell.

Memory in Latin America knocks one out of the park with this excellent report on the US-funded ideological SOA (School Of the Americas) and its ongoing influence on Latin American affairs. There are still people who believe all that 'back yard' malarkey, sad to say.

*a couple of bruddasites, too



General Motors (GM)

Ford (F)
Citigroup (C)
General Electric (GE)

30 million ounces of gold; a real problem for any Russian millionaire

No jokes in Spanish about salami, please

But fear ye not! Because although being handed 30m oz of gold on a plate may be a real problem for any aspiring miner, Andre Agapov of Rusoro (RML.v) says he's broad-shouldered enough to take on this grave responsibility.

I may be scathing of Bloomberg some (!) of the time, but every now and again they come out with a gem of a report. That happened today with this note linked here. Go read all of "Rusoro Says It Is 'Preferred Partner' for Gold Mine" by Stewart Bailey but don't miss this killer line from the interview he got from Agapov;

"Gold Reserve and Crystallex had to find common ground and approach the ministry and they would have gotten their permit a long time ago.'' The delay "is causing us problems. People are losing faith. I'm willing to make it my problem and solve the situation.''

So, RML.v wants to muscle in and steal the concessions with the help of the Venezuelan gov't (which will happen), but the delay the victims have been experiencing with getting permits to mine is a big problem for Rusoro! File this in the "you can't make this shit up" file. Truly wonderful.

Ecuador bonds: I repeat

Ecuador will not default. Watch out for Correa's weekly address tomorrow.


By Lester Pimentel and Daniel Cancel

Nov. 14 (Bloomberg) -- Ecuador's bonds tumbled, pushing yields above 100 percent, after Finance Minister Maria Elsa Viteri said the government may miss a $30 million interest payment tomorrow.

A group of legal advisers will make a recommendation to President Rafael Correa on how to proceed with the interest payment, Viteri said at a news conference yada yada continues here

Snippety stuff

Repsol (REP) surprises nobody with the news that its plan to float off 20% of Argentine arm YPF has been postponed.

Staying with Argentina, Klishtina arrives in the USA today for the G-20 summit. The Economist had a good whack at Argentina this week, calling the country 'irrelevant to the financial world'. Not often I agree with the Economist, but here's a moment when they nailed the truth to the wall for sure. Venezuela has much more claim to a seat at the table, for example ;-). C'mon guys, invite Hugo for tea'n'buns.

In Peru, Romulo 'Where's Waldo?' Leon has been declared the winner. After the police shouted "We give in!" at the tops of their voices he handed himself in after his 38 day world record hide and seek marathon. Kudos to you let's watch as they try to lock your lying ass away for 15 years and you squeal on all the other rats in your party as revenge. I mean, normally there's honour amongst thieves, but I hold out hope you're the type of pondscum that will do anything to avoid a bit of justice.

In Bolivia, Apex Silver (SIL) has sold its 65% interest of the San Cristobal mine (Bolivia's newest biggest operation) to its (up to now) minority partner Sumitomo. Check out the announced terms and conditions here, but from a first overview it looks like SIL gets its slate wiped clean and walks away with $22.5m on its books and a source of small revenues from a mangement job at San Cristobal. The small print on this deal will have to be read carefully before any decision on whether SIL is cheap from here is made. SIL is down 7% in early trading this morning. Cash at bank looks like around $0.35 (but big caveat must apply..that small print really is important this time). UPDATE: make that 19% down at $0.68...falling fast.

In Venezuela, the country made clear it fully approves of cocaine trafficking and confirmed the US view that it is a drug-friendly country by confiscating over 800kg of the stuff yesterday and arresting three people (who are about to find out just how bad the prisons really are in Vzla). So far this year Venezuela has confiscated 20.5 metric tonnes of Uribe's finest export and arrested 10 cocaine bosses as well as countless minions. Not bad for a country where the stuff isn't even grown or produced. But remember, we don't need no stinkin' facts.

A very nice article from Cam Hui

One of the smarter financial bloggers out there, Cam Hui today offers "A Rorschach Test for Investors" and puts Anvil Mining ( in the spotlight isn't a company I cover or follow (cos it's non-LatAm) but a quick overview of its financials make it a very good test-case for investors to decide whether they really want in or out of this market. Go have a look at Cam Hui's full post linked here. An interesting intellectual stimulus and highly recommended.

You know it's a slow news day in LatAm finances when......

......a Bloomberg Brazil journalist writes 1,158 words on the plastic surgery that Venezuelan beauty queens go through to win their crowns. Link here (if you dare).

Go on, keep telling me I should take Bloomberg LatAm seriously.

By the way, it's not a slow news day. Today is the Canuck deadline for 3q08 reports and a whole swathe of miners banging rocks down here will be handing in their performances. Just don't tell Bloomberg.

Chart of the day is............

....the Gold:Silver ratio.

No squiggly lines or stupid drawings added by yours truly this time, just the 50 and 200dmas to add some colour.

This ratio has now been over 70:1 for six weeks, a very high multiple and defying the silverbugs bigtime (a group that makes the goldbugs seem well-adjusted). Of course historically silver is extremely oversold compared to gold but we are also living in historic times (financially speaking, at least), so I'd venture to say the two are related. Wouldn't you? (Check that chart again and note the dates). And then by looking around and noting the state of play in things like copper, tin, zinc etc it seems pretty clear that despite its $730/oz price tag that is 30% off the highs of early this year gold has benefitted from a lot of safe haven buying to keep it from dropping below $600/oz or so (and a GSR that fluctuates between 60 and 64).

I've stayed away from buying SLV for a while. Personally speaking I do get bored sitting on the sidelines and watching the wild swings and so I've tried a couple of small-sized quick-trade stocks recently (well...JAG was small, but then yesterday it turned into medium) but this isn't the time to trade with much confidence even when silver offers an 80:1 screaming ratio.

Final thought: the next time a goldbug tells you (or points to an article that says) the gold bull is still intact, just reply that gold is 30%+ down from its highs. What do they want, that it hits 50% down before calling a gold bear market? 60%? End of story. If they insist, you have full permission from the sensible people to laugh in their faces.


Ecuador bonds

For the record, Ecuador will not default. A very easy call to make.

Signed, Otto


Ecuador's Bonds Tumble on Concern Government to Miss Payment

By Lester Pimentel

Nov. 13 (Bloomberg) -- Ecuador's bonds plunged amid speculation the government will miss a $30 million interest payment in two days on its benchmark dollar bonds due in 2012.

The yield on the 12 percent securities soared 25 percentage points to 69.28 percent at 5:36 p.m. in New York, according to JPMorgan Chase & Co. The price on the $510 million bond sank 17 cents to 25 cents on the dollar yada yada continues here.

No austerity for Bolivia 2009

Last week, away from the public glare and hidden behind the financial horror stories coming from the North, Bolivia announced its 2009 budget (Presupuesto General de la Nación, or PGN). The news gives the USA and its allies just another reason to fear Bolivia, because unlike most countries it is in the position to significantly expand public spending in 2009 in order to combat the effects of the world slowdown.

This chart shows Bolivia's 2009 public spending budget compared to the other three years under Morales (click on any chart to enlarge)

Even the 2006 budget was far more than was previously spent by the country pre-Evo, but next year's budget (U$1871Bn) is 33% bigger than this year's record spend. As to how that money will be used, here's the breakdown:

As any economist worth their salt will tell you, spending on infrastructure is investing in the future of the country. They'll also tell you it's good because it's anticyclical (but don't worry too much, it's just a silly word they use that means "we've saved for a rainy day and now the rainy day is here so let's crack open the savings"). Bolivia is in the middle of a roads upgrading program that will only accelerate in 2009, with energy distribution, mining and agriculture all being alloted significant investments, too. In the word of Bolivia's FinMin Luis Arce:

"The National Government is banking on public investment as a central tool (against) the eventual effects of the (world financial) crisis that is not yet being felt in Bolivia although, obviously, it is not the only measure that will be applied next year to this effect."

As for where the money is destined, here's the regional breakdown:

It must be disappointing for the Evo haters to note how much of the national coffers will be spent in the half moon regions. La Paz is the most populated region so it gets the most. Santa Cruz is the second....hey, it gets the second largest amount. This is a concept known as "equity", and Evo is teaching the fascists all about it. There's nothing controversial you can say here.... man, that must piss them off no end.

Life would be so much easier for the USA regarding Bolivia if it could point to the mess Evo Morales were making of the economy, but the truth is that Evo is running the country very well indeed. By accelerating public spending at a time of world recession he is protecting Bolivia from the worst of the US-created financial mess that is currently being exported to the rest of the world. Maybe he could teach Hank&Benny a thing or two about prudent fiscal management. In fact, scrub the word "maybe", Evo's kicking their tushes bigtime.

Trading Post (sharp and pointy edition)

Jaguar Mining (JAG) down 10% at $2.22. Bot yesterday at $2.62, and my next book will be entitled "The Stupidity of Trying to Catch Falling Knives" by Otto Rock Esq. However there is a limit to my cowardice and this time it's time to make a stand. I'm still holding the chunkette I bot yesterday and now I'm waiting to see how low it can go. Once it bottoms out I'm going to average down on JAG. Not something I do very often, but this share price is now in the realms of the very, very cheap.

Fortuna Silver (FVI.v) has been beaten back down to under $0.50 in the last few days and currently sits at $0.455. Once again back in the obvious buy range. The FVI 3q08 report is published tomorrow 14th November.

Crystallex (KRY):Twenty-two bottles of beer on the wall, twenty-two bottles of beer; take one down and pass it around, twenty-one bottles of beer on the waaaaaaaaall.

Copper sisters FCX and PCU were green all morning but are now following the Dow and the broad markets down into red territory. Samo samo....

UPDATE: YAY!, grabbed a nice chunk of JAG at $2.20 just before the Dow decided to rally. I shudda bot PCU or FCX looking at things (both up 11% now after being negative on the day), but a good buy is a good buy. Goodbye.

Exeter Resources and the art of insulting your shareholders

With the downturn in metals prices, junior mining companies have quite rightly changed tack and become parsimonious. Every day we hear of drill programs being cancelled, expenses being cut, concessions on option agreements being handed back etc.

Not at Exeter Resources ( (XRA), though. Because XRC managed to put $35m in the company coffers due to lucky timing of a placement (March 2008), it thinks it is now awash with cash and can splash shareholders' money on super-duper beano site visits for analysts and suchlike. Of course analysts visits are a part of the game, and when you have something to show the world it's good to get the big brokerages' scribes on your side. However in these budget-conscious times, the Exeter site trip that started today is nothing less than an insult to shareholders who thought they were adding cash for constructive reasons. Chairman Yale Simpson....

.... has spared no expense for the visit that starts today (November 13th), including:

1) A six day tour for 9 analysts, several high-rolling investors and up to 16 staff of Exeter (four of whom will accompany the party on the whole trip, including Simpson of course)

2) Accomodation in four luxurious hotels in Chile and Argentina for the whole party (see photos of three of the four underneath).

3) Chartered private plane transport for the whole group, including short-distance and long-distance flights.

4) 4x4 transport to project sites and also overflights of the same projects.

5) A meet-up and talk with Stephen Leary and Keith Barron (both ex-Aurelian and the duo responsible for the FDN discovery) at one of the luxury hotels.

6) Etc etc etc. These guys are pushng the boat out, so expect no expense spared at any given moment.

The tour starts today, with the party huddled together in Chile as we speak. But you don't need to take my word for it as you can view all the details of this luxurious freebie trip right here. Otto has got his grubby little hands on a copy of the official tour itinerary as published by Exeter Resources. Isn't it strange how they forgot to mention all this to their shareholders? In fact, this is the kind of document that companies, especially small junior mining companies like XRC, are keen to keep away from the retail investors' eye so Otto is breaking a rule or two here. But frankly these idiots at XRC need a lesson in basic manners.

So when the XRC 4q08 results come out, ladies and gentlemen of the investment community, take a good look at the filings (I suggest the SEC filings, as Exeter is obliged to give more detail to US authorities) and find out how much money this charabang has cost the company. And wouldn't it be amazing to find a glowing report or two from the analysts on board (including Wendell Zerb of Canaccord, John Hayes of BMO, Duncan Haye of Galena, Andrew Jackson of Global Resource Investors etc etc etc). You scratch my back...........

Moral of the story is that old expression companies use about shareholders: "If they can't take a joke, f*** 'em". But if you're a shareholder of Exeter and feel like complaining about the way they are splashing your money around on this ridiculously expensive site visit, the itinerary publication linked above (or even here, just to make sure) has all the necessary telephone numbers and contacts to the company to make your voice heard.

Hotel Miramonte, Copaipo, Chile

Hotel Los Españoles, Santiago, Chile

The view from Hotel Candil, Bariloche, Argentina

Human rights problems in Colombia? Surely not!

Isn't it amazing that suddenly, now that Obama has the job, these stories are being picked up by the mainstream media? Call me cynical, but this is just one of thousands of similar stories...only now do they hit a wider audience. Better late than never, I suppose, but there's something kind of nauseous about the way LatAm has been plastic coated for a US audience with the tacit compliance from the media. This from AP today:


BOGOTA, Colombia – The soldiers in Antelope Company's Third Platoon hadn't registered a guerrilla kill in months. And without results, they feared they wouldn't be let off base for Mother's Day.

So they hatched a plan, according to Pvt. Luis Esteban Montes: Lure a civilian to their camp, murder him and register him as a rebel slain in combat.

Montes, 24, didn't object — until he met the quarry. It was Leonardo, the older brother he hadn't seen since he was 9.

Montes said he tried to dissuade his commander, who responded with threats. He slipped his brother out of the camp, he says, only to see him show up dead a week later, a "guerrilla kill" with three bullets in his torso and a gaping facial wound likely caused by a knife.

Read the rest here

Chart of the day is............

....International Currency Reserves per Capita for the nine major South American states plus Mexico.

Click to enlarge

The idea behind this chart is simple; we've heard often enough how LatAm is protected from the financial storm by having accumulated currency reserves in its various central banks. The amount in each country varies considerably (Brazil over $200Bn, Uruguay $6Bn etc), so by showing the reserves as a ratio of each country's population it gives a better idea as to the amoount of protection afforded by each pile of money.

Of course it isn't as cut'n'dried easy at that, as each country has different demands on that reserve (debt servicing, capital outflows, pressures on its currency that depend on copper (Chile) or soya (Argentina) or ten thousand other variables). But the chart does give a general idea of strength.

The strongest country by far is Chile; this because as well as the $26.49Bn in official reserves used in the chart, it also has around $23Bn tucked away in overseas accounts to call on...add these together and Chile enjoys the backup of over $3,000 per capita. Next comes the quiet achiever Uruguay, once again showing itself in excellent position for the turbulence to come. Argentina and Venezuela are relatively rich at the moment, but both of those are more likely to tap reserves heavily in the near future.

Surprises include Bolivia, as the Evo Morales gov't has been fiscally prudent over the last two years (but don't spread that around...we don't need no stupid facts, right?). Also surprising but for the wrong reasons is the relatively low level of reserves that Colombia can call upon.

In general, the question to ask here is "Is $1,000 per head enough to protect a country?". That's one of those subjective, piece-of-string questions I suppose. But it does give us an idea of the numbers involved.


Boney M said it best: "Oh those Russians"

Very pointy boat

Russia is now launching a two-pronged attack on South America, hearts to the North and minds to the South.

The batting of the eyelids is steaming towards Venezuela right now. The nuclear powered battle cruiser "Pyotr Veliky" (Peter the Great) passed the straits of Gibraltar yesterday on its way across the Atlantic and is due to arrive in Venezuela for bi-national naval maneuvers at the end of the month. According to the ship's stats it carries cruise missiles (non nuclear tipped for this trip, so they tell us) with a range of up to 500km, so it won't be long before the US 4th Fleet coincidentally in the area right now is in range (if the Russkies feel like a potshot..which i doubt).

As for the business dealings (apart from the Russian takeover of Venezuela's gold industry slated for early 2009 and Russian oil company Rosneft trying to get its hands on a piece of prime Venezuelan real estate in the last couple of days), that's covered by today's news that Russia via its Gazprom state oil company wants to buy the 20% of Repsol (REP) currently in the hands of Spanish building company Sacyr Vallehermosa (who have announced intention to sell already). The Spaniards are clearly being semi-forced into an asset liquidation by the world downturn, as there wouldn't be much reason to sell its REP for a mooted €3.5Bn when it has the chunk on its books at €6.525Bn.

So with Repsol YPF a major part of Argentina's industrial life, the Russians are looking to open up a second LatAm front, as it were. Let's see how this one progresses.

Those nationalized industries never work.

You know this because they've told you enough times. I mean, why would they ever tell you untruths?

Case in point is the 'Block 15' oil field that the Gov't of Ecuador took back from Ocidental Petroleum back in May 2006 (pre-Muffin, we note in passing). At the time of the seizure (due to clear non-compliance by Oxy) the field was producing 101,000 barrels a day. Within a few months of government control production was down to 60,000bbl/d and the world was awash with the "I told you so" choruses from stupid, prejudiced people who always seem to know better.

But what was really happening was more subtle than the bipolar judgemental world let you believe. In its time at Block 15, Oxy had extracted without putting in the necessary investment to maintain production levels over the long term. Also, when the field was dropped into the lap of state run PetroEcaudor (via newly set up subsidiary PetroAmazonas) the state had little buying power and resources to be able to suddenly take on a big field and make it work.

But maybe you've noticed how recently the finger-waggers and Correa/Ecuador critics have gone all quiet about Block 15, PetroAmazonas and PetroEcuador in general? Maybe that's because the field is now producing at over 100,000bbl/d again, and now even beats out Oxy production (e.g. 103,741bbl produced on Sunday Nov. 9th, and 102,051bbl logged today).

In the words of the CEO of PetroAmazonas:
"In December 2006, on taking charge of Block 15 and concerning the approval of the 2007 company budget, I informed the Board of PetroEcuador that it was necessary to reorientate investments at Block 15 so that production could come from the incorporation of new reserves to compensate the reduction to 60,000bbl/d at the Eden-Yuturi field which was producing up to 75,000bbl/d in the Occidental period."

Yep, those backwater know-nothings in the Ecuadorian Gubmint that wouldn't last five minutes without the foreign Johnnies telling them what to do and charging them a pretty penny for the pleasure have invested, replenished reserves, upped production just as they said they would and have shown Occidental and all the other detractors a thing or two about oil production. Bottom line: Petroamazonas has made good on its promise to return to 100,000bbl/d production (that's a chunky 20% or so of Ecuador's total production, by the way).

We are therefore left with a roaring silence from media and "expert commentators". I mean, there's no point in disseminating good news about the Ecuador oil sector, is there? No point in showing the world the country does not need foreign direct investment. And actually praise a nationalized company? Perish the thought! It's best to keep success stories quiet. Don't want to rock the boat.

Trading Post (refusing to look at the screen edition)

I couldn't resist it and may regret it before the bell, but bot some Jaguar Mining (JAG) at $2.62. Not many, but I'm not full cash in the trading account any more. The trade is a seat-of-pants call on gold recovering. Vamos a ver......

Banco Itau (ITU) down 7.8% at $10.50. Slightly sinister that the big jump the stock had November 3rd when it announced its merger with Unibanco (UBB). has now disappeared Same pricing story there, too.

Farallon ( down 21% at $0.13. My how the market loved the company's decision to cut back on production development in 2009.

Petrobras (PBR) down 6% at $22. It goes up, it goes down, it goes up, it goes down. Today's drop looks connected to the Credit Suisse rating drop to "neutral" from "outperform". Two things to note here:

1) Credit Suisse must have watched PBR bomb all this time with an "outperform" rating on it.

2) Credit Suisse also wins this week's 'No Shit Sherlock' award as it explains that its ratings drop today is on (and I quote) "the prospect that lower energy prices may reduce earnings." And you wonder how these analysts led their lemming clientele over a cliff......

MELI has a great quarter and reports on the wrong day

Or maybe that should read 'wrong year'.

Mercado Libre (MELI) blew away even the most optimistic of calls on its 3q08 earnings and returned a 13c EPS. Sales revenues of U$40.3m were also top notch. These are really good numbers and unsurprisingly MELI jumped bigtime at the bell, touching $13. However the broad market selloff has taken a lot of the shine off today's pop and right now it sits up "only" 13.5% at $11.70 or so.

As for me, well I know I'm fated to get this stock wrong 100% of the time. I sold nearly a buck lower yesterday after chickening out, even though I like the fundamentals of the stock and in this post called it a buy at $20 with charts and everything (in my own defence that was before the whole of the stock market dumped bigtime, but a call is a call). The worst of it was that I even called 3q08 EPS at 10c in that post, and the big beat yesterday should have me buying this stock again. But i think it's best left alone...I might get the big picture on MELI, but my mojo just doesn't work for trading it.

Ecuador: I'm actually kind of disappointed so far...


...with the response to yesterday's note. Only one person has cancelled his e-mail subscription in a huff (claiming to have lost X amount of money and having been ripped off by the locals left right and centre etc etc) and in fact subscriptions on RSS actually went up by a total of nine yesterday, so maybe I wasn't being offensive enough. I even had two mailers agreeing with my point of view (though hatemail/condescending attitudes have been in the majority so far). Part of the cancelling sub's rant (I have to remind myself that the subscription is free at this point) was to say that a reasonable return is needed to invest in a risky country like Ecuador. I mean, where do you start with someone who thinks they're intelligent but doesn't have the first clue about what you're trying to say?

Y'know, I'm not against greed as such. What I'm against is hypocrisy and dishonesty. When someone says outright 'I'm in it for the money' that's fine by me, as people honest with themselves and straightshooting with others tend to be good people and make up for rampant capitalism by doing good in other areas. But those people who put on the "oh but I care" talk, and explain that one of the reasons they chose to invest in this, that or the other poor country is to help society soon change their tune if they lose out via their own back pocket.

It's hypocrits I can't stand, not upfront Gecko-like greedies.

Chart of the day is............

...LME copper futures, still in contango.

Copper is just the example, as everywhere you look contango (which is jargon the financial world uses that simply means "you gotta pay more later than now") rules the scene. Base metals, soft commodities, crude oil etc.

Why are virtually all commodities contangoed right now? I suggest you sit down, take five minutes out of your day and have a good, hard think about it.

Venezuela's Regional Elections: What you need to know

The revolution is in your hands

Now that little vote thingy is out the way up North and the Hawaiian got the job, eyes will turn to the Venezulan regional elections on the 23rd November. Here's the essential guide:
  • The vote is to elect governors for the 22 regions of Venezuela and for local seats as well.
  • The press will tell you something about it being a 'test for the Chávez gov't' and attempt to whip up a polemic about how his power is fading or somesuch.
  • Of the 22 regions, Chávez supporters look good for 16 wins. Two regions will almost certainly go against the gov't. Four are in the balance.
  • This counters both sides' views, with the opposition saying they're good for eight or nine regions. The gov't promises (in Bloomberg expect the word "threatens" at this point) to win the whole country by landslide. Or in other words samo samo.
  • There are eight regions that hold 70% of Venezuela's population. Unsurprisingly these are the most hotly contested.
  • Chávez has been mixing it with Manuel Rosales, governor of the state of Zulia recently. This is because if Rosales loses Chávez knocks out one of his most vociferous political enemies. If Rosales wins nobody will be surprised and Chávez has nothing to lose on the deal.
  • The most important point: Despite all you'll hear between now and November 23rd, NOTHING WILL CHANGE IN VENEZUELA AFTER THESE ELECTIONS.
This is a set of local elections that will be won and lost on local issues. Some guy's plan to fill in all the neighbourhood potholes will win more votes than any rallying cry around some revolutionary or counterrevolutionary flag. This is why this is IKN's last post on the regionals before results night. It really is a non-issue for anyone outside Venezuela. Sorry to disappoint.


Only one country in Latin America

Here's the front page of Bloomberg Latin America right now. Eight stories, the top seven all about Brazil.

Truly pathetic


BM&FBovespa Profit Unexpectedly Rises as Investors Cash Out in Market Rout BM&FBovespa SA, Latin America's largest exchange, reported an unexpected 15 percent increase in profit as Brazilian trading surged after investors cashed out during the worst quarter for stocks in seven years.

Petrobras Profit Almost Doubles on on Higher Production, Rising Fuel Price Petroleo Brasileiro SA, Brazil's state-controlled oil company, said profit almost doubled because of increasing output and higher prices for crude and refined products.

Cemig Says Third-Quarter Earnings Decline After Company Lowered Its Rates Cia. Energetica de Minas Gerais, Brazil's largest combined electricity generator and distributor, said third-quarter net income fell 5.7 percent after it reduced rates to comply with a government mandate.

Eletrobras Records 2.1 Billion-Real 3rd-Quarter Net as Units Raise Rates Centrais Eletricas Brasileiras SA, Latin America's largest utility, recorded a profit in the third quarter as power generation subsidiaries received rate increases.

Brazil Stocks Rebound in Late-Day Rally, Led by Redecard, Vivo; Bolsa Dips Brazilian stocks rebounded in a late- day rally as phone companies and credit-card processors surged after the largest wireless carrier reported profit that beat estimates and the government said the credit crisis is easing.

Vale Allows Customers to Alter Ore-Supply Contracts as Steel Demand Wanes Cia. Vale do Rio Doce, the world's largest iron-ore producer, is allowing customers to alter supply contracts as a global economic slowdown prompts steelmakers to scale back output.

Vivo's Quarterly Profit Soars After Telemig Acquisition, Beating Estimates Vivo Participacoes SA, Brazil's largest wireless carrier, posted a 30-fold profit increase after buying Telemig Celular Participacoes SA and getting more revenue from text messages and e-mail.

Chile Peso Falls on Drop in Stocks, Commodities: Latin American Currencies Chile's peso fell the most in more than two weeks as a drop in global stocks and commodity prices curbed demand for higher-yielding, emerging-market assets.

Albatross update: NOT.v edition

So far Patrick Albatross Anderson is on schedule at Noront (NOT.v). After being part of the proxy slate that bullied its way onto the BoD, The Albatross has managed to knock 25% off the value of NOT.v shares in just 12 trading days.

But that's the hors d'oeuvres when it comes to the magical powers of The Albatross, and today he and his pals hit the little guys with a classic Canadian screw the lil guy special. Noront has $25m or so at bank which is enough to fund its operations through 2009, but that hasn't stopped the new BoD from announcing a non-brokered (i.e. their pals in 'the houses' are already lined up with the cash) placement at $0.80 (virtually the 52 week low....nice time to get your pals on board) that will add 25m to the shares outstanding. Oh, and then there's the little matter of the 1.8m options at $0.80 that the new BoD thinks it deserves after a full 12 days of hard work.

Beats banging rocks together for a living, eh Patty? Oh, and by the way Colossus Minerals ( is at its 52 week low. Ain't no stopping The Albatross.

Minera Andes' Quarter (

Minera Andes ( hasn't reported full figures for 3q08 yet, but tonight it released production and sales guidance figures for its 49% owned San José mine in Argentina (the 51% majority partner is Hochschild (HOC.L)).

While nobody was expecting a repeat of the $63m sales in 2q08 (because in 2q08 San José sold over double its production of gold and silver due to previous stockpiling), the $18.5m in total sales for 3q08 is somewhat disappointing. The mitigating factor is that some metals produced are staying on inventory until 4q08. Those inventory metals look like around 2,580 oz gold and 144,000 oz silver. Using the average selling prices for 3q08 ($861/oz Au & $12.37/oz Ag) that's about U$4m in unsold production (so about $2m for

So we'll likely see $4m or so put in the current assets column, but a sale is a sale. As for net revenue projections, interestingly "forgot" to tell us the cash cost per ounce of its gold and silver co-product this quarter. But let's assume the same numbers as 2q08 for the moment ($6.16/oz Ag and $322/oz Au). According to my casio this would leave a little under $8m in the EBIT column. So one the rest of the calculations are done and through I'm expecting to announce an EPS of around 1.5c to 2c for the quarter, this assuming they haven't broken the bank on capex at the Los Azules copper project and spent a heap of those earnings.

So all in all I'm not expecting a sparkling result for A profit yes, but a blockbuster quarter no. The places to look for variations are with cash cost (assuming the 2q08 figures is a necessarily rough estimate for the moment) and with final net earnings (how much will be diverted towards capex?). The share price will probably move on guidance more than the filed numbers, so let's see what management have to say for themselves come the filings day.

Remember that earnings are one thing, but propects are quite another. For sure it'd be nice to see earning a whole heap of money and stashing it in the bank, but right now the important thing is that the company is self-sufficient in cash and can get on with the job of proving up its potentially enormous Los Azules copper project (JV with Xstrata) without having to beg and scrape to the crunched financial sector. IMHO Los Azules alone makes worth more than its current PPS (we're talking 11Bn lbs Cu and rising there), but then again I see a future for copper and the market now seems to think that nobody will ever need the metal again.

I'll leave you with the recent share price chart. 189.7m shares out at the current $0.73 puts market cap at $138.48m FWIW.

Mercury is funny stuff

Here's a list of interesting facts about Mercury (Hg) and some of the things that happen to people who come into contact with it (and some of the things that don't happen, too).

Almost certainly know:
Mercury is a very dangerous substance, highly toxic and can be ingested through simple touch.

Probably know:
Eight years ago in Peru there was a spillage of 151kg of mercury. The truck was servicing the Yanacocha gold mine and splashed mercury at various points on its route, including the village of Choropampa. Other places affected were Chotén, San Juan, La Calera, El Tingo and Magdalena.

Choropampa in all its glory

Might know:
Of the 151kg of mercury spilled, 49.1kg was recovered, 17.4kg was absorbed into the earth, 21.2kg evaporated and 3.3kg is still unaccounted for (all official numbers).

Unlikely to know:
The mayor of Choropampa, Vicente Zárate Minchán, died early Monday morning, 10th November 2008. He was 34 years old and had been displaying symptoms typical to mercury poisoning.

Very unlikely to know
According to the local doctor (please note the singular), there are 80 other people displaying the same symptoms as showed Mr Zárate, a syndrome known as Guillain-Barré. The local doctor also says that 10 people have already died that were displaying the same symptoms. This is the point where lawyers for Yanacocha mine will tell the world that there is no proven connection between the death of Mr. Zárate, the other symptoms shown by locals and the mercury spillage. They will also show the world pieces of paper to prove their point. That's fine by me. This is also the point when Otto tells Yanacocha's lawyers to go **** themselves with a sharp stick.

I'd be extremely surprised if you knew:
In the eight years since the accident, the medical infrastructure in the village of Choropampa has not changed an iota. It is still reliant on a Medical Post that has one obstetrice, one doctor, one nurse and one technician. Yanacocha claims that all locals have access to private health coverage, but the villagers note that to claim on the insurance they have to travel to the city of Cajamarca, a mockery for those seriously ill.

Funny stuff, mercury. Hilarious, in fact.

Trading Post (uff edition)

Apex Silver (SIL) down 50% at $0.70. I mentioned to avoid this thing like the plague. Now you know why. SIL is also trying to sell its interest in the San Cristobal mine to minority partner Sumitomo.

Meanwhile in the world of the living.......

Jaguar Mining (JAG) down 12% at $2.94. I recently ran the numbers on this thing and reckon $4.50 is a fair initial12 month target if gold moves above $750/oz. As with all the miners right now spot price is the critical driver, but a modicum of bounce in gold and methinks this is a 50% gain. DYODD

True too for Capstone ( down 10+% at $1.01. Despite last week's excellent results and noting cash cost at $1.29/lb, has been taken to the woodshed again. Copper spot is the driver here, of course.

Ecopetrol (EC) is flat on the day with very low volume. Note that the market liked the quarterly results as it opened at $18 yesterday, but since then the bids just keep getting hit. Not even the sound, profitable growth companies are safe in this macro-environment.

Petrobras (PBR) is enjoying the publicity Bloomberg offered up yesterday. Now down 7% or so at $25. Yeah I know oil is under $60 and that's the real reason, but let's keep pretending that Bloomberg actually matters in these makes their hacks feel better about life. Stops them worrying about the impending round of pinkslips in the LatAm region.

Mercado Libre (MELI) got whacked too, down 10+% at $10.40. I sold the portion picked up Friday at a point in insisting. I would have sold them yesterday but I was traveling and it wasn't possible. So be it. Not the first time I've taken a loss on the chin, and not the last time either. Otto is Mr. FullCash again.

Ecuador's Mining Law

Various media, including Mineweb right here, are reporting that the mining law goes to the interim congressillo (literally 'little congress' and the body that's handling matters until the 2009 congressional elections are held) tomorrow.

The hot topics of debate among the Canadian investment community are (as usual) the royalty payments due and the windfall tax regime to be imposed. Plenty of talk about how things are still uncertain at this point (see Michael Gray's comment in the mineweb report, because among the Canadian analysts he's about as good as it gets on Ecuador).

But unsurprisingly, nobody up North cares much about Ecuador (as usual) because the only thing they care about is their investments. All the 'experts' on Ecuador that write, some to me with "Oh look Otto you're missing this-or-that piece of news on the country" that can't even speak the language, have no idea about life there and wouldn't even know where to find it on a map if they hadn't bought 2,000 shares of whatever junior miner exploring the country three years ago.

Don't you guys get it yet? You're greedily grasping at the straws of the very same economic system that is falling into a million pieces. You want things to change, but when a country decides to change, defend and protect itself from the me-first system previously imposed on it by the so called developed nations, all of a sudden Correa's Ecuador isn't playing by the rules. All of a sudden the President isn't doing right by the people. All of a sudden the uncertain future of mining isn't good for the country. And here you are, biting your nails and worrying about a poncey little mining law when 99% of you didn't give a damn about the contents of the country's recently approved new constitution, a far more important document to the future wellbeing of the country and its population.

What makes you think that anybody wants your rotten, selfish and putrid FDI any more? What gives you the right to demand continued personal profits from nations such as Ecuador? My advice is to stop pretending you care about what happens in Ecuador and admit it's pure greed, because with few exceptions you're in it for yourselves and trying to bully a broken system onto a weaker country in order to benefit your own back pockets in the name of freedom, democracy and all the usual bullshit.

Ecopetrol (EC) update: nice numbers, good growth, possible hedge vehicle

It's been a tough debut for the ADR shares of Ecopetrol so far, as the chart above shows. After debuting at $25 the ADR has slipped to today's U$16.49. However the company is doing well enough and yesterday announced profits of U$942m, up from U$800m YoY. EPS was COP$97.06. As the ADR is equivalent to 20 shares and the exchange rate is COP2311=U$1 right now, that gives us a quarterly EPADR of U$0.84 for a U$16.49 equity...not bad at all, really. A forward P/E ratio of 4.9X for a growth hydrocarbons company is attractive, even in the face of $60/bbl oil.

In fact all key numbers were up compared to the same quarter in 2007, but the one that I like the most is production at 441,000bbl/d eq, compared to 392,000bbl/d eq for 3q07. This shows that EC is in position to weather the downturn in barrel prices.

One thing to note about EC is that it provides the US investor an excellent hedge against the USD going forward. If (and it's a big "if", but it must at least be considered) the US dollar weakens in the next few weeks both the Colombian Peso (COP) and oil prices will benefit. This double whammy effect makes EC a good stock to consider when portfolio balancing is on the agenda. DYODD dude.

Chart of the day is............ copper again...unfortunately.

Copper is again making headlines for the wrong reasons. Last week I said in this early morning post that if Cu held $1.72/lb it would have been good. Just a few hours later I noted the metal at $1.69/lb and said "That's not good people."

And so it has proved, with the feted-for-24-hours Chinese stimulus (which contrary to rumour is not some sort of battery operated device you can order online) not convincing Mr. Market about anything. Note that oil is under $60/bbl right now, as well.

Real world impact too, as this morning Frontera Copper ( has announced it is suspending mining at its Mexican copper operation "Piedras Verdes" (literally 'green stones', and makes sense if you know what copper minerals look like in the field). Away from Spanish lessons, says it is continuing with leaching operations in order to generate cash flow. This will probably go down like a lead balloon with the mining workforce who have likely been pushed hard in the last few weeks to stockpile ore next to the leach pads, but's kapitalism, baby.

So where does copper go from here? To be honest I don't have a clue, but I'm quite sure pricing until the end of the year will be more as a function of the US dollar's fluctuations and much less aboout real supply and demand issues.


Don't say I never tell you anything..........

...........but unofficial off the record keep-it-quiet and "whatever you do, don't tell the retail mob" word is that Gold Reserve (GRZ) has been sniffing around Geologix Explorations (, which might explain why has popped from the lowest of the lows over the last few days (though it slumped along with a lot of other juniors today, gotta be noted).

Now I'm not supposed to pass on rumours like this, but as I'm still way tired after getting back from my trip and in a bad mood and fed up with pandering to insincere money I'm shooting my mouth off on this one. This juice is well sourced, FWIW. As full disclosure I own neither stock and to my best knowledge nobody I know owns (though one or two own GRZ I believe).

Does it make sense as a link-up? Yes, as GIX has a nice gold prospect in Peru and not much money to develop it ($13m at bank as at 2q08), while GRZ is in the process of being kicked out of Venezuela and is likely to walk away with up to $120m in cash that will need a new project for a home. DYODD on this one.

When Bloomberg Brazil pumps, the world dumps. So will it work the other way round?

When Petrobras was the bloated beast earlier this year, chief amongst cheerleaders was Bloomberg news. So now that Bloomberg is putting the boot into PBR, my innate contrarian nature is screaming "buy PBR!" at me.

PBR reports tomorrow, BTW. Here's the Bloomie hackjob.

Don Coxe November 7th Conference Call; "Buyer's Remorse

Here's the tapescript of the latest Don Coxe Conference Call. Enjoy.

BMO Capital Markets Client Conference Call for November 7, 2008

Don Coxe

“Buyers Remorse?”

Thank you all for tuning in to the call which comes to you from Chicago. The chart that we faxed out was the Dow Industrials showing the two days leading up to the election and then the collapse in the stock market coming out of the election. And the tag line was “Buyers Remorse?”

And so I want to address the question of the fact that we had had six straight days in which the S&P rose 18%, which was one of the most powerful rallies of all time. And then giving virtually all of it back up and the question then is, where are we at after all of this?

So, I want to take you through the buyers, I think, going on the up side and why they turned from being eager to add to risk assets and then rushed back into T-Bills so suddenly.

So the first, of course, is the question of the election result itself. And we congratulate incoming President Obama who ran the greatest primary election campaign of our generation. And an absolutely brilliant election campaign. And with terrific results. He got 2 1/2% more of the popular vote than Al Gore got and he got 4% more of the popular vote than John Kerry got. A tremendous performance from sea to shining sea. And he’s the President of all Americans and we join everybody else in wishing him a successful presidency.

This was a feel-good election for America. It addressed the sore at the center of the American spirit by electing a Tiger Woods-type figure who transcends racial stereotypes. And from a standpoint within America and America’s image in the world, the election of this President was a great experience.

So, in that sense, you can say “Well then there was no surprise, so why was there remorse?” Well, it’s always difficult to pick through the tea leaves in trying to analyze how emotions come into it, so I’ve got a collection of what I think were the remorses that set in overnight.

The first is that the Obama victory has really altered the balance of power in Congress. And those who were watching the election night returns seeing a triumphant Nancy Pelosi on TV, that reminded investors that the sweep was heavily financed by such far left activists as the Daily Coast,, ACORN and the American Trial Lawyers Association. And that collection of advocacy groups is truly scary for investors.

Furthermore, Obama himself and the Congressional Democrats are pledged to pass card check. And card check would decisively alter the balance of power within labor relations in the US. Because instead of having a secret ballot to put a union in at a shop, it could be done by the fact that as long as people have signed union cards and they’re over the 50%, that they get put in.

Now the reason why this never passed before is because if you have a couple of burly union members who come in talk to you around the kitchen table and you sign their document, that’s a somewhat different decision than you make in secrecy. In fact, the record over the last twenty years of union elections which were based on having the cards and what actually happened when they have a closed door vote, is that the unions would lose a huge percentage of all those elections.

So this is designed to eliminate the secret ballot and that’s so much at the core of the American experience that all polls show that not only are about 80% of Americans opposed to it, but a huge majority of union members are opposed to it. And so that’s something that naturally scared investors.

Now, hedge fund investors, that is, the investors in the hedge funds, have been cashing out at record rates because for the first time, hedge funds failed to deliver positive or breakeven returns in a market sell off. And cash in the hundreds of billions is building up in the system.

But when you see even a master craftsman of hedge funds, Ken Griffin at Citadel, announcing a 40% loss on the funds, you sort of figure that the enthusiasm of pension funds for hedge funds has probably altered in a way that’s going to change the basic structure of pension fund investing.

But in the near term what it does is force the hedge funds to unload their assets. And of course this means that those who had such winning asset classes as commodities and emerging markets, have been forced to sell heavily to meet cash calls. So this is bigger than a margin call situation that you have when you have a market sell off by far. It’s much more concentrated because now you have the pension funds and the hedge funds together in effect, being on the sell side of these asset classes so that you’ve got such strong markets as India down 50% this year.

Yes, the Indian economy – and I’m going to be saying more about it next week when I take a group if investors to India – but the Indian economy will be slowing down a bit, but this is not a disaster situation by any means. But, it’s the kind of asset class that gets sold off. And indeed heavy shorting, because one place, one market where you could short sell with impunity.

The third group of buyers remorse, I think, was equity investors who now seeing with such a decisive mandate, that President-elect Obama and Congress will be able to implement the tax changes which will be higher taxes on people who have higher incomes. So the investor class was rushing, I think, to lock in tax losses in the last couple of days, because they can be carried forward into a year of higher taxes. So that’s a response of intelligent tax-planning investors to a situation where if the election results in Congress had been something less than they were, they might not have felt as frightened about what was coming next.

Then another class of buyers remorse was European investors. And their remorse was a little different. We had those big rate cuts. The Bank of England shocked people with a 1 ½ point cut, with more apparently coming. And the European central bank made a fifty basis point cut. The European stock markets sold off and of course, they’re huge holders of US stocks, so that selling continued into our market.

And you say “Well, why is that? Ordinarily if you cut rates, that’s just a reason to buy stocks. Historically it’s been that way.” But the reason for that is the recognition that out of the situation globally is more severe than perhaps they thought. And most particularly within Europe, and that’s Europe from the Atlantic to the Urals, because the situation in Eastern Europe is getting truly dire. So many of those economies over there were borrowing heavily. That is, homeowners and countries, were borrowing heavily in the Euro currency so they have terrible balance of payment deficits. And their economies are in terrible recessions.

So, this effected emerging markets indices very decisively because if you add in all those Eastern European countries plus Russia, again you have a situation where that asset class as measured in the global emerging market indices was getting hammered, which was further pressure on risk assets.

That’s a big collection, but then we add in the fact that coming out of this, we had a renewed commodity collapse and that reinforced the view that the global economy may be in worse shape than investors were thinking as they were eagerly buying stocks in those six days where we had firmness in commodity prices and the view that the various liquidity and other special injections were going to give us a much stronger outlook for next year than had been feared.

Well, of course as far as the stronger outlook, we got the ghastly US employment numbers this morning. And although that gave us a somewhat weak opening, the market does seem to be firming now. But we get to the stage where Ben Bernanke faces the problem of the zero rate of interest, which is the Japanese dilemma that when you get down to zero or near zero, that the basic mechanism of central banks to stimulate the economy no longer can function.

And that was something that Keynes talked about that’s always been out there as a question mark about the limits of central bank powers. And the Japanese example is a horror story that a lot of investors say “Well, we can’t really see therefore that the kind of curative mechanisms that we’ve been getting up ‘til now can be projected forward.”

Well that’s the bad news.

But as you know, on the last few calls, I’ve been expressing the view that we are forming a bottom for the stock market. So I’ll just mention one other asset…or collection of investors who have had remorse. The cash outs of mutual funds are running at an unbelievably high pace. And that was flagged by the fact that before we had the stock market sell off – in other words, back to June – that the ten-year rate of return on the S&P was zero. And that was the kind of thing that meant that 401-K numbers would have been disappointing when they got their September statements anyway, but by that time, we’d had the Lehman collapse. So that investors were saying “Look, I over-levered my house because housing was a good asset, but I was saving through my 401-K and that’s failed me. And so I guess I’ve got to get in to cash.” And that, of course, is capitulation, which is a condition of forming a market bottom.

As you know, we have emphasized - perhaps to the level of boring some of you – that a bear market which is lead by the financials ends when you’ve had a sustained period of outperformance by the banks relative to the S&P. And boy do we have that…in spades. Unless that indicator is totally a false signal this time, what we’ve got is a situation where the performance of the BKX to the S&P is very powerful.

Now, of course it doesn’t mean they’ve gone up. But we’ve had a huge rally on relative strength without going to a new low.

So I have to tell you I try to live by the rules. And this tells me that the Bernanke-Paulson mechanisms are working. And they haven’t run out of ingenuity and they haven’t run out of money. Therefore, I’m of the view that this Mama Bear market should have bottomed out at around these levels, because of the Mama Bear markets of our time, the ones which were in the early ‘70s, at the end of the ‘70s, those two, both of them were down 47 and 48%. And we got to those levels at the depths.

So once again, I would say that unless we are going to have a global depression or this is unique, that we had the required amount to classify it as a Mama Bear not a Papa Bear and that this particular grizzly had done her work.

Now, the argument this of course is well, it’s different this time, because things are worse this time. But I’m not prepared to accept that. Because we’re measuring an index which is basically tied to economic growth within the OECD. And although the collapse in emerging markets would tell you that there’s trouble for the economies that commodities are tied to, and that global growth is tied to, I believe that there were special factors in those and those markets which are volatile anyway will rebound because those economies are not collapsing.

That is, if you take out Russia and Eastern Europe out of the question of the emerging market index, then if you take the ones that we’ve been emphasizing which are China, India, Brazil and Southeast Asia, I still believe that those economies have fundamentals including demography, which are favorable and therefore over any reasonable time horizon, we’re going to have economic growth. And that economic growth is automatically tied into acquisition of commodities.

So the asset class which is most tied to growth and emerging markets, whereas you could say that they went down together, I believe the adjusted index will show you that even within a few months, people will say “Yeah, this is, ah…we overdid it.”

Well, does this suggest I’m trying to catch at straws? No! It’s that we were looking for a Papa Bear market which would signal a recession. It was worse because of the Lehman collapse and the collapse of so many banks in Europe and the bailouts and so forth, which meant that the financial excesses were worse in this cycle than in any previous cycle. And therefore, we got a Mama Bear.

But unless the BKX breaks through to a new low, than I think that we will have found, even if we have to look back on it, that we were forming a base here amidst all the pain and anguish. And so I’m not going to throw in any towels here. And yes, we’re close to where the low was on the BKX, which was 49, so this is not a big one, but the relative strength is the most crucial thing in that and the relative strength is so dramatically in favor of the bank stocks relative to the rest of the market that I think that that signals what we need.

Now we’ve told you that coming out of this the stock groups that were going to lead it were going to be the bookends of the market: the banks, because once people no longer feared that there would be renewed collapses, that they would be prepared to buy these battered banks. And on the other side, the commodities which would be tied to a renewed growth pattern of relative strength for the commodity consuming economies.

So, the financials which are tied directly into the economies of the OECD that the huge bailouts and the huge injections of capital and liquidity would stop the OECD from plummeting further and that we would get the signal from abroad. So after all of this adjustment we would go in to a new weighting of global GDP and the commodity investors would be tied to the economies whose weighting in global GDP would be much higher in the next cycle than it was in the last. And that means an all-time record high for emerging markets vs. established markets.

So one of the things we will be doing in the next issue of Basic Points that I’m working on now, will be to increase exposure to emerging markets. But we are going to put an asterisk that that means the non-Eastern European emerging markets.

Well, as to the commodities themselves, you can pretty much say that as oil goes, all the commodities seem to go. Yet, that’s not the right way to view the situation. Because most particularly for India and China, if the oil prices are lower, that is a huge stimulus to those economies. India in particular, the biggest problem that the Indian economy has faced on an international basis, has been its bill for oil. And China not as much because China had a significant amount of domestic production. But collectively, China accounted for about 1/3 of the growth in oil consumption so far in this decade. And if the bill for oil is more moderate than it was before, than that’s going to mean more prosperity. Consumers are going to be in better shape. And the industrial recovery will be stronger.

So the fact that investors in the commodities…the Goldman Sachs index which is sort of two-thirds in hydrocarbons, is the one that most people look at. And that index, I think, overstates the demand/supply situation for commodities.

Well, the next one is “Well why didn’t we get, with all of this bad fear spreading through the markets for all of the reasons I’ve outlined, why didn’t we get a bounce in gold?” And I wish I could give you a firm answer on that. I’m still of the view that when you have the kind of expansion of monetary resources that we’re getting here – and we have no precedent for anything on this scale being done – that this ultimately is gold-bullish.

The US monetary base is up fifty percent in a few weeks. Well there’s no precedent for anything like that before. So, going back to the other two Mama Bear markets, we had nothing like that. And of course the grand mama of them all, which was the crash in ’29, we had actually a drop in the monetary base.

So I have to say that the basics say that when you have this kind of expansion of monetary resources, ultimately it translates into a pickup in economic activity. It allows you to have the debt write downs. And it allows a healing process. But if you consider the global economy as having been in the intensive care unit, the intensive care unit basically puts in glucose to the patient. And the glucose in this case is monetary.

I think the patient will be out of the intensive care unit fairly soon, in the recovery room. And the recovery, I think, will actually be stock-friendly, because this bear market unlike those other bear equity markets did not start from a level of great equity overvaluations, not at all. If you take the financials out of the market, this market was trading at sort of historic P/E ratios. And the excesses were not within the stock market, they were in other markets. And therefore I’m of the view that the values in stocks relative to other asset classes now, if we use other asset classes being particularly housing, that this is an asset class that over the next five to ten years is one that people are going to feel comfortable with again.

Now there’s been so much devastation done to the baby boomers psyches and their finances, because they of course bid up the tech mania on the basis that P/E ratios no longer mattered. So they’re going to have to slowly rebuild their finances. We’re not going to have a rush back in to equities, I don’t believe, but for pension funds, which are building up cash at a tremendous rate as they close out hedge fund positions, they’re going to be looking at their equity exposures and pension funds who do truly have long-term investment programs based on relative exposures to historic asset classes, I think they’re going to be keener to rebuild their equity exposure. The big fad for pension funds in this decade was not stocks. The big fad was alternative investments. And leading the pack in alternative investments was hedge funds. And private equity. And the private equity funds – and this is where I conclude this part of the call - the private equity funds are reporting nothing but losses on a big scale.

So where do you go, as a pension fund, to meet your long-term liabilities? Now you can go in to corporate bonds because the spreads between Treasuries and corporates are at tremendous levels of the kind that would entice bond investors. I’m talking of investment-grade bonds. But, when you see that the equity percentage of your total fund is back down to the bottom of any range you would have ever expected historically, I have to believe that when they’re looking at what to do with all that cash on which the returns they get will keep falling as central banks cut their rates, that they will be forced – even if it’s being dragged screaming and kicking – back into investing in quality equities.

They may take a while to get back into emerging markets and more sexy equity investments, but we are not dealing with a situation where the 48% sell off in the S&P merely corrected a wild overvaluation of the S&P. That’s not the case. Ten years of a flat return was in itself a huge adjustment, in effect a huge bear market, which therefore had put equity valuations back to the kind of levels that would attract a Benjamin Graham.

And then, when we have the gigantic sell off in the panic, what it’s done is produced a whole range of stocks that long-term investors will be able to say “Well, unless everything we’ve learned about stocks is now obsolete, this is our last chance to rebuild our funds against those liabilities. And this is the asset class that we’re going to want to emphasize.

So my prediction is that whereas the pension funds have been a negative force in the last few weeks, precisely because they’ve been unwinding their exposure to hedge funds, I think that they will be back, in size, and investing for their own account rather than paying two and twenty for hedge fund managers.

And as for the private equity firms, they’re going to have great trouble getting them, the hedge funds, to make new commitments. And they’re going to be making a lot of phone calls to get them to actually live up to the commitments they’ve made.

So the stars on Wall Street, in this cycle, these stars have turned out to be supernovas. And after that, we look to where in the universe you go.

That's the story. Any questions?

Question 1 (David Miller): The TED spread seems to have come in a lot more than the VIX or the BKX. What, if anything, can we read into that?

DC: Thank you. I neglected to mention the indicator that has been my favorite and I managed to skip over that. The good news is that as of this morning we're at 197 which is still a high range for it but when it's down from 500, you would say that that's real progress.

The VIX index is a volatility index. Now there's a difference. Risk and volatility usually go together but you can separate them out if you need to and what's happened with the VIX although it's come down today. The VIX is remember the index that's used by those who are trading the S&P futures to protect their exposure on a very short term basis and when you have routinely as we've had days in which the S&P has 40 point swings intraday, the VIX index is the way you hedge that wild and unprecedented hourly volatility.

So it is measuring the volatility on a short term basis of the S&P and as such point as the S&P stops having these wild intraday swings then the VIX can retreat and follow the TED spread down into a range at which people feel comfortable.

So the TED is a more reliable index in that it definitely is an index that measures the fear and risk within the financial system itself. And it measures it on a global basis because it takes away the yield from treasury bills and measures them against the yield on EuroDollars and therefore it is a pure risk index.

What banks have learned to their unhappiness in all past crises is the TED spread leaps and you aren't sure which banks it is that are going to be in the most trouble and because it's a global index based in London then it means that each of the central banks that does checking on their own banks has to sort of scurry around to find out whether their bank is the one that's causing the problem. And there's no question about it that London was a big center in this with these hedge funds collapsing after Lehman where 65 billion in hedge fund assets got locked up and are being sold up into the marketplace.

So the TED spread should lead on the downside and although it's still at an elevated range to use my intensive care unit, the patient is out of intensive care and in the recovery room. If it continues to move downwards from that 200 level - we were at 215 the day of the crash in '87 and this time the TED spread after all only skyrocketed to those levels when Lehman went down and that's because of the Lehman and then the AIG coming together it meant that all those banks who had counterparty arrangements that you had a whole bunch of banks simultaneously then getting into trouble.

So the fact that they've managed to deal with the consequences of those collapses ... it wasn't in time to save John McCain because he was virtually tied with Obama for about two weeks until Lehman went down Obama jumped to a 4 and then a 5 and then a 6 point lead that he never relinquished but from an investment concern what's happened is we soared from 165 to 500. We're back to 197. That means that risk in the financial system is dwindling.

DM: The BKX how does that layer over. I would have thought it sort of measures somewhere in between the VIX and the TED spread then?

DC: Well the BKX is telling you what the bank stocks collectively are worth and of course it's a much more complicated index because people may decide that banks aren't going bust but that they aren't going to make much money and then therefore they aren't a prime investment and I got an e-mail message from a frequent participant on this call who was unable to get through for whatever reason and he's asked me to comment on the fact that how is it that the BKX seems to be doing so well while Goldman keeps gapping lower and I'm afraid I can't answer that because Goldman is sort of the gold standard for investment banks. But frankly this whole financial crisis came, now that we look back on it, from the fact that banks after Glass-Steagal decided that the way to grow their earnings and get bonuses for their top people was to become investment banks.

So they got into businesses they didn't know that much about. They levered up. They took risks that they didn't understand and they got away from the basic business of banking. The crash in '29 and the collapse of banks then was because their borrowers couldn't cover their loans because of the depth of the recession. The collapse this time wasn't with 6 1/2% unemployment because all of the borrowers out there can't meet their liabilities. It's because of all these kinds of toxic paper that banks added to their book instead of their conventional business of making loans to borrowers that they knew and had relationships with.

So I think that you can separate out in this the bank banks which we assume are going to be going back to the business of banking and when they do there will be credit flows to regular bank customers like small businesses and exporters and those kinds of customers and I hope the banks have learned from this that they shouldn't try to put on the trappings of Wall Street stars.

When I was watching the election returns and that North Carolina voted for this time for the Democrats and one of the big reasons when they were analyzing it was the drop in the Republican vote in Charlotte. Well Charlotte lost one of their two big banks. Charlotte was on its way to being the second financial center in the United States and because of Wachovia's takeover of Golden West Financial where they got all of these toxic mortgages, what they did is they went outside their basic business.

Wachovia was a well-managed bank and so they had to be taken over. And I think that is another example that this crisis is different from the others because of the fact that the risk practices of investment banks who could lever up to 20 and 30 times were adopted by bank banks and those bank bankers didn't have experience with this but they told themselves, "We're as smart as Goldman. We're as smart as Bear Stearns," We may in fact dramatically reduce the role of pure investment banks for a while because they are not performing the economically necessary function that pure banks are. So as people troop back to doing the businesses that they know best, the economy will stabilize out.

So I apologize for the length of this answer but in order to analyze something as big as this you've got to understand how it is that mistakes could be made on this scale and what happened was that the investment banks took risks that they didn't understand but you could lose investment banks as long as you had bail outs so that the counterparty risk was covered. We can't afford to lose the bank banks.

Thank you. Any other questions?

Question 2 (Steve Osmak): Don, I was wondering if you could talk about the grains because I can understand why all the other commodities, the base metals and the oils would collapse in the context of a global recession but I mean last winter it was the Philippines I believe rioting over rice and Costco had a limit on how much you could buy. I just can't understand how the grains could completely collapse after all you say people have to eat. So any insight as to why that's been so severe?

DC: Well one of the reports that we follow closely is the Chicago Board of Trade, the CME daily report on commodities and they always begin with the report on the grains and on days that there's grain sell offs they always point out right at the beginning that they tie it in with sell offs by commodity funds at the same time they were selling off other commodities and so therefore the kind of lapidary distinctions between foods and fuels and fuels and metals don't get reflected when these commodity funds are finding out that their investors are pulling out their money.

So frankly in my view the most undervalued commodities now are the grains and I'll reiterate that the evidence about the cooling trend just gets stronger by the day and by the week. London had its first snow since 1922 in October. Yesterday in the high Prairies we had snow storms with snowfalls of more than 2 feet in some places and this is early November. Brazil has experienced extensive snowfalls.

So the evidence is that we're going to have another winter which will be bad for crops. China experienced such huge crop losses because of the bad winter last year which was a force that undergirded the commodity rally of the spring. That looks like that trend is still in place but I realize that for a lot of people on the call the idea that there could be a global cooling trend is still the ultimate heresy.

So I will just mention that the carryovers of grains remain inadequate and the fundamental story for the grains remains intact but I'll be able to discuss this in perhaps greater detail and knowledge I hope after my return from my India trip at the end of this month.

Thank you. Any other questions?

Question 3 (Anthony O'Malley): Thank you for the Basic Points. I read it every time it gets published. I'm very interested in the Dollar and the 10 trillion dollar national debt which I'm doing some research for a college where I work at and how would you point to the Dollar in the next year perhaps?

DC: Well the Dollar had better come down because the strongest component of the US GDP so far this year has been the export side. So this is taking away some of the dynamism in the US economy at a time that there's not much else that's dynamic.

So there will be no reason for the Fed to try to do anything that's Dollar friendly like raising interest rates. The Dollar is the currency of the debt as they repatriate these hedge funds. I regard that as a temporary development and so I would expect the Dollar to fall and the next big currency is from the EuroZone and since the news from that zone gets bleaker by the week you say, "Well how can the Euro rally?" The difference is you've got high savings rate in many of the European countries whereas the US savings rate remains at zero. The US has to import vast quantities of money each month to cover its current account deficit and offset its lack of domestic savings.

So at such moment as that inflow dries up or weakens, the Dollar will fall and of course commodities still as an asset class tend to trade inversely to the Dollar not just gold but commodities as an asset class. So what we're seeing today with the strengthening of commodity prices, well the Dollar is somewhat weaker.

But then the other big currency zone of course is the Yen and it's hard to make out a case for that except for the fact that people borrow in Yen, people that is outside of Japan and meanwhile Japanese savers are still rushing to take their money out of Japan and invest it at higher interest rates abroad. The gap between Japanese and foreign rates however is narrowing as central banks rush to rescue their own economies. So that Mrs. Watanabe may be more constrained in exporting from Japan her savings.

So putting it all together, the Dollar is stronger than it should be but I think it's partly reflecting:- (a) the repatriation of hedge fund money, (b) the perceived weaknesses in those other two currencies. But what it does mean is currencies other than the Dollar should strengthen and particularly the Canadian Dollar, which was way oversold, should rally back because the fundamentals in Canada remain very strong relative to those south of the border.

But the Dollar remains at the center of the global system and so therefore it does acquire haven characteristics but at such time as people start believing in a global economy then they're going to look at the fundamentals for the Dollar and the fundamentals for the Dollar remain bleak.

Thank you. Any other questions?

Question 4 (Kirk Aldridge): Yes, Don, could you just comment on the high yield bonds.

DC: Thank you. Frankly I think that for investors who are looking at some point at unloading cash and going into an asset class, corporate bonds as an asset class look good and within the high yield market as long as you aren't dealing with the LBO bonds where they've stripped out their covenance pretty much in order that they could have birthday parties for the private equity people. I would within the high yield group there are lots of companies that you have to believe unless this is a depression are going to be able to service their debt and again people have been rushing away from risks of all kinds. So this is an asset class which grew dramatically in size because of the private equity mania.

So again within the group what you've got to separate out is those whose bonds have been used to finance machinery and equipment and business purposes and as long as you look at the underlying companies and what they're doing that would be an asset class that should have terrific attractions over the next twelve months but this is a case in which more than the ordinary degree of study is required and is a game for specialists. We have a partner company, Monegy, that's really good at these. There are other fund managers out there who are good at private equity and high yield and distinguishing the ones that don't have the proper convenance in them. To have a covenant free bond at a time of global recession, to have a devastated balance sheet is to have an asset that has very little apparent value.

Thank you. Any other questions?

Question 5 (Donna Short): Just quickly for clients who are using tax losses to their advantage can you just reiterate the sectors that are the leading sectors that one should still stay in?

DC: Well I'll go back to it that on the assumption that there will be a brighter day tomorrow if you argue a posteriori then what you can say is the banks have to be in better shape twelve months from now than they are today. They've been hammered down, and bank banks that is as opposed to investment banks have to have intrinsic merit because their earnings should be tied to the recovery of economies.

So although it's been a long time since you've heard me recommending bank stocks on these calls I'm saying that they make sense now if you assume that equities as an asset class because we just cannot get a rally in the stock market now from these levels without having some leadership from the good banks and again the global economy if it comes back is going to be led by those economies that have positive demography and where high savings rates and growing labor forces and these are economies that have a greater appetite for commodities than the advanced economies.

So by having the asset class that will do relatively well as the OECD economies recover which is the banks and the commodities tied to the economies that are going to have the greatest growth rates over the next few years. So what you do is you take the two bookends and in between it's a stock by stock basis.

Thank you. Any other questions?

Question 6 (Marcus Backham): On the monetary expansion that we are witnessing at the moment is truly impressive. There is just one concern that the patient being the global economy being in IC. We in check should really help him to get back on his feet but you get somehow the impression that the drip is blocked. We see that in anecdotal examples that companies struggle to get patient and family financing. We still see that reflected in a very depressed Baltic Freight Index. Is there a risk that the patient being the economy is probably more seriously damaged than we wish to think because of potentially that blocked drain that we're seeing at the moment or are these concerns maybe too overstated?

DC: Thank you. Well the Baltic Dry Index is a classic index that's a short term measuring commitments for charters and at a time when the banking system of the world is at bay one of the big problems with these is getting letters of credit and having the certainty that if you load up a ship and send it off to sea that when it reaches its destination that there will be somebody there who can definitely pay for the cargo. So in that sense it's very much levered to the BKX because of the squeezing or the freezing of the financial flows.

I might just mention that I was talking to a short term fund manager and asking for an update on how the short term paper market is behaving and he says, "Well, it is certainly looking better but we've got a different problem now. We've got loads and loads of money but we have fewer assets that we can invest in," and that's because we're losing all sorts of investment classes that were AAA rated earlier in the cycle that funds could use. They're being taken off the list because we find out now that things like auto loans, home equity loans, these trusts that were set up where they could maintain their AAA rating by just substituting new credits as credits went bad. These are being taken off the table.

So the oddity is that one of the things constraining the regrowth here is that we are not flowing it from the short term investors now who have money to invest into a lot of economically sensitive classes. Again I regard that as a short term problem. In general once you keep piling up lots of loose cash it eventually starts moving out of treasury bills and starts moving into other kinds of paper but with the Lehman collapse was such a catastrophe for short term investors that acquiring an appetite for any kind of risk is going to take some time to do but I don't regard this as a sign when you put them together that the Baltic Dry Index indicates that the global economy is in a depression situation. I think it's simply that nobody is prepared to take the risk when they aren't sure about the counter party on the other side. It is a counter party relationship and so we need a process of healing to get that functioning again.

Thank you. Any other questions?

Question 7 (Mr Growenwagen): Hi Don. I would like to ask you something with respect to the currencies because I believe that what we will see going forward is that the currencies will basically show weaknesses and strengths according to the fundamentals in the economy and I was wondering you touched upon the high savings rate of Europe and so on and potentially also debt levels. What do you see happening because you were mentioning the gold and I think it has been a big question mark for a lot of people that gold didn't rise despite the fact that it doesn't have any counter party risk and as you said that the US monetary base has expanded by 50% in the last couple of weeks. So there is something odd going on here. So what's your view on this and how do you think that the currencies will behave going forward and what will determine their strength?

DC: Well that's a huge question about the currencies and you're right they'll eventually be behaving in response to the behavior of their domestic economies and what their domestic savers do with their funds and that's a case by case basis.

The gold story is one where we moved from fearing inflation when gold was trading at 940 and then we had the Midnight Massacre and then we had the collapse of Lehman and so the result is that we stopped fearing inflation and feared only deflation and people said, "Why do I need an inflation hedge asset," and although it's haven assets for a financial crisis seem pretty weak it's because it was coming off a high peak which was driven off inflation fears. Remember as recently as July the 10th the CPI was 4.5% the highest in 15 years and the question was how much the Fed was going to have to tighten.

So my view is that gold as a store of value - by the way again if you want to take a horrible example of going back to 1929, gold was a great place to be because it held its value better than other assets and then eventually of course got revalued upwards after the 1932 elections from $20.67 an ounce up to 35 as part of the reliquification of the US economy.

So we haven't been through such disorganized chaotic conditions in my lifetime and so trying to put these things together and suggest there's something rational behind everything is a venture in futility. What I can say simply is that as investors what you try to say is there's going to be a world out there and when we've gotten back to some kind of normalcy how will these assets relate to each other and I believe that when all this is done that gold is going to be considerably higher than it is today because people will recall Milton Friedman's dictum's that inflation is always a monetary phenomenon.

I can tell you that back in the '70s when inflation was soaring, gold for a while hesitated. It didn't start moving until later on when the horrible bear market of '72-74 was over. So gold can take a pause even when the fundamentals for it are getting dramatically better.

I've got time for one more question.

Question 8 (Catherine Morrisey ): A couple of things. I'm wondering if the prospects for one North American currency have risen of late and then the second question is are you worried about protectionism here.

DC: There won't be one North American currency because in order to do that you'd have to amend the Federal Reserve Act and that's only slightly easier to amend than the US constitution. So that won't happen and your second part of your question was protectionism?

Well at the time of all economic crises you get a lot of protectionist talk. It's not so easy to bring back protectionism now because there's treaties out there and tearing up treaties is a very difficult act and in the case of incoming President Obama, he's going to have a big NAFTA problem which has nothing to do with Canada.

It has to do with Mexico because over 50% of the budget of the Mexican government comes from revenues from the Mexican oil company, Pemex, and $61 oil means a coming financial crisis for the Mexican government which means a big increase in attempts from Mexicans to come into the US illegally and he wouldn't have carried a lot of the states he did carry had it not been for carrying the Latino vote by such big margins. It's going to create such a dilemma for him that he's not going to be placing any phone calls to Ottawa.

DC: So thank you all for tuning into the call. I try to as a matter of justification for doing these calls limit them to one hour so that you can get back to your work. I appreciate your participation. I'm leaving for India in the middle of next week. We will try to arrange a call at some point from India but it will probably be at a somewhat different time given time zones but given as there is so much going on I will try to stay in touch with you. Thank you again.