Things to look at for 2009H1

Here are the things that I personally believe will be the interesting areas to look at for the first half of 2009. In the investment world, always good to be an early bird...

1. The fundamentals of commodities are unimpaired even since the credit crunch and the deepening of the economic crisis. Farmers cannot get loans for fertilizer now. Minners cannot get loans to open new mines. Oil companies are delaying or cancelling projects for oil exploration and developments. So we are going to have some serious, serious supply problems before too much longer.

2. Again, the shipping industry will probably benefit from the widening of oil price contango (the future price is higher than the spot price), as investors might be in anticipation of profit from higher oil prices in the future and book the tankers with options to use them as storage facility. Therefore, the shipping cost will probably bottom up from their current low level.

3. Another interesting idea is to look at British Pound. Since reaching a 26-year high of $2.1161 in November 2007, the currency has dropped 30 percent. In the past two decades, the five major declines in the pound averaged about 22 percent from peak to trough against the dollar, according to data compiled by Bloomberg. it is possible that the pound’s recent 26 percent slide may be coming to an end. So be aware of any non-negative developments in the economy in the coming weeks, there might be signs for entering the long side of Pound.

4. The current crisis has exposed severe shortcomings in banks’ ability to cope with a drying up of liquidity, largely because their reserves were insufficient or held in debt instruments that proved impossible to sell when the market turned. In an effort to boost banks’ liquidity reserves, the regulators around the world would probably recommend a proportion of banks' assets should be in the form of highly liquid government bonds. This would have a far-reaching impact. as many institutions will need to significantly reshape their business model over the next few years as a result. Therefore, highly liquidity assets, especially government bonds will be better off as demands pick up.

Bear Alarm: Market Timing Works, It Reduces Risk, Not Return Potential

I recently developed a market timing indicator called "Bear Alarm", which tends to be successful in identifying those major market downturns in history. The strategy based upon the "Bear Alarm" indicator is constructed as follows: when the "Bear Alarm" is on, put the money into cash (I assume a zero return on cash in the historical back-testing, equivalently putting all your money under your bed, if you don't trust the banks during trouble periods); when the "Bear Alarm" is off, put the money into the market. Here I have run the historical back-testing for S&P 500 for the last 20 years, and Dow Jones Industrial Average for the last 100 years. For S&P 500, the Bear Alarm Timing strategy returns 13.4% per annum while S&P 500 returns 8.8% per annum for the last 20 years. For Dow Jones Industrial Average, the Bear Alarm Timing strategy returns 11% per annum while Dow Jones Industrial Average returns 5.8% per annum during the last 100 years.

Farmers in US face up to credit squeeze

By Javier Blas and Esther Bintliff

Published: November 18 2008 11:07 | Last updated: November 18 2008 20:24

US farmers face tighter credit conditions as they approach the next crop season, the Federal Reserve Bank of Kansas City said on Tuesday, in the first concrete sign that the financial crisis was affecting agricultural markets.

In its quarterly survey of farming credit conditions, the Kansas City Fed said agricultural lenders were reporting tighter credit standards and warned of a further reduction in the availability of funding.

However, demand for loans remains strong as farmers require credit to pay for fertilisers and seeds. “Almost 20 per cent of respondents raised collateral requirements,” the bank said, referring to the guarantees that borrowers have to provide.

The bank also forecast a reduction in agricultural capital spending, owing to higher input costs and lower crop profitability.

On Tuesday Chicago Board of Trade December corn traded 3 cents lower at $3.82¾ a bushel, down 50.6 per cent from its record high of $7.75 in June.

CBOT December wheat gained 3¼ cents at $5.37 a bushel, down almost 60 per cent from this year’s peak of $13.34¾ in February.

CBOT January soyabeans lost 11 cents at $8.95½ a bushel, down 46.2 per cent since hitting an all-time high of $16.63 in July.

JPMorgan said a contraction in supply would help agricultural commodities outperform energy and base metals markets next year.

Lewis Hagedorn, JPMorgan analyst, said: “Even allowing for a more conservative demand estimate in light of slowing global economic conditions, corn and soyabean supplies will struggle to meet demand, keeping inventories low.

“Lower prices could even prompt a contraction in production.”

The comments from the Kansas City Fed underscored a warning delivered this month by the United Nations’ Food and Agriculture Organisation, which said the world might face a repetition of this year’s food crisis as the credit crunch hit agricultural markets, forcing farmers to cut production.

The FAO said: “Under the current gloomy prospects for agricultural prices, high input costs and more difficult access to credit, farmers may cut their plantings, which might again result in a tightening of world food supplies”.

In oil trading, US crude prices hovered round $55 a barrel amid continuing concerns about the outlook for demand.

Nymex December West Texas Intermediate touched a low of $54.13 before recovering to trade 55 cents higher at $55.50 a barrel.

ICE January Brent gained 37 cents at $52.68 a barrel, recovering from a low of $51.25.

The Centre for Global Energy Studies, based in London, said a year-on-year decline in global oil demand in 2008 and 2009 was now “a very real possibility for the first time for 25 years”.

It said: “With people fearful for their jobs and income prospects, a 25-30 per cent fall in gasoline prices will not change their new driving habits.”

The CGES poured cold water on the prospect that Opec could stabilise the market by agreeing further supply cuts when it meets on November 29, saying there was “little point in pledging new output cuts until those already agreed are implemented”.

Gold rose 0.6 per cent to $740 a troy ounce.

Make way for the economic power of Generation A

They may earn only about £2,000 a year but they are 400 million-strong, scattered across the globe and have just bought themselves a fridge.

Meet Generation A, who soon could become the most important economic force on Earth.

Aged between 30 and 40, their per capita income is rising fast and their numbers are forecast to hit one billion within the next two decades. And it is a group whose consumerist aspirations (the “A”) are not about to stop with that fridge.

The emergence of Generation A coincides with a tipping-point reached this year, in which the world's urban population equals its rural population for the first time. The concept of Generation A has been developed by analysts at Macquarie to explain and track many of the “mega trends” holding the global economy in their sway.

The entire future business of investment, Macquarie analysts argue, would make sense only through reference to the activities and spending patterns of Generation A.

Soaring prices of hard and soft commodities, energy and transport are symptoms of what the economist Stewart Ferns describes as a “silent revolution” - an inexorable shift of economic power from the old developed world (Generation Z) to the growing, aspirational middle classes of emerging markets in Asia, Africa and Latin America.

“The increasing per capita income and the huge lifestyle changes of the stereotype we are calling Generation A is what is going to drive the global economy over the next decades,” he said - and as Generation A increases in wealth and numbers, the financial map of the world would have to be changed, along with all the tools used by investors to understand it all.

Generation A's increasing share of global income would irreversibly change world demographics, Mr Ferns said, pointing to the looming demand explosion that will occur when large numbers of people - particularly in China - hit the “magic” annual income levels that cause consumption to soar.

Analysts believe that the figure is reached when a country's per capita GDP reaches $3,000.

The shape of things to come? Generation A's next immediate purchases include not only a wide range of meats and processed foods to put in their new fridge, but a car to go to the shops in and a mobile phone.

Soon Generation A will be thinking about a first holiday, looking for decent financial services, considering healthcare needs and wondering about investing in higher education.