February 3, 2009

Global Market Comments for February 3, 2009
Featured Trades: (SQM), (CGW), (TIP)
Special 'Invade Bolivia' Issue

1) Politicians, industrialists, and environmentalists who see battery powered vehicles as the wave of the future are overlooking the fact that 50% of the world supply of lithium comes from impoverished, landlocked Bolivia. This is a country that until now was best known for killing off famous foreigners (Che Guevara, Butch Cassidy and the Sundance Kid), and being the source of a new form a venereal disease. Lithium ion batteries are four times more efficient than the current generation of nickel cadmium batteries, and are essential for electric cars to finally become economically viable. But now that the country finally has something the world wants, nationalism is rearing its ugly head. Local politicians see their country as the Saudi Arabia of the highly corrosive, toxic, reactive metal, and are already discussing ways to restrict access. The only other supplies are to be found in Chile, Argentina, Australia, China, and Nevada.  Should the US invade to insure supplies? Iraq worked didn't it? The best way for opportunistic investors to play this is to buy Sociedad Quimica Y Minera (SQM), Chile's largest producer of lithium.

Lithium-1.png  picture by sbronte

2) Noted Chicago economist David Hale does not see a pretty picture for 2009, and believes the recovery in 2010 will be weak at best. It may take until 2011 before we return to a normal growth rate because of the systemic financial carnage that makes this downturn unique. His just released report on the global economy was a tour de force of negative metaphors (cliff diving, David?). Deleveraging will continue for 2-3 more years, with mortgage financing plunging from $3.9 trillion in 2003 to $1.9 trillion last year. US home prices will drop 40% peak to trough, so they still have more to fall. The Q4 24.6% collapse in consumer spending is unprecedented. American real estate loan losses could reach $2 trillion. The export dependent economies of Germany and Japan have been especially hard hit by this recession. Chinese exports are also falling, but the country has $2 trillion in reserves to absorb the shock. The Fed's desperately expansionary monetary policy could trigger a bull market in gold. The US financial system has lost $5 trillion in market capitalization in 18 months. A safe haven bid will keep the dollar strong for the time being. The Obama stimulus plan will save millions of jobs and add 3.7% of GDP growth by Q4 2010, but will come at enormous cost and have only a delayed effect. All sobering food for thought.

3) Water may be the ultimate consumer staple, and investment in fresh water infrastructure is going to be a good long term investment theme. Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles.  Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years. The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the US stimulus package will be similarly spent. An easy way to participate is to buy the Claymore S&P Global Water Index ETF (CGW), or buy the individual stocks Geberit AG (GEBN) and Veolia Environment (VIE).

Water2.png  picture by sbronte

4) If you believe that imminent and massive Treasury issuance is going to pop the Treasury bond bubble, and that Obama's reflationary policies are long term inflationary, you have to be looking at Treasury Inflation Protected Securities. TIPS offer investors a US government guaranteed protection against future price hikes by raising the principal in line with the inflation rate. A 3% coupon TIPS facing a 10% inflation rate automatically boosts the face value of your bond from an issue price of 100 to 110, giving you a total return of 13%. You can buy these directly from the US Treasury, or buy the iShares Lehman TIPS Bond Fund (TIP). The best time to buy flood insurance is at the end of a long drought.

TIP.png picture  by sbronte


'The mission of a conservative is to stand in the onward path of history and shout 'Stop,' said the late conservative commentator William F. Buckley.