But this fruitcake behavior is the accepted reality in the commodity and stock markets where supposedly rational investors have munched too many magic mushrooms. As we’ve opined in our last message, when people lose their heads it’s time to start buying. The time, we think, is now. Get into the market, buy blue chips in stages and look forward to a little Christmas rally. Of course we still have to look across our shoulders because here and there guys are still screaming “Fire” and some people might be trampled in the recurrent mini panics.

At Xam Capital Ltd. we have been bears for a very long time but yesterday we started buying in a meaningful way. We certainly put our money where our mouth is.
Regarding the German market and the fantastic voyage of Volkswagen shares we don’t shed a tear for the hedge funds which lost their shirts ( and underpants too ). We all knew that there is this oddity of so-called cash settled options in the German market ( see recently the Continental/Schaeffler case ) which enables predators to buy up companies without announcing that to the world. This makes it possible for speculators like Porsche to make billions of euros by manipulating share prices. Our guess is that a few others might try the same trick ( until it will be outlawed ). Daimler, for example, would be a perfect target.

When people lose their heads and run screaming for the exits, I just want to remind everybody that those are the times when the foundations of fortunes can be laid.

I don’t know where the bottom is, perhaps the Dow goes down to 8,000 or even below that. But I notice one thing: everything, good or bad, is now being liquidated. No more shades of grey, only pitch black.

I have seen panics before, e.g. in October 1987, when many markets dropped over 20% in a single day. Nobody wanted to buy stocks then, banks were warning of severe recessions, the sky was about to fall. Of course it was all wrong. The truth is, you could make a 100% plus return within a year if you had the guts and the money.

So, I’m sticking my head out here today by saying: if you have enough cash, start to buy now. Buy a variety of first class names in different sectors, some banks, some industrials, some energy companies. Do I need to tell you to buy in steps? You’re not a baby, are you? My suggestion is this: keep some funds in cash in order to secure your living expenses for about two years. In addition, keep some gold, regardless where its price stands. Divide the investment pot into four or five parts and invest the first part straight away. Whenever the market goes down another seven percent or so, buy more. In case of an intermediate rallye, sell some of the stocks you hold. Above all, don’t panic. Crash times are gifts of the investment Gods for clear headed people.

A last reassuring note: Nobody trusts politicians, including me. But I believe when the house is on fire, they will act as they should. Ben Bernanke, the one with the famous printing press, has studied the Great Depression of the 1930s all his life. He will take extreme measures if the panic gets out of control. That’s why I think the USA is in a better position right now than Europe or other parts of the world, because it can act faster, more forcefully and decisively. The dollar might be in trouble again in the future, inflation might get out of control and so on, but these are not our immediate problems.

In terms of strategy, it’s probably wise to keep one’s powder dry for a while longer, although it might be tempting to pick up some cheap looking paper. The general air of panic in the air and the huge daily drops could mean a bottom is coming into sight. But some bottom pickers will end up with dirty fingers, that’s inevitable.

Our advice here would be to look at individual companies which are still good cash generators, have little or no debt and rely on a solid business model. Investors with a longer-term outlook can probably buy some of them right now. Dividend yields are looking reasonable when compared to interest rates. At least if you compare to safe investments like short-term treasuries. Of course it’s easy to gain high interest rate returns by buying junk paper. On some GM bonds, you can get clearly over 20% p.a., and on some issuers from countries whose name ends in “-stan”, probably more. But that’s for lovers of two-shot Russian roulette, not investors.

The dollar had a remarkable recovery over the last four weeks, up by about 10 % against the euro. It seems a new dollar up-trend has developed and, apart from the usual setbacks, will continue to perhaps 1.35 ( against the Euro).

With regard to the US elections, we stick to our previous forecast of a Republican win. But in any case, it will be a paper-thin win. If McCain wins, we expect defense, resources and pharma stocks to do well. In case of an Obama win, alternative energy plays and generic drug manufacturers (e.g. Teva) might do well. Whatever happens, the world is in recessionary mode, sentiment is gloomy and day-to-day life is no bed of roses. But out of deeply blue moods and abysmal events, something good might come. Super low interest rates will help, thank God and Bernanke.

Sounds far fetched? It is entirely possible that company profits collapse over the next 12 months. If that happens, prices and p/e ratios will not look cheap any more. Let’s look at some facts: In the USA, the chickens have come home to roost. The government is pumping hundreds of billions into failed banks and reckless borrowers - just to keep them afloat. But it’s not a liquidity problem we’re faced with, it’s bankruptcy. Many banks and semi-governmental institutions would be stranded without capital if they’d be realistic about their balance sheets. Consumers are already stranded and will have to cut back till it hurts.

Apart from the USA, we have disaster scenarios in various other countries who thought it clever to stop producing most anything in favor of property and finance games. Excesses as seen over the last few years are usually ending in recessions. There’s no reason to believe it will be different this time. The wall of money that has flooded the world will guarantee us more inflation. Traditionally gold and real estate have been good hedges against inflation. Despite the relatively high price of gold, we still think it’s one of the safest and best assets to buy and hold now. Distressed property can also be recommended, but there’s no need to hurry. Foreclosures and other opportunities will be with us for another year or two.

Stock markets, as mentioned above, will probably go down much further. But in between the slide there will always be short-term trading opportunities where one can pick up a fallen asset on its bounce back. Some banks and also oil companies are good candidates. Look for example at Citibank, UBS or Occidental Petroleum – who all live on roller coasters.

Not much is safe right now, but pharmaceuticals are likely to be a bit more quiet than others. Roche, Novartis, Schering Plough and Teva could be worth a second look. If oil prices go down further, airlines will be beneficiaries. Lufthansa is a good consolidator in Europe and due to an ongoing strike, the share price is reasonable. But such a bet should be rather limited. After all oil prices could well go up again in a few weeks time.

And lastly: whenever oil service companies like Schlumberger, Halliburton, Baker Hughes or National Oil Well Varco go down by 10-12 % from a recent high, they should be bought.

Inflation is a serious problem. No longer a silent creeper, it has entered the consciousness of many folks who can see their paychecks losing muscle by the day. Up to very recently, governments have just manipulated statistics and treated the public like morons by telling them inflation was, say 2 or 3 percent, when everybody could see that the relevant rate was twice as high. But now inflation has become front page news. Sooner or later central banks have to ratchet up their rates. This, in combination with high energy prices and socialist taxation levels, will stifle the economy. The most likely scenario is stagflation, a horror we have already seen in the seventies of last century.

It won’t be an easy situation to navigate. Many assets will stagnate or fall in price. Even commodities could disappoint. Presently I don’t foresee a lost decade, rather a few lost years. Considering that over the last 8 years many indices ( certainly in the US and here the Nasdaq in particular ) have practically gone nowhere, this is not a bright outlook. I think the banks will remain in the doghouse for some time to come.

The winners will be those who can ride a seesaw, a market going nowhere while swinging wildly. That calls for deft traders who enter and exit hazardous places where furniture falls and ceilings collapse. It will probably be a good time for guys with money who are looking for property in Las Vegas or Spain, slightly used sports cars and other pretty but essentially superfluous things.

The most interesting item and the most difficult to forecast is oil: my guess is it may fall short term and rally again later. Oil is valuable and probably worth 130 usd/barrel or more. But its high price chokes off our economies which are built on oil. The recent jolt is now spurring a serious hunt for alternatives. But fossil fuel will still be important 20 or 30 years from now.

With regard to the forthcoming elections in the USA I’d presently bet on McCain. If he wins, oil and defense companies will be winners. And the dollar could rally.

Hey, it was good while it lasted. But just like cocaine addicts the greedy idiots in pinstripe costumes needed ever larger doses for their kicks and felt like invincibles.

The failed Wall Street house of Bear Stearns alone had 14 trillion dollars worth of derivatives outstanding. JPMorgan, which rescued Bear with 30 billion USD of public money, is the largest issuer of credit default swaps and has thus guaranteed a lot of bad stuff. It probably had to rescue Bear or pay out to the buyers of its guarantees. It is a rather complicated picture, but it’s clear that many, if not most banks in the world are connected in a spider web of derivatives, swaps and questionable securities. And the whole pile of junk was financed with up to 30 times leverage, meaning for every single dollar available from investors the managers borrowed another 30 dollars, just to spice up the game and increase their take.

But this game is over now.

We think that banks have still a long way to go down, and even if they can eventually sort out the garbage in their balance sheets, they won’t be able to generate big profits from the mad gamble they were engaged in previously. Eventually, bank shares will be a good investment. But they have to hit bottom first and be left for dead for a while.

What does all that mean for the real economy and for stocks other than financials?

Emerging markets, especially in South East Asia, could do relatively well because excess money won’t flow to the US as before, but will look for new destinations. Countries like Thailand, Taiwan or Singapore are thus comparatively attractive. Gold and commodities in general have become more volatile but still offer good opportunities.

A few days ago, there was an interesting report in the Financial Times: the so-called Empty Quarter (a giant desert in Saudi Arabia), which was supposed to hold immense gas reserves, turned out to be, well, empty. This confirms our long-held belief that oil and gas are bound to stay expensive. We therefore hold on to most energy investments despite the wide-held view that a US recession must knock down prices in the sector.

In general we suspect that markets worldwide will trend lower over time. We are reminded of the situation in Japan and Thailand in the nineties when, after huge credit expansions, it took a decade to find a bottom, despite low interest rates. It will go faster this time, because the Americans are not as hesitant as the Japanese to clear the desk. But it could well take us into 2009 till we see a bright horizon again.

Meantime, stay liquid, buy the dips, get out quickly again, that’s what can be done for now.

First, the mood is already pretty bad, in itself a good sign.
Second: money is being pumped in, interest rates are low and falling.
Third: Large parts of the world are in good shape.
As always, it comes down to a question of timing. And here I would advise my readers to hold back the horses.
It’s very likely that the world of finance will announce a few more monsters as having escaped from its house of horrors. Banks and insurance companies are still the most obvious counters to avoid.
Commodities incl. metals have done extremely well, but at present highs there is a significant and growing danger of a harsh pull back. The longer-term uptrend is intact but it wouldn’t hurt to take a profit here and there.

The energy horizon is still bright. At this time I prefer the service companies, the likes of Schlumberger, Halliburton, National Oilwell Varco, Baker Hughes and Weatherford. All of the big oil companies are having extreme difficulties finding enough new oil.

The car industry is talking about better batteries for hybrids, perhaps an incremental improvement, but definitely not the big solution to its energy problems. Some years ago fuel cells were touted as the solution, but one hasn’t heard much about them recently. I guess cars will still run on petrol for a long time.

Old age is creeping up on all of us and that brings me to two long-term investment ideas: Zimmer Hldgs. and Medtronic are both world leaders in medical devices, orthopedic implants and pacemakers. Look them up and when the price is right, buy some of them.

The dollar is at all-time lows. That makes US assets more attractive for overseas buyers.

First, some considerations: The USA will experience a recession, but that’s not necessarily reason for a full-fledged panic. Due to the weak dollar US exports will do reasonably well and results of multinationals will therefore look ok. Interest rates will drop noticeably and central banks are on standby to open the monetary gates. Our feeling is that the crisis is relatively well contained within the financial sector and that black box valuations will become clearer as the quarter proceeds. The turmoil might well continue for a few weeks longer but already now we can see some good buying opportunities. While still staying clear from the banks, brokers, car manufacturers etc. we wouldn’t be shy about buying a few energy stocks, perhaps a bit more gold and one or the other blue chip which has been hit by the door as crowds were on their way out ( think for example: GE, Intel, Schlumberger, Occidental Petroleum, Conoco Phillips and so on ).

This is not a green light to load up on stuff, just a hint that one might stick the toes in again. Keep in mind that the big trends which have moved markets over the last few years, e.g. the growth in China, India etc. are still intact and will be with us for a long time to come. Inflation will be our companion for the next few years and stocks have traditionally been a good long-term hedge against its negative effects.

Be prepared for further trouble and adjust your positions as necessary. But remember: a poltergeist upstairs and some falling furniture are not a good reason for adults to throw in the towel for good.

Who’s benefited from the mess, that’s one part of the equation? The other is, who will pay? Certainly not Leona Helmsley who, besides being dead now, has previously and famously stated:”We don’t pay (.). It’s the little people who pay.” Right. How will they pay? My guess is: through inflation Just a few days ago the European Central Bank has injected 500 billion euros to grease the system and the Fed is also pump priming like mad. This at a time
when inflation is already running at multi-year highs.

All of the above and some more which we can’t elaborate on in this limited space will guarantee us a wild ride in the near and intermediate future. But please, do yourself a favor and don’t just run with the masses along the published consensus view. Rarely do people make money by following the consensus. For example: although the dollar is weakening and stock markets might collapse, the opposite could also happen. Whichever way things will turn out: buy and hold is probably not the right strategy for 2008. The
coming year might resemble a Hollywood studio set where shouts of “Action!” seem to come from every direction. And in such a scenario one particular status is very desirable: to be liquid. Liquidity was undervalued for many years. It looks increasingly valuable now.

My guess is that patience will be a virtue. Things might look tempting when they are down by a quarter; but how do they look at half that price again? We’ll have reached bottom only when most “advisers” will tell everybody to be extremely careful and don’t touch anything. We haven’t reached such a stadium yet.

Some quiet moments during the festive season should be used to reflect on one’s financial position. Is it age-adequate, is it reasonably safe, is it taking into account current concerns? If panic strikes you shouldn’t stand with the sheep but with the butchers.

Good luck, good health and happy holidays from all of us here.

Surrounded by a wall of noise the little ball was flipped back and forth through a field of obstacles to its inescapable destination, a black hole, into which it disappeared. A lot of money has now also disappeared from the scene. The squeeze is on and the pressure has not yet lessened much. Unlike the market crash of October 87 which looked like a decapitation, we are witnessing more of a strangulation now. Every other day a bank or insurance company seems to discover more losses. Bad news is oozing out like the slime of a fat snail. And I’m pretty sure of one thing: it ain’t over yet.

Because nobody knows the true value of assets for which there is no liquid market we can’t know the full extent of the mess into which the financial industry has driven itself. It was easy to spread loans around by the bucketful but the recovery process is arduous.

As I expected a few issues ago we are already seeing banks’ share prices much devalued but we haven’t hit the bottom yet. I guess we can wait to see some naked desperation around before we buy the stuff. Last time when Citibank was hovering near bankruptcy a Saudi prince bought a lot of its shares. The same guy has just become the first private customer for an Airbus A 380 which will cost him about half a billion bucks fully fitted.

Now I’m not saying we can do the same when we buy C at below 10 usd ( still two thirds down from today’s price ) but maybe it’s enough for a little sports car. Just wait. On to the oil price: while many experts have insisted year in and out that the oil price is unsustainable ( when it was at 50, at 60, at 70, at 80 and now at 97 dollars per barrel ) we here at Xam Capital have maintained since at least four years that the price is headed much higher. That’s perhaps one of the reasons why our share price is not gasping for air at the bottom of a swamp but holding steady not much below its all time high.

Another is that we don’t believe in staking our cash on mathematical models, based on assumptions, leveraged with insane borrowings as seems to be the fashion nowadays. Let’s hope we can stay that way, and why shouldn’t we?

Among all the floating debris we see a possible opportunity in Thailand:
Elections will be held around Christmas and this has in the past often been a catalyst for steep upward swings. We presently expect the market to get slightly cheaper in sympathy with the overall sentiment and could then be buyers just before Santa arrives. At last a morsel from my perch in freezing Europe: Cocain consumption is rising steadily. The devil’s dandruff is getting cheaper all the time. Perhaps some recent market euphoria was based on that development.