Friday Afternoon Musings on the Resource Sector

Well, what a week it has been. My travels this week took me to Toronto where the gloom and doom was so thick you could chew on it. The weak junior resource sector is really hitting below the belt now as the end of the year comes into sight and no sign of a bottom is forthcoming.

Right now, the only analogy I can find is a comparison to the Tech Wreck on several years back. People thought we were headed for a New Age economy and if an investment had dot com in its name, people bid the share price higher. We all know how that story ended. Then in 2002 we were told the world was entering a Commodity SuperCycle of epic proportion. Junior resource companies sprang up like weeds in my garden and vast sums of cash were thrown at these plays. Now the global economy is slowing and credit risk is being re-defined. Clearly too may resource plays exist out there and the weeding out process is underway in earnest. The Commodity Supercycle has many years to run yet, but not all companies will be around for the final leg of the journey. In fact, not all investors will be around. This week brought news that Ospraie Management LLC is shutting its flagship Ospraie Fund after posting a 38.59% loss year to date. I have also heard rumors that a big UK based hedge fund (name withheld) is headed for a crash landing too. Last month the $2 billion Andor Capital shut its engines off after hitting severe turbulence.

Sometimes empire building does not pay. After dazzling the world with its huge economic potential, Russia is now being sent back to the doghouse. Mr. Putin over the past year through words and actions made it clear that he was intent of flexing his political muscles. But, capitalism has a way of taming even the biggest of egos. The Russian RTS Index has suffered its biggest decline since the 1998 crisis. Some $25 billion in investment capital is thought to have pulled out of Russia since the skirmish with Georgia a few weeks back. Enough to make one want to have a good stiff shot of Vodka.

Oil over $100 a barrel – yet it sucks to be an oil company. A study by British consultancy Herold Harrison Lovegrove ( a division of Standard Chartered Bank) concludes that although oil companies are making profits, their return on capital is still the same as it was in 2004 even though oil is considerably higher than it was in 2004.

Why is the US Dollar rallying when fundamentals argue against such a move? Turns out that people in the US and other major developed countries are shopping less which means demand for Asian manufactured goods has fallen. This demand drop has caused a reduction of foreign currency flowing into the coffers of Asian nations. As a result, the desire to diversify away from the US Dollar has fallen off and in fact these nations are now selling off Euros, Pounds, Aussie Dollars, Canadian Dollars and what have you to try to push the US Dollar up to make it more attractive for US consumers to keep buying foreign made goods at Wal Mart. This goes to show, you cannot form an opinion on the US Dollar based on pure fundamentals. Forex traders, beware.

And lastly this week I finished reading a most excellent book entitled The War for Wealth by Gabor Stiengart. I strongly suggest reading this book and to entice you to do so, let me briefly share a couple scenarios he outlines:

1) The Shock Scenario: Social unrest in China boils over and the Chinese economic miracle comes to a grinding halt. The spillover effects on the USA would be devastating.

2) Asia Above All Scenario: America continues to falter under the burden of bank failures. China manages to keep the social unrest under control and its growth continues. China cuts back on buying US Treasuries and the US is forced t raise interest rates thus placing a further burden on the economy. Baby Boomers reach retirement age and illegal immigration continues to be a problem. The pressures to keep the economy growing prove too much. America is forced to redefine its lifestyle and make some serious changes.

All in all, quite a wakeup call. To read more from Gabor Steingart go to www. spiegel.de/westwing

I hate ending on a note of gloom, so here is something positive. The uranium sector has been decimated to put it bluntly. But, the financial powers in Toronto are now firmly convinced that uranium stocks are the thing to be looking at right now. You certainly have lots to choose from. For a free copy of a brief report on junior uranium stocks, please be sure to contact us at www.themarkettraders.com .