** WEEKEND THOUGHTS **

Agricultural commodities have occupied our minds the past weeks. We think there is a good chance that these out of favour commodities will enjoy their spot in the sun in 2006. Have a look at these posts for additional information: Agricultural Commodities, Jim Rogers says Corn & Wheat are Best Investments and this weekly chart of the Goldman Sachs Agricultural Commodities Index.

On the subject of equity markets we wonder whether recent strong price performance will continue, or whether a significant dip lies around the corner. We notice that the “bear case” is not getting much attention in the media these days and consensus seems to be looking for (yet another) strong year. Are investors positioned accordingly and is there a lack of fresh money available therefore which can push equities to even higher altitudes? We certainly appreciate a contrian view in these circumstances! From a sector point of view there continue to be opportunities though in our view. The nicest one is probably in the oil sector which seems to be resuming its long term uptrend.

On the currency front we notice that the Street is again widely bearish on the US dollar. Just as they were last year. The reasons for being bearish are pretty compelling: US deficits are still of enormous proportions, the Fed indicated that the end of rate hikes might be nearing, the repatriation of tax dollars from abroad might slow down and Central Banks all around the world have indicated they want to diversify out of the greenback. Pretty compelling isn’t it? But the real question is: how much of this is already reflected in current prices. We believe the Fed might not be as near to ending its restrictive policy as the market seems to believe (see: Asset Prices More Important to Fed) and we wouldn’t be surprised to see more of the so called US dollar “carry trades” being unwound. Carry trades were put on massively (by hedgefunds and the likes) by means of borrowing dollars short-term and investing these dollars in longer term, higher yielding assets. Now that short-term money in the US isn’t “cheap” anymore we wouldn’t be surprised to see these carry trades move to the Euro and the Japanese Yen. How this would benefit the dollar? When money is borrowed through banks, the money supply increases as money is created and this leads to a drop in the value of money (relative to other currencies). However once these loans are repaid, the money supply decreases again, leading to a rise in the value of money (relative to other currencies). With the carry trade moving from the USD to say the EUR or JPY we are prepared for another year of dollar strength.

Have a good weekend!