** WEEKEND THOUGHTS **

It’s been an interesting week in financial markets. Equities reversed their positive note of the first weeks of January, as oil prices made new highs due to the possibility of the Iran situation escalating and disappointing earnings guidance hammering individual stocks. Risk appetite in markets clearly decreased with implied volatility exploding and credit spreads moving higher.

We believe markets will be dominated by the oil related news once again. Although the Iran situation might call for friendy solution (it’s really not in Europe’s or the US’s interest to see oil breaking to new highs) we’re not exactly sure Iran looks at it the same way: Iran’s removal of forex reserves from Europe doesn’t indicate that Iran is betting on a quick political solution.

Investors in equities are probably best of owning oil companies in these circumsances as these cos will obviously benefit from higher crude oil prices. Above that the European and US Energy sector is still among the cheapest within the overal market. At an estimated P/E 2006 of 12x, the energy sector is cheap in our view and therefore likely to continue to do well relative to the general market.

Further we notice that, despite equities tanking and risk appetite decreasing, Gold is not really benefiting under these circumstances. Sure, Gold is holding its price, but the events of the last week would have typically triggered new highs in Gold. However, that didn’t happen. We believe this mainly has to do with investors locking in gains in Gold and temporarily moving back to cash. We’re buying dips.

Finally we continue to be bullish on agricultural commodities. This week the Dow Jones AIG Softs Index managed to break out of a consolidation formation to new multi-year highs. Have a look at these posts for additional information: Agricultural Commodities, Jim Rogers says Corn & Wheat are Best Investments

Have a good weekend!