12/24/08 08:01AM EST

"The winters of my childhood were long, long seasons. We lived in three places - the school, the church and the skating rink - but our real life was on the skating rink." - Rich Carrier ("The Hockey Sweater")

Keith is back in his hometown of Thunder Bay, Ontario this week and I am in mine, Bassano, Alberta. If there is a quote that describes life growing up in a small rural Canadian town it is the one above. After I finished editing the Early Look with Brian and Keith yesterday morning and was enjoying breakfast with my parents, I was reminded of the long cold Canadian winters as I stared at the thermostat outside that was flashing -34 degrees celsius.

My hometown of Bassano is a quiet prairie outpost of 1,345 people located about 80 miles south of Calgary.  The town was incorporated in 1911 and was an agricultural center originally founded in conjunction with the building of the Bassano Dam, which was, at the time, the largest man-made dam in the world.  Yet in the last few decades agriculture has been far surpassed by the Oil and Gas industry as the life blood of the local economy.  The context of growing up within the Oil and Gas industry has given me a great foundation to do fundamental research on it.

Bassano is located above the Western Canadian Sedimentary Basin, which is one of the largest oil and gas reservoirs in the world, and a short flight from the tar sands in northern Alberta.   In total, Canada ranks second largest in terms of global proven crude oil reserves (15% of world reserves), after Saudi Arabia. The majority of these reserves are found in Alberta's tar sands – over 173 billion barrels.

While I've taken a slighly different path in life than many of my friends from Bassano (thanks to an apptitude on standardized tests and a decent slapshot) it is always a pleasure to come home.  Most of my friends from growing up now work in the Oil and Gas industry in jobs which are popularly known as "Roughnecks". These guys are the lifeblood of the industry and operate the massive CAT tractors in the Oil Sands up north, service the Oil batteries spread across the prairie in the dead of winter, and travel with their drilling crews around the country, and world, in search of the next gusher.

Most Roughnecks probably don't own a suit and will never have a seat in a boardroom. Despite their lack of "sophistication", they forget more about the energy industry in a day than most of us will ever know in a lifetime, so being back home and sharing a few Labbat's Blues at the local watering hole (there is actually only one!) gives me a great opportunity to do some real due diligence.

These conversations, along with work the Macro team has been doing on the Oil industry recently, have helped me cement a few energy related macro themes heading into 2009.

First, geopolitical power will shift in 2009 with the massive year-over-year decline in energy prices.  In particular, this is important as it relates to Russia.  We emphasized "Putin Power" repeatedly in 2008 and saw witness to it with the Russian incursion into Georgia.  With Oil in the $40/$50 range, Putin's power both domestically and abroad will be reigned in dramatically. Amplified “Putin Power” was a key global macro tail risk for the last 3 years – now it’s no longer in the tail.

Second, there is liklihood that a major oil producing nation encounters serious internal budgetary difficulties in 2009 and potentially defaults on sovereign debt.  At the top of our list of countries that may ecounter serious economic difficulties in 2009 due to this dramatic year-over-year price decline in Oil is Mexico. The combination of lower prices and production declining at -10% year-over-year (driven by the peaked Cantarell field) is concering as more than 40% of the state's budget is funded by PEMEX, the national oil company.

Finally, the long term supply constraint issue remains. While Oil has crashed for a -74% move from its manic July 11, 2008 high due to demand declines and deleveraging, longer term supply constraints are real and will likely re-emerge in late 2009 and beyond.  According to the BP Statistical Review of Energy from June 2008, world oil production in 2004 was 80.3MM barrels per day and, despite massive investment, had only grown to 81.5 barrels per day, or 1.4%, by 2007.  Because of oil’s expedited crash this year, investment will slow to a level that will only eventually exacerbate the problem.  The long term supply issues will eventually remerge  as a major investable theme. Every asset class has a price.

In the short term, we like Oil as a reflation “Trade” based on a declining U.S. dollar combined with nominal interest rates in the U.S. being as low as they have ever been, and interest rates going lower globally.  With Oil in the low $40s/high $30s per barrel, we do need much inflation to have a highly profitable “Trade” on our hands.  And if the “Trade” turns out to be profitable, maybe we'll even celebrate. Or as the well known Alberta country singer Corb Lund sings, maybe "we'll shine up our boots and head into town, scrape up twenty dollars and throw it around."

I hope you are all enjoying being home and visiting with your friends and family. (If I could only figure out how to put these fancy degrees of mine to work and beat my Mom in our nightly Jeopardy competition, I'd be really happy. . .)

Happy Holidays from Big Alberta,

Daryl G. Jones
Managing Director

Long ETFs

SPY-S&P 500 Depository Receipts – Front Month CME S&P 500 contracts opened down slightly, trading in a range of 857.1 to 861.3 before 6:30AM.

USO - U.S. OIL FUND – Front month NYMEX Light Sweet crude contracts traded as low as 38.04 before 6:30AM as surveyed refiners anticipated that today’s EIA report will show further inventory increases.

GLD -SPDR Gold Shares – Spot Gold declined 0.5% to $836 an ounce in LME trading this morning.
VYM – Vanguard High Dividend Yield- General Electric (VYM 5.2%) announced an agreement to sell their Australian mortgage lending unit including a portfolio of $2.7B  in residential mortgages. letter of warning from the FDA criticized Coca Cola’s (VYM: 2.51%) nutritional claims on the packaging for their new “Diet Coke Plus” beverage.

DIA –DIAMONDS Trust Series – Front Month CBOT DJIA contracts opened down slightly trading in a range of 8,370 to 8,417 before 6:30AM.

EWT – iShares Taiwan —Export orders declined a record 29% year-over-year in November, according to a government report released late yesterday.

EWZ – iShares Brazil —In a televised address last night, Brazilian President Luiz Inacio Lula da Silva encouraged increased consumer spending to help the national economy overcome the global slump, noting that inflation levels appear under control.

EWH –iShares Hong Kong –The Hang Seng declined 0.3% to close at 14,184.14 in a shortened holiday session today.

FXI –iShares China —The CSI 300 fell by 1.7 % to close at  1,887.07 at the close today while the yuan strengthened 0.13% to 6.8397USD.

Short ETFs

FXY – CurrencyShares Japanese Yen Trust - The yen rose to 126.50 EUR and 90.45 USD this morning

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