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Bad Sushi!

The Japanese easy money bailout model resulted in two decades of economic stagnation. Their latest local issue is effectively depicted by this chart.

This is the free money chart overlaid with the resulting boiling pot of inflation.

Stocks closed lower again in Japan overnight. The Nikkei is stagflating like their domestic economy is. Japanese stocks are "cheap" relative to a lot of countries that are expensive. You can run out and buy Japan on that, but I won't.

KM

The Bandit's Chart: Nice Work, If You Can Get It!

Here is a chart of Citigroup, overlaid against the duration of Vikram Pandit's tenure. This is as ugly as the state of leadership in the US Banking system.

Pandit was however able to sell Citigroup shareholders his hedge fund, Old Lane, right before it blew up, and has since been paid handsomely irrespective of his shareholders losing large.

KM

Pershing Square and Leucadia - This Is Scary...

There is levered long investing, then there is levering up on a levered long investor. The notion that a public company would make such a "bet" is plain scary. Who signed off on this?

When my Partner, Howard Penney, forwarded me the following excerpt from the Leucadia (LUK) 10K, I thought there were typos in the numbers!

Taken from LUK 10K filed 2/29/08:
"In June 2007, the Company invested $200,000,000 to acquire a 10% limited partnership interest in Pershing Square, a newly-formed private investment partnership whose investment decisions are at the sole discretion of Pershing Square's general partner. The stated objective of Pershing Square is to create significant capital appreciation by investing in Target Corporation. For the period from investment to December 31, 2007, the Company recorded losses of $85,500,000 from this investment under the equity method of accounting, principally resulting from declines in the market value of Target Corporation's common stock. At December 31, 2007, the book value of the Company's investment in Pershing Square was $114,500,000."

No wonder why LUK insiders have been net sellers...

KM

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USDA Cotton Numbers -do they add up?

Complacency in the cotton markets continues in the face of mounting supply issues.

Cotton futures traded up on seasonably thin volume on Friday as the new USDA crop report was digested. Prices for the Dec 08 contract reached 74.75 before settling to 73.59 at close of session while the near month contracts closed above 70 for the first time this month. This price level is over 9% above the same period last year.

The USDA report estimates US Crop will be3.4% smaller that estimated due to dry weather in TX, leaving total production at 14 million bales for the September harvest versus the 14.5 million June forecast and well below last year's 19.2 million. This downturn in US production was largely anticipated due to rotation away from cotton to higher priced commodities like wheat and Soy Beans.

With bad weather conditions in the Punjab Cotton belt having a similar impact on Indian estimates, total global is now estimated at 119.9 million bales for this marketing year with global consumption anticipated at 124.3 million.

The big dilemma here is how to interpret data from China, the world's largest grower. The USDA has left the predicted production there at 35.5 million and has actually dropped estimates of Chinese imports by a million bales.

Consider this: according to a report filed on 7/10 by the Chinese Office of State Flood control and Drought Relief, 13% of total Chinese farmland was impacted by natural disasters in the first half on 2008 including early spring blizzards, flooding in the south, drought in the north and west (potentially exacerbated in some regions by water re-directed to Beijing for the Olympics) not to mention the Sichuan earthquake.
In the cotton producing region of Xinjiang alone, drought has affected over 750,000 hectares, of which 300,000 are expected to see yields drop by more than 30% while close to 100,000 hectares more will lose more than 70%.

If we were to receive any supply surprises from China post-Olympics as we move into the harvest season, the cotton market seems set to be caught with its pants down.

Andrew Barber
Director

Sandelman Needed the Research Edge...

The Wall Street Journal broke a story today on Sandelman Partners $3.2B hedge fund putting a freeze on withdrawals. I do not have edge on the this being fact or fiction - but that's not the point. The point is an industry one.

Obviously the banks are grabbing plenty of the headlines this morning. I would not underestimate the tail risk (on the US market in particular) associated with the hedge fund cycle rolling over.

There are way too many funds who do not understand how to make money in a down tape.

Liquidations and redemptions will be stories you'll hear about after they occur.

KM

EYE ON Commodities - Corn

CORN - Friday's USDA report showed an increase in U.S. inventories before the 2009 harvest and there is speculation that ideal crop weather will help the U.S. crop recover from the flood. About 833 million bushels of unsold corn will be on hand before next year's harvest, up from 673 million forecast a month ago, the U.S. Department of Agriculture said July 11.

The surplus for the year ending Aug. 31 will be 1.598 billion bushels, up 12 percent from last month's estimate as ethanol-plant construction delays and falling demand for animal feed lifts this year's corn supply, the government said.

SOY BEANS - A shift to hot, dry weather will reduce yields after record Midwest rains last month stunted root development, leaving U.S. crops vulnerable to heat stress.

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