Last of Mega Commodity Exchanges Goes Public

Friday, November 17, 2006
Vol. 8 No. 230

In Today's Letter:
Comment: Last of Commodity Exchanges Goes Public
Offshore: Virgins Revival?
Wealth: Global Bonds a Yawn in 2007
Sovereignty: Boiling the Frogs

The Last of the Mega Commodity
Exchanges Goes Public

Today's comment is by Eric Roseman, Investment Director of The Sovereign Society, and editor of Commodity Trend Alert.

Dear A-Letter Reader:

In the investment business, advisors don't bat 1,000. And that includes me. But if there's one sector of the market where I've consistently hit homeruns and grand-slams, it's the red-hot publicly-traded commodity and specialty exchanges.

Over the last three years, I've scored big gains for my members and subscribers, especially on my first recommendation in April 2003 on the Chicago Mercantile Exchange or CME. Forty-two months later, that plug has skyrocketed from $46.75 to $505, a blistering 990.8% total return, including dividends. Earlier this spring I also recommended CME's cross-town rival, the Chicago Board of Trade Holdings or CBOT. That stock has surged 53% since May following a buyout by the CME last month. I've got a few other winners in the same sector under my belt, too, but there's nothing more mouth-watering than today's latest initial public offering (IPO) on the New York Stock Exchange.

November 17, 2006 is a seminal event in market history because that's the day the world's largest publicly-traded oil-trading platform goes public. It's also the day one of the most profitable private companies goes public, booking record third quarter revenues as contract volumes surge, especially oil-related revenues. But it's not just about oil. This gem also provides the trading platform for gold, silver, copper, aluminum, platinum, palladium, coal, propane, and electricity.

The way I see it, the bull market in energy and other commodities is about 50% through its secular peak. And oil is by far the most politicized commodity in the world (gold is a close second), manipulated by world governments, corporations and cartels. It's also in short supply amid Peak Oil, a condition marked by declining global production and falling long-term reserves. There has not been a major oil field discovery in almost 35 years. Most investors and consumers alike fail to appreciate that oil is a relatively new commodity in short supply with less than 200 years of market history as a publicly-traded commodity.

Oil prices have corrected about 25% since hitting multi-decade highs in August and natural gas has crashed from its all-time high last December. But corrections in bull markets are perfectly normal. In this case, contract trading volume for energy trades (crude oil, natural gas, heating oil, gasoline) continues to set record highs as more traders participate, whether to ride the uptrend (calls) or the declines (puts), however temporary.

It really doesn't matter what the trend is, provided traders are active. That's how the derivative and commodity exchanges make money - on rising contract volume, unleashed by rising volatility in either direction for that contract.

The last of the great publicly-traded commodity exchanges has gone public. I expect this stock to fly to the moon in no time, and possibly become a target for a merger or takeover as the Chicago Merc hunts for global exchange dominance.

ERIC ROSEMAN, Investment Director
On behalf of The Sovereign Society

EDITOR'S NOTE: Eric will send out a special investment alert to his Commodity Trend Alert subscribers today, explaining exactly how to buy this grand-slam investment pick. You can read all about it when you sign up for his Commodity Trend Alert investment-trading service right now. Click here to access this investment opportunity.

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Offshore

U.S. Virgins Revival?

Business leaders located in this U.S. Caribbean territory are trying to help revive a tax-saving program. The new economic development program would allow companies in the U.S. territory to shield 90% of their profits from U.S. corporate taxes. Two years ago, new investments nearly slammed to a halt after the U.S. Congress tightened this tax break, based on allegations that some state-side money managers were exploiting the USVI program and evading U.S. taxes. Congress enacted the tax incentive program in 1986 to spur economic development in a territory where per capita income was $18,652, half that of the U.S. mainland. Soon after the territory altered the program in 2000 to attract service industries, the IRS claimed some money managers were defrauding the government by pretending to be USVI residents.

Congress responded in 2004 by requiring anyone claiming the tax break to live in the territory for at least six months of the year. The IRS opened hundreds of audits and said the three-year statute of limitations did not apply to U.S. citizens and corporations filing tax returns in the territory. This potentially allowed auditors to assess taxes going back decades. The result was that dozens of companies pulled out. Now Virgin Islanders are campaigning to clarify the law and entice new corporations back to the USVI.

BOB BAUMAN, Editor

LINK: http://www.iht.com/articles/2006/10/22/bloomberg/bxtax.php

Wealth/Investments

Global Bonds a Bore in 2006 and a Yawn in 2007

Are global bonds are good place to invest over the next 12 months? Probably not. In fact, I'd say most bond markets look pretty dull heading into 2007.

Global government bonds will probably finish 2006 with another subpar year of performance. In local currency terms, the J.P. Morgan Global Government Bond Index has gained just 1.3% this year or up 5.6% in U.S. dollars. In 2005, the global bond benchmark declined 6.4% in dollars after gaining 10.8% in 2004.

Unless the global economy rapidly gains momentum over the next 12 months, which I doubt, then bonds are a neutral place to park your money at best. But U.S. Treasury bonds have room for more gains as the Fed comes to the rescue of the housing market, dropping short-term lending rates. That might juice the returns for global bond funds but it won't be enough to offset rising rates overseas.

Some of the best speculations for bond investors in 2007 include Treasuries, Canadian government bonds, New Zealand government bonds and probably Japanese government bonds because the yen is long overdue for a major rally, now sitting at a 20-year low versus most currencies, including the dollar. Even if the Bank of Japan hikes rates, the rise will likely be very modest, allowing foreign currency-based investors the opportunity to profit from the yen's eventually rally.

Overall, I still can't find much value in bonds for 2007 and instead, I'd stick to T-bills if you want safety and yield in U.S. dollars and selective foreign currency bonds for capital gains and income, mostly in the resource currencies and Japan.

ERIC ROSEMAN, Investment Director

Sovereignty

Are We Slowly Cooked Like Frogs?

According to figures released today by the Bureau of Labor Statistics, the CPI declined by 0.5% in October, with most of the decline being in apparel and energy. During the first ten months of 2006, the CPI-U rose at a 2.4% seasonally adjusted annual rate. This compares with an increase of 3.4% for all of 2005.

Many respected economists have argued that a little inflation is good for an economy, and 2% or 3% seems like a little, so we imagine that Mr. Bernanke is relieved to see the year-to-date figures. No doubt the public and the financial markets will be relieved, as well.

But, just what does a 3% inflation rate really mean to the average citizen over the long run? It means that in purchasing power, a dollar held for 25 years would be worth about 50 cents, in 50 years about 23 cents, and in 100 years, about a nickel.
The old story is that if you put a frog in a pot of hot water, it will jump right out, but if you put it in room-temperature water then gradually bring the water to boiling, the dumb frog will just let itself get cooked.

Right now, the monetary pot is only lukewarm, so most people holding dollars are insensitive to the loss and don't feel any urge to jump out of the pot. Even if the chefs at the Fed don't increase the rate of money creation, and price inflation stabilizes at 3% a year, dollar holders are still being slowly cooked. Moreover, there's little doubt that these low inflation rates can last for long.

What's the alternative to holding depreciating currencies? Tangible goods...the very things that the dollars will be buying. That's why those of us at The Sovereign Society are strong advocates of natural resources, including precious metals, oil and gas, industrial commodities, and the companies that produce them.

JOHN PUGSLEY, Chairman

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