It will instead move to an index developed by Argus, a London-based oil pricing company.

The Financial Times reports:

“The decision by the world’s biggest oil exporter could encourage other producers to abandon the benchmark and threatens the dominance of the world’s most heavily traded oil futures contract. It is the main contract traded on Nymex.”

Full Story here.

What’s it all mean? I am not dogmatic or religious about gold (in fact, for throughout the 1990s I did not even follow it), but markets  send signals for a reason. Shouldn’t we all find a way to make money in one of the great bull markets of our time?

It’s curious how the investment “mainstream” is still so skeptical of gold. I believe this is a sign that the market can march on, and, in fact, enter its final euphoric stage (which I believe it is now entering). Before the bull market is over, this skepticism will end. And that will be the time to sell.

Consider for a moment, for example, that the stock market has gone nowhere for the last 7 y ears. In that time period, the gold price has quadrupled! If somebody told you in 2002 you could buy something that would quadruple in value, and then retain that value, wouldn’t you have bought it? Why CNBC almost never points this out is a mystery to me!

The fact is that gold is reacting to fundamentals in the world monetary system. As gold steadily rose from its bear-market bottom in 2000 (which interestingly coincided with the apex of the technology bubble), the market was starting to sniff out major structural shifts in the financial markets: The housing bubble, overleveraged banks, and the derivatives nightmare that still lives with us today. Now we know why gold was rising so strongly.

Many times, markets forecast events — and this is an example of why you should always be listening to the market. Gold enters September, 2009, at an interesting juncture. All of the “technicians” have been eagerly anticipating a breakout from a tightening “triangle” formation — a coiling action of the last few months between $930 and $975 that some believe has been the preparation for a big move. Last week, gold exploded out of this triangle with ferocity, rising $50 in one week into the $990s, indicating that the next breakout move in gold will be substantially highter.

(Source: Jim Willie, the Hat Trick Letter).

Another significant factor is the “$1,000 mark” that everybody watches so closly. Gold has made it to $1,000 twice now, only to be rejected. Will the third time be the charm? Many gold trading experts expect it to be so. Most notably Jim Sinclair, a legendary gold trader, expects gold to explode through $1,000  and hold the four-digits (Sinclair was hired in the 1980s by the federal government to unwind the Hunt Brothers silver position after their attempt to corner the market ended in disaster).

So what does this potential breakout in gold mean? Here’s the way I see it: It’s becoming the last bastion of safety capital as governments around the world print money with only a limited effect on reviving the post-bubble economy. In 2008, bonds and the U.S. Dollar benefitted from the “safe haven” play as financial markets around the world descended into crisis. Then, the U.S. government announced massive financial programs, including the buying of hundreds of billions of mortgage-backed securities and government bonds, in order to “rescue” the financial markets. What now? The U.S. bond buybacks are set to end (in fact, with $130B in treasury issuance alone this week and only about $25B left in the government buyback kitty, the buybacks could be exhausted as early as next week).

The federal government, unless it announces an extension of its Quantitative Easing programs or convinces foreing governments to increase their bond buying (they have, in fact, been decreasing it), is losing the power to control the bond market and the dollar. I expect that support for the bond market will disappear shorftly. The dollar is in a steady downtrend. So you have to ask yourself: As government deficits rise and public support of money-printing wanes, can you still look at bonds and the U.S. dollar as safe havens?

The gold market is voting, and it is clearly saying: No. We are now entering an uneasy period in which we find out what markets really think of an era in which there is unprecedented money-printing and government manipulation of the markets.

 If you do not own any gold (and I recommend a significant position of physical bullion), this may be your last chance to grab it before the price becomes truly mind-boggling. Gold is insurance against your wealth, as the gold market is now showing. It is the last store of value in a financially unstable world.

The powerful stock market rally of the last few months has been a notable feature. Admittedly, I sat this one out. But after looking at the numbers (below), I am surprised at how much noise has been made about this rally – and how little it actually delivered. The fact is the stock market remains negative for the year. I remain skeptical of the stock market due to the “junk” nature of the rally (most of it was fueled by low-quality stocks, and financials, which is indicative to me that short-covering was a powerful factor).

 That being said, I will continue to look at the stock market with an “open mind,” because there is a huge wall of stimulus on the way. It is possible that some stocks in the stock market will be a good hedge against the coming wave of inflation. The emerging markets are appealing to me again, but only on a pullback, as they just ran aggressively. I am not opposed to buying some high-quality stocks on a pullback. It was government stimulus that created the last stock bull market, so I suppose it’s possible they will do it again, despite the fact that the last bubble ended so miserably.

But, more important, I believe, is what has happened during the last few weeks in the bond and currency markets – which could be a byproduct of the coming wave of money-printing and inflation. Namely:

1) Gold and silver appear to be breaking out – with healthy gains on the year
2) The USD has broken down and appears to be resuming a bearish trend.
3) U.S. Treasury bonds have cracked, and yields have risen, despite the formidable buying power of the U.S. Treasury – which has agreed to “monetize” or buy back its own bonds to the tune of $300B this year
4) Oil has firmed, showing a reversion to the prior inverse relationship with the U.S. Dollar. I believe that this indicates that moving forward, oil will be an important inflation hedge.

What this indicates to me is that there is considerable nervousness developing among global investors about the safety of U.S. dollar-based assets, especially T-Bonds. The elephant in the room is China, which holds $1T+ in U.S. Dollar reserves and buys the bulk of our Treasury supply! Think about it this way: We are a heavy borrower, close to insolvency, and we’re in hock to “The Man” – The People’s Republic of China. Now we’re going back to The Man to ask him for more debt than ever. What would you do? They literally have the ability to set the rate of our currency and debt pricing, because they own so much of our stuff.

What does this mean for the future? It means that in the battle to “reflate” the economy – the U.S. Treasury may well be overwhelmed by a supply of bonds. This year, in order to finance our deficits, the Treasury must put out more than $1 Trillion in Treasury bonds – the largest U.S. Treasury issuance in history! This will be a big problem for the bond market going forward. A weak bond market means rising yields, which means inflation, which means it will act as an anchor on global growth.

I realize all of this sounds somewhat esoteric, but I like to keep it in simple terms. Debt is the disease, and we are adding more of it. We created a global crisis by borrowing too much, and the U.S. government apparently the wise solution is to create MORE debt. If you were the person being sold this debt, wouldn’t you be a bit suspicious?

What does all of this mean for our positioning?

I believe the actions of the last few weeks have ratified my thesis for the year: Treasury bonds are in the late stages of a bubble. Hard assets, particularly gold and oil, are the place to be, because they are significant hedges against a currency crisis and inflation. Both Jim Rogers and George Soros, both enormously successful investors, have pointed out the possibility for a serious U.S. Dollar currency crisis in the coming months. I put these odds at better than 50%. The only way to protect yourself will be with hard assets such as gold, silver, oil, and land. (Timber farms and mines work too, but they are more difficult to acquire).

In our Model Portfolio we are flat for the year, but we are still outperforming the general market indices. Following the recent selloff, the S&P is now down 2% YTD (surprising, isn’t it, given all the noise about “The Rally!”), so we are still outperforming the S&P. Because several of our stocks yield significant dividends (BDX, BMY, BNA, BPT), we are actually slightly ahead for the year if you include dividends

Gold us up 11% for the year. Again, to me, this is surprising, giving the mass media’s senseless bias toward following equities and the “huge stock market rally.” Quite simply, if you had bought precious metals and oil on January 1, you would be up between 10-20%, whereas if you bought most stocks you have almost broken even.

Our best performers so far this year are SLV (the Silver ETF) and TBT (the double-inverse Treasury bond ETF – which means you are short T-bonds), again ratifying our theory that the new macro model going forward may be mass flight from U.S. Bonds and the dollar.

In my personal portfolios, I am adding to mining stocks such as PAAS, RGLD, and GG, as well as select oil and drilling companies such as CVX, BP, and SLB, and I will continue to do so on any weaknessI will be doing more research on mining and oil stocks in the next few weeks and I’ll keep you up to date. I have also bought gold and silver futures positions, based on the recent breakout. I would short bonds on any weakness. I prefer to do this by shorting the 10-year bond futures, but you essentially can do the same thing by buying TBT and or shorting the TLT.

This performance does not include dividends, which are substantial on some of these investments. Dividends are key to our strategy.

The best trades so far are the Treasury Bond short via the ETF TBT, which is up 17%, and the Silver ETF, which is also up 16%. I am sticking with these trades for the year as I believe they will both be long term winners.

Treasury bonds have weakened substantially and there is a huge amount of supply coming on the market this year: This will be an extremely important area to monitor.  Next week will be very important one in the markets as U.S. Congress looks to work out the final details and vote on the stimulus package and the Treasury Department announces its revamped bank bailout plan a.k.a. “Bailout Bucks.”

I am expecting some sort of bear-market rally to develop out of this news. My generalize “market map” for the year has the market rallying in the near-term and then topping out again in the March/April timeframe as the market goes back to focusing on deteriorating economic fundamentals.

 But given the history of bear-market rallies, this rally could be sharp and last months. It is certainly not a time to be short, and it does offer the opportunity for some some trades to the upside, I believe. But it will still be a bear-market rally, and one to sell.

The data I monitor indicates that inflationary pressures are beginning to build underneath the surface which is why I view precious metals, mining, and materials stocks favorably. They have in fact been the leading outperformers to start the year.

It’s important to note that while gold is off the highs in US Dollar terms ($1,000), it has broken out to new highs in almost every other global currency – the UK Pound and Euro included. This is indicative of a strong bull market in gold and also shows that global confidence in world currencies is sinking as central banks resort to the printing press to solve our problems. Bad move, considering the printing presses are what got us into the problems in the first place.

I believe the only reason that gold has not made new highs in 2008 in U.S. Dollar terms is because of the artificial flight-to-quality into the US Dollar, which is most likely a short-term phenomenon. Now, I have not always been a “whacked out gold bug,” but I am gaining new confidence in the case for the gold bull market to enter its strongest phase: panic buying. We are now in the eighth year of a strong gold bull market, which is likely to continue for, in my estimation, at least another 3 years. Gold has averaged a 16% annual gain in Dollar terms for the past 8 years. Clearly it is the best performing asset class in the decade. You might ask if its getting late in the move, but the fundamentals are still supportive.

The gold bull market is reflective of how dependent our governments have become on creating and pushing debt on its people – a trend that is  accelerating. Because of the breakout of the gold and strength in mining stocks, I would recommend at looking to buy some of the mining and exploration stocks including RGLD, PAAS, NEM, and AUY.

You can also buy a basket of mining stocks with GDX. This sector was crushed in the October/November sell-off, but it is now bouncing back violently with mining asset prices being supported by the moves in gold and silver. This will be a careful area to watch because these stocks have established early leadership in 2009.

Another interesting trend to watch is that commodities are displaying renewed strength, especially in relation to equities. This week commodities and hard assets outperformed equities. Could this be a sign of a trend that will be established in 2009? It is something that bears close watching. The chart below shows the potential for an interesting turn in the commodities sector.

INDEX NAME VALUE CHANGE OPEN HIGH LOW TIME  UBS BLOOMBERG CMCI 898.98 26.86 873.21 903.43 866.80 01/23  S&P GSCI 350.51 12.97 331.76 352.83 329.43 01/23  RJ/CRB Commodity 225.79 7.10 218.78 226.05 217.86 01/23  Rogers Intl 2554.60 94.00 2444.75 2571.84 2419.09 01/23

Energy

PRICE CHANGE %CHANGE TIME   BRENT CRUDE FUTR (USD/bbl.) 48.370 2.980 6.57 01/23   GAS OIL FUT (ICE) (USD/MT) 424.000 -2.750 -0.64 01/23   GASOLINE RBOB FUT (USd/gal.) 115.440 6.100 5.58 01/23   HEATING OIL FUTR (USd/gal.) 145.050 10.190 7.56 01/23   NATURAL GAS FUTR (USD/MMBtu) 4.518 -0.163 -3.48 01/23   WTI CRUDE FUTURE (USD/bbl.) 46.470 2.800 6.41 01/23

Agriculture

PRICE CHANGE %CHANGE TIME   COCOA FUTURE – LI (GBP/MT) 2025.000 56.000 2.84 01/23   COCOA FUTURE (USD/MT) 2661.000 81.000 3.14 01/23   COFFEE ‘C’ FUTURE (USd/lb.) 119.650 0.200 0.17 01/23   CORN FUTURE (USd/bu.) 390.500 3.000 0.77 01/23   COTTON NO.2 FUTR (USd/lb.) 50.640 1.710 3.49 01/23   FCOJ-A FUTURE (USd/lb.) 74.900 -0.900 -1.19 01/23   SOYBEAN FUTURE (USd/bu.) 1009.000 -3.000 -0.30 01/23   SOYBEAN MEAL FUTR (USD/T.) 318.300 0.100 0.03 01/23   SOYBEAN OIL FUTR (USd/lb.) 33.600 0.070 0.21 01/23   SUGAR #11 (WORLD) (USd/lb.) 12.700 0.320 2.58 01/23   WHEAT FUTURE(CBT) (USd/bu.) 582.750 16.000 2.82 01/23   WHEAT FUTURE(KCB) (USd/bu.) 610.500 12.500 2.09 01/23

Industrial Metals

PRICE CHANGE %CHANGE TIME   ALUMINUM FUTURE (USd/lb.) 62.250 0.500 0.81 01/23   COPPER FUTURE (USd/lb.) 147.200 7.600 5.44 01/23

Precious Metals

PRICE CHANGE %CHANGE TIME   GOLD 100 OZ FUTR (USD/t oz.) 897.700 37.200 4.32 01/23   SILVER FUTURE (USD/t oz.) 11.940 0.575 5.06 01/23

Livestock

PRICE CHANGE %CHANGE TIME   CATTLE FEEDER FUT (USd/lb.) 92.750 0.450 0.49 01/23   LEAN HOGS FUTURE (USd/lb.) 64.400 -1.000 -1.53 01/23   LIVE CATTLE FUTR (USd/lb.) 85.800 0.400 0.47 01/23

Don’t you hate when on a day when all the world is allegedly going to “celebrate hope and change,” the markets take a big nosedive.

Dick Cheney gets wheeled off in a wheelchair and Senator Kennedy has a seizure at the inaugural luncheon.

Some start to the Obama Adminstration!

Sure, I know. In the scheme of things, it means nothing. And today was  a day to celebrate America. But, there was that issue of the red ink.

The most distrubing thing about today is that you had formally respectable banks like Royal Bank of Scotland and State Street tanking north of 50%. That is frightening stuff.

Royal Bank of Scotland. Isn’t that one of the banks your conservative Uncle Ernie in Pittsburg always told you to buy.? Sensible bankers, those Scots.  Until they become insolvent.

Elsewhere in the great casino, there was lots of action. Oil continues to go through pops and drops, depending on which month contract you are playing. The front-month, February, which is expiring, rallied nearly two beaners. But the next month, March, got whacked 2 beaners at the same time. There’s nearly a $10 difference between the February and March contracts. Will oil be that much more difficult to get in one month? To me these are signs that oil are trying to bottom. I have established some small initial long oil position.

The dollar was skyrocketing against most currencies, but gold still rose $20. I find this interesting. Are people starting to realize that all paper currencies are, in fact, made out of paper?

Below is so more action in the futures arena. Generally, it was not a good day to trade, unless you were shorting the christmas out of the S&Ps. other stuff was fidgety, volatile, and without discernable trend. Though it’s certain that commodities are still a dangerous place to be. Be careful out there.

Commodity Futures

INDEX NAME VALUE CHANGE OPEN HIGH LOW TIME  UBS BLOOMBERG CMCI 884.85 -21.54 881.80 901.50 881.14 01/20  S&P GSCI 330.79 -12.31 328.30 343.46 326.10 01/20  RJ/CRB Commodity 215.88 -5.21 220.40 221.09 215.88 01/20  Rogers Intl 2429.92 -75.35 2435.86 2504.19 2408.55 17:50

Energy

PRICE CHANGE %CHANGE TIME   BRENT CRUDE FUTR (USD/bbl.) 43.800 0.180 0.41 20:35   GAS OIL FUT (ICE) (USD/MT) 437.250 -9.750 -2.18 20:34   GASOLINE RBOB FUT (USd/gal.) 114.000 -0.310 -0.27 19:01   HEATING OIL FUTR (USd/gal.) 139.100 1.520 1.10 19:12   NATURAL GAS FUTR (USD/MMBtu) 4.723 0.081 1.74 20:36   WTI CRUDE FUTURE (USD/bbl.) 41.100 0.260 0.64 20:39

Agriculture

PRICE CHANGE %CHANGE TIME   COCOA FUTURE – LI (GBP/MT) 1866.000 86.000 4.83 01/20   COCOA FUTURE (USD/MT) 2470.000 7.000 0.28 01/20   COFFEE ‘C’ FUTURE (USd/lb.) 114.900 -0.900 -0.78 01/20   CORN FUTURE (USd/bu.) 384.000 0.500 0.13 20:57   COTTON NO.2 FUTR (USd/lb.) 46.810 -2.190 -4.47 01/20   FCOJ-A FUTURE (USd/lb.) 72.250 0.150 0.21 01/20   SOYBEAN FUTURE (USd/bu.) 996.250 4.250 0.43 20:56   SOYBEAN MEAL FUTR (USD/T.) 309.500 0.500 0.16 20:57   SOYBEAN OIL FUTR (USd/lb.) 33.870 0.060 0.18 20:58   SUGAR #11 (WORLD) (USd/lb.) 12.590 0.330 2.69 01/20   WHEAT FUTURE(CBT) (USd/bu.) 553.500 3.500 0.64 20:57   WHEAT FUTURE(KCB) (USd/bu.) 583.750 4.000 0.69 20:34

Industrial Metals

PRICE CHANGE %CHANGE TIME   ALUMINUM FUTURE (USd/lb.) 64.300 -3.250 -4.81 01/20   COPPER FUTURE (USd/lb.) 150.800 0.350 0.23 20:38

Precious Metals

PRICE CHANGE %CHANGE TIME   GOLD 100 OZ FUTR (USD/t oz.) 850.200 -5.000 -0.58 20:38   SILVER FUTURE (USD/t oz.) 11.155 -0.020 -0.18 20:39

Livestock

PRICE CHANGE %CHANGE TIME   CATTLE FEEDER FUT (USd/lb.) 91.775 0.025 0.03 19:27   LEAN HOGS FUTURE (USd/lb.) 65.925 0.225 0.34 19:39   LIVE CATTLE FUTR (USd/lb.) 85.200 -0.150 -0.18 20:41

I have started to make some inflationary bets — long gold & silver, short bonds, mostly — and I would like to increase them. However, I would like some of the data — and the market’s reaction to the data — confirm some of these theories before I act on them further.

 Let me simplify it in these terms: What we currently have is a deflationary phase of the economy, driven by weakening economic activity as well as deleveraging of investment assets. The government is desperately trying to “reflate” the economy by guaranteeing banks, lowering rates, creating stimulus, and driving down interest rates. So far, it’s done little, but these things always have a lag.  Credit as measured by a number of indicators has loosened up a bit since last October.

The  mode could change quickly from deflation to inflation if all of the monetary stimulus created by the central banks starts to work itself back into the economy. Make no mistake about it: they have created a lot of new money. The problem is that this money has been locked up in banks.

Some smart people have been watching and analyzing the money supply data for hints as to how this deflation/inflation warfare will play out. The first is John Williams, the economist who runs the brilliant site www.shadowstats.com. Williams does a lot of work to filter the news out of government statistics and figure out what is actually happening. His recent work shows that his measure of “M3″ or broad money supply, is accelerating. From his Web site:

“M3 Growth Surges. With full reporting in place for the month of December, annual growth was higher across the board for M1, M2 and the SGS-Alternate Measure of M3. For December, annual M3 growth surged to roughly 10.7% from its recent trough of 9.1% in November.”

Source: www. shadowstats.com (full site access requires subscription)

This is important, because until December of 2008, measures of M3 had been shrinking – reflecting the deflationary nature of the credit contraction. Williams thesis is that it appears that this credit contraction may be waning, and that  a turn in M3 will unleash the  huge explosion in “M1″ money suppply, fueling a surge in inflation.

As you can see by the charts below — M3 and M1 have been “fighting each other” — headed in different directions. The decline in M3 has overwhelmed the surge in M1, causing deflation. But if M3 now turns up, what you have is an overwhelming surge in both measures pushing toward the inflation direction.

US Broad Money Supply (M3)

Source: St. Louis Fed M1 measure

Ed Seykota, the master trader,  recently posted these charts on his Web site, Trading Tribe (www.tradingtribe.com).  Seykota is usually very cagey about his specific trading ideas or economic theories, but he implied that his is watching money supply carefully for inflationary implications. You can read some of his commentary in his FAQ here.

Let’s forget for a moment that the ADP data has been a terrible indicator over time. What this really is about is the market grappling with the timing of the “employment bottom.”

The U.S. Dollar, for simlilar reasons, has been incredibly volatile. I believe this is because the market is toggling between the “We are doing more to fix the problem and our economy will recover first” idea and the “We are sowing the seeds of massive inflation” idea.

In short, dollar bulls think that if the stimulus, TARP, and various rescue packages work, we will recover and tax revenues will surge to help allay fears of massive deficits.

Well, fine, but didn’t Obama say that we will have “Trillions of dollars of deficits for years to come”? This is not like the 1990s, where a strong and productive economy will produce a surplus. We are taking on trillions of dollars in liabilities, which is likely to weigh on the Federal Balance Sheet for decades to come. In time, I don’t see how the dollar can possibly stay strong.

I think that is why every morning when I wake up, I’m not suprised at all to see massive currency moves, as the global markets “freak out” about how all this money printing will sort itself out. Currency volatility is likely to be a regular feature of the market in 2009.

At any rate, technically it’s in a bounce, if if you look at this fine chart by Clive Maund, we can see that the Dollar Index can rally up to 84-85 and still maintain a possible “breakdown” technical picture.

The highlights are :

* US Dollar Strength

* Positive action in the grains

* Dismal economic news. But stocks have whipsawed and are trying to catch a bid to remain in the “big bounce” from the abyss.

This morning I didn’t do much of anything but I added a small amount to my long silver position. I am short the treasuries and watching them carefully. They are looking a bit dicey here.

Energy

PRICE CHANGE %CHANGE TIME   BRENT CRUDE FUTR (USD/bbl.) 50.630 1.010 2.04 11:59   GAS OIL FUT (ICE) (USD/MT) 521.250 37.250 7.70 11:59   GASOLINE RBOB FUT (USd/gal.) 119.430 1.190 1.01 11:39   HEATING OIL FUTR (USd/gal.) 162.890 5.260 3.34 11:39   NATURAL GAS FUTR (USD/MMBtu) 6.060 -0.012 -0.20 11:39   WTI CRUDE FUTURE (USD/bbl.) 48.900 0.090 0.18 11:39

Agriculture

PRICE CHANGE %CHANGE TIME   COCOA FUTURE – LI (GBP/MT) 1787.000 -15.000 -0.83 11:49   COCOA FUTURE (USD/MT) 2610.000 55.000 2.15 11:59   COFFEE ‘C’ FUTURE (USd/lb.) 115.400 7.700 7.15 11:59   CORN FUTURE (USd/bu.) 420.250 9.000 2.19 11:59   COTTON NO.2 FUTR (USd/lb.) 49.700 1.390 2.88 11:58   FCOJ-A FUTURE (USd/lb.) 76.250 1.550 2.07 11:52   SOYBEAN FUTURE (USd/bu.) 1004.000 17.000 1.72 11:59   SOYBEAN MEAL FUTR (USD/T.) 300.800 2.600 0.87 11:59   SOYBEAN OIL FUTR (USd/lb.) 36.360 1.190 3.38 11:59   SUGAR #11 (WORLD) (USd/lb.) 12.240 0.420 3.55 11:59   WHEAT FUTURE(CBT) (USd/bu.) 633.500 16.750 2.72 11:59   WHEAT FUTURE(KCB) (USd/bu.) 655.000 12.750 1.99 11:59

Source: Bloomberg.com

Greetings Investors,  Happy New Year! It’s time to catch up on the serious developments in  the financial markets.  I have been running a private investment advisory newsletter in which I pick a “Top Ten” Portfolio for four years now. In 2008, I did not issue a “Top Ten” portfolio based on the fact  that I thought it would be a very difficult year to invest. As we  now know, that may have been the understatement of the century.

Twelve months later, as we start 2009, the investment landscape has  changed dramatically. The investment banking industry has been  obliterated. Fannie Mae, the largest mortgage buyer on the planet,  has been taken over by the U.S. government. The federal government  has expanded its balance sheet to over $1 Trillion (the truth is,  nobody knows by exactly how much) and is taking large stakes in  private businesses. We’re becoming “Francified” as the country moves  toward large-scale socialization of industry.

Where does it all lead? Unfortunately, Americans aren’t very good at  making baguettes, so the “Francification” isn’t a good look for us.  As the government takes on more and more liabilities of the private  enterprise, prints up money, and seeks to bail out the economy by  the creation of new public debt, this could lead to the largest  inflationary bubble of our lifetime.

Nearly all asset classes were destroyed in 2008: Equities, corporate  bonds, municipal bonds, real estate, oil, industrial commodities.  Almost everything was down 40-60%. I guess we can take solace in the  fact that we weren’t Iceland, where the stock market declined 95%!  There were really only two places to hide: 1) Gold, of which I have  been a big fan (and still am), which ended the year up 5% 2)  Treasury bonds, which mounted their largest rally in history. 2009 will certainly throw a few curveballs.

I believe we will see a  “divergence in asset classes.” As the government prints more money,  expands its balance sheet, and becomes the public dumpster of all  toxic assets that caused the collapse in the market, savvy investors  are likely to run for the cover of assets that would hold their  value in an inflationary environment as global governments begin a  mad race to “print the most money.”

I believe  the “stuff” trade will be back on, as people protect themselves  against the coming inflation.  As Jim Rogers, the commodities  investor and founder of the Quantum fund has pointed out,  commodities do not have “impaired” fundamentals. That is, the  fundamentals for many commodities, especially agricultural  commodities, remain incredibly strong (for example, wheat stocks are  at their lowest point in history while global demand for food hits  new highs).

To sum up the problem: In 2009, you might not be able  to buy a new Escalade on bank credit, but you will need to eat and  buy food. Financial assets, including government balance sheets, are, in fact,  impaired. Nobody knows where the federal government balance sheet  will end up after this process, nor what it will be valued at.

Some  corporate earnings numbers are also big question mark, especially in  the retail sector. To invest in treasury bonds at this point for a  measly a 2% yield looks like one of the worst risk/reward trades in  history. In fact, I advocate:

* Shorting Treasury bonds and believe it  may be one of the best trading opportunities in a long time.

* Precious metals and agricultural commodities are likely to  outperform. 

* Energy will return, but likely later in the year, after  the precious metals and grains. It is interesting that major  diversified oil companies such as Chevron (CVX) has stabilized ahead  of crude oil, and we think that is a favorable sign for energy  stocks.

* The stock market could see a benefit from  the return to liquidity, and for that reason it would not surprise  me to see the market rally for the next 2-3 months. It is a good time to test the equity waters with some high- quality  dividend-producing stocks, if only because they are a decent hedge  against inflation and the dividend “pays you to wait.” But take it slow and easy! Dollar-cost averaging rules, and have a long time horizon.

* High-quality  corporate bonds are also interesting. Individual corporate bonds  take a lot of work to understand and I am no expert, therefore I am  going to stick with some reputable funds, including the BlackRock  Income Opportunity Trust. However, any stock market rally should be  seen skeptically and sold accordingly. I doubt that a new bull  market can emerge in 2009 because of issues with corporate profits. 

It’s unlikely that corporate profits will return to the giddy growth  of the 2003-2006 period because of under-investment and a consumer  that is returning to saving. Our stock picks are weighted to things  that might be impervious toward a prolonged recession, including  healthcare and biotech. In general, I am expecting that the stock  market will be a trader’s market in 2009, with violent chops up and  down.

This year, our first portfolio “goes to 11” because we like to add  another unit of diversification to our approach.  Without further ado, here is my “Top Ten Portfolio” for 2008.

Top Ten Portfolio 2009 – The “Macro Portfolio”

1) Gold – Either  iShares Gold (GLD) or gold futures (I prefer to play futures and physical)

2) Silver – Can be bought as 1) coins on eBay 2) iShares ETF (SLV) 3) Silver stocks like PAAS or SSRI 4) Silver futures (be careful, silver is notoriously volatile) 5) physical bars other than coines. Believe it or not, I own ALL OF THE ABOVE!
2) DBA – Powershares Agriculture ETF
3) BNA – Blackrock Income Opportunity Trust
4) BPT – BP Prudhoe Trust
5) CVX – Chevron
6) BMY – Bristol Myers
7) MCD – McDonalds
*) BDX – Becton Dickinson
9) GILD – Gilead Sciences
10) TBT – Double Short Treasury Bonds (Note: you are selling bonds short  when buying this ETF)

11) Corn & Wheat futures (those of you who can’t buy  futures can substitute DBA)