The Inflation/Deflation Debate and China’s Commodity Carry Trade

The inflation vs. deflation debate is heated up again. The debate looks far from being settled, even among professional investors. The average Joes are probably more clueless. This may be the single most important debate in the investment world.

Jim Rogers, Peter Schiff, James Sinclair, Gerald Celente, Marc Faber and Congressman Ron Paul are on the inflation camp. The argument is simple: As the US government racks up trillion dollars of deficit spending, the money can come from neither raising tax, nor borrowing. So the only way out is print money out of thin air. In history, any time a government chooses to solve its fiscal problem through massive money printing, it always leads to hyper-inflation at the end. So that is going to happen. It might be postponed a bit but can not be avoided.

But I will not immediately dismiss the arguments from the deflation camp, either. Well known people on the deflation camp includes Mike Shedlock (MISH), Nouriel Roubini, and market ticker Karl Denninger. They present three strong arguments for deflation:

  1. Credits are destroyed in the ongoing de-leveraging process. Credits are circulated as money so the destruction of credit means less liquidity in the system.

  2. Although the government is massively printing money, most of the newly printed money is just hoarded away in the vaults of banks and do not enter circulation.

  3. Where is the inflation today? It's no where to be found!
Debunking the second argument is simple. Banks keep a high reserve because they are highly leveraged and they fear a bank run. If banks hoard cash instead of extend consumer credits, people will have to withdraw cash so they have the money to spend. Such a bank de-leveraging process could escalade into a bank run, resulting in the destruction of the banks and massive release of cash into the general circulation.

De-leveraging of the financial derivatives bubble does not cause deflation. Look at the history of Dutch Tulip Mania and the subsequent collapse. Did it lead to price inflation and deflation of things unrelated to tulips? Of course it didn't. The Dutch grocery stores never took a flower as a payment for milk and bread. Can I use a credit default swap to pay for milk and bread today? I can't. Inflation is a currency phenomenon. It has nothing to do with leverage.

De-leveraging is the process that people abandon paper assets due to counter party risks, and turn towards physical assets with no such risk. Physical assets have intrinsic values: the marginal costs to replace them and maintain an adequate supply. So in the de-leveraging process, paper assets will lose value, and physical assets will gain value. The US dollar is a paper asset. The dollar is leveraged on the full faith and credit of the US government on its ability to pay off its huge amount of debts, which frankly does not look good at all.

The world knows the US dollar is going down. Chinese students laughed loudly when Tim Geithner told them China's US dollar assets are "very safe". Many very rich and successful Americans know the dollar is going down. People like Jim Rogers are moving their assets out of the US dollars and into China and other places. No wonder the US government is cracking down on Swiss Accounts owned by Americans.

So here is your answer where is the inflation. Blame it on guys like Jim Rogers are selling their US assets! Jim Rogers is a billionaire. He sold his house in New York, therefore New York real estate collapsed. He sold his furniture, sofas and tables and chairs, so that brings the furniture prices down. He sold his US stocks so the US equity market is down. He sold his stuff for US dollars, and bring his dollars away from the US soil, and into China. Jim Rogers drains liquidity from the US market, thus prices of everything drop :-) Speaking seriously: This is an ongoing BANKRUPTCY LIQUIDATION SALE, not a deflation. The low prices will not last.

I told you that is exactly what happened, in my last article. Liquidity is drained from the US market because smart capitals are escaping from US soil to look for opportunities in places like China. This is a huge liquidity drain from the US. But it also causes headache for the Chinese. They need to deal with all the "hot money", the US dollars flooded into China to be exchanged into Chinese Yuan, as speculators are betting on Yuan appreciation over the dollar.

In other words, currency speculators are EXPORTING our inflation to China by draining the liquidity from the US and bringing hot money to China.

How China handles the massive inflow of hot money? China simply print their own money to soak up all the inflowing US dollars. It costs them nothing to print the Yuan to buy the dollars, and they can spend all the dollars to purchase physical assets and raw materials around the world. This is the Commodity Carry Trade they are playing, very successfully.

Few people in the west recognize China's real strategy. They thought it is impossible for China to sell the dollar and exchange it into euro or yen. Why would China sell one paper just to exchange for another paper? They thought China's recent commodities buying spree is to merely boost price to help domestic producers, or to stockpile for strategic safety. But China's buying of aluminum, a material that China has plenty, signals that it goes far beyond strategic hoarding. Commodities ARE China's new foreign exchange reserves. China is not selling the dollars, China is SPENDING the dollars.

With continued inflow of US dollars, and with China's own money printers running at high speed, China has plenty of money to spend and continue the buying spree. With Yuan tightly pegged to the dollar, this game can continue indefinitely until currency speculators stop sending the dollars to China. Then the US will go from being the largest exporter to the largest importer of inflation, over night! All the dollars will fight their way back home at once. Goods and raw materials will flow out of the USA, until this land is ripped barren! I predict many people will be voting with their feet, before the nightmare scenery occurs.

The currency speculators did the wrong thing selling dollars buy the Yuan. The dollar is going down, but so will the Chinese Yuan. Investors should go to physical commodities, not Yuan or any foreign fiat paper money.

Some Chinese already realize that the Yuan is losing purchase power. In recent months, there was a SUDDEN turn up in real estate markets in major cities in China. The housing slump turned into red hot housing boom, literally over-night, caught many people in a big surprise.

Unless you read news in Chinese, you might think I was telling a fairy tale. But it is absolutely true. There is a sudden housing boom; an auto sales boom; a boom in bank loans. Mean while China could NOT sell its own treasury bonds. What does that tell you? China could not borrow a mere Y28 billion Yuan (US$7B) from its own people. Why would China be able or willing to extend another trillion dollars of credit to the US government?

Jim Rogers is absolutely right that commodity is the only asset class whose fundamentals have not been impaired, but improved. One of the best sectors to play the Chinese commodity buying spree is dry bulk shipping, as China's global buying spree is far from over.

Stocks in dry bulk shipping include the follow names:
EXM, EGLE, TBSI, DRYS, GNK, DSX, NM, OCNF and SBLK.

There is a shipping ETF called SEA. Do your own due diligence on specific positions.

Raw materials that China does not produce, but are critically important to China's economy, are the best commodities to buy. This includes platinum group metals, platinum and palladium; aviation metal titanium; battery technology metal cobalt. My best favorite is the palladium metal, and palladium mining plays: Stillwater Mining (SWC) and North American Palladium (PAL). Recently Andrew Snyder published an article pitching palladium as a critical metal for China, and SWC with a potential of 1,389% gain, without naming the names! I am not sure any one knows what China's next big purchase is. But it is a fact that palladium is one of the critical strategic metals that any modern country must stockpile. Look at TIE as a titanium play, and OMG as for cobalt play. I also recommend buying physical cobalt.

If you are interested in rare and strategically important metals, then follow Jack Lifton, a regular writer for Resource Investor. Jack's article on tellurium got me first interested in the metal. I actually bought some tellurium. Read a recent article on First Solar (FSLR) and tellurium: Hard to Find, Easy to Smell. It's amazing that FSLR still holds up well today and there is still no rush to buy tellurium. But as I predicted, Samsung bets big on tellurium based Phase Change Memory. The chip is already in commercial production. I recommend shorting FSLR if it raises near $200 a share. If you hold long or short position in FSLR, you have a fidelity to your money to demand the truth from FSLR on their tellurium supply.

I have high respect for Jim Rogers. But I have a huge disagreement with him on his love of agriculture commodities. I know his agriculture love is very influential and a lot of people agree with him. But I must point out that he is completely wrong on agriculture. In terms of dollar or any fiat currency, all commodities are bullish. But in terms of growth potential in real purchase power term, agriculture products will perform near the bottom, only better than gold.

I don't like gold (GLD) at current price at all. As the world is facing so many resource crisis, I can not understand why the world as a whole still dedicate a lot of efforts digging a metal that is least useful, and least in shortage. Sell gold to buy silver, physical silver, not SLV. After I carefully scrutinized the silver bars list I do NOT believe SLV has the actual silver bars.

On agriculture: granted that the world sees a food crisis looming; granted that every fact Jim Rogers cited is correct: Farmers can't get loans to buy fertilizer; Asian countries eat more meat; And that food is the single most important human need. Despite all these facts, Jim Rogers is still wrong on being overly too optimistic on growth potential of agriculture products.

Jim Rogers doesn't know how the poorest people in the world are struggling to feed their families. There is demand destruction. The poorest people in the world are already spending 80%, 90% or more of their income on food. Farmers could barely make any profit raising their cattle. If food price doubles, do you think the poor people will have more than 100% of their income to spend? Or a farmer can spend more to feed their cattle? No! Poor people will have to buy less and eat less, and farmers will have to slaughter their cattle.

Such demand destruction can quickly reduce food demand, and hence it tightly caps the price growth potential of agriculture products. This is why agriculture products will never be the most bullish of all commodity plays. Agriculture is still bullish, not bearish, but the growth potential is simply unattractive. A number of rare metal plays can easily beat any agriculture hands down.

My last article called to buy United States Natural Gas (UNG) fund. I was a bit premature. But at current price level, UNG has no more down side and plenty of explosive upside potential. A recent EIA report noted an important trend: At current low natural gas price, it could become economically incentive for power plants to switch to burning natural gas instead of coal to generate electricity! Please read that document carefully. If power stations switch from coal to natural gas, the huge demand boost will put a rock solid bottom at current natural gas price. In comparison, I will caution about adding position on US Oil Fund (USO).

Full Disclosure: The Author is heavily invested in palladium mining stocks SWC and PAL. I also hold significant positions on shipping stocks EXM, EGLE, TBSI, DRYS, GNK, as well as positions in UNG. I hoard physical tellurium metal but have no position in FSLR.

The Inflation/Deflation Debate and China’s Commodity Carry Trade

The inflation vs. deflation debate is heated up again. The debate looks far from being settled, even among professional investors. The average Joes are probably more clueless. This may be the single most important debate in the investment world.

Jim Rogers, Peter Schiff, James Sinclair, Gerald Celente, Marc Faber and Congressman Ron Paul are on the inflation camp. The argument is simple: As the US government racks up trillion dollars of deficit spending, the money can come from neither raising tax, nor borrowing. So the only way out is print money out of thin air. In history, any time a government chooses to solve its fiscal problem through massive money printing, it always leads to hyper-inflation at the end. So that is going to happen. It might be postponed a bit but can not be avoided.

But I will not immediately dismiss the arguments from the deflation camp, either. Well known people on the deflation camp includes Mike Shedlock (MISH), Nouriel Roubini, and market ticker Karl Denninger. They present three strong arguments for deflation:

  1. Credits are destroyed in the ongoing de-leveraging process. Credits are circulated as money so the destruction of credit means less liquidity in the system.

  2. Although the government is massively printing money, most of the newly printed money is just hoarded away in the vaults of banks and do not enter circulation.

  3. Where is the inflation today? It's no where to be found!
Debunking the second argument is simple. Banks keep a high reserve because they are highly leveraged and they fear a bank run. If banks hoard cash instead of extend consumer credits, people will have to withdraw cash so they have the money to spend. Such a bank de-leveraging process could escalade into a bank run, resulting in the destruction of the banks and massive release of cash into the general circulation.

De-leveraging of the financial derivatives bubble does not cause deflation. Look at the history of Dutch Tulip Mania and the subsequent collapse. Did it lead to price inflation and deflation of things unrelated to tulips? Of course it didn't. The Dutch grocery stores never took a flower as a payment for milk and bread. Can I use a credit default swap to pay for milk and bread today? I can't. Inflation is a currency phenomenon. It has nothing to do with leverage.

De-leveraging is the process that people abandon paper assets due to counter party risks, and turn towards physical assets with no such risk. Physical assets have intrinsic values: the marginal costs to replace them and maintain an adequate supply. So in the de-leveraging process, paper assets will lose value, and physical assets will gain value. The US dollar is a paper asset. The dollar is leveraged on the full faith and credit of the US government on its ability to pay off its huge amount of debts, which frankly does not look good at all.

The world knows the US dollar is going down. Chinese students laughed loudly when Tim Geithner told them China's US dollar assets are "very safe". Many very rich and successful Americans know the dollar is going down. People like Jim Rogers are moving their assets out of the US dollars and into China and other places. No wonder the US government is cracking down on Swiss Accounts owned by Americans.

So here is your answer where is the inflation. Blame it on guys like Jim Rogers are selling their US assets! Jim Rogers is a billionaire. He sold his house in New York, therefore New York real estate collapsed. He sold his furniture, sofas and tables and chairs, so that brings the furniture prices down. He sold his US stocks so the US equity market is down. He sold his stuff for US dollars, and bring his dollars away from the US soil, and into China. Jim Rogers drains liquidity from the US market, thus prices of everything drop :-) Speaking seriously: This is an ongoing BANKRUPTCY LIQUIDATION SALE, not a deflation. The low prices will not last.

I told you that is exactly what happened, in my last article. Liquidity is drained from the US market because smart capitals are escaping from US soil to look for opportunities in places like China. This is a huge liquidity drain from the US. But it also causes headache for the Chinese. They need to deal with all the "hot money", the US dollars flooded into China to be exchanged into Chinese Yuan, as speculators are betting on Yuan appreciation over the dollar.

In other words, currency speculators are EXPORTING our inflation to China by draining the liquidity from the US and bringing hot money to China.

How China handles the massive inflow of hot money? China simply print their own money to soak up all the inflowing US dollars. It costs them nothing to print the Yuan to buy the dollars, and they can spend all the dollars to purchase physical assets and raw materials around the world. This is the Commodity Carry Trade they are playing, very successfully.

Few people in the west recognize China's real strategy. They thought it is impossible for China to sell the dollar and exchange it into euro or yen. Why would China sell one paper just to exchange for another paper? They thought China's recent commodities buying spree is to merely boost price to help domestic producers, or to stockpile for strategic safety. But China's buying of aluminum, a material that China has plenty, signals that it goes far beyond strategic hoarding. Commodities ARE China's new foreign exchange reserves. China is not selling the dollars, China is SPENDING the dollars.

With continued inflow of US dollars, and with China's own money printers running at high speed, China has plenty of money to spend and continue the buying spree. With Yuan tightly pegged to the dollar, this game can continue indefinitely until currency speculators stop sending the dollars to China. Then the US will go from being the largest exporter to the largest importer of inflation, over night! All the dollars will fight their way back home at once. Goods and raw materials will flow out of the USA, until this land is ripped barren! I predict many people will be voting with their feet, before the nightmare scenery occurs.

The currency speculators did the wrong thing selling dollars buy the Yuan. The dollar is going down, but so will the Chinese Yuan. Investors should go to physical commodities, not Yuan or any foreign fiat paper money.

Some Chinese already realize that the Yuan is losing purchase power. In recent months, there was a SUDDEN turn up in real estate markets in major cities in China. The housing slump turned into red hot housing boom, literally over-night, caught many people in a big surprise.

Unless you read news in Chinese, you might think I was telling a fairy tale. But it is absolutely true. There is a sudden housing boom; an auto sales boom; a boom in bank loans. Mean while China could NOT sell its own treasury bonds. What does that tell you? China could not borrow a mere Y28 billion Yuan (US$7B) from its own people. Why would China be able or willing to extend another trillion dollars of credit to the US government?

Jim Rogers is absolutely right that commodity is the only asset class whose fundamentals have not been impaired, but improved. One of the best sectors to play the Chinese commodity buying spree is dry bulk shipping, as China's global buying spree is far from over.

Stocks in dry bulk shipping include the follow names:
EXM, EGLE, TBSI, DRYS, GNK, DSX, NM, OCNF and SBLK.

There is a shipping ETF called SEA. Do your own due diligence on specific positions.

Raw materials that China does not produce, but are critically important to China's economy, are the best commodities to buy. This includes platinum group metals, platinum and palladium; aviation metal titanium; battery technology metal cobalt. My best favorite is the palladium metal, and palladium mining plays: Stillwater Mining (SWC) and North American Palladium (PAL). Recently Andrew Snyder published an article pitching palladium as a critical metal for China, and SWC with a potential of 1,389% gain, without naming the names! I am not sure any one knows what China's next big purchase is. But it is a fact that palladium is one of the critical strategic metals that any modern country must stockpile. Look at TIE as a titanium play, and OMG as for cobalt play. I also recommend buying physical cobalt.

If you are interested in rare and strategically important metals, then follow Jack Lifton, a regular writer for Resource Investor. Jack's article on tellurium got me first interested in the metal. I actually bought some tellurium. Read a recent article on First Solar (FSLR) and tellurium: Hard to Find, Easy to Smell. It's amazing that FSLR still holds up well today and there is still no rush to buy tellurium. But as I predicted, Samsung bets big on tellurium based Phase Change Memory. The chip is already in commercial production. I recommend shorting FSLR if it raises near $200 a share. If you hold long or short position in FSLR, you have a fidelity to your money to demand the truth from FSLR on their tellurium supply.

I have high respect for Jim Rogers. But I have a huge disagreement with him on his love of agriculture commodities. I know his agriculture love is very influential and a lot of people agree with him. But I must point out that he is completely wrong on agriculture. In terms of dollar or any fiat currency, all commodities are bullish. But in terms of growth potential in real purchase power term, agriculture products will perform near the bottom, only better than gold.

I don't like gold (GLD) at current price at all. As the world is facing so many resource crisis, I can not understand why the world as a whole still dedicate a lot of efforts digging a metal that is least useful, and least in shortage. Sell gold to buy silver, physical silver, not SLV. After I carefully scrutinized the silver bars list I do NOT believe SLV has the actual silver bars.

On agriculture: granted that the world sees a food crisis looming; granted that every fact Jim Rogers cited is correct: Farmers can't get loans to buy fertilizer; Asian countries eat more meat; And that food is the single most important human need. Despite all these facts, Jim Rogers is still wrong on being overly too optimistic on growth potential of agriculture products.

Jim Rogers doesn't know how the poorest people in the world are struggling to feed their families. There is demand destruction. The poorest people in the world are already spending 80%, 90% or more of their income on food. Farmers could barely make any profit raising their cattle. If food price doubles, do you think the poor people will have more than 100% of their income to spend? Or a farmer can spend more to feed their cattle? No! Poor people will have to buy less and eat less, and farmers will have to slaughter their cattle.

Such demand destruction can quickly reduce food demand, and hence it tightly caps the price growth potential of agriculture products. This is why agriculture products will never be the most bullish of all commodity plays. Agriculture is still bullish, not bearish, but the growth potential is simply unattractive. A number of rare metal plays can easily beat any agriculture hands down.

My last article called to buy United States Natural Gas (UNG) fund. I was a bit premature. But at current price level, UNG has no more down side and plenty of explosive upside potential. A recent EIA report noted an important trend: At current low natural gas price, it could become economically incentive for power plants to switch to burning natural gas instead of coal to generate electricity! Please read that document carefully. If power stations switch from coal to natural gas, the huge demand boost will put a rock solid bottom at current natural gas price. In comparison, I will caution about adding position on US Oil Fund (USO).

Full Disclosure: The Author is heavily invested in palladium mining stocks SWC and PAL. I also hold significant positions on shipping stocks EXM, EGLE, TBSI, DRYS, GNK, as well as positions in UNG. I hoard physical tellurium metal but have no position in FSLR.

The Great China Commodity Carry Trade

In a volatile market, rather than trying to get ahead of the daily movements, successful investors spend their effort on figure out the big picture of long term fundamentals. Many people often draw the wrong conclusion when their views are too narrow: They look at only the demand side and forget the story on the supply side, or they fail to see the effect of government interventions or speculative forces.

Recently, in researching the market trend of currencies, commodities and shipping, I made one stunning discovery! The discovery is so shocking it completely changed my views, yet almost no one else discussed in any public literature. My discovery, if proven correct, could mean gigantic investment opportunity for those who get it first!

Where is US dollar Going

A dollar bear means a commodities bull. The 2009 US federal budget deficit will be $1.75 TRILLION or even more! It's utter insanity! Any budget bill can be decreed into law, regardless of the deficit. But no one can decree new economic laws. Where do we get the $1.75T? It will be printed out of thin air, as no one, not even China, can lend this much money to us, unless we lend our money printing machine to China first. History has proven repeatedly that mass printing of fiat money always leads to currency debasement and hyperinflation!

My shocking discovery is that we HAVE already lent our money printer to China!!!

I am dreadful of the worst case scenario for America. Current gigantic deficit spending is not the worst part. The worst part is that capitals may escape from American soil for better overseas opportunities, taking away jobs and tax revenues, reducing us to the only option: print more money and debase the dollar further, a nightmare scenario for America.

US dollar bear leads to commodities bull. The people and nations will hoard physical goods to preserve wealth, hence generate demands higher than the immediate needs and higher than available supplies. China is on a big natural resources shopping spree around the world lately, in order to divest its huge foreign currency reserves.

Both events are occurring as people have noticed: Capitals are escaping American soil; and China is on a global shopping spree of raw materials. But people who do notice these two things explain it as simply market behavior driven by speculative forces, they fail to see a more direct, conscious and deliberate reason behind what's going on, because no one noticed one quiet fact!

People watch the US Dollar index daily, but are they watching the Chinese Yuan? Investors trade trillion dollars between the USD, Euro and Japanese Yen daily. But there is not much trading between USD and Chinese Yuan. That is because for the past one year, trading between USD and CNY is equivalent to exchange one dollar into four quarters, nothing is gained or lost.

The Chinese government has locked the exchange rate at a constant Y6.832 = US$1.00, for over a year now. WHY? Insightful investors Jim Rogers, Peter Schiff, Marc Faber all predicted US dollar collapse and the appreciation of Chinese Yuan, and advised people to sell the dollar and buy the Yuan. Many people listened. They sold their houses and furniture in the USA, sold all their US assets. They brought boat loads of US dollars to China, exchange into Yuan, and sit on their piles of Yuan, betting on the Yuan appreciation over US dollar to collect some profits.

And they collected some dust instead. Making money should never be easy. Straight line thinking is never how great investors make their money. Why would China allow foreign speculators to profit on its currency while it suffers loss?

As the flood of US dollars flows in, China merely cranks up its own money printing press to print more RMB Yuan to exchange for the US dollars. It then uses some of the dollars to buy US Treasury bonds and prop up the value of the dollar, maintaining a constant USD/Yuan exchange rate. But China's real goal is not to support the dollar in long term, but to buy time to allow it to divest the huge dollar assets it is holding, in exchange of physical assets: natural resources, raw commodities, foreign mining companies and other physical assets. It costs China nothing to print more Yuans to buy more US dollars and then use the dollars to buy up the whole world!!!

Thanks to currency speculators, we have lent our money printing machine to China. This opportunity allowed China to launch the greatest Commodity Carry Trade (CCT) in history! It is an absolutely ingenious move: US government has no choice but keep printing more dollars; Speculators betting a dollar collapse flee the US market and bring the dollars to China; the drainage of market capital from the US market forces the US government to print even more dollars and drives more investors away from the US and into China; China then print more of its own currency at virtually no cost, swap for the dollars, and then holding the dollars at hands, they go around the world to buy up everything, and go to the USA to buy up everything. At the end when China is done, they will let the US dollar collapse, mean while, the Chinese Yuan, due to strong backing of all the physical assets China hoarded, will hold up its value.

On the concept of China's Commodity Carry Trade (CCT), credit must be given to Andrew Snyder, whose article on the CCT is an interesting read. I smiled big when I read his pitch on a certain metal and a certain US mining company as the next big target of China's CCT. I knew he was talking about palladium, my favorite metal, and Stillwater Mining (SWC), my most favorite mining stock. There is also North American Palladium (PAL) for palladium play. I am not sure whether palladium is China's next big strategic purchase. But even without China's CCT purchases, palladium is extremely bullish. Thanks to recent break through in cold fusion, palladium could be the investment opportunity of a lifetime!

Shipping and China's Strategic Investments

If China is buying commodities for strategic stockpiling, it will boost demand in the dry bulk shipping sector. I correctly called the bottom of the Baltic Dry Index on Dec. 5, 2008. Shares of dry bulk shippers are up tremendously from the early December, 08 bottom, and from the early March, 09 double bottom. I was betting on a reasonable recovery of shipping, but I never dreamed that the BDI could reach 4291 merely 6 months after it bottomed at 666! Today shipping stocks are still very cheap, as analysts are not convinced the global economy is in recovery. But isn't it now an open secret that China is spending out its US dollar holdings in exchange for natural resources and raw materials it can buy and hoard at current low prices. When China purchases for strategic hoarding, current industry demand is not even relevant.

There is but one small cloud in the shipping sector. Drewry report calls current dry bulk sector recovery temporary, as they see a big number of new order ships joining the fleet in the next few years. How credible is Drewry's bearish call based on their new ship order prediction?

Drewry called that BDI "seems to have reached the bottom", six months after the fact. That doesn't give them much credibility predicting something six months after the fact. I actually called the bottom spot on. In 2003, Drewry also made a similar bearish call on dry bulk shipping, based on their prediction of excessive number of new ships. We now know that shipping saw an unprecedented boom period in the next 5 years, peaking in August, 2008. If the new ships Drewry predicted since 2003 are still on paper in 2009, they may stay on paper for 6 more years. Most new order ships may never be built, due to reasons I discussed before.

One of the criteria I use to pick the best shipping stocks to invest, by looking at the ratio of shipping capacities of their fleets versus current market capital, as the shipping tonnage is ultimately what earns revenue. I will leave the detailed discussion till next time. My favorites are EXM, EGLE, DRYS, TBSI and GNK, in that order.

On Precious Metals

Gold will continue to be a laggard in precious metals. The world is never in shortage of gold. Gold is just money, or just cash. Recently some gold bugs made a lot of noise of China revealing that it doubled its gold reserve in the past 5 years. But it must be pointed out that China's foreign currency reserve increased more than 10 fold during the time, so gold is now actually a smaller percentage of China's total currency reserve.

Silver is a better story than gold. If fiat currencies fail, silver is the only monetary metal that is cheap enough to be used as bartering currency. The Chinese consider gold as a luxury but silver as money and storage of wealth. In Ancient China the gold/silver price ratio was 2:1. As Chinese investors turn their attention towards precious metals, silver will be their most favorite metal.

But the best precious metal story is in platinum and more so in palladium. The bullish palladium news from Norilsk Nickel (NILSY.PK) in Russia keeps getting better. Norilsk had announced the production result of Q1, 2009. The Q1 palladium production had fallen to only 557K ounces in the Russian division. Annualized it's 2.23 million ounces per year, compare with a normal year's 3.1 million ounces. I predicted Norilsk's 2009 palladium production would be only 2 million ounces, because they are producing the ores rich in nickel content and poor in palladium. The Q1 result had confirmed my prediction.

The current low palladium price provides no economic incentive to recycle auto catalytic converters. So as the palladium recycling grinds to a halt, it removes another one million ounces of global supply. The drop of recycling is confirmed in Stillwater Mining (SWC)'s Q1 report.

Palladium has huge future potential due to recent renewed interest in Cold Fusion, especially after CBS 60 Minutes aired a special report on Cold Fusion on April 19, 2009.

Other Commodities To Consider

Crude oil price has now surges back to $68 per barrel due to the weakness in US dollar. Some predict oil could surge to $200 in the near future. Comparatively, natural gas price still far lags behind. This creates a great buying opportunity, as natural gas is still cheap to buy, when most other commodities have rallied from recent bottom. Even Dr. Doom Marc Faber called natural gas the most under-valued commodity recently.

Two reasons to buy natural gas here. First, current price is far below the marginal production cost. In the US, the conventional natural gas fields are depleting rapidly. Natural gas production was boosted in the past two years only because of new technology and higher natural gas price made it economical to develop the so called shale gas. But as the price falls below $10-$13 per thousand cubic feet (TCF), shale gas is no longer profitable so producers must cut back.

Second, from the energy point of view, 5.3 TCF of natural gas contains the same amount of energy as one barrel of oil, so $4 per TCF is equivalent to $21 per barrel oil. When crude oil price is already at $68, the low price in natural gas is unsustainable as industry energy consumers will try to use more natural gas and less oil.

How to play natural gas? Buy the United States Natural Gas fund (UNG) is the best way. Stocks of natural gas producers would go up with the commodity. But judged from past experience, price of the natural gas itself could jump up faster and more furious than stocks of producers. Some producer stocks to consider: CHK, SWN, COG, MCF and WMB.

Full Disclosure: The Author is heavily invested in palladium producers SWC and PAL. I am also heavily long shipping stocks EXM, DRYS, EGLE, TBSI and GNK. I also own UNG.

The Great China Commodity Carry Trade

In a volatile market, rather than trying to get ahead of the daily movements, successful investors spend their effort on figure out the big picture of long term fundamentals. Many people often draw the wrong conclusion when their views are too narrow: They look at only the demand side and forget the story on the supply side, or they fail to see the effect of government interventions or speculative forces.

Recently, in researching the market trend of currencies, commodities and shipping, I made one stunning discovery! The discovery is so shocking it completely changed my views, yet almost no one else discussed in any public literature. My discovery, if proven correct, could mean gigantic investment opportunity for those who get it first!

Where is US dollar Going

A dollar bear means a commodities bull. The 2009 US federal budget deficit will be $1.75 TRILLION or even more! It's utter insanity! Any budget bill can be decreed into law, regardless of the deficit. But no one can decree new economic laws. Where do we get the $1.75T? It will be printed out of thin air, as no one, not even China, can lend this much money to us, unless we lend our money printing machine to China first. History has proven repeatedly that mass printing of fiat money always leads to currency debasement and hyperinflation!

My shocking discovery is that we HAVE already lent our money printer to China!!!

I am dreadful of the worst case scenario for America. Current gigantic deficit spending is not the worst part. The worst part is that capitals may escape from American soil for better overseas opportunities, taking away jobs and tax revenues, reducing us to the only option: print more money and debase the dollar further, a nightmare scenario for America.

US dollar bear leads to commodities bull. The people and nations will hoard physical goods to preserve wealth, hence generate demands higher than the immediate needs and higher than available supplies. China is on a big natural resources shopping spree around the world lately, in order to divest its huge foreign currency reserves.

Both events are occurring as people have noticed: Capitals are escaping American soil; and China is on a global shopping spree of raw materials. But people who do notice these two things explain it as simply market behavior driven by speculative forces, they fail to see a more direct, conscious and deliberate reason behind what's going on, because no one noticed one quiet fact!

People watch the US Dollar index daily, but are they watching the Chinese Yuan? Investors trade trillion dollars between the USD, Euro and Japanese Yen daily. But there is not much trading between USD and Chinese Yuan. That is because for the past one year, trading between USD and CNY is equivalent to exchange one dollar into four quarters, nothing is gained or lost.

The Chinese government has locked the exchange rate at a constant Y6.832 = US$1.00, for over a year now. WHY? Insightful investors Jim Rogers, Peter Schiff, Marc Faber all predicted US dollar collapse and the appreciation of Chinese Yuan, and advised people to sell the dollar and buy the Yuan. Many people listened. They sold their houses and furniture in the USA, sold all their US assets. They brought boat loads of US dollars to China, exchange into Yuan, and sit on their piles of Yuan, betting on the Yuan appreciation over US dollar to collect some profits.

And they collected some dust instead. Making money should never be easy. Straight line thinking is never how great investors make their money. Why would China allow foreign speculators to profit on its currency while it suffers loss?

As the flood of US dollars flows in, China merely cranks up its own money printing press to print more RMB Yuan to exchange for the US dollars. It then uses some of the dollars to buy US Treasury bonds and prop up the value of the dollar, maintaining a constant USD/Yuan exchange rate. But China's real goal is not to support the dollar in long term, but to buy time to allow it to divest the huge dollar assets it is holding, in exchange of physical assets: natural resources, raw commodities, foreign mining companies and other physical assets. It costs China nothing to print more Yuans to buy more US dollars and then use the dollars to buy up the whole world!!!

Thanks to currency speculators, we have lent our money printing machine to China. This opportunity allowed China to launch the greatest Commodity Carry Trade (CCT) in history! It is an absolutely ingenious move: US government has no choice but keep printing more dollars; Speculators betting a dollar collapse flee the US market and bring the dollars to China; the drainage of market capital from the US market forces the US government to print even more dollars and drives more investors away from the US and into China; China then print more of its own currency at virtually no cost, swap for the dollars, and then holding the dollars at hands, they go around the world to buy up everything, and go to the USA to buy up everything. At the end when China is done, they will let the US dollar collapse, mean while, the Chinese Yuan, due to strong backing of all the physical assets China hoarded, will hold up its value.

On the concept of China's Commodity Carry Trade (CCT), credit must be given to Andrew Snyder, whose article on the CCT is an interesting read. I smiled big when I read his pitch on a certain metal and a certain US mining company as the next big target of China's CCT. I knew he was talking about palladium, my favorite metal, and Stillwater Mining (SWC), my most favorite mining stock. There is also North American Palladium (PAL) for palladium play. I am not sure whether palladium is China's next big strategic purchase. But even without China's CCT purchases, palladium is extremely bullish. Thanks to recent break through in cold fusion, palladium could be the investment opportunity of a lifetime!

Shipping and China's Strategic Investments

If China is buying commodities for strategic stockpiling, it will boost demand in the dry bulk shipping sector. I correctly called the bottom of the Baltic Dry Index on Dec. 5, 2008. Shares of dry bulk shippers are up tremendously from the early December, 08 bottom, and from the early March, 09 double bottom. I was betting on a reasonable recovery of shipping, but I never dreamed that the BDI could reach 4291 merely 6 months after it bottomed at 666! Today shipping stocks are still very cheap, as analysts are not convinced the global economy is in recovery. But isn't it now an open secret that China is spending out its US dollar holdings in exchange for natural resources and raw materials it can buy and hoard at current low prices. When China purchases for strategic hoarding, current industry demand is not even relevant.

There is but one small cloud in the shipping sector. Drewry report calls current dry bulk sector recovery temporary, as they see a big number of new order ships joining the fleet in the next few years. How credible is Drewry's bearish call based on their new ship order prediction?

Drewry called that BDI "seems to have reached the bottom", six months after the fact. That doesn't give them much credibility predicting something six months after the fact. I actually called the bottom spot on. In 2003, Drewry also made a similar bearish call on dry bulk shipping, based on their prediction of excessive number of new ships. We now know that shipping saw an unprecedented boom period in the next 5 years, peaking in August, 2008. If the new ships Drewry predicted since 2003 are still on paper in 2009, they may stay on paper for 6 more years. Most new order ships may never be built, due to reasons I discussed before.

One of the criteria I use to pick the best shipping stocks to invest, by looking at the ratio of shipping capacities of their fleets versus current market capital, as the shipping tonnage is ultimately what earns revenue. I will leave the detailed discussion till next time. My favorites are EXM, EGLE, DRYS, TBSI and GNK, in that order.

On Precious Metals

Gold will continue to be a laggard in precious metals. The world is never in shortage of gold. Gold is just money, or just cash. Recently some gold bugs made a lot of noise of China revealing that it doubled its gold reserve in the past 5 years. But it must be pointed out that China's foreign currency reserve increased more than 10 fold during the time, so gold is now actually a smaller percentage of China's total currency reserve.

Silver is a better story than gold. If fiat currencies fail, silver is the only monetary metal that is cheap enough to be used as bartering currency. The Chinese consider gold as a luxury but silver as money and storage of wealth. In Ancient China the gold/silver price ratio was 2:1. As Chinese investors turn their attention towards precious metals, silver will be their most favorite metal.

But the best precious metal story is in platinum and more so in palladium. The bullish palladium news from Norilsk Nickel (NILSY.PK) in Russia keeps getting better. Norilsk had announced the production result of Q1, 2009. The Q1 palladium production had fallen to only 557K ounces in the Russian division. Annualized it's 2.23 million ounces per year, compare with a normal year's 3.1 million ounces. I predicted Norilsk's 2009 palladium production would be only 2 million ounces, because they are producing the ores rich in nickel content and poor in palladium. The Q1 result had confirmed my prediction.

The current low palladium price provides no economic incentive to recycle auto catalytic converters. So as the palladium recycling grinds to a halt, it removes another one million ounces of global supply. The drop of recycling is confirmed in Stillwater Mining (SWC)'s Q1 report.

Palladium has huge future potential due to recent renewed interest in Cold Fusion, especially after CBS 60 Minutes aired a special report on Cold Fusion on April 19, 2009.

Other Commodities To Consider

Crude oil price has now surges back to $68 per barrel due to the weakness in US dollar. Some predict oil could surge to $200 in the near future. Comparatively, natural gas price still far lags behind. This creates a great buying opportunity, as natural gas is still cheap to buy, when most other commodities have rallied from recent bottom. Even Dr. Doom Marc Faber called natural gas the most under-valued commodity recently.

Two reasons to buy natural gas here. First, current price is far below the marginal production cost. In the US, the conventional natural gas fields are depleting rapidly. Natural gas production was boosted in the past two years only because of new technology and higher natural gas price made it economical to develop the so called shale gas. But as the price falls below $10-$13 per thousand cubic feet (TCF), shale gas is no longer profitable so producers must cut back.

Second, from the energy point of view, 5.3 TCF of natural gas contains the same amount of energy as one barrel of oil, so $4 per TCF is equivalent to $21 per barrel oil. When crude oil price is already at $68, the low price in natural gas is unsustainable as industry energy consumers will try to use more natural gas and less oil.

How to play natural gas? Buy the United States Natural Gas fund (UNG) is the best way. Stocks of natural gas producers would go up with the commodity. But judged from past experience, price of the natural gas itself could jump up faster and more furious than stocks of producers. Some producer stocks to consider: CHK, SWN, COG, MCF and WMB.

Full Disclosure: The Author is heavily invested in palladium producers SWC and PAL. I am also heavily long shipping stocks EXM, DRYS, EGLE, TBSI and GNK. I also own UNG.

The True Rationale of Commodities Supply and Demand

The price of rhodium staged an impressive rally in recent weeks. At the bottom of recent commodities sell off at the end of October, 08, rhodium dropped to $750 per ounce, from the high of $10,000 just a few months ago. Since the October bottom, rhodium price has raised to $1650 per ounce, a surge of up 120%, while gold is up only 25%, silver up 36%, platinum is up 58% and palladium is up 38%. Clearly rhodium has been the best performing precious metal.

But if you ask the metals analysts, they will tell a bearish story. Rhodium has no investment demand, as the metal is extremely hard to buy and sell, and there is no futures trading on rhodium. Rhodium's demand is purely industrial, with auto sector accounts for over 90% of the total. The auto sales are weak, so the rhodium demand should be weak and the price must drop.

Analysts get one thing wrong. For an easily hoarded metal like rhodium, the true industry demand does NOT equal to the immediate consumption need. The true demand is how much industry users are willing to buy, at current price, NOT how much their current needs are. Analysts have confused purchase demand, the force that drives price, with consumption demand, which doesn't affect price.

Like wise, the true supply of the metal is NOT how much the mining companies have produced, but rather, how much they are willing to sell, at current price. I suspect some South African PGM mines may hold back some of their rhodium to wait for a better price in the future.

As the metal is dirt cheap now, industry users will want to buy more, much more than they would need for the next 3 months, 6 months or even 10 years. The cost is minimal to store rhodium for long term. It makes perfect economic sense to buy extra at $1600/oz, so you can buy less when the price runs up to $10,000 again. It's common sense people should buy more when things are cheap, and buy less when they are expensive.

Such rationales, as well as the fact that PGM prices rallied strongly off their recent lows, are proofs that the bearish calls on the PGM metals, such as bearish calls made by the Fortis Group, do not reflect the reality and are completely unfounded. Investors would do better looking at the complete picture and do not let the analysts do the thinking for you.

The same rationale can be applied to other easily hoarded commodities, like industrial base metals: copper, zinc, nickel, cobalt, aluminum. That might be the reason why most commodities bottomed at roughly the same time, and then all rallied up since. People in the industry understand they can not expect prices to stay low forever. If prices are lower than marginal production cost, producers will have to cut back and prices must go up to reflect the real cost. So it is prudent for industry users to buy more, hoard more for their future needs, if they can, while the prices are low.

One exception is coal, as coal is cheap and bulky. It is costly to store large quantity of coal if it is not used soon. That's why coal price hasn't recovered yet like other commodities do. I would caution about buying coal stocks now, like BTU, ACI, CNX, MEE and JRCC.

The Chinese government understands the economic principles of commodities pricing. There are reports that China has been aggressively spending out its US dollar reserves to buy and stockpile all sorts of industrial materials. Some speculate that China's purchases could be the reason behind recent surge of copper price. Copper is unique as its price never significantly fall below production cost, and few producers actually cut copper production as they are still making profits. For example, Southern Copper Corp. (PCU) could still break even in Q4, 08. Read "copper standard" on recent China speculations in copper.

If China and other countries are stockpiling industry raw materials, then it's a good bet that dry bulk shipping stocks will continue to be bullish, as you need ships to transport bulk materials around the world. All shipping stocks are still dirt cheap to buy, like EXM, EGLE, DRYS, TBSI, GNK, NM, DSX, OCNF, SBLK. My favorite shippers are EXM, EGLE, TBSI, due to their high ratio of shipping capacity versus current market capital, and DRYS due to its asset of ultra deep water drilling rigs. Watch Transocean (RIG) to get an idea on deep water oil drilling.

The biggest metal story is about my favorite metal palladium. On sunday April 19, CBS 60 Minutes carried a special TV program about the science that will shape our energy future: Cold Fusion! You can watch it or read it. Read my previous comment on the breaking news.

The 60 Minutes program, titled "Cold Fusion is Hot Again", is a powerful endorsement on the science of LENR, Low Energy Nuclear Reactions, previously known as Cold Fusion, an important physics discovery previously discredited, but picked up research interests again as new evidences have convinced many former cold fusion skeptics.

It's an impressive CBS report to watch or read. CBS contacted American Physical Society, who sent Dr. Robert Duncan to help to make a determination. Dr. Duncan was a cold fusion skeptic. They flew him to the Israel lab to spend several days there. Let him scrutinize every detail and ask tough questions. At the end, Dr. Duncan was totally impressed and convinced by the compelling cold fusion experimental evidences. The fact that CBS brought alone a skeptical physicist to visit the cold fusion researchers and convinced him that the experiments were legitimate is pretty impressive. On the other side, Dr. Richard Garwin's claim in the TV program that the researchers measured the input energy wrong for 20 years (?!), was decidedly unimpressive. Watch the program and judge by yourself.

Cold fusion relies on the precious metal palladium. Successful commercialization of cold fusion will mean humanity will have a cheap and virtually inexhaustible new energy source, and hence we can put the threat of Peak Oil Crisis behind us. If you are concerned about our energy future, if you care about our children's future, you need to contact politicians and urge them for support of cold fusion research. This science was suppressed for 20 years. We can not allow it to be suppressed any more, for our children, as Peak Oil has already become the reality.

Cold fusion will take some time to be developed into a commercial reality. But when it does, palladium price could go up to unimaginably high level. Such a great investment is worth buying and holding patiently for long term. So now is time to buy any physical palladium you can lay your hands on. It is also a good time to buy stocks of Stillwater Mining (SWC) and North American Palladium (PAL). They are the only PGM producers in North America. As I explained, when things are priced ridiculously low, it is a good time to buy.

Full disclosure: The author is heavily invested in palladium mining stocks SWC and PAL and own AAUK. I also hold large stakes in shipping stocks EXM, EGLE, DRYS, TBSI, GNK, and ETF shares of USO, UNG and SLV.

Latest On Precious Metals and Commodities

The news over the weekend was that IMF is going to sell 403.3 metric tons of gold. Wow! 400 tons of gold!

Except that it is old news. IMF has been making a lot of noise of selling 403.3 metric tons of gold for nearly a year now (some say for over a decade!). So what exactly is new? They never sold an ounce of gold. I will believe the IMF gold sell when it happens.

But such an expired old joke was enough to knock gold price down $25 on Monday, or -2.8%. Silver was down even more, -5.0%. Was IMF going to sell silver as well, or what?

There must be too many speculators and not enough serious investors in gold and silver. If you are serious about buying gold and silver as safe haven assets, then you should buy the physical metal, take delivery and hold for long term as an insurance for your financial security. Monday's gold/silver plummet proves that speculators still dominate the gold market; sentiments, rather than fundamentals, are still the driving force behind gold price. Even James Sinclair, the most outspoken gold bug, got so frustrated that he almost gave up attempts to persuade people to demand gold delivery from the COMEX.

Mean while, London based ETF Securities had just made US filings for platinum and palladium trust. Read the SEC filings for platinum and palladium. This is the first step in introducing the ETFs for physical platinum and palladium into the US market. This is extremely important and very bullish for the platinum and palladium metal, as demand from US investors could absorb a considerable amount of available PGM metals, and could trigger panic hoardings by industry users as they fear a looming shortage due to booming investment demand.

Jim Rogers summed up successful investments in three words: Skeptics, Curiosity and Persistence. My favorite precious metal is palladium as my study convinced me this metal has the most bullish supply/demand fundamentals among all precious metals. Norilsk Nickel (NILSY.PK) in Russia supplies 45% of the world's palladium. So every day I watch closely any news coming from Norilsk Nickel in Russia.

As I watched, the news from Russia keeps getting better for the palladium bull story:
  • Russia could suspend platinum/palladium export due to bureaucratic confusions. The confusion was due to conflicting laws and presidential decrees. The unspoken truth is if the Russians have a high incentive to export, the bureaucracy can be sorted out quickly. But as current prices of palladium and platinum are so low, there is absolutely no incentive for the Russians to speed up the exportation of the precious metals. Logically, they would rather drag their feet on the issue, and watch the metal prices skyrocket in an ensuring shortage. Then they can resume the exportation at much higher prices.


In a previous article I discussed why fundamentals of palladium are getting better. The recent science break through in Low Energy Nuclear Reaction (LENR) could attract more investment interest in palladium as it will become a critical strategic metal for the future energy needs.

Besides buying physical palladium metal, you can buy shares of two mining stocks: Stillwater Mining (SWC) and North American Palladium (PAL). People have complained about the difficulty in buying and selling physical palladium, as the premium is too high and the buy/sell spread is too wide. Complain no more, folks! You will soon be able to directly buy and sell shares in a palladium ETF, just like GLD for gold and SLV for silver.

Talking about ETFs, I am not a big fan of any ETF. Why invest in physical precious metals, if the metals are not in your direct control, and free of counter-party risks? Many people questioned whether SLV really holds the silver. But to their credit, SLV has been tracking silver spot price rather precisely so far. So long as SLV continue to track silver spot price, you may feel safe to hold SLV positions. But just don't hold it for too long. Holding physical metals is still the safest investment, when there is so much mistrust in the system.

On other commodities, crude oil price has already bottomed as OPEC's production cut is beginning to take effect. You may buy some US Oil Fund, USO on dips. Mean while, I believe it is time to massively load up US Natural Gas Fund, UNG, as there is very little further down side. Natural gas producers are cutting production aggressively at current price level. From an energy point of view, current natural gas price is equivalent to roughly $23 per barrel oil. That's rather cheap compare with crude oil price. Unfortunately, for oil and gas, you have to buy the ETFs as it is impossible to take physical delivery of these two things.

Full Disclosure: The author is heavily invested in SWC and PAL, and hold positions in silver stocks SSRI and PAAS. I also hold positions in AAUK, USO and UNG. I am also heavily invested in shipping stocks EXM, EGLE, DRYS, TBSI, GNK.

A Beatiful Science Dream Came True On The 20th Anniversary!

Two news items make the bullish case for precious metal palladium stronger.

First, a 20 years old beautiful science dream is finally confirmed this week. The breaking news quickly spreads through the global Medias. Read it here, here, here and here. On the 20th anniversary of the initial Fleischmann-Pons announcement of the original Cold Fusion, and on the same University of Utah campus, scientists from the US Navy SPAWAR lab presented their experimental work that convincingly proved that Cold Fusion is real, at the annual American Chemical Society meetings.

This news brings renewed hope that we may finally have a virtually inexhaustible new energy source to replace the world's depleting fossil fuels, cut carbon emission (Secretary Steve Chu are you listening?), and overcome the world's looming Peak Oil energy crisis.

I have previously discussed the connection between Cold Fusion and palladium. Cold fusion relies on palladium as the metal has a unique property: its extreme affinity to hydrogen and deuterium helps the deuterium nucleus to get closer and fuse into helium, releasing lots of energy. I have followed cold fusion developments, and tracked the research of Pamela Mosier-Boss and colleagues at SPAWAR. I also mentioned the Arata public demo, the first successful public demo, in a previous Seeking Alpha article. Read the heated debates in the comments.

For the first time, the SPAWAR discovery is accepted as real, as no one, not even the skeptics would question the credibility of the experiments any more. The remaining controversy is in the interpretation of the observations. To any one who knows physics, it's conclusive that nuclear reaction must have happened, as neutrons and gamma rays are detected.

No wonder the news quickly spread through the global Medias in less than 24 hours! I can not emphasize enough how important this break through means to humanity's energy future! I immediately called my Congress representatives but found out that they have already noticed the story, and have printed copies sitting right on their desks!

How many investors immediately realize the connection between palladium and cold fusion, and are quick to seize one of the best investment opportunities in a generation?

How many politicians realize the EXTREME DANGER if the cold fusion technology falls into the wrong hands? It can be developed into a new energy source, or a new thermal nuclear bomb! The research can be done with a couple million dollars, the materials are readily available: palladium and heavy water. Such a horrible weapon can be easily smuggled in undetected. There is no radiation. No suspicion could be raised as the heavy water is perfectly drinkable and the palladium is merely a precious metal! A terrorist could also pull a "Cold Fusion Bomb" hoax and the threat must be treated as credible, as we have no way of discrediting such a hoax if we do not grasp the Cold Fusion technology ourselves!

I urge people to contact elected politicians and urge for support of the Cold Fusion research, not only to secure our energy future, but also to prevent this potentially dangerous technology from falling into the wrong hands!

Now back to palladium. One Russian news story makes the metal extremely bullish, in the immediate future. The news suggests that Norilsk Nickel (NILSY.PK), the world's largest nickel and palladium mine, may run out of cash and could be on the brink of shut down. A Norilsk Nickel shut down will have a huge impact on the global supply of nickel, palladium and platinum, as they supply 20% of the world's nickel, 45% of palladium and 12% of platinum. Their shut down could immediately send prices of all three metals flying in the ensuring panic of shortage, particularly palladium.

The latest news that Russian Deputy Prime Minister Igor Sechin was inquiring about Norilsk's finances knocked the stock (NILSY.PK) down as much as 14%. Mr. Sechin demanded an explanation of the 86 billion rubles (US$2.6 billion) share buyback and other matters.

At the end of August, 08, Norilsk Nickel launched a controversial stock buyback program to buy back 7,947,000 shares at 6167 Roubles per share, or 49 billion Roubles (US$2B). The buyback proceeded even as some share holders fought against it in court, denouncing the program for depleting the company's cash reserve and push it to the brink of bankruptcy.

Then on March 11, 09, Norilsk announced that they are re-selling the buyback shares for a mere $355M, getting only 18 cents back on the dollar. It's absolutely hilarious! As commodities collapsed, companies are suspending dividends, issue new shares and do all they can to raise and preserve cash liquidity. But Norilsk Nickel threw cash away in a meaningless stock buyback, and then had to re-sell the shares for a fraction of the cash. WHY?

This story and the Russian Government investigation of Norilsk Nickel finances imply that they could be in a deep financial mess concealed to the public, and that they are desperate for cash, as their mining operation is losing money heavily at current low nickel and copper prices (my estimate is a loss of $0.5B to $1B per quarter). If they run out of cash, they must shut down the mining operations. It will send the palladium price to the moon when that happens.

To seize the opportunity, you can buy any physical palladium metal you can find. Better yet, buy shares of Stillwater Mining (SWC) and North American Palladium (PAL). These two are the only primary palladium producers in the world. You can also buy South African PGM mining companies, like Anglo Platinum (AAUK) and Impala Platinum (IMPUY.PK). Palladium metal can be bought from APMEX and PAMP or other precious metal dealers. I am trying to talk with SWC and PAL to see how they can help average folks to acquire physical palladium more easily for investment.

The FED has unleashed the nuclear option: US debts monetization. It means mass printing of money and inevitable collapse of the US dollar. It makes a compelling case for owning precious metals to safeguard your financial security: Gold, Silver, Platinum and Palladium. I will talk about outlook of US dollar and how to survive the hyper-inflation in the next articles.

Looking at the fundamentals of supply and demand, palladium beats other precious metals hands down. Again I want to caution people against buying Gold ETF (GLD) and Silver ETF (SLV), as I do not see convincing evidences that physical metals actually exist to back these two ETFs, and the silver bars serial number list contains lots of red flags to be trusted. If you like silver, you'd better owning physical silver or silver mining stocks like SSRI, PAAS, HL and CDE.

Some thought on what looming hyper-inflation would do to banks. I believe that NO BANK can survive the hyper-inflation, regardless of how sound their balance sheets look. The reason is simple: Why would any one leave money in a bank if the currency is losing value rapidly? All banks will fail if people are withdrawing cash en mass. But please do NOT rush to your bank to withdraw your cash tomorrow. I do NOT want to cause bank runs. You still have enough time to gradually and orderly withdraw money from your bank and put the money into precious metals and other valuable physical assets.

I am looking for short opportunities in all bank stocks. Jim Rogers said he was shorting JP Morgan (JPM), which looks to be a good choice. Some other bank names come to consider: Bank of America (BAC), Citibank (C), Wells Fargo (WFC), Bank of New York (BK). All banks ultimately will fail or be nationalized. There is absolutely no investment value in any bank. Bottom line: There can be NO healthy banking industry without a sound monetary system, just like no fish can live without water. But too many people have already shorted banking stocks. In light of the on-going short squeeze in financial stocks, it is better to wait patiently a little longer, before entering short positions in banking stocks at higher price levels.

Full Disclosure: The author is heavily invested in SWC and PAL, and shipping stocks like EXM, DRYS, EGLE, TBSI, GNK, NM. I own silver mining stocks SSRI, PAAS and HL. I do not currently have short positions in banks but am waiting for opportunity to short.

China and the World Drives the Commodities Boom

The Baltic Dry Index (BDI), a shipping index considered as one of the most reliable global economic indicator, has been surging up for 17 consecutive days as of Feb. 11, 09. It's not often that something just keeps going up for 17 days. The strong rally of BDI has caught a lot of attentions. However, dry bulk shipping stocks like DRYS, EXM, EGLE, GNK, TBSI and NM plummeted instead of moving with BDI. What's going on? Let me digress a bit on the big pictures before talking about specifics of shipping fundamentals.

Most people remain skeptical about the outlook of the BDI, despite of 17 days rally. Trader Mark asked "What's Really Going On". Most believe the BDI rally will be short lived. So when BDI finally dropped for two days, Bespoke Group declared "BDI rally is DEAD"!

The skeptics are wrong because they only read the news headlines but failed to study the real reasons of the BDI plummet in 2008 and strong surge back recently. They do not know the fundamental forces behind the global commodities boom and China's emergence as a major economy. The skeptics failed to predict a rebound in BDI so soon and so powerful. I correctly called the bottom and called for an imminent and powerful rebound of the BDI as well. So I am comfortable to call the skeptics wrong and predict continued surge of BDI.

Skeptics are wrong because they know what's going on in the USA, but paid little attention to the rest of the world. Chinese knew even less about the world 30 years ago. There was no TV, no telephone and you were NOT allowed to listen to foreign radio stations. Today, China has more internet surfers and cell phone users than the USA has population. Chinese teenagers are bigger fans of America's Hip Hop than American teenagers. One rich Chinese farmer bragged to live in an exact replication of the White House, down to small details. The Chinese are eager to learn everything in America and Europe, and try to imitate everything.

The internet brought easy access to information and profoundly changed China and the world. INFORMATION, not idealism, is the fundamental driving force behind the global commodities boom. China is not alone. Changes are also happening in India, Brazil, Russia, and even in the African continent. An isolated African village could remain in a primitive lifestyle indefinitely. But once they have a TV or a computer or just an outside visitor, they will learn about the outside world. They will want a better life and they will be eager to learn to acquire knowledge and work skills. They will produce something to exchange for useful products from the rest of the world. The chain reaction will leads to more developments and more demands of the world's raw materials. As I discussed before, it all started with one Chinese's visit to Texas and a cowboy hat, and now it becomes a global trend no one can stop.

INFORMATION drives the global commodities boom. The current global financial crisis, severe as it is, will NOT last as long as the Great Depression. Easy access of information allows capitals (smart money) to quickly discover and relocate to new investment opportunities.

Many Americans believe the collapse of the US economy is the end of the global economy. But we are not the whole world. The rest of the world can live on without America. The danger America faces is that the rest of the global economy can continue to boom without us, as capitals flow away from American soil to find opportunities overseas. The Obama administration's new stimulus package WILL boost demand for sure, for a while. But will it bring home capitals to generate jobs, or rather drive capitals and jobs to overseas?

President Obama: I challenged you to bring home Jim Rogers, America's best known billionaire refugee. If he comes home with his money, we have hope. If he stays in Singapore, I might as well leave, too. Please abolish FASB#157, "Mark to Market" rule immediately! There is simply no fair market value in an unhealthy, distressed and distorted market. There have been heated debate of M-to-M rule on the Bank of America (BAC) message board on Yahoo (YHOO) Finance. Abolishing "Mark to Market" is the only way to save banks.

The outlook of global shipping is bullish as China's 4 trillion yuan stimulus program is already taking effect. China's bank loans in January more than double the record set a year earlier. Steel price surged 41% from the low, indicating a booming demand again. More demand on steel means more demand on iron ore and more demand on shipping.

In recent years China's economic growth rely on growth of export to the US and Europe. But China's export remains a small percentage of its GDP. China can sustain its growth without exporting goods to the USA in exchange of US dollars. The 1.3 billion population can and will generate huge domestic consumption demand. China is pushing people to consume more.

China sells goods to the USA and then uses the dollars to buying US treasury bonds. China is basically lending money to America so we can continue to buy Chinese products. This is unsustainable and will not be sustained. Instead China should lend the money to African countries so that Africa can purchase Chinese goods and export their natural resources to China for a payback. I have been reading XinhuaNet (ChinaView) daily. This is exactly what is being discussed in China and what China is doing in Africa. Unlike the debt-laden and tapped-out US market, the African market is completely un-tapped. Africa can afford to borrow more money from China, put more money in their infrastructure building and consume more goods and services. Eventually a developed Africa can afford to pay back the debts.

The information age is narrowing the gap between people and between nations. The world doesn't even have enough commodities to satisfy the development of one China. So does the world have enough to satisfy an Africa and a South America in addition to China? The developing world is developing rapidly and looking up to a much better life standard. Does the world have enough ships to ship raw materials from Africa to China, and goods from China to Africa?

I am bearish on US dollar and US treasury bonds. I am bullish on commodities, on global shipping, and on precious metals, especially palladium. Please read my last article on palladium's fundamentals. I am heavily invested in Stillwater Mining (SWC) and North American Palladium (PAL), the only two primary palladium producers in the world. People do need to be cautious about precious metal ETFs: GLD and SLV. James Sinclair publicly questioned where GLD gets all the gold bullion. He should ask where did SLV get all the silver bars with low serial numbers (like 1,2,3). Buy physical metals, not ETFs!

Trader Mark quoted from a Lloyd's List article, which expressed skepticism that the freight rate surge could be short lived. These concerns raised must be carefully addressed:
1. Recent freight rate surge resulted from China restocking the import iron ore inventory. It will slow down as there is no evidence of increased steel demand.

Well, surely there is already strong evidences China's economy and demand on raw materials is recovering rapidly. Pay more attention to news from China!
2. Despite of a remarkable raise in percentage, the BDI at current 2000, is still far below the all time high last August at 12000.

Come on! No one expect the BDI to return to high level overnight. Nothing goes straight up or down. BDI did not fall from 12000 to 666 overnight. No one expects it to return to 12000 tomorrow. The surge from 666 to 2000 in just a few weeks is a more remarkable recovery than any one can expect. In geometric scale, the recovery is at 38% already. From 666 to 2000 is a triple. Another triple will bring it to 6000, just a leap short of 12000.
3. Huge back log of new ship orders. New ships entering service in 2009 and 2010 could expand the global dry bulk fleet by 40%, causing capacity oversupply. Refer to this article on details.

That's a good argument. But we should not take data out of context. New ships are entering service but old ships are being scrapped at the same time. During recent years of shipping boom, scrapping was almost none, as ship owners extended the services of old ships to profit from high shipping rate. Now the shipping rate has fallen, there is a sudden rush to send all the old ships to scrap yards, to bring in cash liquidity and enhance the balance sheets. In just two month, 4 million DWT tons worth of ships were sent to demolition, more than the last few years combined. Scrapping old ships is surely faster than building new ships!

Numbers from the UNCTAD review need to be taken in context. As of end of 2007, there were 10053 new ships and 495M DMT tons on the order books, including 222M DWT tons of dry bulk carriers. That was 72 times higher than it was in 2002. 72 times!!!

Global dry bulk fleet is about 600M DWT tons in size, so assuming a new ship takes 2 years to build, 222M worth of new ships will be build in two years, not counting scrapping, the increase of global fleet will be 222M/600M = 37%. That's how some analysts figured the 40% increase.

But the number is wrong! Average ship lifespan is about 20 years. So normal scrapping due to aging would remove 10% of the fleet in 2 years. The speed up scrapping of over-aged ships could remove up to 20% of the fleet in 2 years. Subtracting 20% scrapping, the increase of the global fleet is only 17% in two years even if all new orders are built.

But don't expect 222M worth of new ships in the next two years. Due to low shipping rate and lack of financing, more than 1/3 of ship orders have already been canceled. More are being canceled or delayed. Read Hellenic Shipping News, ship yards around the world are in very bad shapes. Many could go bankrupt without help.

Question: If shipyards had normal business in 2002. Now their order book is 72 times bigger than the 2002 level. That looks like an incredible booming business by any standard. Why are shipyards in bad shapes now? Even if 30%, 50% or even 90% of orders were canceled, the remaining orders would still be many times bigger than the 2002 level, not to mention the profit from cancellation fees. There are not a lot of ship builders in the world. The list easily fits on one sheet of paper. Global ship building capacity could not have increased too much from 2002 level, surely not 72 times! There is not enough space, materials, building capacity or financial backing to build 10053 ships at the same time, and deliver them within two years.

Some one must get the numbers terribly wrong. In any case, you can be rest assured that if ship builders are on the brink of bankruptcy, then we will NOT see any rush of new ships joining the global fleet in the next two years. More likely the global fleet will shrink instead.

Thus I encourage people to take advantage of recent shipping stock plummet. Buy shipping stocks like EXM, EGLE, DRYS, NM, DSX, GNK, TBSI, OCNF, SB and PRGN. I have not looked at all of them in details. But based on my study, my personal favorites are EXM, EGLE, DRYS and NM. Please do your own due diligence research.

Disclosures: The author is heavily invested in palladium producers SWC and PAL. I also hold big positions in shipping stocks EXM, EGLE, DRYS. I do not own other stocks mentioned.

Recent Developments in Precious Metals and Shipping

Gold rush 2009 is on! Gold is the front runner in precious metals so far. Gold is now only 10% away from its early 2008 high; silver is 39% off; platinum is still 57% off the high; palladium is still 67% off the 2008 high. Gold is the front runner and palladium is the laggard.

Don't buy the front runner, buy the laggard! Chasing the front runner and big crowds is the fastest way of losing money. Just look at recent bloodshed in DryShips (DRYS), a front runner in shipping stocks. I switched from DRYS to EXM and cautioned about DRYS in mid January, 09. So I was lucky to have avoided the massacre in DRYS. There are inherit problems in DRYS that are now exposed, but big crowd sentiments added to the severity of plummet.

Gold is currently the front runner of precious metal because most people intuitively know what is gold. But few people have heard about palladium. Recent stories from Russia and South Africa indicate that palladium and platinum has the most bullish fundamentals among precious metals, while gold has the weakest fundamentals.

First, palladium. Norilsk Nickel, producer of 45% of the world's palladium, just released the Q4 and full year 2008 production. The palladium production dropped to 2.702M ounces, much lower than the 3.05M ounces in 2007, even though the nickel production is in line with 2007. Norilsk expects another drop of 7% in palladium production in 2009 to bring it down to about 2.5M ounces. The reason cited is lower grade of PGM content in the ores. I explained before that Norilsk has two types of minerals: the one high in nickel and low in palladium content, and the one low in nickel and high in palladium. Due to current low nickel price, they must opt to mine the high nickel ores, hence produce less palladium.

Base on my calculation of their mineral ores grades, if they produce the highest nickel grade while maintaining the nickel production level, the 2009 palladium production could drop to only 2.0M ounces, from 3.05M ounces in 2007. More likely, Norilsk will be forced to cut nickel production to meet weaker global demand. In that case, palladium production could fall significantly below 2.0M ounces.

Adding to the bullish case is news from South Africa of a looming mining worker strike to protest against the job cuts. I think the mining companies there, hurt by low PGM prices, would LOVE to see the strike proceed so as to drive up the metal prices.

The bullish case of palladium can not be better. Look at the supply/demand picture starting with data from Impala Platinum (IMPUY.PK); we will be talking about global demand of roughly 8.215M ounces. On the supply side, South Africa can provide roughly 2.2M ounces if current production cuts are implemented. Russian will provide 2.0M ounces, North America will provide about 0.33M from Stillwater Mining (SWC), other sources count for about 0.3M, and there will be little recycling as low palladium price discourages recycling.

Summing it up; we are looking at about 4.83M in palladium supply, versus 8.215M in industrial demand, not counting any investment demand on the physical metal. The deficit will be 3.385M ounces, or 41% of industrial demand. No other metal has such a large margin of deficit!

Remember, a less than 4% deficit in rhodium was all it took to drive the metal from $300 to $10000 per ounces!!! What would a 41% deficit in palladium do, to the price? What would investors do, when they jump on the palladium shortage wagon and help drive up the price?

Remember, the Russian Government is trying to help Norilsk Nickel with its financial difficulties due to current low metal prices. There have been talks that the government will purchase some of the precious metals from Norilsk Nickel and re-stock the government's depleted strategic stockpile. The Russians can easily drive palladium price up to $2000, $3000 or even $5000 per ounce, if they so choose. I don't see why not! The Polar Bears are not Santa Clause! They want to make money just like every one does.

In 2000/2001, upon one false rumor that Russian government was terminating the annual palladium stockpile sale, the panic buying drove palladium price up from $300 to $1100 per ounce. There was only one investment fund noticed the palladium rally, and profited from it. At the time gold was at the low and there was no interest in precious metals as safe haven assets.

Today, it is a material fact that Russian government stockpile sale ended, and Norilsk's palladium production is down, and Russian government may be buying the metals to help Norilsk as well as replenish its strategic stockpile. And today there is plenty of interest in all precious metals as safe haven assets as the financial crisis unfolds. Rest assured there will be a lot more investment interest in palladium than last time.

It's not too late to buy physical palladium. And time to buy stocks of the world's only primary palladium producers, Stillwater Mining Company (SWC) and North American Palladium (PAL).

I am openly calling these two companies to consider how they can help the average investors to acquire the physical metal easily, and hence be able to participate in and gain from the coming palladium boom. I believe that the precious natural PGM resources are NOT the private properties of mining companies, but belong to the people. These two companies, blessed with the privilege to produce the natural resources, have the social responsibility that they must maximize the value of the metals they produce so as to pay back the community.

Likewise, the Governments of the USA and Canada have the responsibility to ensure any minerals produced from their soil must maximize the values and must not be sold below cost. If the metals are priced below cost, then the governments should purchase and stockpile these precious strategic metals. The Chinese government is already stockpiling strategic metals to protect its domestic mining industry and take advantage of recent low commodity prices. The US and Canadian governments must do the same for their respective national interests.

Now let's talk about gold. Current price of gold is about $900 per ounce. I believe gold is fairly priced as most gold mining companies are making comfortable profits. I believe there is now no good reason for average Joe to buy gold at this price. Joe makes $40K per year, or $28K after tax. He makes $112 per work day after tax. So to buy a one ounce gold coin, he needs to work at least 8 full work days to earn enough money for it.

Joe might as well take 8 days off to go prospecting for gold. Some gold prospecting web sites claim you can collect up to two ounces of gold a day. Sounds like a better deal than earning a salary to buy gold. Maybe California the golden state should have zero unemployment? Lost your job? Go prospecting for gold and you get yourself a job making tax-free real money.

The economic incentive to prospect for gold rather than to buy gold puts a reasonable natural cap on gold price, in terms of purchase power. But silver, platinum and palladium are different as you can NOT prospect for these other precious metals. So these other precious metals should have bigger room for gain. My only advice is stay away from ETFs like GLD and SLV. Instead buy physical metals and precious metal mining shares. I am suspicious of these two ETFs after I browsed through their physical metal bars serial number lists. I will not elaborate here. Spend your time scrutinizing the lists to see if you can find some red flags.

What about shipping and the recent bloodshed in DRYS? The Baltic Dry Index has been going up strongly for TEN consecutive trade days in a row, reaching 1099. The low was 666 on Dec. 4, 08. How often do you see something going up 10 days in a row? That says the shipping is recovering strongly. The plummet of shipping rate last year was largely due to credit crunch freezing up trading activities, NOT due to supply and demand. As the credit now eases up, there will be pent-up demand to clean up the goods previously piled up on harbors.

The short term outlook of dry bulk shipping is bullish, the long term prospect is even better, as governments around the world, particularly China, are ramping up gigantic economic stimulation programs. Governments can print money out of thin air. They print paper money not to hoard their own money, but to spend the money.

When governments spend money, every dollar spent is a demand on physical goods and services, just like average Joe's grocery spending. So it is really a moot point talking about consumers spending less and saving 3% of their incomes, when the governments are racking up deficit spending in the tune of multiple trillion dollars.

China is one big driving force behind growing global demand on commodities, as well as growing demand on global shipping, and will continue to be, for many years to come. It's not just a matter of economic development; it is a matter of China's very survival. That's because China is rich in cheap labor forces, but poor in critical natural resources.

As Jim Rogers correctly pointed out, China's very survival hangs in one thing: WATER. China's biggest engineering projects are all water related. The most famous one is the Three Gorges Dam, the world's largest hydro-electric dam. At its peak of construction, this one project alone consumes 1/4 of the world's cement and steel production.

But Three Gorges Dam is nothing comparing with another mammoth project that's already well underway in China, but little talked about in the western world, China's South to North Water Diversion Project, which is at least TEN TIMES as big as the Three Gorges project. It's been talked about for half a century but was only recently rushed through the approval by the People's Parliament in a hurry without much debate: There is simply not much to debate about: Beijing, with its 14 million populations, is depleted of water resources and desperately needs the water to quench the thirsty! It's a non-negotiable, survival issue!

The South-to-North Water Transfer Project was supposed to take at least half a century to finish due to its gigantic scale, but will be rushed probably in a decade, due to the urgency of the water crisis in Northern China. Just think about how much concrete, steel, construction machineries and materials this one project will demands from the world! The infrastructure projects in China will ensure a global commodity and shipping boom for many years to come.

What do I think about DRYS's recent plummet? The panic was caused by DRYS's disclosure that two banks notified it that it was in breach of the loan covenants, as the fair market value of its ships has fallen below a certain percentage of the debts, and that DRYS was trying to raise $500M cash by selling shares in the open market, hence dilute the share value.

I do NOT think the loan covenant thing is too much a deal. How do you define a ship's fair value? I think any physical property's fair value is its replacement cost. But the convention is use recent market transactions of similar properties to determine the "fair market value". I think such terminology is ironic! The market is never a fair place to begin with so the word "fair" and "market" don't come together. Why would it be a "fair price" when a ship owner is coerced to sell its ship far below inherit value, under financial stress? Such unfair price is then used as "fair price" to undercut the assets of every one else and force many more defaults and stress sells, further escalating the crisis. This unfair "mark to market" rule results in distorted values of physical assets. It is one of the culprits of current crisis in real estates and other sectors. It must be abolished and replaced by a "mark to cost" rule.

In light of the continuous surging BDI index, the value of ships goes up with BDI. Banks know this and they don't want to bring an unnecessary crisis on themselves. They will work with shippers to find acceptable solutions to the loan covenants. It's in their best interest to do so.

My biggest worry about DRYS is the ongoing sell of shares to raise $500M. This will greatly dilute the value of DRYS shares. How much dilution? No one knows. So even though DRYS has become much cheaper, I would advice wait a little bit till the dust settles, just to see how much the share dilution factor is. Mean while I believe other shipping stocks like EXM, EGLE, GNK, DSX, TBSI and NM are better buys than DRYS, until we know more about DRYS's share dilutions. For the same reason, avoid OCNF for now.

Full Disclosure: The author is heavily invested in SWC, EXM and EGLE. I also own shares of PAL, OMG, TBSI, DRYS and USO. I do not own other stocks mentioned but positions may change at any time.

Extreme Opportunities to Make or Lose Money

Today's market is full of opportunities to make money or rather to lose them. Just remember: The market always makes the biggest group of people lose the largest amount of money to allow a few to get obscenely rich at the same time.

For your own good, you should always avoid the biggest crowd, and go to quiet secret places few noticed, it's true for making money and for life in general. Imagine you are at a place with hundreds of thousands of people. There is imminent danger and there are only two bridges leading to safety. One is narrow and in terrible shape. Another is big and in solid shape. Which one would you rush to? I would rather foolishly run to the dangerous one, knowing that all the smart folks will rush to the safer bridge, and collapse the safer bridge due to the sheer weight of the big crowd. That's the philosophy of life.

Read my previous analogy using Noah's Ark. Safe havens, by definition, must be narrow and can not accommodate too many people. If a perceived safe place can accommodate every one, then it is a death trap! The biggest presumed safe haven today, and hence a death trap, is the US Treasury Bonds market. There is an imminent danger in the TB market. People invested in treasuries have already lost big time, without realizing it. The bridge is perfectly safe, until one last person step onto it, and then it collapses suddenly under the collective weight.

Like the bridge, the TB market could collapse merely because there are too many investors in TBs for the perceived safety. The problem is when these people want to unwind their positions, who is going to buy? Whoever want to buy TBs have already done so! In 10 years you will be paid back the principal amount, but maybe not the purchase power. I suspect that government of China or Japan may have utilized recent US Treasury Bonds frenzy to quietly unload their overly too large US Treasury Bonds holdings which are otherwise impossible to unload. It's purely just my speculation with no evidence that I know.

Always avoid the big crowds! Last year when I suspected the big crowd had arrived, I called for folks in coal stocks like JRCC, ACI, ANR, BTU, CNX, MEE, to take profit. The timing was perfect as JRCC peaked just one day later after my article was published on Seeking Alpha.

Recently I was alerted that the dry bulk shipping stock DRYS was too crowded with too high a daily volume. My initial entry into the shipping sector was perfectly timed near the bottom, and I picked the best one to buy at that time, DRYS. But when I became cautious as the sentiment in DRYS was too high. So I switched from DRYS to EXM, another dry bulk shipper, as I believe EXM presented a much better valuation now. Read also David White's take on EXM.

Then, on Jan. 22, 09, DRYS dropped $4.01 on some "bad" news, even as the BDI surged up 5% that day. The news was out before the market open, but it turned into a total panic only in the last hour of trading. I think DRYS was overly punished by the news which isn't so bad after all. DRYS is over sold here. But EXM is still a better buy, from the valuation point of view. Unfortunately Mr. George Economou, the CEO of DRYS, will continue to disturb investors' perception of the company, regardless whether any of his private dealings are appropriate or not. I would rather stick with a company clean of such doubts.

In a previous article, I recommended shorting three stocks which are related to discretional consumer spending, and hence vulnerable during hard times: Coca Cola (KO), Pepsi (PEP) and Colgate (CL). All three are down from when I recommended the shorts. These stocks are not very volatile, and do not have too much short interests. So they are nice long term shorts if you hate volatility.

Along the thinking of discretional spending, I would now recommend shorting Apple (AAPL), and a recent high flier PALM. The current valuation of AAPL is just ridiculous. It is based on the hope of continued fast growth of AAPL's earnings, which is unrealistic. How many more iPhones can AAPL sell, before the market is saturated? The recent hype of PALM is a joke. They have a nice product which may be better than iPhone, but so what? I would rather buy a proven and established product, than something un-proven and non-established. Google (GOOG) is probably a good short, too. GOOG's income mostly comes from web advertisements. When companies are struggling to cut cost, they do not have much appetite spending money on advertisements. These three might not be immediate shorts amid recent earnings announcements. But watch closely for good short entries.

Stillwater Mining (SWC) continues to be my most favorite stock to hold. I firmly believe there is an undisputable bullish case for the precious metal palladium, and hence for SWC. I have yet to analyze North American Palladium (PAL)'s recent announcement for a comment. But SWC is a better value with much higher ore grade and a much bigger mineral reserve. Read about the palladium bullish case.

In short term, the dry bulk shipping sector is the best to be in. The global trade has not and can not come to a complete halt. The shipping industry is capable of adjusting to lowered demand quickly. But think about it: Trillion dollars of government spending is going to be a much bigger demand on physical goods and commodities, than your $200 weekly grocery shopping. There is a chance shipping can even reach new highs.

The unique nature of shipping supply and demand is that when demand is high, it's hard for supply to catch up, because you can not build new ships fast enough, or make the ship sail fast enough to meet the demand. On the other hand, when the demand is weaker, the industry CAN respond promptly to reduce capacity to meet lower demand, by canceling new ship orders, speed up scrapping of old ships, lay up ships for longer period of maintenance, or simply sail slower to save fuel cost and make fewer port calls. All those adjustments are happening right now so in short term, dry bulk shipping is very bullish. All of these shipping stocks are good buys: EXM, DRYS, EGLE, NM, TBSI, GNK and OCNF.

Full Disclosure: The author is heavily invested in SWC and shipping stocks EXM, EGLE, TBSI, as well as hold PAL and cobalt stock OMG. I have no positions on other stocks mentioned in the article.