Enzio's Clock

1. Asian stocks started on a weak note, where do you see them trading year end

· We have warned clients for a long time that the US economy is headed into stagflation. Congress wanted a weaker dollar, so up go import costs. And Congress wanted war, so up go commodity prices. And Congress has done nothing to improve US vocational training, so down goes productivity. Thus, Prof. Bernanke has the rather unenviable task of having to steer “cost push” inflation. This is trickier than the traditional “demand pull” inflation that we all are so used to…

· That worsening of The Economic Time™ in America, in conjunction with a ballooning of the sub-prime mess, implies that the profits outlook particularly of US, but also of European and Japanese corporates, has to fade. We have Once the market accepts this reality, watch the US and thus global markets crack. We don’t believe in this “de-coupling” or indeed in this “this time it’s different” swan song propagated by our younger colleagues….

· They will fall until the U.S. market has cracked, say by this June. Then they will languish in 3Q08 and rebound strongly in 4!08

2. Slowing macroeconomic outlook - impact on foreign funds flow into the region

· Funds will still flow into the region, just not as strongly. That is, until 4Q08

· The main outflow will be run by macro asset allocators avoiding the low-growth “first world” and opting instead for emerging markets

3. Strong regional currencies vs competitiveness

· We are skeptical about the effect of exchange rates on trade flows. After all, America has a huge trade deficit – yet a weakening dollar. And Japan has a huge trade surplus, yet a rising yen.

· This week’s Economist ran a useful article querying the importance of trade to the Chinese economy. We have argued this point for years: if you take a country’s net trade balance and put it in relation to its GDP, the “importance” of trade shrinks to three percent of GDP. However, never underestimate the importance of psychology: once manufacturing jobs go, also in China, people start worrying about their own jobs, too

· Finally, remember that when currencies strengthen, for instance against the US dollar, that importer pays less units of local currency per US dollar of commodity!

4. Stronger oil and commodity prices - impact on Asia corporate earnings in 2008

· This addresses one part of the profits equation, MARGINS

· Great for commodity producers

· Terrible for commodity users – depending on the industry. Profit prospects all depend on what percentage of these higher input costs can be passed-on.

o In China, my guess is that higher costs of commodities used for infrastructure can be passed-on: after all, China is re-tooling. This is particularly true of commodity inputs required for the Olympics this August

o I also would guess that higher prices of precious metals – e.g. gold and platinum – can be passed-on: many Chinese ladies want more jewelry, after all

o But, if an exporter has a commodity-intensive good that he/she is selling from an appreciating currency base such as the RMB into a market where The Economic Time™ is worsening: watch out. That producer cannot pass his/her higher input costs on, so down go the margins.

· The far stronger earnings impact will stem from falling TURNOVER – the other part of the profits equation.

o Here, we do see that a crash in the US stock as well as housing market will melt US consumption by about USD 350 billion – which is about twice the amount that China exported to America in 2006!!

5. Market/Sector you like and the reasons behind that

· MARKET

o For some time we have suggested to our clients that cash and commodities are king; this is why our Economic Clock Funds are up by about 20% this year, outperforming the S&P 500 by a multiple of about four. We’ll run these positions until the U.S. market has cracked by around 2Q08.

o Once it has cracked, then particularly China/ Hong Kong and India are the ones to go for:

§ China has the growth mandate, coupled with China’s Olympics this August

§ Hong Kong is the water skier being pulled by the Chinese speed boat, and

§ India has a growth mandate, like China does.

§ We are skeptical of the politics of Taiwan, Malaysia and Thailand: there are better opportunities elsewhere.

· SECTOR

o For now, cash is king.

o If you must be in sectors, then go for the ones that provide what we all need, regardless of what The Economic Time™ is:

§ Food

§ Utilities like water and electricity

§ Jewelry (particularly for Chinese women who want the vanity and security of precious metals)

6. Investment trends and themes for 2008

· They will fall until the U.S. market has cracked, say by this June. Then they will languish in 3Q08 and rebound strongly in 4!08

· Oil prices will remain erratically high courtesy of George Bush’s Muddle East policies, so “defence” is another theme

7. Any topics you like discussed

· The dollar will keep sinking. This is what happens to super power currencies: their governments run out of money, and therefore print more of it. That increase in the supply implies that the price of the currency falls.

· That is why we have suggested to our clients that STAGFLATION is going to be the big US theme for 2008