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Newsletter Follow-Up, Part 1

On Friday, we mailed my most recent newsletter which focused on oil. If you are on our mailing list, you should be receiving it shortly. If you are not, and want to receive it, please email me ( ballard@bankchampaign.com ) and I’ll add you to the mailing list.

Below is an article by Jim Cramer who many of you may watch on CNBC. It focuses on oil and touches on some of the same issues that I wrote about in the newsletter.

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Supply, Not Speculators
By Jim Cramer
6/23/2008 10:57 AM EDT

Speculators may actually be a part of the problem with oil, as may be the index players of commodities.

But before we assess their role, let’s accept something: there is nothing wrong with commodities being indexed, as we want institutions to make money and speculators are actually investors when oil is this high. In other words, the best investment is in oil, and has been in oil, so we should go after those non-users who got into it? Since when have we cared what people do with a commodity? Not since the cornering of silver by the Hunt family have we focused on this. And this is not a cornering. Today the futures were down earlier in part I believe because some feel there is at last a lot of inventory. I don’t see if, but if it is true, then the speculators should be selling, freeing up more oil. (A strong dollar will also be cited.) Then the indexers should get clobbered.

But I don’t think any of this will happen, and the price will not stay down. For me the next stop is $150, and the speculators/indexers win.

As performance people, shouldn’t we just wonder how right the speculators and indices have been rather than blame them for inflating their own performance? It is simply a great decision to invest in a commodity that is being driven up by worldwide demand.

Theoretically, if there is a speculative bubble, someone should have sated it by now, just like the dot-coms were sated by too many offerings, the ethanol plays were sated by too many offerings and the and the housing bubble was sated by too many houses being built.

Where is the satiation here? Nowhere. Instead of blaming the buyers, we should admit that the sellers can’t meet demand at these prices and stop railing. If speculators are driving things up, then Exxon (XOM) and Shell (RDS.A) and Conoco (COP) should be able to go after shut-in capacity and hit that bid and all the other bids all the way down. Nigeria, Mexico, Venezuela and all of the other places that are supposed to be awash with oil should be able to sell out their production out six to nine months — not the near term, that’s unrealistic — as they ramp up that production. They can’t, because at these levels they still can’t produce more. It is quit obvious that the Saudis are dissembling because they have never wanted the price to soar. It will now make the more inventive of us find other sources of power.

It hasn’t happened yet.

People don’t understand the dynamics of a futures market if they blame the buyers.

Do people think the buyers can just take the stuff off the market inevitably and therefore permanently wreck pricing?

Why aren’t we blaming Exxon for not pumping full-tilt? To me, the answer is obvious: they are.

Why aren’t we blaming the members of OPEC for not pumping full tilt? The answer is obvious: they are.

Do we believe the speculators have removed from the market 4 or 5 million barrels a day? Is that what we think? 2 million barrels? 1 million barrels? A half million? Where the heck is it? In secret underground storage facilities?

Sure, someone caught short has been hurting .But every squeeze in the end is met by supply. This wasn’t hasn’t been because the prices are still too low versus the real demand from the countries that need oil.

It is pathetic that the focus is on the speculators. But that’s the way we see it, and that’s what’s going on, and it solves nothing at all. Frankly typical if you ask me.

I have been saying over and over again that there’s food inflation and oil inflation. To some degree (weather permitting), we control the former. How can we not let our grains float free of wrong-headed subsidies? Money. Political money. Small amounts of political money and the need to win Iowa are the reason 30% of the corn crop went to 3% of the gasoline.