The year 2009 has again shown investors that the signals we get from financial markets and those we get from macroeconomic factors can sometimes be very far apart in the story they tell. This year has also illustrated how crucial it is to always look at the present in order to get guidance for the future. The past year has been extraordinary in many ways. Especially noteworthy has been the magnitude of the economic contraction, with GDP falling between 2%-5% in major economies, a situation the likes of which has not been faced in recent history.

Comparing this slowdown and market crisis to previous corrections or market collapses might help to explain some of the aspects of this crisis, but, we think looking at past events alone to predict the future is often too simplistic since every situation is largely unique. Many prognosticators today predict that we are just experiencing a temporary recovery and that the “mother of all crises” will soon be upon us. We shun this view for several reasons but do agree that the magnitude and implications of the present crisis are likely bigger than those of most any comparable historical event.

We think one of the big themes in 2010 will be investments in agriculture and soft commodities. We feel that due to the unique supply/demand dynamics of these markets, a normalization of global growth will result in relatively large price increases. The Goldman Sachs Commodity Index has recovered to levels around the 500 point mark, compared to about 350 points at the trough.

However, this is still far away from the all-time high of 890 points seen in 2008 when prices were driven by a lot of speculation. This time we think things are different and that current prices are very well supported. There is probably going to be more speculative money flowing into commodity markets again in 2010 but considering the supply/demand situation, we think soft commodities could easily go up 30%+ in 2010 and still not look overly expensive.

Interpreting the various signals sent by financial markets remains a puzzle, a quite tricky one in fact. Some equity markets have rebounded by 40%+ since the trough in spring 2009 and it seems difficult to justify this strong upward move by just looking at commonly used value measures.

The Dow Jones rose a stunning 4000 points since spring alone and Asian markets basically doubled in the last 9 months – it’s hard to explain such large movements looking at the economic challenges we still face. It seems that normal markets have already priced in a very impressive recovery. Subsequent to the market’s rapid rise, many investors, having missed the run up, are reluctant to put money back into markets after such a huge rally.

Since investing in foreign currencies is a critical component of our global macro investment strategy, we would like to present you with a few ideas and updates every quarter. In this issue we look at two of the most promising foreign currency investments that we hold: The Chinese Renminbi and the Brazilian Real. We think foreign currency exposure should be treated as a separate value driver in a portfolio since its impact on investment performance is significant and often bigger than the performance of the underlying security when the exposure is taken by buying stocks or bonds.

Among the most attractive long-term opportunities we see are investments in the Chinese Renminbi and the Brazilian Real. Both economies are, in our view, in a long-term economic uptrend, albeit for different reasons. The Chinese economy is still growing at around 8% per year and its pace has only slowed marginally during the last couple of quarters, despite the global recession. This success can be attributed to the Chinese Central Bank and the government, which have reacted very swiftly by providing the necessary liquidity and an enormous amount of investment spending.

When markets reached a bottom this spring, we realized that an interesting change was happening. The way the market absorbed new information was changing slightly and bad news was having less of an impact - i.e., driving price declines. That’s when we got interested again. Now on top of our compelling and thoroughly researched investment ideas, we got extremely compelling valuations and a market that was beginning to respond more positively to news of any kind, even bad news wasn’t so bad anymore. That’s when we entered the market again and started to build up our equity and corporate bond positions.

Of course, there were and are still enough negative factors out there that we don’t know currently whether we are in for a long-term recovery here…BUT, no matter what the reason is for rising prices, we want to be in markets that go up and we are not betting against markets that WANT to go higher. Honestly, sometimes we don’t know all the reasons why a market is moving upwards but I guess nobody does – all though many of today’s financial “gurus” will tell you they do. It is, however, important to realize that markets can’t be explained only with economic data and logic. When we spoke at various investment events and conferences in April 2009, we realized how skeptical people were when we told them that we had started to buy back into markets. Now, five months later, global markets have risen between 40% and 60%.

In our May issue of our newsletter we looked into the changing importance of and outlined our investment case for gold. At that time, we made the following forecasts:

• Trading within narrow range (USD 860-950) for Q2, 2009
• Move towards and eventually breach the USD 1,’000 mark in Q3/Q4, 2009
• Increased supply/demand shortfall
• Increased demand as inflation hedge

Now, about six months later, these forecasts have become reality

Private household consumption is weak among most western economies. While this might only be a temporary situation for some of them, other nations are faced with a structural adjustment of consumption.

For example, consumption has been the main driver of the U.S. economy in the past 20 years with consumers buying and spending everything they could get. This has resulted in a situation where excess consumption was financed by rising asset or home equity prices or in many cases even worse, increased borrowing from credit cards and other sources.

The new administration in the U.S. is trying hard to increase tax revenues in any way they can. The war on tax havens which was declared a while ago can be felt by global offshore financial centers worldwide. Switzerland might have received the most attention so far, mainly because of the UBS story, but the situation is very similar for all offshore financial centers.

But let me clarify one thing, there really is no such thing as a tax haven –‘haven’ is a relative concept for each of us. In practical tax terms, it simply means that these so called haven countries have their own taxation system and legal and regulatory frameworks.

We would like to give you an update on our global macro view at a time when the future direction for the global economy seems more uncertain than ever. Despite having gone hrough a global economic crisis the magnitude of which has not been seen for many decades, the world has not gone under, and we predict that it won’t do so in the future.

These times remain very challenging in many ways. We are convinced, however, that the current environment presents a unique investment opportunity for the long-term minded investor who does not let his focus shift away from what is really important. We agree that it is all too simple to get lost amidst the confusion of global market and economic upheavals and the ever-expanding measures taken to combat the current crisis. It’s easy to get trapped in a state of frustration and endless complaining, but, the returns of the future are made today.

When we first wrote an article on gold in the 4^th quarter of 2008, the yellow metal was trading around $740. We outlined at that time the reasons why gold had performed so poorly despite the challenging economic environment. We argued that the reason for the underperformance was largely due to selling pressure from investors who were looking to sell assets in order to generate much-needed liquidity. We recommended buying gold at that time, and our decision was right; gold prices rose to $930 until early February.

We received so much feedback on our article and questions regarding the outlook for gold from our clients that we decided to write an update in early February. At that time we noted that we expected gold to break through the $1,000 level later this year but expected it to remain in a relatively tight trading range of between $820 and $930. After briefly touching the $1,000 mark, shortly after writing this update in February, gold began to move lower and has since then consolidated in a price range between $860 and $940

For many decades, investors worldwide always looked to the United States to find answers about the future direction of the world economy. Financial markets in the U.S. always took the lead and markets worldwide followed U.S. markets very closely. The correlations between international financial markets have risen quite a bit in the last two decades, especially in times of crisis where the link between the various markets is particularly strong. This time is no different. With global markets suffering badly, investors do not make a distinction between U.S. equities and other markets.

We have received a lot of feedback since we first published our gold report article “Why gold isn’t shining (yet…) on November 25, 2008. When we first published our report on gold, the yellow metal was trading at USD 744 and recommended buying gold as it was moving closer to USD 700.

We have seen a strong recovery since then and gold is currently trading around USD 900. In our November report we argued that the rather big selloff last year was caused by a weak U.S. dollar, a deflation of the commodity bubble and investors' need to generate cash. At this time, a lot of investors who purchased gold for security were disappointed and confused because they did not understand what was driving the gold price back then.

Currency markets are hard to understand for many investors, and even I have to admit that I don’t understand certain price movements, especially short-term price moves. In my view, investors often make the mistake of not being able to distinguish between a trade and a strategic investment decision. A trade is done in anticipation of short-term price development, whereas a strategic investment is made on the basis of a longer-term fundamental investment rationale. In foreign exchange markets the price dynamics are even more complex. I learned this when I was working as a currency strategist for one of the biggest U.S. companies.

At Alpine Atlantic, we help people from all over the world to get proper international investment diversification. For North American clients, this means helping them manage their U.S. Dollar related investment exposure. For them, we typically sell U.S. Dollars as a first step towards international diversification. We have become more bearish on the U.S. Dollar in recent weeks just when the currency showed renewed strength. In our view the temporary U.S. Dollar recovery was driven by the global deleveraging process. We predicted this artificial U.S. Dollar rally would come to an end soon and the market would focus on the structural weakness of the currency.

When analyzing macroeconomics, we at Alpine always regard the world economy and the world of finance as one system, with the various regions and markets being an integral part of it. The correlation of global financial markets is, as we know, very high with various regional economies somewhat less directly linked in terms of real economics. It is a constant system of changing dynamics, where one development influences another.

Therefore, making predictions on one market or one investment should always be a process of carefully analyzing the driving forces behind a price development. Not looking at something in a broader context means running the risk of being terribly wrong in the long run. We need to know where we are today and in which direction we are going in coming months. It is much like sitting in a dark room at night looking out of the windows and wondering when and where the sun will rise. The time of sunrise is yet unknown, but it will happen and when dawn comes, we are starting to see real value through the windows of opportunity. This is the beginning of the next cycle. These cycles are a natural part of our economy, of investing and in fact our lives.