Don Coxe Conference Call for 2008-09-05 “And Hank And Ben Looked At Their Handiwork

And They Were Glad”

BMO Capital Markets Client Conference Call for September 5, 2008

Don Coxe
Chicago

“And Hank And Ben Looked At Their Handiwork And They Were Glad”

Thank you all for tuning in to the call, which comes to you from Chicago. The chart that we
faxed out was the CRB futures and the tag line is “And Hank And Ben Looked At Their
Handiwork And They Were Glad”.

As the chart reveals, we had a fast run up from the first of May to mid-July in the commodities
and then came the massacre of Sunday the 13th. And we’ve had a plunge to the CRB. And the
CRB breaks its uptrend line if we get down to 350. We’re at 374 at the moment.

So I don’t have to tell anybody on this call that what’s happened in the last nearly two months
has been pretty devastating. And it’s been against a backdrop of bear markets in equities around
the world. And they aren’t confirmed bear markets in North America unless they break through
lower levels. And the breakdown levels would be 1210 on the S&P and we would get a
breakdown on the Dow at 10,850. We get a breakdown in the Transports at 4650. We get a
breakdown in the TSE at 12,000. And the FTSE at 5150 and it’s only, not even 200 points above
that.

So, let’s talk about this, what they did, why they did it and how brilliantly they did it, because
this is the most massive intervention of government into the capital markets or the financial
system since Roosevelt closed the banks back in 1933, briefly.

Well, one of the things that we have to address in this is, first of all, why they did it and then how
they did it. But we have to look at also, what are the chances that their intervention in fact
changed the fundamentals enough so that we’ve got the commodity story right off the table for
an extended period of time. And in looking at that, I’d like to take you back to where we were in
the first week in July. And that seems like eons ago and that’s why I’m going to take you through
it. Because it’s hard for some people to recall just how much we were up so recently.

Back then, gold looked like it was going to break through the 1,000 mark, which it had done
briefly at the time of the Bear Stearns bailout. But this time it was also being fueled by the big
surges that occurred in CPI from spring. CPI was now in the US – and of course that’s the
nominal CPI, not the adjusted CPI or the core – but that’s what all sorts of things are tied to,
including Social Security and indexed wage contracts. And we were at a 15 year peak for that.
And with a 2% Fed funds rate, this was putting enormous pressure on Ben Bernanke. He’d
already had one or two dissenters on his board. And so he was faced with the fact that he might
be under pressure to actually raise the rate. Oil was above a hundred and forty bucks a barrel.
Corn was at seven and a half and soybeans were above fourteen. And although cost pass
throughs were being resisted in the system, food inflation was threatening to break out really big
time.

The Dollar looked like it was going to break down anew, it was down at 70 on the DX and
despite spreading recessions across the Eurozone, the Euro was threatening to burst upwards
through a buck sixty. The bank stock index, the one we use, the BKX had fallen in six months
from 90 to 50. And all those bank equity deals with sovereign wealth funds were way under
water.

But Bernanke had another problem, which was that the Fed’s balance sheet was being degraded
by the day with this extraordinary policy of swapping Treasuries for CDOs according to the
bank’s models for the prices of these ones that they couldn’t sell. And this was a huge change in
Fed policy from what securities were required up until then, you’d have to use Treasuries for the
purpose.

Meanwhile, the policy of course, the problems had spread across the world. The ECB was facing
the same kind of degradation problems on a smaller scale in it’s balance sheet, because banks in
the regions – particularly in Spain, but also smaller German mortgage lending banks – were
packing up their illiquid mortgage products and borrowing from the ECB at rates that once again
put the ECB in a position that their balance sheet could be in trouble.

But out there also, the screams were coming that…the Wall Street Journal was leading the
charge, saying that $140 oil was due to what was happening to the Dollar and that the Fed had to
raise interest rates to protect the Dollar and therefore get oil prices down.

Now, the most immediate problem of course was that Fannie and Freddie were on the edge of
collapse. And that meant that hundreds of billions worth of their paper held by government funds
abroad, including a hundred billion by Russia, was at risk. And it also meant that the big
exposure that banks have to Fannie preferred stocks and other equity securities was in trouble
and the banks didn’t need anything else to go wrong.

So what they did – and this is why you want in a crisis like this, you want a Goldman Sachs ex-
CEO at work. People sometimes sneer about the fact that Goldman seems to just get all these big
appointments. But what it means is you’ve not only got somebody that really knows the markets,
but somebody who’s access to information is terrific and who really understands how you can
intervene in the markets successfully. Because if you’re going to do a strategy like this, it’s got
to work.

So what they were able to get information on, with help from the Commodity Futures Trading
Corporation, was the change in the make up of who was driving this huge rally in the
commodities. And there had been a change since May in the speculative investors had a much
bigger share on the buy side. And these were levered speculators lead by the hedge funds.

So what they did was basically said “All right, we’ve got to bail out these over-levered banks,
we’ve got to do something to get the bank index rising so that we can create equity in the
banking system that they can do re-financing. So we’ll go from taking all the pressure on
leverage off the banks to putting it on the commodities. And we’re going to focus particularly on
oil, gold and the grains.” Because if you could take those out, you would also take out the
inflation scare. So you get a psychological effect, plus the real effect of the leverage being
unwound in the private sector in a way that was deemed deleterious to the financial system.

And they did it and it worked.

And leverage was being unwound dramatically. And of course by doing it Sunday night, that was
brilliant because the hedge funds who were short the financials and long the commodities were
in the position that the commodities were already going down because they trade around the
world. But the available supplies of bank stocks were very small in foreign markets. So that by
the time that New York opened on Monday morning, what you had was massive bids for the
bank stocks gapping upwards. And that just reinforced the need of the hedge funds to unwind
their positions. So we had a true panic.

And this was bigger by far than what had happened when the Bank of Japan had made that
massive adjustment to its balance sheet a couple of years earlier in the merry month of May,
which was the quickest downdraft we’d seen in this commodity bull market.

Nothing like this had been done efore and they got help from the SEC. In other words, they got
all their troops in line. Chris Cox – no relation to me – came up with an unprecedented rule
against short-selling of Fannie, Freddie and of selected bank stocks.

So you had a situation where, when these stocks were rallying, it’d be difficult for those who
weren’t caught in a levered position but said “Ah these stocks aren’t worth these prices”, that
they couldn’t move in and supply the stock to meet the panic short-coverings. That was,
therefore, what you had a situation where all the regulatory authorities in effect moved in at the
same time. And it was enough to blow the system apart and to change the game.

They also had some…lots of help on their side from deteriorating economic numbers and they
were coming in day after day so they would have undoubtedly talked to their friends at central
banks abroad and the Bernanke people would have been able to get all sorts of help on that. And
remember that with central bankers, they’re real group, their real collegiality is with other central
bankers. They find themselves regularly in an position of an adversarial relationship to local
politicians and interest groups, so the people that they can talk to most comfortably are the kind
of people that they do social events with and they have meetings during the year around the
world. They know each other. They trust each other. They consider themselves the true global
elite group. And therefore I’m quite sure that they got all the information that they needed about
positions around the world and that this intervention was going to work.

Well, if, in that kind of situation there was no new source of buyers to stop the descent…and this
is also against a backdrop that we had of bear market conditions for equities generally. And what
happened then just fed on itself. And as oil in particular went down and as gold broke down, then
what we had with the grains was that the rain stopped. Terrific weather returned to the plains.
And so, the USDA started coming in with better reports about the outlook for grains.
So, it was a perfect storm in the sense that we had no storms.

So everything was on their side for making it work. And of course the price losses were
dramatic, taking the grains down big. And once again every time you do that, you’ve got people
that were long commodity futures generally watching that every part of their portfolio was
getting blasted at the same time. There was nowhere to hide.

That of course was a surprise to us because one of the things that we had been maintaining
throughout in this was that we could have a commodity sell off tied to news of a slowing global
economy but that food was unique because everybody needed to eat. And therefore it would go
on the basis of supply and demand. We didn’t have good carryovers of grains. And so the foods
would act independently. That call did not work out because of the really good weather and also
because of the fact that speculators who owned grain futures also owned huge exposure to gold
and oil.

So, the unwinding was massive, ruthless, across the system. And of course the commodity stocks
had nothing going for them then. They were stocks at a time stock markets had problems. And in
addition, they were tied to commodities that were going down.

Well, from the calls from clients – and I appreciate your calls and e-mails on this – the natural
reaction is “Well, is the commodity bull market over?” And our view has been that there was
inevitably going to be a largo movement in the commodity bull market which was going to be in
a minor key. It would be rather shorter than the first and third movements. The bull market, the
allegro movement had been…had lasted for six years. So we were entitled to have nine months
to twelve months of a slowing or a sell off. And during which time we have been telling you this,
we thought the commodity stocks would outperform others simply because of the fact that this
would be the last chance for major well-financed, with good balance sheet commodity
companies to buy other producers.

And…well that hasn’t functioned well either, because BHP had already got itself hooked in to its
big bid for Rio Tinto, which is tied up in all sorts of regulatory approvals and then was blocked
by Chinalco’s acquisition of 12% of Rio Tinto’s stock, obviously stimulated by the Chinese
government. So you took BHP out of the bidding situation to buy anything. And, at a time when
stock prices are getting blasted all over the place, very hard to get Boards of Directors to agree to
doubling down.

This adjustment process – and I don’t see it as anything more than that, you may say “Come on,
with something this drastic you can’t just call it an adjustment” but if we look to where these
prices are on the commodites and the commodity stocks, we’ve basically given up something
like nine months to a year or less, depending on which stock group you’re talking about. And so,
we are still in a situation where on any kind of long term basis, they’re in major bull moves. But,
that doesn’t mean that we can’t have them cheaper. Because we still have a situation where it
was a minority of investors who were overweight the commodities. And we’d have to get new
buyers coming in to provide overall support and of course that’s not likely to happen when the
Wall Street people who failed to predict the commodity bull market are saying “Well, we told
you so.”
How long can the pain last? Well, I don’t know the answer to that, but if we start with the big
one, which is oil, oil is in the position that the slowing down of consumption across the OECD at
a time that OPEC is producing flat out and the Saudis add an extra million barrels a day of
production, that near term supplies are generous and that oil is so gigantic, because you’ve got 85
million barrels a day coming out of the system. So if the sentiment changes and then what you’ve
got is it just keeps hammering it.

We saw the sell off that had taken oil all the way down to fifty bucks. And although I don’t see
anything like that on the horizon, what it did mean was that the sentiment that said oil prices
have nowhere to go but up changed dramatically. And it didn’t help that we had the number of
people out there forecasting $200 oil, which would have meant that oil prices would have
quadrupled in less than two years. And it’s pretty hard to make that case, because that kind of
ratio in that kind of time for something which is in daily supply on this scale would involve
something where you’d still have to see really strong growth in demand. And an OECD
recession is not a time where you’re going to get that.

And, of course, overlying all of this was all the discussions about what was going to happen to
China after the Olympics. And the viewpoint was that China was going to slow down. So you
take out the big marginal buyer for energy and metals. And we won’t know, of course, how
much of a recovery after the Olympics China is going to have. So this is one where both sides of
the case can say “Well, just wait, you’ll see.” But given that the Chinese stock market has been
trashed this year, that argument doesn’t look good. However I’ll remind you that for the first
three years of the commodity bull market, just about the worst stock market in the world was
China’s.

So, it’s a funny kind of stock market. And I don’t understand it well enough to make any
authoritative comments. But, it’s stock market looks like so many others. It’s in a bear phase.

Meanwhile, what we’ve done is driven interest rates even lower in open market instruments.
You’ve got the US ten-year now at 3.58. And at a time you’ve got CPI well above 5%. So this
reinforces this global phenomenon of negative real yields on bonds. And that is a warning of two
things. First of all, it’s an inflation warning. If we learned anything from the ‘70s, it is that the
only way you stop inflation from going up without a very deep recession is by having high real
interest rates.

So to have negative real rates everywhere and particularly in the US, given it’s role in the global
economy, means that the fundamentals for paper money are deteriorating.

Now the fact that the Dollar was rallying like this against gold and against other currencies
would say well the market is predicting that inflation is about to collapse. That it was just an
inflation bubble. Hard argument to make. Because again, citing the ‘70s, one thing that did not
happen was that recessions collapsed inflation. Yes we know it’s different this time because we
don’t have powerful unions that get big wage increases even during recessions. And so therefore
we’re not getting the cost pass throughs. But, I still am of the view that negative real interest
rates is a high risk strategy. It may be one that needs to be followed by central banks around the
world, but what it means is when we come out the other side of this recession, first of all the
recession cannot be deep, when you have that kind of liquidity. And in addition, we come back
to the demography, which is so much different now than it was before. We’re now at 6.1% US
unemployment, but remember, it wasn’t that long ago where the Phillips Curve people told us
that if unemployment rates ever fell below 6%, it was inflationary.

So, yes, we’re up from 4 ¼ , but this is not, again, the kind of recession where you’re going to
have massive unemployment because of course we’ve got all kinds of shortages developing now
in skilled workers. And if the Republican convention is any sign of what’s coming, we’re going
to have huge demand for anybody tied to metals, pipes, oil, seismological work, these kinds of
things. And that’s going to mean that there’s going to be a big push from that side. The kind of
push, of course, that Alberta experienced with the opening up of the oil sands.

Now there’s lots of other unemployment you can talk about but remember the improvement in
the US trade deficit shows you that the manufacturing sector other than autos has been doing
surprisingly well. It’s been the biggest contribution to US GDP growth.

I’ve been telling Midwest audiences for two years that one of the big surprises was going to be
an industrial renaissance in the Upper Midwest - ex autos - simply because the overvaluation of
the Dollar was gradually being taken out and any companies that managed to survive the gross
overvaluation of the Dollar must be really well run and they would really benefit if the Dollar
came down. That doesn’t mean the Dollar has to collapse but it’s quite clear that this recovery
occurred with the Dollar at the 75 or lower range and this was quite enough in itself that even
with slowing across the OECD and slowing among the US’s main trading partners that what you
had was surprising improvement.

Finally in commenting on the politics that we’ve seen developing in the last two weeks. We’re
back in the election campaign being a toss up.

Obama got a tremendous bounce out of the fabulous performance the Democrats put on at their
convention with all that help from Bill and Hillary. So the Democrats are united and they haven’t
been united for a long time. And the Republicans who were totally disunited as of a few weeks
ago because McCain was not popular with large segments of the Republican party, the Country
Club Republicans in particular, and the very conservative Republicans who felt that he had never
been a true conservative.

So the Republicans were facing an electoral disaster. The Congress was going to go hugely
Democrat and there could have been a landslide at the White House level because you had this
extraordinarily attractive Barack Obama at the top of the ticket and of a united party and it was
time to punish the Republicans for Bush.

Now how could all that change in a hurry? Well, what we saw of course was that the choice of
Governor Palin turned out to be an inspired choice in that it changed the pieces on the
chessboard. It’s united the Republican party.

Now the only ones who are sulking a bit are the old-style country club Republicans who still
don’t like McCain that much and certainly don’t like the idea of a conservative evangelical. But
in the overall scheme of things they aren’t that big. And so I think it’s interesting that we’ve only
had one tracking poll that came out after Governor Palin’s speech and that was CBS news. They
only surveyed a few over 700 voters but they show a tie. The other polls that have come out
show that Obama’s lead has been cut to 3 or 4 points.

I think the tracking poll should be taken seriously because of the other announcement which was
a surprise which is that Senator Obama agreed to appear on Bill O’Reilly’s show last night. And
they’ve taped sections of it for broadcast next week. The Democrats refused to even have their
debates on the Fox news because they regarded that as a Republican channel. They of course
appeared on all the others because their friends run those.

The fact is that he chose to do this, which was an amazing thing. I saw the first interview last
night and I thought Obama came across very well, but this was a shock to the Democratic core.
And I don’t believe that he would have done that if their own polls hadn’t shown that Governor
Palin had produced a big swing. And he had to come out there and come into the lion’s den as it
were and show that he really was up to the job, because the key thing that was getting the big
response out there was the question of whether he had any real experience.

Wrapping it up…we’re going to have more turbulence and the backdrop of bearish equity
markets and disappointing economic numbers is not the stuff of big rallies.

Oil is quite likely going to break $100 and that’s going to be a big psychological effect on
commodities generally, but if you accept that we’re not going into a deep global recession and
you accept the fact that most commodity companies have very powerful finances and are making
lots of money and haven’t done dumb things and if you accept the fact that everything that’s
occurred geopolitically in the world suggests that unhedged resources in the ground in politically
secure areas of the world are actually growing in value as we speak.

But the long term is a series of short-term forecasts and I have never been very good at short-
term forecasts, but I’ll reiterate that the long term forecast actually gets better under this.

The next issue of Basic Points will be out next week. We go into detail on how we see these
changes but our bottom line is that with any longer term viewpoint - and that is anything a year
or more - you’ve got to believe the underlying value of these companies relative to their stock
prices is better now than it’s been for several years. But pain now is more felt than the possibility
of lack of pain later.

So I can’t give you perhaps the consolation you’d like, except to say that I couldn’t disagree
more with those who say this proves that the commodity boom was a bubble, like the tech
bubble. And I don’t know when the day will be that we’ll look back at the prices of these stocks
today and say why wasn’t I backing up the truck?

That’s it. Any other questions?

Operator: Mr. Coxe, you do not have any questions registered at the moment.
Question 1 (Bill Mascovich): Just thinking that another big shoe is about to drop. In particular
Merrill Lynch took that write off on those CDOs. I can’t remember if it was 30 billion dollars at
5 cents on the dollar. Other people must have to own - have to own similar securities - the same
securities. I don’t believe they’ve marked them down yet and thinking that going into the end of
the year audit committees and etcetera boards. What do you think of the likelihood that we’re
going to see additional massive mark downs in some of these structured synthetics?

DC: Good question. Thank you. Remember when I talked about the goals that Bernanke and
Paulson had. A central goal was to create equity within the banking system so that the banks
could float more equity. Given the fact that all those sovereign wealth buyers had lost heavily on
their investments and they had been reassured at the time by the bankers that, “Oh this is just a
short term selloff. The housing market is going to turn and we have done very careful revaluation
of the structured paper on our books and all the bad news is out.”

It’s going to be hard to come back to them. So therefore the idea was we’ll get their stock prices
up by forcing the people that are shorting them to cover their shorts, but what we haven’t seen is
there’s been a rush of anybody to take advantage of the opportunities created.

So I don’t know when we’ll get back to the situation that we were in in the first six months of
this year where each week we had scary news about the fundamentals of the US financial system
and that was driving down the stocks. Everybody’s been distracted by the fact that the stocks
themselves seem to been doing well but they didn’t get up to the kind of levels and couldn’t find
the big buyers stepping up to float new equity.

So the leverage in the banking system remains excessive. And as you say once they start
reflecting actual market transactions on this stuff then we’re going to be back in the soup. And so
ultimately what this is going to do is get people looking at investing in companies that have real
balance sheets, real income statements and you can believe their earnings statements and they’re
in no danger of going bankrupt. So I don’t know when that will be, but your point is an excellent
good one that the yearend is no longer off far in the distance that we can not worry about it.

So seeing the selloffs that are occurring in these stocks today, not big, but it’s across the system.
And the BKX today is down just a little bit more than the Dow. Yeah it’s going to happen
because the housing market has not improved and the other big, as you talk at SHU, is the
commercial mortgage backed securities. They’ve been taking small haircuts on those but I just
believe that there’s so much product that’s coming on stream in the cities that hasn’t been
completed yet - big buildings and what you’re going to see is huge impact then on that part of
their portfolio and the leverage loan part of it - the collateralized loan part of it we haven’t talked
about it yet. Well you can see in the KKR Fund and these others that there’s all sorts of lousy
paper that’s still sitting in the system that they can’t sell to anybody.

So we’re going to get back into a real bad news situation where people are going to say, “Yeah
the financial system continues to be in a mess and it’s this long in the cycle,” but again there’s
only so much room for headlines and what you’re talking about is a page 16 story.

Thank you. Any other questions?

Question 2 (Stephen Bartillo): The contrast between financials and energies has been really
striking and we’ve sort of been wondering when there would be a reversal in that trend and
thanks to the engineering of Ben and Hank we’ve seen somewhat of a reversal and we’re
wondering whether that’s just a swing trade opportunity. But I mean clearly the long run profit
story seems more compelling for energy and the commodities as you say. But if investors can
really find a reason to believe that the stated tangible book value of some of these quote unquote
high quality global financial service companies are really what they are then they might start
buying a dollar’s worth of book value for quarters based on their book value. So are we seeing,
in your view, a reversal of these two sectors that’s more than just a swing trade? I know you’re
not so sanguine on the financials still, but what is your view of this issue?

DC: Well, thank you. You see we’re not comparing apples to apples here because the financials
are hugely levered. They are hedge funds writ large. And therefore you know a 10% markdown
even if you’ve met the Basel Accord rules and you have 7% of free equity, that means in effect
that you’re levered up something on the order of 12 times to 15 times. And so therefore
writedowns of the kind that Merrill had to take are absolutely devastating to your equity.

Nothing like that can happen to an energy company. As for the US energy stocks, there’s
absolutely no doubt in my mind that these stocks are going to have a wonderful year next year.
Because even if Obama does win the election, I don’t think he can win the election without a real
deal being done on drilling.

The polls show that even among Democratic voters they want to drill. You saw that Governor
Palin got her biggest cheers and the audience got most energized when they started shouting,
“Drill, baby, drill” and those expensive ads by T. Boone Pickens promoting natural gas and wind
power. The answer that’s being given is, “Yeah, we need those too.”

Well natural gas prices are only 7.27 at the moment. If there’s any talk about starting to do the
style of converting to natural gas powered vehicles, they’ll start with municipal vehicles and
others, what you’re going to have is that this policy which has been enunciated over and over by
the Republicans this week which was, “We’re sending hundreds of billions of dollars abroad.
We’ve got the resources here. Let’s use what we have.”

Governor Palin is in the position to talk about this knowledgably, as she did in her speech, we
have it here. Why are we sending this much money abroad to countries that don’t like us very
much?

So I do believe that the surprise will be that we will be developing more shale, gas and there will
be major drilling projects offshore. I have no doubt about it. It’s not a matter of if, but when. And
if McCain should pull off an upset and wins the election, it will be sooner rather than later. As a
matter of fact if McCain wins the election these stocks are going to gap up, because everybody is
going to say who has the knowledge, the smarts, the cash to drill in a politically secure region of
the world?
In terms of identified supplies of barrels of oil seismically, US offshore now ranks just about at
the top of political secure regions of the world and yet they’re being held back by the whole
attitude which is that it would be bad for our beaches to have the drilling.

So I think this is a hugely good time to be buying the companies - the only thing about these
companies is you’re talking about blue chip and red chip companies. Companies that have big
balance sheets and good earnings. Even if oil falls to 80 bucks, they’re still going to make
money. The integrateds will finally get an improvement in the crack spread and so they’ll have
the cash flow to do these projects and it’s right here at home. So yeah, I think the energy
companies have to be one sector that you’ve got to feel comfortable about.

And if you look at the foods, okay we’ve got corn at 5.50 which is down considerably from its
high. But if a year ago I’d predicted 5.50 corn a lot of you might have stopped reading Basic
Points because you’d say I was ridiculously optimistic. Corn is also one of the few commodities
that’s in contango. This year’s corn crop is at 5.50. Next is at 5.86 and corn in ‘10 is 5.84, which
means and you’ve got to understand that with the grains this is one group where the
participation, now that you’ve taken out the speculators, is overwhelming between producers and
users. And so the fact that we’ve got a contango here in other words that the selloff was done
primarily at the front end illustrates again that you’ve got companies that are going to have
enormous cash flows.

So foods and fuels are going to be the first way out of it. And the gold story is simply that once
people realize that the rise in the Dollar was a force fed rally and that the financial system has
not been cured. I look at it and I say, “My gosh the arguments that we’ve had are just more
compelling now,” but talk about whistling past the graveyard. But in this case what’s under the
ground isn’t corpses, it’s billions of barrels of oil.

Thank you. Anything else?

Question 3 (Ethan Silver): I want to take a point a little farther and see what you think of it.
We’ve gone from inflation fears to slowdown fears. And in my estimation this financial crisis,
which is reappearing, is much longer and deeper than people in denial are thinking about.

Level three assets are about 500 billion. Level two assets about 300 billion. And if you look at
the last five years of earnings, which were basically paper earnings that were created by financial
engineering, my estimation is that the brokerage model is basically evaporating. Because the IPO
business is dead. The advisory business is dead. Fixed income is not going to happen any more
for a while. The earnings were fake and these companies were hedge funds and I’m not sure
given the leverage that’s going to be coming down based on regulatory issues that they’re not
going to be punished, including the leveraged private equity firms, dramatically from here which
is going to scare the overall market. Because a financial meltdown in Wall Street ultimately is
what drives the stock market.

So I’m curious. I mean, I think potentially it’s much more extreme and people who are optimistic
because of phantom men and liquidity and valuation are going to be quite negatively surprised.
DC: Thank you. Well watching the political conventions, one of the heaviest advertisers has been
Merrill Lynch. And they’ve had these terrific ads showing a bull and talking about how Merrill
Lynch has been guiding people through difficult markets for a long time. They’re terrific
commercials, but there’s nothing in that that says the people at Merrill Lynch managing their
own money have managed to blow billions and billions of dollars. It was a good news and a
reassuring commercial for dealing with equity bear markets, but this is different than simply an
equity bear market as you point out, because it’s the basic structure of the financial system that’s
at bay. And that’s not been the case of any bear market in your lifetime or mine.

So yeah, we need all the cheerleaders we can get but I don’t know how long the cheering can
work. Certainly the cheering starts in a football season the first few games. There’s lots of
cheering and enthusiasm but if the team starts losing seven games in a row what you see is some
empty seats and people start booing the quarterback and demanding that we get a new coach.

That’s going to happen but - and then you say, “Well in that kind of case the scale of the equity
bear market will be worse,” and that’s true. But are you saying, “Well does that mean that the
commodity stocks could outperform simply because they continue to make money and they
don’t have financial problems and it would just be relative performance?”

My view is simply they will make money in this kind of environment and that could be done
even if the Dow falls you know another 20-25%. And in fact at some point what we might get is
finally the reverse flow where people would say, “I want to invest in companies that actually
make money and I can be confident about their earnings forecast.” And that will happen, but I
don’t know when.

By the way just interpolation the Rasmussen tracking report has come out - this is the first one
that was done after Sarah Palin - and it’s now 46 Obama - 45 McCain which, yeah, we’re in a
true toss up situation. And again that tends to reinforce my view that this enthusiasm of the
populace at large saying that the only big new game out there for the US economy is the
development of domestic oil and gas reserves is going to become a very safe haven for investors.

Thank you. Any other questions?

Question 4 (Stephen O): I find it amusing in maybe in a bit of a wry way that commentators are
all going on about the price of commodities all going down together and yet for the mining
companies the price of oil going down quite dramatically is really very beneficial to them as it’s
a major cost to their production.

DC: Good point and you know despite the huge selloff, we’ve still got copper above three bucks
a pound and any company that isn’t making a lot of money at that price doesn’t deserve to be in
the copper business because there wasn’t a forecaster who could be found two years ago who
thought we’d be above $3 on copper.

So, yeah you’re right that the price of steel and the price of energy is a big factor in the cost
structure of developing mines. So yeah, it’s profit margins, and it’s a very good point you make,
that count. So yeah, it’s not all bad news. But I have to say though that people who buy
commodity stocks are people who say generally that they like the outlook for commodities
relative to other asset classes. It would be hard to make the case that I should be buying a mining
stock because I think they would be beneficiaries of $50 oil, but yeah, it’s a good argument.

Thank you. Any other questions?

Operator: Thank you. There are no further questions registered.