Why 1,471 Hedge Funds Failed

September 29th, 2010

Why 1,471 Hedge Funds Failed

My phone is an old Nokia about the size of a small brick.

It doesn't take pictures, tell me the weather or connect to the Internet. That's the way I like it.

In a world that has grown increasingly complex, I feel like a throwback to a different era. I like things to be as simple as possible — and that includes my investing.

As an engineer at IBM (NYSE: IBM) in my former life, I used to deal with complex problems… and solutions… day in, day out. That's when I started to understand just how damaging too much complexity can be — no matter where it pops up.

Nowhere is this more obvious than the nasty recession we've lived through for the past two years.

For example, home mortgages were packaged and repackaged into mortgage-backed securities time and again until even the banks that invested so heavily in them weren't sure just what they contained. The result was our government having to bail out the financial firms.

Meanwhile, complicated derivatives led to sky-high leverage around the investment community — bringing hedge funds to their knees.

Bernie Madoff even hid behind a curtain of complicated scheming to commit fraud on an unprecedented scale. But no one could really tell what was going on because of its complexity.

Is it any wonder that I like to keep things simple in my day-to-day life, but also in my investment portfolio?

Judging from the investment landscape, many investors equate complexity and secrecy with smart investing decisions. How else can you explain the rise of hedge funds during the past several years?

These funds have very little regulation, usually use complex derivatives and futures contracts and are generally tight-lipped about their investing decisions. To me, that doesn't sound like it is in the best interest of investors.

In fact, 1,471 hedge funds shut down in 2008, according to Forbes. That was fully 15% of all the funds in the industry. And it's been rocky for the industry ever since. In the first quarter of 2010, hedge funds had a net outflow of $11 billion.

So much for outsmarting the market.

My investing style is just a little bit different. Like I said, I keep things simple. In fact, you could sum it up in one sentence: “Find one stock each month that will beat the market.”

There are several reasons I like this “Keep it Simple” approach, and think all investors should follow it:

1. It allows investors to be experts on their holdings
You've heard the phrase “Jack of all trades, master of none.” To me that describes a lot of investors. Portfolios with dozens — even hundreds — of securities run an extreme risk of having more than you can handle. But keeping a very focused portfolio allows any investor the time to go in-depth into a handful of select companies, making them experts on their operations.

2. It lets your winners work and cuts the losers
We all have at least a couple of stocks in our portfolios that we don't really like. For whatever reason, it's tough to let go of some holdings — even if we're not hot on their prospects right now. But if you limit your portfolio size to just 10 or 12 holdings and use a “pig at the trough” game plan (only so many pigs can eat at one trough; if you add a new pick to an already-full portfolio, you have to get rid of one current holding), you'll solve this problem.

As a result, the dogs that you've always wanted to get rid of will stop wreaking havoc on your portfolio, and your holdings will consist only of those stocks you like the most. As Warren Buffett says, “It's crazy to put money into your 20th choice rather than your 1st choice.”

3. You can't beat the market if you are the market
A funny thing happens as you add more and more picks to your holdings — your returns can suffer. Experts will always tout the benefits of diversification. And I agree with them… but only if you want to track the market. I'm more interested in beating the market.

The more holdings you own, the closer you are going to come to matching the market's moves. That makes sense: you can't beat the market if your portfolio is the market (one notable exception — using a “Daily Paycheck” strategy to earn consistent dividends, and reinvest). If you want to beat the Street, you need to pick your very best investment ideas and use them to power your portfolio.

Action to Take –> The “Keep it Simple” approach is one that I've been practicing day in and day out for all my life. That's why it comes as second nature to my investing. It's also one of the reasons I was selected to head up StreetAuthority's Stock of the Month newsletter.

Each month I practice what I preach — I pick only one idea that I think is poised to beat the market. And I don't stop there. I'm actually putting $100,000 of StreetAuthority's cash to work in these picks with my real-money portfolio. That's why my publisher likes to say he buys every stock I recommend… it's his cash going into the holdings!

Uncategorized

The 4 Best Investing Hot Spots

September 29th, 2010

The 4 Best Investing Hot Spots

If you had a crystal ball in the 1960s, you probably would have seen that Japan would turn out to be a great investment. The country's economy was growing nicely, family birth rates were high enough to ensure a young workforce, its education system was excellent, its currency was cheap and it was generally regarded as ranking high in terms of lack of corruption. The Japanese stock market did great for two decades, rising +178% in the 1970s and an eye-popping +587% in the 1980s.

Of course, some of those metrics (such as a cheap currency and high birth rates) stopped being a positive factor years ago, and may help explain why Japan's Nikkei Index fell -51% in the 1990s and another -49% in this last decade. (It plunged from 38916 at the end of 1989 to a recent 9600. Yikes).

Such a rare confluence of positive factors such as Japan had in the 1970s and 1980s rarely exists. These days, countries with strong education systems are often found in the developed world, where population growth rates have cooled. In other places, stock markets may look like relative bargains, but corruption concerns should keep you far away.

So your preference in international markets is largely a factor of what you consider to be important. For example, many investors will only put their money in countries that have a history of clean and transparent business climates. And for good reason. The Heritage Foundation has historically found a tight correlation with strong market returns and low national corruption. The organization produces an annual “Freedom Index” that highlights the best places to do business. Here's the latest snapshot:

Freedom Index
Country Rank* Birth Rate**
Hong Kong 1 F
Singapore 2 F
Australia 3 C
New Zealand 4 B
Ireland 5 B
Switzerland 6 D
Canada 7 D
U.S. 8 B
Denmark 9 C
Chile 10 B
U.K. 11 B
Netherlands 12 D
Japan 13 F
Sweden 14 D
Germany 15 C
* only includes countries with suitably-sized stock markets. Source: Heritage Foundation
** ranks A-F relative to birth rate percentile. Source: CIA Factbook

I cross-referenced these high-ranking countries with their respective birth rates. The greatest enemy of long-term growth is a shrinking population that yields fewer younger workers supporting a rising tide of retiring workers. Of these least corrupt countries, only New Zealand, Ireland, the United States and Chile are having enough children to avoid the retiree crunch (immigration policies notwithstanding).

Before we move on, there is an important secondary corollary to this table. New Zealand, Ireland, Canada and Chile are all adjacent to strong economic regions or trading partners, and their growth can be sustained through exports even if their domestic markets are small. For example, Australia is blessed with massive natural resources and high growth rates — just the right environment for neighboring New Zealand, which has a comparatively weaker currency and could increasingly become an export powerhouse to Australia.

Get schooled
To establish sustainable long-term growth rates, countries need to develop well-educated middle classes, and not just Harvard-educated elites. The fact that Korea ranks high in math and science is a big factor in explaining that country's solid economic growth during the past decade. In the developed world, Canada and New Zealand score quite high in terms of education standards. And as noted, they are fortunate to have larger trading partners right at their door.

Education Attainment
Country Reading Rank Math
Rank
Science Rank Total
Score
Korea 1 2 7 10
Canada 3 5 2 10
New Zealand 4 7 4 15
Netherlands 9 3 6 18
Australia 6 9 5 20
Japan 12 6 3 21
Switzerland 11 4 11 26
Ireland 5 16 14 35
Germany 14 14 8 36
Sweden 8 15 16 39
U.K. 13 19 9 41
Poland 7 20 18 45
France 18 18 20 56
Spain 27 25 24 76
Italy 25 29 28 82
Russia 30 26 32 88
Turkey 29 31 31 91
Mexico 31 32 33 96
Brazil 32 33 33 98
Note: OED members only. No U.S. data available. Source: OECD
TOTAL SCORE = The lower, the better.

Chasing momentum
The global economic crisis of 2008 and 2009 has led to a slowdown in economic growth. But some countries were able to see their economies expand at a rapid pace in 2009. The table below highlights the world's fastest-growing economies, and it's no surprise that they are mostly located in Asia and Latin America, where rising middle classes are fueling a virtuous cycle of further spending gains.

Fastest Growing Economies (2009)*
China +9.8%
Argentina +7.1%
Egypt +6.9%
India +6.6%
Vietnam +6.2%
Indonesia +6.1%
Russia +6.0%
Brazil +5.2%
Poland +4.8%
Chile +4.0%
Israel +3.9%
Colombia +3.5%
*Includes only countries with suitably-sized stock markets. Source: CIA Factbook

Historically speaking, fast-growing economies can maintain their momentum for quite some time, especially when key trading partners are growing in tandem. It's no coincidence that Argentina, Brazil, Chile and Colombia all made this list. All of these countries feed off of each other and (with the arguable exception of Argentina) are also benefiting from far sounder fiscal policies that encourage growth and inhibit inflation.

Now, let's see how those economic growth rates have translated into stock market returns this year for those same countries:

2010 Year-to-Date Stock Market Return*
China -19%
Argentina +5%
Egypt +5%
India +4%
Vietnam -7%
Indonesia +25%
Russia N/A
Brazil -2%
Poland +4%
Chile +29%
Israel 0%
Colombia +21%
*Through the first 8 months of the year. Source: Bespoke Investment Group

Several of these countries were discussed in my analysis of the CIVETs, thought by some to be the new hot investment area after the BRICs (Brazil, Russia, India and China). [Forget About BRIC: Buy These Emerging Economies Instead]

As I noted in the article, countries like Colombia are quite appealing, but after a strong run they are no bargain. If one were to disregard relative valuations, then places like Chile, Indonesia and Colombia would look far more appealing.

The Big Mac Index
Of course, a country's competitiveness is tied to its currency, as Chinese government bureaucrats would likely note. Japan was blessed with a cheap currency 20 to 40 years ago. More recently, its currency has strengthened, which partially explains why the Nikkei has shed -70% of its value in the last 20 years.

Every year, The Economist takes a look at the price of a Big Mac to gauge the relative strength of a country's currency. Looking at those same countries in the last table (below), you'll note that a Big Mac can be had for a low price in Russia, Poland and China. It's an inexact gauge, as the cost of Big Macs is also a function of taxes, local sourcing and other variables. But it's no coincidence that a Big Mac is relatively expensive in places like Colombia and Israel. The cost of doing business in those countries is fairly high, and they must compete in the global economy on the basis of an educated workforce and/or an abundance of natural resources.

Price of a Big Mac ($U.S.)
China $1.97
Argentina $3.75
Egypt $3.48
India N/A
Vietnam N/A
Indonesia $2.51
Russia $2.31
Brazil $2.33
Poland $2.22
Chile $3.52
Israel $3.99
Colombia $4.46
Source: The Economist

Uncategorized

The One Blue-Chip Stock Every Investor Should Own

September 29th, 2010

The One Blue-Chip Stock Every Investor Should Own

Legend has it that the term “blue chip” stems from poker, in that it represented the poker chip with the highest value in the game. These days, the term is ubiquitous in the stock market and refers to a large, stable company that is financially sound, has well-known brand and market awareness and a diversified sales base.

Blue chips are also frequently known as industry bellwethers. A perusal of the 30 companies that make up the Dow Jones Industrial Average is perhaps the best illustration of blue chips across a wide array of industries. Prime examples include Coca Cola (NYSE: KO), American Express (NYSE: AXP) and Intel (Nasdaq: INTC), as they dominate their respective industries and their corporate logo qualifies as a global brand with billions of dollars in brand equity.

Interestingly, these companies have been laggards in terms of overall stock market returns. This is in stark contrast to historical periods when they have been the most sought after firms for investors. The Nifty 50 stocks in the 1960s and 1970s represented a time when investing in the largest firms in the market was seen as a no-brainer — these stocks could be held forever because it was difficult to see them lose competitiveness to smaller, lesser capitalized rivals.

The late 1990s represented another period where investors held blue chips in high regard and bid valuations to more than 50 times earnings in many cases. These days though, blue chips are trading at low double-digit multiples of their earnings, as it has taken a decade for sales and profit growth to catch up to the lofty valuations placed on these firms during what is now considered the dot-com bubble.

At some point, perhaps in the very near future, investors will again reward quality companies with higher valuations. In addition, these firms are large and globally diversified, which means they should be able to withstand downturns in the business cycle and expand in faster-growing emerging markets. As such, blue-chip investing has great appeal right now.

Downside protection is another strength these firms offer investors. A large number of investors remain worried about global economic growth, given that we just went through one of the worst financial crises since the Great Depression. For the most part, blue chips, barring a select class of unfortunate financial titans, have survived the global meltdown with flying colors.

Given the valid concerns regarding a double-dip or prolonged recession in the global economy, Wal-Mart (NYSE: WMT) is the blue chip that every investor should own. It has survived two major recessions in the past decade, demonstrating it is capable of withstanding “tail risk” (a supposedly improbable market meltdown that is occurring with regularity in the market) and was one of only a few firms that actually benefitted during a recession.

The stock hasn't done much during the past decade. This is because the price-to-earnings (P/E) ratio was at 47 back in 2000. Sales and earnings have grown about +10% annually during this time frame though, and though double-digit sales growth will be challenging in the next decade, management has the discipline and wherewithal to leverage high single digit top-line growth into +10% or higher profit growth well into the future. And Sales upside does still exist as Wal-Mart expands globally. As a case in point, it has seen success in cost-conscious markets such as Mexico and just announced ambitious expansion plans into Africa.

Action to Take —> At a current P/E of about 14, this means that shareholders can expect investment returns along these levels. Throw in potential earnings multiple expansion (though 47 seems like a huge stretch) and a 2.3% current dividend yield, and it's hard to see a safer investment out there that also offers a high likelihood of solid returns for many years to come.

– Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies…

Uncategorized

Return of Quantitative Easing Good for Gold

September 28th, 2010

The Federal Reserve said two words in its statement this week that should make every gold investor happy: Quantitative Easing. The Fed hinted that we may see additional QE measures as early as November. The news is good for gold investors because it means there could be more dollars chasing a finite amount of resources, further devaluing the U.S. dollar.

We’ve already seen an intervention by Japan’s central bank to weaken the yen in an effort to boost the nation’s sagging export sector. Japan is currently the world’s third-largest economy.

Another key driver for gold has been diminishing supply from gold mines. This chart from JP Morgan shows the all-in cost to produce and replace an ounce of gold for a handful of miners.

Despite $1,300 gold, margins are still relatively modest. The costs vary widely depending on the company, but the peer average is $880 an ounce. Gold miners will be looking for ways to expand these margins and cash in on higher gold prices.

Another good sign for gold equities is the recent pickup in M&A activity we’ve seen in the sector. There are generally about 1,000 mining M&A deals a year but we’re already above 1,300 deals so far this year, according to a Pricewaterhouse Coopers report.

Faced with diminishing production from existing mines, many of the seniors have looked to acquire additional reserves at a reasonable price as many junior companies remain below their 52-week highs. In many cases, these are the small- to mid-tier miners who’ve already put in the initial legwork in taking a discovery to production.

This week, two of our portfolio managers attended the Denver Gold Forum and both returned with a constructive outlook on gold for the near- and long-term.

Another observation from the conference was large amount of interest in gold as an investment and that there’s still a lot of education taking place on the best ways to invest in the gold sector. It’s important that investors don’t get caught up in the media’s pejorative view of gold and remember to utilize exposure to the gold sector as a portfolio diversification tool.

By the way, if you haven’t already had the chance to listen to what Roger Gibson had to say about the role of commodities in asset allocation, you can do so here.

Gold can be a portfolio tool for both the individual and professional investors. Energy stocks have been pummeled since the Deepwater Horizon accident earlier this spring, but the managers of our Global Resources Fund (PSPFX) have used gold as a way to protect against the recent financial and economic malaise. By increasing their portfolio weighting in gold and gold stocks, they’ve managed to limit exposure to a sector that has fallen out of favor with investors at the moment.

If you’re interested in gold, we suggest investing no more than 5 percent to 10 percent in the gold sector. In addition, this allocation should include both the physical asset—like gold bars or coins—and gold mining shares.

An opportune chance to enter the market may be just ahead. With gold moving up sharply in recent weeks, it’s likely there’s a pullback on the horizon but if the Fed reinstitutes QE measures as expected later this fall. Combine that with rising fiscal deficits and currency debasement among countries in the developed world and the future looks bright for gold.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. Brian Hicks, co-manager of the Global Resources Fund (PSPFX), contributed to this commentary. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

Return of Quantitative Easing Good for Gold originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Return of Quantitative Easing Good for Gold




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

Return of Quantitative Easing Good for Gold

September 28th, 2010

The Federal Reserve said two words in its statement this week that should make every gold investor happy: Quantitative Easing. The Fed hinted that we may see additional QE measures as early as November. The news is good for gold investors because it means there could be more dollars chasing a finite amount of resources, further devaluing the U.S. dollar.

We’ve already seen an intervention by Japan’s central bank to weaken the yen in an effort to boost the nation’s sagging export sector. Japan is currently the world’s third-largest economy.

Another key driver for gold has been diminishing supply from gold mines. This chart from JP Morgan shows the all-in cost to produce and replace an ounce of gold for a handful of miners.

Despite $1,300 gold, margins are still relatively modest. The costs vary widely depending on the company, but the peer average is $880 an ounce. Gold miners will be looking for ways to expand these margins and cash in on higher gold prices.

Another good sign for gold equities is the recent pickup in M&A activity we’ve seen in the sector. There are generally about 1,000 mining M&A deals a year but we’re already above 1,300 deals so far this year, according to a Pricewaterhouse Coopers report.

Faced with diminishing production from existing mines, many of the seniors have looked to acquire additional reserves at a reasonable price as many junior companies remain below their 52-week highs. In many cases, these are the small- to mid-tier miners who’ve already put in the initial legwork in taking a discovery to production.

This week, two of our portfolio managers attended the Denver Gold Forum and both returned with a constructive outlook on gold for the near- and long-term.

Another observation from the conference was large amount of interest in gold as an investment and that there’s still a lot of education taking place on the best ways to invest in the gold sector. It’s important that investors don’t get caught up in the media’s pejorative view of gold and remember to utilize exposure to the gold sector as a portfolio diversification tool.

By the way, if you haven’t already had the chance to listen to what Roger Gibson had to say about the role of commodities in asset allocation, you can do so here.

Gold can be a portfolio tool for both the individual and professional investors. Energy stocks have been pummeled since the Deepwater Horizon accident earlier this spring, but the managers of our Global Resources Fund (PSPFX) have used gold as a way to protect against the recent financial and economic malaise. By increasing their portfolio weighting in gold and gold stocks, they’ve managed to limit exposure to a sector that has fallen out of favor with investors at the moment.

If you’re interested in gold, we suggest investing no more than 5 percent to 10 percent in the gold sector. In addition, this allocation should include both the physical asset—like gold bars or coins—and gold mining shares.

An opportune chance to enter the market may be just ahead. With gold moving up sharply in recent weeks, it’s likely there’s a pullback on the horizon but if the Fed reinstitutes QE measures as expected later this fall. Combine that with rising fiscal deficits and currency debasement among countries in the developed world and the future looks bright for gold.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. Brian Hicks, co-manager of the Global Resources Fund (PSPFX), contributed to this commentary. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

Return of Quantitative Easing Good for Gold originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Return of Quantitative Easing Good for Gold




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

Four ETFs To Cash In On Gold’s Rally

September 28th, 2010

According to a poll amongst analysts, bankers and producers at the world’s largest gathering of the gold industry, the shiny metal is expected to reach $1,450 per troy ounce this year, providing positive price support to the SPDR Gold Shares ETF (GLD), the iShares Gold Trust (IAU), the PowerShares DB Gold Fund (DGL) and the ProShares Ultra Gold (UGL).

One driver behind gold’s expected increase is the fact that numerous central banks are utilizing it as a monetary asset.  Nations such as Russia, China, India and the Philippines, who have traditionally been known as net sellers of the precious metal, have all recently increased their gold holdings to shore up their balance sheets and protect against the potential of a falling dollar.  As a result, these nations are now net purchasers of gold, which is further bolstering demand. 

A second driver supporting gold is the overall fear of a potential double-dip recession in the United States continues to prevail.  In fact, the Conference Board recently reported that its index of consumer confidence fell to 48.5 in September from a revised 53.2 in August, primarily driven by a weak job market and concerns that the job market will fail to significantly improve.  Traditionally, a declining trend in consumer confidence indicates weaknesses in consumer buying patterns, which could be detrimental to overall US GDP growth as that consumer spending accounts for nearly 70 percent of the US economy.

Furthermore, fears of further monetary easing by the US Federal Reserve to further stimulate its economy are providing positive support to the precious metal.  The Fed continues to keep interest rates at near-record lows, and is likely to continue to do so for the remainder of the year, and could potentially further boost money supply.   These policies are likely to lead to inflation and a weaker US dollar. 

Lastly, gold appears to be trading much lower than its inflation-adjusted 1980 prices indicating that there is plenty of upside potential in the metal.

In a nutshell, the overall outlook on gold remains bullish and is expected to remain so in both the near future and the long-term.  As noted earlier, some easily accessible ways to play gold include:

  • SPDR Gold Shares ETF (GLD), which is the most commonly traded gold ETF
  • iShares COMEX Gold Trust (IAU), which is backed by physical gold bullion
  • PowerShares DB Gold Fund (DGL), which holds futures contracts in gold.
  • ProShares Ultra Gold (UGL), which is a leveraged security that seeks to replicate twice the performance of gold bullion

Disclosure: Long GLD

Read more here:
Four ETFs To Cash In On Gold’s Rally




HERE IS YOUR FOOTER

ETF, Uncategorized

Four ETFs To Cash In On Gold’s Rally

September 28th, 2010

According to a poll amongst analysts, bankers and producers at the world’s largest gathering of the gold industry, the shiny metal is expected to reach $1,450 per troy ounce this year, providing positive price support to the SPDR Gold Shares ETF (GLD), the iShares Gold Trust (IAU), the PowerShares DB Gold Fund (DGL) and the ProShares Ultra Gold (UGL).

One driver behind gold’s expected increase is the fact that numerous central banks are utilizing it as a monetary asset.  Nations such as Russia, China, India and the Philippines, who have traditionally been known as net sellers of the precious metal, have all recently increased their gold holdings to shore up their balance sheets and protect against the potential of a falling dollar.  As a result, these nations are now net purchasers of gold, which is further bolstering demand. 

A second driver supporting gold is the overall fear of a potential double-dip recession in the United States continues to prevail.  In fact, the Conference Board recently reported that its index of consumer confidence fell to 48.5 in September from a revised 53.2 in August, primarily driven by a weak job market and concerns that the job market will fail to significantly improve.  Traditionally, a declining trend in consumer confidence indicates weaknesses in consumer buying patterns, which could be detrimental to overall US GDP growth as that consumer spending accounts for nearly 70 percent of the US economy.

Furthermore, fears of further monetary easing by the US Federal Reserve to further stimulate its economy are providing positive support to the precious metal.  The Fed continues to keep interest rates at near-record lows, and is likely to continue to do so for the remainder of the year, and could potentially further boost money supply.   These policies are likely to lead to inflation and a weaker US dollar. 

Lastly, gold appears to be trading much lower than its inflation-adjusted 1980 prices indicating that there is plenty of upside potential in the metal.

In a nutshell, the overall outlook on gold remains bullish and is expected to remain so in both the near future and the long-term.  As noted earlier, some easily accessible ways to play gold include:

  • SPDR Gold Shares ETF (GLD), which is the most commonly traded gold ETF
  • iShares COMEX Gold Trust (IAU), which is backed by physical gold bullion
  • PowerShares DB Gold Fund (DGL), which holds futures contracts in gold.
  • ProShares Ultra Gold (UGL), which is a leveraged security that seeks to replicate twice the performance of gold bullion

Disclosure: Long GLD

Read more here:
Four ETFs To Cash In On Gold’s Rally




HERE IS YOUR FOOTER

ETF, Uncategorized

St. Louis Fed’s Financial Stress Index

September 28th, 2010

When I started this blog, I added what sounded like a whimsical tagline at the time, “Your one stop VIX-centric view of the universe.” In retrospect, perhaps the joke was on me, as the content here has consistently been VIX-centric, despite my occasional forays into that “and More” netherworld.
I will be the first to admit, however, that the VIX captures only a small slice of investor sentiment and represents only one type of threat to the markets.

Back in March 2007 I addressed a broader range of sentiment indicators when I wrote A Sentiment Primer (Long) and urged investors to take a broad-based view of threats to the market in The Credit Default Swap Canary. Along the way, I have been a strong proponent of using put to call ratios (Put to Call Everest), bond yields, the VIX divided by T- bill yields (VIX:IRX), the TED spread, counterparty risk measures, and other factors.

One excellent index which attempts to capture a broad range of components of financial stress is the St. Louis Fed’s Financial Stress Index, henceforth to be known here as the STLFSI. The index constituents are highlighted below and include an interest rate group, a yield spread group and an third uncategorized group of additional indicators in which the VIX is one of five components.

Interest Rates:
  • Effective federal funds rate
  • 2-year Treasury
  • 10-year Treasury
  • 30-year Treasury
  • Baa-rated corporate
  • Merrill Lynch High-Yield Corporate Master II Index
  • Merrill Lynch Asset-Backed Master BBB-rated

Yield Spreads:

  • Yield curve: 10-year Treasury minus 3-month Treasury
  • Corporate Baa-rated bond minus 10-year Treasury
  • Merrill Lynch High-Yield Corporate Master II Index minus 10-year Treasury
  • 3-month London Interbank Offering Rate–Overnight Index Swap (LIBOR-OIS) spread
  • 3-month Treasury-Eurodollar (TED) spread
  • 3-month commercial paper minus 3-month Treasury bill

Other Indicators:

  • J.P. Morgan Emerging Markets Bond Index Plus
  • Chicago Board Options Exchange Market Volatility Index (VIX)
  • Merrill Lynch Bond Market Volatility Index (1-month)
  • 10-year nominal Treasury yield minus 10-year Treasury Inflation Protected Security yield (breakeven inflation rate)
  • Vanguard Financials Exchange-Traded Fund (VFH)

The chart below shows the performance of the STLFSI and the VIX going back to 1993. Not surprisingly, there is a high degree of correlation. If one accepts the STLFSI as a more broad measurement of stress in the financial system, one can make a case that while the VIX is usually directionally correct, at certain times the VIX has underestimated the stress in the system (e.g., May 2008) while at other times the VIX has overestimated the stress in the system (e.g., May 2010). Going forward, I will make an effort to flag important divergences between the VIX and the STLFSI.

Note that the Kansas City Fed has a similar Financial Stress Index, aka the KCSFI, which is more concise and more focused on yield spreads.

The St. Louis Fed has more information on the STLFSI here, while the Kansas City Fed has more information on the KCSFI here.

Related posts:

[source: Federal Reserve Bank of St. Louis]

Disclosure(s): none



Read more here:
St. Louis Fed’s Financial Stress Index

OPTIONS, Uncategorized

St. Louis Fed’s Financial Stress Index

September 28th, 2010

When I started this blog, I added what sounded like a whimsical tagline at the time, “Your one stop VIX-centric view of the universe.” In retrospect, perhaps the joke was on me, as the content here has consistently been VIX-centric, despite my occasional forays into that “and More” netherworld.
I will be the first to admit, however, that the VIX captures only a small slice of investor sentiment and represents only one type of threat to the markets.

Back in March 2007 I addressed a broader range of sentiment indicators when I wrote A Sentiment Primer (Long) and urged investors to take a broad-based view of threats to the market in The Credit Default Swap Canary. Along the way, I have been a strong proponent of using put to call ratios (Put to Call Everest), bond yields, the VIX divided by T- bill yields (VIX:IRX), the TED spread, counterparty risk measures, and other factors.

One excellent index which attempts to capture a broad range of components of financial stress is the St. Louis Fed’s Financial Stress Index, henceforth to be known here as the STLFSI. The index constituents are highlighted below and include an interest rate group, a yield spread group and an third uncategorized group of additional indicators in which the VIX is one of five components.

Interest Rates:
  • Effective federal funds rate
  • 2-year Treasury
  • 10-year Treasury
  • 30-year Treasury
  • Baa-rated corporate
  • Merrill Lynch High-Yield Corporate Master II Index
  • Merrill Lynch Asset-Backed Master BBB-rated

Yield Spreads:

  • Yield curve: 10-year Treasury minus 3-month Treasury
  • Corporate Baa-rated bond minus 10-year Treasury
  • Merrill Lynch High-Yield Corporate Master II Index minus 10-year Treasury
  • 3-month London Interbank Offering Rate–Overnight Index Swap (LIBOR-OIS) spread
  • 3-month Treasury-Eurodollar (TED) spread
  • 3-month commercial paper minus 3-month Treasury bill

Other Indicators:

  • J.P. Morgan Emerging Markets Bond Index Plus
  • Chicago Board Options Exchange Market Volatility Index (VIX)
  • Merrill Lynch Bond Market Volatility Index (1-month)
  • 10-year nominal Treasury yield minus 10-year Treasury Inflation Protected Security yield (breakeven inflation rate)
  • Vanguard Financials Exchange-Traded Fund (VFH)

The chart below shows the performance of the STLFSI and the VIX going back to 1993. Not surprisingly, there is a high degree of correlation. If one accepts the STLFSI as a more broad measurement of stress in the financial system, one can make a case that while the VIX is usually directionally correct, at certain times the VIX has underestimated the stress in the system (e.g., May 2008) while at other times the VIX has overestimated the stress in the system (e.g., May 2010). Going forward, I will make an effort to flag important divergences between the VIX and the STLFSI.

Note that the Kansas City Fed has a similar Financial Stress Index, aka the KCSFI, which is more concise and more focused on yield spreads.

The St. Louis Fed has more information on the STLFSI here, while the Kansas City Fed has more information on the KCSFI here.

Related posts:

[source: Federal Reserve Bank of St. Louis]

Disclosure(s): none



Read more here:
St. Louis Fed’s Financial Stress Index

OPTIONS, Uncategorized

Day Care or Default? – The long-expected decline of an unsustainable economic model

September 28th, 2010

After so much traveling, we’re happy to stay at home this week and do our reckoning here.

This past weekend, we got back from Florida only to depart immediately to a wedding in New York.   The roads are a lot worse in New York than they are in Florida.  Maybe it’s the weather.  Maybe it’s the tax system.  But as you drive up from Maryland, the roads deteriorate as it costs more to drive on them.  You run into more and more potholes and shabby tollbooths as you go north.

That’s not likely to change.  Local governments are going broke.  So are national governments.  The politicians will have to make choices.  Repair the roads…or keep the libraries open?  Day care…or default?

At the wedding was a former Goldman bond trader.  “How long do you think it will be before government debt blows up,” we asked him.  His reply, “no time soon”…more below…

Not much happened on Wall Street yesterday.  The Dow lost 48 points.  Gold went nowhere.

And so far, almost everything that we thought ought to happen is happening.  More or less.  The crisis.  The feds’ reaction.  The market’s lack of reaction to the feds’ over reaction.   Then, the feds’ reaction to the markets failure to react.  One dumb thing begets another.

But so far, government debt market hasn’t blown up.   But even when things happen that we expect, they don’t necessarily happen the way we think they ought to or when we think they should.

We’ve had the crisis we expected.  Then, the feds poured good money in after bad…as expected.   They said the economy would ‘recover.’  Of course, the economy would do no such thing.  Instead, it has only just begun its “Great Correction”  – with high unemployment, falling house prices and treacherous asset markets.  And now Obama and Congress are paralyzed by upcoming elections.  And Ben Bernanke is thinking about Plan B…and hoping it won’t be necessary.

Unemployment is really far worse than the ‘official’ numbers suggest.  The feds take people off the unemployment roles if they go too long without finding another job.  In that regard, this slump is the worst ever.  People wait longer than ever before to find another job.  So more of them slip off the jobless tally before they ever find work.  They are disappeared by fed statisticians.  We haven’t done the numbers ourselves but John Williams of ShadowStats tells us that if they still did the figures the way they did before Clinton-era “adjustments,” we’d have an unemployment rate between 15% and 17%.

Gradually the financial media and investors are catching on.  They’re beginning to realize that this was no ordinary recession…and there won’t be any ordinary recovery either.

The New York Times brought the story to readers this weekend:

“In the old days — before 1990 — American recessions tended to be fairly sharp. But the recoveries, when they came, were also rapid. Laid-off workers were recalled and consumers who had deferred purchases out of fear they might lose their jobs were willing again to buy cars and homes.

“The newer version of recessions — in 1990-91 and 2001 — provided shallower downturns. But the aftermath was also slow and painful. They came to be known as jobless recoveries.

“The National Bureau of Economic Research determined this week that the recession that began in December 2007 ended in June 2009. That made it the longest downturn since World War II, and data had already shown it was the deepest in terms of decline in gross domestic product.

“And now that we know the recovery is more than a year old, it appears that this cycle is combining the worst of both worlds: deep fall followed by slow recovery.”

“There are some aspects of this cycle that have no direct precedent. One is the performance of service industries. For most of the years after World War II, the United States economy became more and more oriented toward service jobs, and both employment and spending rose, whatever the state of the rest of the economy. But this time service businesses suffered, and they have been slow to recover.

“That is particularly true for the industry that bears the most blame for the recession — financial services. The big banks were bailed out — Lehman Brothers excepted — but employment fell sharply during the recession and has continued to decline.

“Another area that is weaker than in previous recoveries is the condition of state and local governments. Working for them was always considered safe, if not particularly rewarding. Neither of the two recessions before the latest one had any significant impact on those jobs.

But in this cycle, governments are facing severe budget shortfalls, and layoffs are accelerating.”

What kind of cruel fate is this, dear reader…when even the zombies on the public payroll aren’t safe from layoffs?  Have the gods turned against us?

And more thoughts…

The Great Correction is good news, as far as we’re concerned.   Finally, the financial gods are kicking the right butts.  You can’t really get rich by spending money.  And you can’t really create prosperity by building houses for people who can’t afford to pay for them.  So to the Bubble Epoque, we say: ‘Goodbye and Good Riddance.”

America needs a correction; it’s getting one.  It was wasting too much of its resources on phony, unsustainable ‘growth,’ while actually going deep into debt.

Why was it doing that?  Well…blame Alan Greenspan…blame the Fed…blame the US Treasury…blame Richard Nixon…blame Milton Friedman and John Maynard Keynes.  They all had a hand in it.

We’re beginning to see more clearly how economists and the feds connived and conspired to rig the system.  The dollar-based monetary system they created has a huge bias towards debt and inflation.  Almost everyone likes it.  And the others don’t know what’s happening anyway…  But has any pure paper money ever survived an entire credit cycle – from the boom years through the bust years – intact?  Nope.  Never.

And now the Great Correction has begun.  And the serious question is: how much of this scam is it going to correct?

We don’t know.  But there’s a lot to be corrected.

*** “Well, I think the bond market is the most misunderstood market in the world.  Everybody is talking about how bonds are the worst place for your money.  But I think they are the best place for your money.”

Speaking was one of the best bond traders in the US.  At least, that was the judgment of other bond traders and industry experts.  We wanted to know more…

“Some of the best investments you can make now are in the bonds of places such as Ireland and Greece.  Everyone thinks they’re going broke.  But they’re not.  The European Central Bank will give them the money to make their payments.  They’re not going to default.

“That’s what is great about bonds.  We’re entering a difficult period for the world economy.  There is simply too much capacity.  This correction is going to take a long time.  People are worried about defaults on sovereign debt?  They can forget about it.  Neither Europe nor America will default.  The central banks won’t let them.  Instead, they will announce a program of long-term deficit reduction.  In return for correcting structural budget problems, European nations will get the money they need to meet their obligations.  These will be pure cash “awards,” not debt.  So their debt won’t increase.  Bond investors won’t have anything to worry about.

“I don’t know if they will actually correct their long-term finances or not.  It depends on the growth rate.  If they can grow their economies fast enough, they may not have a problem.  But whatever problem it is, it is far in the future.  In the meantime, these sovereign bonds will go up.  Because the payers won’t default.  And everything else will go down.  Want some good advice?  Buy bonds.”

Regards,

Bill Bonner,
for The Daily Reckoning

Day Care or Default? – The long-expected decline of an unsustainable economic model originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Day Care or Default? – The long-expected decline of an unsustainable economic model




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Day Care or Default? – The long-expected decline of an unsustainable economic model

September 28th, 2010

After so much traveling, we’re happy to stay at home this week and do our reckoning here.

This past weekend, we got back from Florida only to depart immediately to a wedding in New York.   The roads are a lot worse in New York than they are in Florida.  Maybe it’s the weather.  Maybe it’s the tax system.  But as you drive up from Maryland, the roads deteriorate as it costs more to drive on them.  You run into more and more potholes and shabby tollbooths as you go north.

That’s not likely to change.  Local governments are going broke.  So are national governments.  The politicians will have to make choices.  Repair the roads…or keep the libraries open?  Day care…or default?

At the wedding was a former Goldman bond trader.  “How long do you think it will be before government debt blows up,” we asked him.  His reply, “no time soon”…more below…

Not much happened on Wall Street yesterday.  The Dow lost 48 points.  Gold went nowhere.

And so far, almost everything that we thought ought to happen is happening.  More or less.  The crisis.  The feds’ reaction.  The market’s lack of reaction to the feds’ over reaction.   Then, the feds’ reaction to the markets failure to react.  One dumb thing begets another.

But so far, government debt market hasn’t blown up.   But even when things happen that we expect, they don’t necessarily happen the way we think they ought to or when we think they should.

We’ve had the crisis we expected.  Then, the feds poured good money in after bad…as expected.   They said the economy would ‘recover.’  Of course, the economy would do no such thing.  Instead, it has only just begun its “Great Correction”  – with high unemployment, falling house prices and treacherous asset markets.  And now Obama and Congress are paralyzed by upcoming elections.  And Ben Bernanke is thinking about Plan B…and hoping it won’t be necessary.

Unemployment is really far worse than the ‘official’ numbers suggest.  The feds take people off the unemployment roles if they go too long without finding another job.  In that regard, this slump is the worst ever.  People wait longer than ever before to find another job.  So more of them slip off the jobless tally before they ever find work.  They are disappeared by fed statisticians.  We haven’t done the numbers ourselves but John Williams of ShadowStats tells us that if they still did the figures the way they did before Clinton-era “adjustments,” we’d have an unemployment rate between 15% and 17%.

Gradually the financial media and investors are catching on.  They’re beginning to realize that this was no ordinary recession…and there won’t be any ordinary recovery either.

The New York Times brought the story to readers this weekend:

“In the old days — before 1990 — American recessions tended to be fairly sharp. But the recoveries, when they came, were also rapid. Laid-off workers were recalled and consumers who had deferred purchases out of fear they might lose their jobs were willing again to buy cars and homes.

“The newer version of recessions — in 1990-91 and 2001 — provided shallower downturns. But the aftermath was also slow and painful. They came to be known as jobless recoveries.

“The National Bureau of Economic Research determined this week that the recession that began in December 2007 ended in June 2009. That made it the longest downturn since World War II, and data had already shown it was the deepest in terms of decline in gross domestic product.

“And now that we know the recovery is more than a year old, it appears that this cycle is combining the worst of both worlds: deep fall followed by slow recovery.”

“There are some aspects of this cycle that have no direct precedent. One is the performance of service industries. For most of the years after World War II, the United States economy became more and more oriented toward service jobs, and both employment and spending rose, whatever the state of the rest of the economy. But this time service businesses suffered, and they have been slow to recover.

“That is particularly true for the industry that bears the most blame for the recession — financial services. The big banks were bailed out — Lehman Brothers excepted — but employment fell sharply during the recession and has continued to decline.

“Another area that is weaker than in previous recoveries is the condition of state and local governments. Working for them was always considered safe, if not particularly rewarding. Neither of the two recessions before the latest one had any significant impact on those jobs.

But in this cycle, governments are facing severe budget shortfalls, and layoffs are accelerating.”

What kind of cruel fate is this, dear reader…when even the zombies on the public payroll aren’t safe from layoffs?  Have the gods turned against us?

And more thoughts…

The Great Correction is good news, as far as we’re concerned.   Finally, the financial gods are kicking the right butts.  You can’t really get rich by spending money.  And you can’t really create prosperity by building houses for people who can’t afford to pay for them.  So to the Bubble Epoque, we say: ‘Goodbye and Good Riddance.”

America needs a correction; it’s getting one.  It was wasting too much of its resources on phony, unsustainable ‘growth,’ while actually going deep into debt.

Why was it doing that?  Well…blame Alan Greenspan…blame the Fed…blame the US Treasury…blame Richard Nixon…blame Milton Friedman and John Maynard Keynes.  They all had a hand in it.

We’re beginning to see more clearly how economists and the feds connived and conspired to rig the system.  The dollar-based monetary system they created has a huge bias towards debt and inflation.  Almost everyone likes it.  And the others don’t know what’s happening anyway…  But has any pure paper money ever survived an entire credit cycle – from the boom years through the bust years – intact?  Nope.  Never.

And now the Great Correction has begun.  And the serious question is: how much of this scam is it going to correct?

We don’t know.  But there’s a lot to be corrected.

*** “Well, I think the bond market is the most misunderstood market in the world.  Everybody is talking about how bonds are the worst place for your money.  But I think they are the best place for your money.”

Speaking was one of the best bond traders in the US.  At least, that was the judgment of other bond traders and industry experts.  We wanted to know more…

“Some of the best investments you can make now are in the bonds of places such as Ireland and Greece.  Everyone thinks they’re going broke.  But they’re not.  The European Central Bank will give them the money to make their payments.  They’re not going to default.

“That’s what is great about bonds.  We’re entering a difficult period for the world economy.  There is simply too much capacity.  This correction is going to take a long time.  People are worried about defaults on sovereign debt?  They can forget about it.  Neither Europe nor America will default.  The central banks won’t let them.  Instead, they will announce a program of long-term deficit reduction.  In return for correcting structural budget problems, European nations will get the money they need to meet their obligations.  These will be pure cash “awards,” not debt.  So their debt won’t increase.  Bond investors won’t have anything to worry about.

“I don’t know if they will actually correct their long-term finances or not.  It depends on the growth rate.  If they can grow their economies fast enough, they may not have a problem.  But whatever problem it is, it is far in the future.  In the meantime, these sovereign bonds will go up.  Because the payers won’t default.  And everything else will go down.  Want some good advice?  Buy bonds.”

Regards,

Bill Bonner,
for The Daily Reckoning

Day Care or Default? – The long-expected decline of an unsustainable economic model originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Day Care or Default? – The long-expected decline of an unsustainable economic model




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Flip-Flops-On-The-Ground Research

September 28th, 2010

“Brazil is blessed with enormous reserves of the metals and minerals essential to modern manufacturing… Coal may be the only substance vital to industrial production that is in short supply.”

~ Larry Rohter, Brazil on the Rise: The Story of a Country Transformed

As I write, I’m in Florianopolis, the capital of the state of Santa Catarina, in southern Brazil. “Floripa,” as it is known, is on the landward side of an island, where it can shelter ships from the brunt of the Atlantic Ocean’s powers. Our guide tells us that Portuguese colonists settled here in the 17th century, looking for gold.

They didn’t find gold, but Floripa has become a favorite spot for wealthy Brazilians. We are staying at a resort on Jurere Beach, which is one of 42 beaches on this 200-square-mile island. Jurere is the best one, apparently, having won a number of awards. Jurere is where the rich stay when they come, and we saw some monster houses that looked like beached cruise ships — one even had a helipad.

This is the southernmost part of our four-city tour through Brazil. We came to Floripa to look at a new project by a group called Txai (pronounced “chai,” like the tea). It is a spectacular piece of property. This project will be open to individuals to buy bungalows, lofts and more.

In the video below, Barb Perriello and I do some boots-on-the-ground investing — or, in this case, flip-flops on the ground — as we check out the views on our way to the beach:

But our topic today is fertilizer. In Sao Paulo last week, I gave a short presentation to a group of readers about a few attractive Brazilian investment themes. I talked about the expanding middle class, which is driving the need for new housing. I talked about Brazil’s dominant position in the global meat trade. I also talked about the case for hard coking coal (also known as met coal)…and about fertilizer.

Brazil, like most emerging markets, needs much more fertilizer than it produces for itself.

Fertilizer demand is also soaring throughout all the large emerging markets. Companhia Vale Do Rio Doce, “Vale,” (NYSE: RIO) is a large Brazilian company that offers a glimpse into Brazilian demand for both coal and fertilizer.

Last Friday, Vale announced that it planned to sell its fertilizer assets in an IPO in the first half of 2011. (Vale will likely retain a stake in the company, but how much is not clear yet.) Vale Fertilizantes, which is the name of the new fertilizer company, will hold all of Vale’s fertilizer assets. Vale is doing this to create value for Vale shareholders by drawing more attention to these things, which are the second biggest revenue generator for Vale, after its more famous iron ore mines.

Vale Fertilizantes has many of Brazil’s best fertilizer assets, which is key because Brazil also imports most of its fertilizer needs. Take a look at this chart:

You can see that Brazil depends on the rest of the world for its fertilizer needs, which keep its mighty agricultural production humming. In particular, note the lack of domestic potash, with 93% of Brazil’s needs coming from outside of the country.

Vale has some good assets outside of Brazil, too. It has, for example, the Bayovar mine in Peru (a joint venture with Mosaic), which is one of the largest phosphate deposits in South America. It also has potash projects in Saskatchewan and Argentina (though I’m not sure how good its deposit is in Argentina. I have my doubts).

In any event, I’m fascinated by the IPO and will keep you posted. Investors may soon have another choice in potash producers. Vale is looking to boost its production of potash tenfold by 2017, which would put it behind only PotashCorp and Mosaic.

In a bigger-picture sense, both of these commodities fit under a broader theory that you will do well to invest in the commodities that the big emerging markets are short of. China, India and Brazil import both hard coking coal and potash — and it looks likely they will import a lot more over the next decade.

Regards,

Chris Mayer,
for The Daily Reckoning

Flip-Flops-On-The-Ground Research originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Flip-Flops-On-The-Ground Research




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

Flip-Flops-On-The-Ground Research

September 28th, 2010

“Brazil is blessed with enormous reserves of the metals and minerals essential to modern manufacturing… Coal may be the only substance vital to industrial production that is in short supply.”

~ Larry Rohter, Brazil on the Rise: The Story of a Country Transformed

As I write, I’m in Florianopolis, the capital of the state of Santa Catarina, in southern Brazil. “Floripa,” as it is known, is on the landward side of an island, where it can shelter ships from the brunt of the Atlantic Ocean’s powers. Our guide tells us that Portuguese colonists settled here in the 17th century, looking for gold.

They didn’t find gold, but Floripa has become a favorite spot for wealthy Brazilians. We are staying at a resort on Jurere Beach, which is one of 42 beaches on this 200-square-mile island. Jurere is the best one, apparently, having won a number of awards. Jurere is where the rich stay when they come, and we saw some monster houses that looked like beached cruise ships — one even had a helipad.

This is the southernmost part of our four-city tour through Brazil. We came to Floripa to look at a new project by a group called Txai (pronounced “chai,” like the tea). It is a spectacular piece of property. This project will be open to individuals to buy bungalows, lofts and more.

In the video below, Barb Perriello and I do some boots-on-the-ground investing — or, in this case, flip-flops on the ground — as we check out the views on our way to the beach:

But our topic today is fertilizer. In Sao Paulo last week, I gave a short presentation to a group of readers about a few attractive Brazilian investment themes. I talked about the expanding middle class, which is driving the need for new housing. I talked about Brazil’s dominant position in the global meat trade. I also talked about the case for hard coking coal (also known as met coal)…and about fertilizer.

Brazil, like most emerging markets, needs much more fertilizer than it produces for itself.

Fertilizer demand is also soaring throughout all the large emerging markets. Companhia Vale Do Rio Doce, “Vale,” (NYSE: RIO) is a large Brazilian company that offers a glimpse into Brazilian demand for both coal and fertilizer.

Last Friday, Vale announced that it planned to sell its fertilizer assets in an IPO in the first half of 2011. (Vale will likely retain a stake in the company, but how much is not clear yet.) Vale Fertilizantes, which is the name of the new fertilizer company, will hold all of Vale’s fertilizer assets. Vale is doing this to create value for Vale shareholders by drawing more attention to these things, which are the second biggest revenue generator for Vale, after its more famous iron ore mines.

Vale Fertilizantes has many of Brazil’s best fertilizer assets, which is key because Brazil also imports most of its fertilizer needs. Take a look at this chart:

You can see that Brazil depends on the rest of the world for its fertilizer needs, which keep its mighty agricultural production humming. In particular, note the lack of domestic potash, with 93% of Brazil’s needs coming from outside of the country.

Vale has some good assets outside of Brazil, too. It has, for example, the Bayovar mine in Peru (a joint venture with Mosaic), which is one of the largest phosphate deposits in South America. It also has potash projects in Saskatchewan and Argentina (though I’m not sure how good its deposit is in Argentina. I have my doubts).

In any event, I’m fascinated by the IPO and will keep you posted. Investors may soon have another choice in potash producers. Vale is looking to boost its production of potash tenfold by 2017, which would put it behind only PotashCorp and Mosaic.

In a bigger-picture sense, both of these commodities fit under a broader theory that you will do well to invest in the commodities that the big emerging markets are short of. China, India and Brazil import both hard coking coal and potash — and it looks likely they will import a lot more over the next decade.

Regards,

Chris Mayer,
for The Daily Reckoning

Flip-Flops-On-The-Ground Research originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Flip-Flops-On-The-Ground Research




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.”

September 28th, 2010

Better-than-expected is not the same thing as good…

Last Sunday, the offense-challenged Buffalo Bills scored an impressive 30 points against the mighty New England Patriots. Thirty points was double the Bills’ per-game point total from last season, and also double the Patriots’ points-allowed total from last season. So thirty points was definitely much better than expected.

The Bills lost the game – 30 to 38.

Last week, the growth-challenged U.S economy posted a 2% growth in durable goods orders for August and a 7.6% jump in existing home sales. Both reports were better-than-expected. And the stock market welcomed the news with a much better-than-expected response. But the economy is still losing the game.

During the last few weeks, the banter from the financial news play-by-play analysts has upticked from despondent pessimism to cautious optimism. The threat of a double-dip recession is receding, the analysts say, and the economy is slowly recovering.

But is it?

The only problem with cautious optimism is the optimism part. The caution is warranted. The better-than-expected durable goods orders, for example, were still pretty dismal – today’s durable goods orders remain lower than they were five years ago and much lower than they were three years ago.

True enough, say the Wall Street analysts, but you’ve got to look at capital goods orders – the subset of the capital good reports that, in the words of the Associated Press, “is considered a good proxy for business investment planning.”

Okay, so let’s look. What we see is a data series that has bounced off the bottom of very depressed levels, but is stalling well below optimal levels.

Existing homes sales also came in better-then-expected, or “above consensus,” as the Wall Street folks like to say. According to a survey of Wall Street economists, existing homes sales were supposed to increase 7.1% from July’s record-low sales number. Instead, sales jumped a better-than-expected 7.6%…to the second-worst level of the past ten years.

Maybe the economy is improving, but the better-than-expected reports that have been crossing the newswires lately are very far from good. The chart below shows one very clear picture of the difference between better-than-expected and genuinely good.

Here in the U.S., existing home sales have rebounded from disastrous to merely awful. Meanwhile, down in the booming Brazilian economy, home sales have progressed from strong to stronger.

These contrasting housing market trends correlate very closely with the contrasting trends of U.S. and Brazilian economic growth. During the last three years, the U.S. economy has produced zero net GDP growth. The Brazilian economy, meanwhile, has grown about 4% per year. This contrast offers just one glimpse into the compelling investment profile of Brazil…and of the Emerging Markets in general.

Last week, your editors here at the Daily Reckoning extolled the virtues of Emerging Market economies and investments. Continuing this theme in today’s edition of the Daily Reckoning, Chris Mayer, editor of Mayer’s Special Situations, provides a few thoughts on Brazil…from Brazil.

Eric J. Fry
for The Daily Reckoning

The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.”




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.”

September 28th, 2010

Better-than-expected is not the same thing as good…

Last Sunday, the offense-challenged Buffalo Bills scored an impressive 30 points against the mighty New England Patriots. Thirty points was double the Bills’ per-game point total from last season, and also double the Patriots’ points-allowed total from last season. So thirty points was definitely much better than expected.

The Bills lost the game – 30 to 38.

Last week, the growth-challenged U.S economy posted a 2% growth in durable goods orders for August and a 7.6% jump in existing home sales. Both reports were better-than-expected. And the stock market welcomed the news with a much better-than-expected response. But the economy is still losing the game.

During the last few weeks, the banter from the financial news play-by-play analysts has upticked from despondent pessimism to cautious optimism. The threat of a double-dip recession is receding, the analysts say, and the economy is slowly recovering.

But is it?

The only problem with cautious optimism is the optimism part. The caution is warranted. The better-than-expected durable goods orders, for example, were still pretty dismal – today’s durable goods orders remain lower than they were five years ago and much lower than they were three years ago.

True enough, say the Wall Street analysts, but you’ve got to look at capital goods orders – the subset of the capital good reports that, in the words of the Associated Press, “is considered a good proxy for business investment planning.”

Okay, so let’s look. What we see is a data series that has bounced off the bottom of very depressed levels, but is stalling well below optimal levels.

Existing homes sales also came in better-then-expected, or “above consensus,” as the Wall Street folks like to say. According to a survey of Wall Street economists, existing homes sales were supposed to increase 7.1% from July’s record-low sales number. Instead, sales jumped a better-than-expected 7.6%…to the second-worst level of the past ten years.

Maybe the economy is improving, but the better-than-expected reports that have been crossing the newswires lately are very far from good. The chart below shows one very clear picture of the difference between better-than-expected and genuinely good.

Here in the U.S., existing home sales have rebounded from disastrous to merely awful. Meanwhile, down in the booming Brazilian economy, home sales have progressed from strong to stronger.

These contrasting housing market trends correlate very closely with the contrasting trends of U.S. and Brazilian economic growth. During the last three years, the U.S. economy has produced zero net GDP growth. The Brazilian economy, meanwhile, has grown about 4% per year. This contrast offers just one glimpse into the compelling investment profile of Brazil…and of the Emerging Markets in general.

Last week, your editors here at the Daily Reckoning extolled the virtues of Emerging Market economies and investments. Continuing this theme in today’s edition of the Daily Reckoning, Chris Mayer, editor of Mayer’s Special Situations, provides a few thoughts on Brazil…from Brazil.

Eric J. Fry
for The Daily Reckoning

The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

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The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.”




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