Surging Commodities Have Created a Window of Opportunity

October 13th, 2010

Surging Commodities Have Created a Window of Opportunity

Thanks to a confluence of events, prices for corn, soybeans and wheat have been surging recently. And that has set agricultural equipment stocks afire. Shares of irrigation equipment maker Lindsay Manufacturing (NYSE: LNN) have surged more than +10% since last Thursday, while Deere (NYSE: DE) has made a similar move since last Monday. The same can be said for many other sector names, a number of which now sport price-to-earnings (P/E) ratios that are starting to get frothy.

It may be too late to make a quick hit on this farm belt trade, but another sector has suddenly become very attractive simply because these commodities are seeing a surge in prices. I'm talking about the major producers of chicken, beef and pork. Their costs just went up, and their shares just went down. Yet viewed in the context of traditional long-term earnings power, these stocks are suddenly quite cheap.

To fatten up livestock, farmers buy up massive amounts of corn and soybeans, which often account for a big chunk of operating expenses. But these “protein” producers have little control over revenue, even as their expenses rise and fall. The supply of animals on the market controls pricing, which is dictated by supply and demand on global markets. So with expenses rising and those costs unable to pass through, profit forecasts are falling.

For example, back in July analysts thought poultry producer Sanderson Farms (Nasdaq: SAFM) would earn $6 a share next year. Now they think profits will be at least 20% below that view.

But Sanderson's profit forecasts are dropping for another reason as well: the nation's production of chicken and other poultry is set to rise +3% next year, according to the U.S.D.A. And rising supplies usually means falling prices in this industry. Yet that's not the case for beef and pork, as those producers have shown a great deal of discipline by culling herds. Fewer hogs and cattle coming to market next year mean that prices should rise, according to the USDA's World Agricultural Supply and Demand Estimates (WASDE) surveys. By this time next year, global beef production should be -4% lower. (Pork production is slumping now, but is expected to rebound by the second half of 2011.)

So if expenses are rising for all protein producers but the revenue pictures are diverging, investors need to be selective. Smithfield Foods, which focuses solely on the pork market, is looking increasingly attractive, as the company should benefit from surging pork prices. Goldman Sachs expects hog prices to rise +25% to +30% next year, which should be more than enough to offset rising feed costs. If feed costs pull back to historical levels, then earnings could really take off. After a recent pullback, shares of Smithfield Foods trade for less than 10 times projected 2011 profits.

A long-term shot at poultry
Even as poultry producers are struggling from near-term expense hikes, their shares are setting up for a long-term buy. That's because these stocks tend to rise and fall in conjunction with earnings forecasts. Those forecasts have been cut lately, and shares of Sanderson, Tyson (NYSE: TSN) and Pilgrim's Pride (NYSE: PPC) now trade closer to their 52-week low than their 52-week high. Yet estimates should soon hit a bottom — and so should share prices.

Looking into 2011, other factors are conspiring to take profit forecasts back up. For example, poultry exports to China and Russia are finally starting to rebound after recent embargoes were lifted. And poultry producers have a much greater ability than pork and beef producers to alter industry supply dynamics, as it takes much longer to fatten a hog or cow. As a result, poultry production is likely to peak in the first half of 2011 and start dropping from there as farmers realize lower prices and move to bring supply back in line with demand.

Shares of the major poultry producers are trading for around eight times next year's downwardly revised 2011 profit forecasts. An expansion of the multiple to around 10, coupled with an eventual uptick in forecasts, should set the stage for meaningful upside — once this current round of rising feed costs have been cycled through to the investment community.

Action to Take –> Smithfield's pork focus makes its shares attractive right now. Investors need to show more finesse with the poultry stocks, however. Wait until quarterly results are out and lagging analysts finally reduce their estimates. Once that happens, forward estimates are likely to find a floor — as are share prices. As estimates start to rebound in ensuing months, shares are likely to rebound at an even more robust clip as the P/E multiple expands.


– David Sterman

P.S. –

Commodities, Uncategorized

This May be the Only Sure Way to Play Real Estate

October 13th, 2010

This May be the Only Sure Way to Play Real Estate

I've always been a sucker for the home improvement shows on HGTV.

That's why I planned to sit in front of the TV for just a few minutes while folding laundry over the weekend, but it wasn't until an hour later that I got moving again. One of my favorites — Holmes on Homes — was on.

If you like these shows as much as I do, you might have noticed some telling changes in the lineup over the past few years.

A few years ago, shows like Flip That House and Property Ladder were in heavy rotation. During the home real estate boom, they featured people who bought, remodeled, and quickly resold homes for near six-figure gains.

But as the housing market went from boom to bust, a different kind of real estate show emerged. Designed to Sell, Get it Sold, Real Estate Intervention and The Unsellables featured desperate home owners, struggling to sell in a buyer's market.

Now there is a new trend in the real estate television market that's plenty telling. Shows like For Rent and Income Property feature storylines that play into the growing demand for apartment rentals.

The statistics behind the real estate television trend
No matter what trends you examine, the conclusion is the same. There just aren't as many people buying homes as there once were.

In the first quarter of 2010, the amount of U.S. mortgage debt dropped by -$99 billion. In the second quarter, it dropped by another -$49 billion. In August 2010, the number of sales of existing homes was -19% below August of last year. The rate of new home sales was off -29% compared to August 2009.

But the decline in home buying is starting to trigger an increased demand for rental apartments. Apartment occupancy rates rose to 92.2% in the second quarter of 2010, up from 92.0% in the first quarter according to Reis Inc. Rents are also starting to rise modestly, up +0.7% in the second quarter.

Could this short-term trend become a long-term shift?
Clearly the burst of the housing bubble and continued high unemployment rate are instrumental in the increase in apartment demand. Without clear evidence of a housing rebound, people continue to be reluctant to buy. After all, why buy today what you may be able to get cheaper tomorrow? And although the chances of a double-dip recession appear to be waning, the fragile employment market has made people far more cautious about making any large financial commitment.

But even stability in the housing and job markets may not stem the rising apartment tide.

For Baby Boomers, the myth of a constantly appreciating housing market was fueled by our parents' home ownership experience. As the chart below shows, with data compiled by real estate guru Robert Shiller, home prices steadily rose in the decade following World War II, fueled by returning GIs and a booming mid-century economy. But until the boom in the 2000s, home prices were mostly stagnant, supported only by the rising demand of the Baby Boomers themselves.

We grew up with the perception that buying a home was a dependable and savvy investment. But in reality, from 1940 to 2004, housing prices only appreciated an average of +2% annually, according to data from the U.S. Census. And according to a recent report released by Ned Davis Research, that's probably the best we can hope for in the foreseeable future — prices might not rise until unemployment drops to 6%.

Would we have made the same decision to leverage ourselves with 30 years of debt for an investment that, after inflation, was a break-even proposition?

As we learned from our parents' experience, the next generation of potential home buyers will be colored by our experience. Roughly 20% of them see their parents with a home that is worth less than when they bought it — and not worth as much as the debt their parents owe.

In other words, I think this is a long-term shift in behavior.

Opportunities to profit from the renting generation
Reis Inc. is forecasting continued strength in the apartment sector throughout next year. The firm is tempering its outlook past that due to the number of new apartment projects coming online in 2012. But I am more optimistic about the apartment sector. I believe we are not looking at a temporary shift — but are looking at a trend that could span a generation.

That's why I've been snooping around some apartment REITs in preparation for my next Stock of the Month issue.

Action to Take –> There are a number of real estate investment trusts (REITs) that specialize in apartment properties. Equity Residential (NYSE: EQR) and AvalonBay Communities (NYSE: AVB) are among the market leaders. Investors looking for a slightly more diversified REIT play may prefer the iShares FTSE NAREIT Residential Plus Capped Index ETF (NYSE: REZ). Roughly 47% of the ETF is represented by apartment holdings, with healthcare properties making up the next biggest slice at 37%.

I'm not ready to pull the trigger yet, and one of these ideas may or may not make it into my real-money portfolio. But if you're looking for a long-term trend that also throws off solid income, I think apartment REITs are looking appetizing, given the trend.

ETF, Real Estate, Uncategorized

5 Investments That Will Profit from a Falling Dollar

October 13th, 2010

5 Investments That Will Profit from a Falling Dollar

Before the economic crisis took hold, the U.S. dollar began a steady downward drift as global investors started to realize that economic growth would be more robust elsewhere in the world. The dollar's slump was also due to never-ending trade deficits, which had long been expected to weaken the greenback, and finally did so beginning in late 2004. During the next 30 months, the U.S. dollar, compared to the euro, fell from 0.86 euros to 0.63 — a -25% drop.

With concerns about the global economic crisis receding, the dollar is back on a downward path. As I noted recently, the dollar “now stands at all-time lows against the Australian dollar and the Swiss franc, a 15-year low against the Japanese yen, and more recent lows against the euro.” [What the Global Currency Wars Mean for Your Portfolio] That recent downward move should have an almost immediate impact: export-related profits are bound to come in higher than forecasts in the fourth quarter of 2010 and the first quarter of 2011 as those earnings get repatriated back into dollars.

Yet it's the long-term impact that investors need to embrace. Not only are foreign-earned profits likely to be pumped up by further dollar weakness, but the competitive positioning of U.S. firms is also bound to improve, setting the stage for rising market share.

Of course, many exporters also have operations in foreign countries, so their expenses will also rise. So if you're looking to cash in on the potential export surge, then it pays to focus on companies with a still-considerable manufacturing presence here in the United States.

Here's a look at five industries and representative companies that I will think will flourish from a weaker dollar…

1. Industrials — Illinois Tool Works (NYSE: ITW)
Of all of the industries that comprise U.S. exports, the industrial sector is the largest by far, with more than $100 billion in manufactured goods shipped abroad annually. Among the major exporters, it's almost impossible to find companies that don't also manufacture some of their production abroad, and Illinois Tool Works is no exception. But this company has ample flexibility and can easily migrate some of that foreign production back to the U.S., as its domestic manufacturing base is under-utilized.

The weak dollar scenario could be a real boon to the company, which faces serious local competition in the international marketplace. Its 800 divisions have a chance to pick up market share, helping sales rise from a projected $15.7 billion in 2010 toward the $20 billion mark in coming years.

2. Agriculture — Smithfield Foods (NYSE: SFD)
The U.S. has become an impressive exporter of commodities — a trend that will only be strengthened if the dollar continues to slump further. Yet it's our livestock that could be the real trade winner. Did you know that Japan is the largest market for imported pork in the world? And did you know that China, which consumes 50% of the world's pork, is at maximum production and may soon become a pork importer? That means China will be ill-equipped to supply the Japanese market, and we here in the U.S. stand to post rising pork exports — especially as the dollar weakens.

Smithfield Foods, which I profiled in this piece, is the world's largest producer of pork. Right now, Smithfield is looking to restrain output to help boost prices. But as global demand for pork exports rises, Smithfield won't have to worry about constraining output much longer.

3. Mutual Funds — Fidelity Export and Multinational Fund (Nasdaq: FEXPX)
This fund has returned just +0.8% on an annualized basis for the past five years. That's right in line with the S&P 500. But a weaker dollar changes everything for this fund. It helps pump up earnings for the companies in its portfolio, and it helps them take market share. This play may be especially timely, as a number of its holdings are likely to speak about the benefits of a weaker dollar in their upcoming conference calls.

The Fidelity Export Fund's top five holdings are: ExxonMobil (NYSE: XOM), Apple (Nasdaq: AAPL), Johnson & Johnson (NYSE: JNJ), GE (NYSE: GE) and Procter & Gamble (NYSE: PG).

4. Media — Disney (NYSE: DIS)
Despite the occasional cultural war, we remain the undisputed kings of global entertainment. Many countries heavily subsidize local film industries to help create domestic blockbusters, but it's the U.S. blockbusters that often take home the local gold in terms of box office receipts. Disney, with interests in theme parks, Pixar movie studios, cruise ships and other forms of entertainment, is truly a global brand. Disney, like other media firms, will be hard-pressed to boost market share simply because the dollar is cheaper, but those foreign-earned profits are likely to be worth even more as the dollar slips further.

Before the global economic crisis hit, Disney was on its way to become a profit powerhouse as EPS grew more than +30% in 2006 and 2007 and topped out at $2.28. Profits subsequently slumped in the economic downturn, but should return to pre-recession levels this year. It may not be long before Disney resumes that upward profit surge: analysts think per share profits can approach $3 by 2012 or 2013. Not bad for a $34 stock with such strong global brand cachet.

5. Software — Oracle (Nasdaq: ORCL)
I'm hesitant to include this stock after it has had a recent strong run, but you can't ignore the appeal of this sector when talking about the global trade picture. Oracle's software is not a price-sensitive product. But the after-market support the company sells in terms of service contracts sure is.

Oracle often needs to make major price concessions on these service contracts to win business away from rival SAP (NYSE: SAP), whose business is denominated in euros. Oracle's business is done in dollars. In a world of cheaper dollars, Oracle can either cut price in the local currency and take market share, or maintain price and boost margins as the dollar falls farther. It's a nice problem to have, and can be said of many other tech powerhouse such as Hewlett-Packard (NYSE: HPQ), Microsoft (Nasdaq: MSFT) or IBM (NYSE: IBM).

Action to Take –> There are already compelling reasons to own these stocks, but a falling dollar makes it all the more tempting to consider these names. Not only that, but a busier export sector creates a virtuous cycle, as support businesses receive more orders to help provide goods and services to these large firms.

The Obama administration realizes the power of a weak dollar, which is why we don't read much about the U.S.'s “strong dollar” approach anymore. Keep an eye on the currency markets. If the dollar's recent slide continues, you can expect to start hearing about these export plays all over Wall Street.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
5 Investments That Will Profit from a Falling Dollar

Read more here:
5 Investments That Will Profit from a Falling Dollar

Commodities, Mutual Fund, Uncategorized

VIX Sets Two New Records

October 13th, 2010

It is not every day that the VIX establishes some sort of new all-time record and it is rarer still that the volatility index sets two different records on consecutive days, but such has been the case at the beginning of this week.

The first record, established on Monday, was in the VIX:VXV ratio – a subject that I covered on a regular basis in the first year or so following the launch of VXV, which is essentially a 93 day version of the VIX and whose formal name is the CBOE S&P 500 3-Month Volatility Index.

Long-time readers will recall that for the first year after VXV was launched, the VIX:VXV ratio performed flawlessly (see VXV Is One Year Old.) In a post-Lehman world, however, the VIX:VXV ratio has been inconsistent as the persistent extreme contango has made the ratio more difficult to calibrate. I have been doing some work on this, however, and will share some of my thinking about how to tweak this ratio going forward.

The latest record, established today, is in my proprietary VIX Futures Contango Index. I spelled out some of my thinking about the epic disconnect between the cash/spot VIX and the VIX futures in a post a month ago with the title of VIX Futures: What Are/Were They Thinking?

In the end, the VIX:VXV ratio and the VIX Futures Contango Index both measure different aspects of the same phenomenon: how much current volatility readings vary from future market volatility estimates. I do believe that when estimates of near-term and long-term volatility show a record degree of divergence, some considerable opportunities are presented. As I have spelled out in a number of instance lately, my thinking has been that the back month volatility will likely collapse in order to bring the present and the future back into line. There has been some evidence of that happening during the past two days, but I anticipate that long-term volatility expectations will continue to decline.

On a related note, VXX has made a new all-time low six days in a row and counting…

Related posts:

[source: StockCharts.com]
Disclosure(s): neutral position in VIX via options at time of writing



Read more here:
VIX Sets Two New Records

OPTIONS, Uncategorized

Three ETFs To Play Nuclear Energy

October 13th, 2010

As the world’s energy needs amplify, volatility in oil and gas continue to prevail and rising concerns over global warming loom on the political forefront, there are numerous reasons to keep an eye on nuclear energy.

According to the Nuclear Energy Agency (NEA), global demand for electricity is expected to rise by 2.5 times over the next 40 years and is suggests that nuclear energy should be the answer to this uptick in demand.  In fact, the NEA has forecasted the number of nuclear reactors worldwide to grow 600 and 1,400 by 2050, translating into a necessary investment of between $680 billion and $3.9 trillion.  One major driver behind this belief is that at current utilization rates, nuclear energy generates nearly 15% of all global electricity.  In some countries, nuclear energy plays a much more significant role in providing electricity-in France, the country with the second largest number of nuclear plants, 80% of all electricity is generated via nuclear reactors.

A second reason to consider nuclear energy is its eco-friendliness.  Nuclear energy doesn’t produce carbon dioxide like its fossil fuel competitors.  This is important because nearly every nation in the world is focusing on reducing greenhouse gases.

Thirdly, nuclear energy is receiving wide range global political support, especially from emerging market powerhouses who are expected to witness enhanced energy demand over the next few decades.  In fact, China is expected to have as many as 150 new nuclear power reactors become operational over the next 10 years and India plans on doubling the share of nuclear power on its grid to greater than 8% over the next 20 years.

Lastly, the use of nuclear energy seems to make economic sense.  Granted, the initial construction costs of a nuclear plant are huge, but the ongoing maintenance and fuel costs have proven to be far lower than that of other energy sources.  Additionally, new nuclear power plants seem to have a longer life-span of nearly 60 operational years compared to 30 or 40 of older ones.

In a nutshell, nuclear energy offers economic, political, social and scientific reasons why it is a viable source of energy and is likely to be an answer to the expected supply and demand imbalances that the energy sector is likely to see in the near future.

Three ways to play nuclear energy include:

  • PowerShares Global Nuclear (PKN) which has 66 holdings, carries an expense ratio of 0.75% and includes companies that are involved in uranium mining.
  • Market Vectors Nuclear Energy (NLR), which has 21 holdings and carries an expense ratio of 0.63%. NLR includes utility services holdings like Constellation Energy (CEG) and Exelon Corporation (EXC) who are involved in the generation, transmission, distribution, and sale of electricity to residential, commercial, industrial, and wholesale customers.
  • iShares S&P Global Nuclear Energy (NUCL), which has 23 holdings, carries an expense ratio of 0.48% and gives one global exposure to nuclear energy. Its top holdings include nuclear energy and uranium mining company Cameco Corporation (CCJ) and power generation systems firm McDermott International (MDR).

Although an opportunity seems to present itself in nuclear energy, some concerns that could put a damper on its future include the absence of a stable and lasting strategy for nuclear waste management, and a potential weakness in credit markets as the result of the sovereign debt crisis

Disclosure: No Positions

Read more here:
Three ETFs To Play Nuclear Energy




HERE IS YOUR FOOTER

Uncategorized

Three REIT ETFs That Are Shining

October 13th, 2010

As the residential real estate market continues to remain volatile and highly dependent on the strength of the labor force, some signs of prosperity have emerged in real estate investment trusts (REITs) enabling the iShares Dow Jones US Real Estate (IYR), the iShares Cohen & Steers Realty Major (ICF) and the Vanguard REIT ETF (VNQ) to perform relatively well this year. 

One reason these ETFs have been trending upward is because they offer an opportunity to debt that traditional financing institutions like banks and insurance companies are unwilling to take on.  Increases in foreclosures, a weak job market and other recessionary factors have put extreme pressure on income producing properties leading to increased stress on the loans that these properties support.  As a result, an opportunity has arisen for REITs to lend, either through debt or equity financing, to the owners of these income properties. 

A second reason these ETFs have been performing well is due to the relatively low prices of real estate.  As a result of the financial crisis of 2008, the real estate markets as a whole took a dive making them cheap and putting the sector in a position destined to go up. 

Lastly, the diversification REITs offer to a portfolio adds to their appeal.  In general, REITs have relatively low correlations and risk measures when compared to equity indices and give investors a way to mitigate the volatility of the equity markets.  

As mentioned above, the following ETFs have been trending upwards for the aforementioned reasons:

  • iShares Dow Jones US Real Estate (IYR), which is up 33.6% over the last year and boasts a yield of 3.56%.
  • iShares Cohen & Steers Realty Major (ICF), which is up 37.3% over the last year and has a yield of 3%
  • Vanguard REIT ETF (VNQ), which is up 34.9% over the last year and has a yield of 3.61%.

Although an upward trend appears to be prevailing in the REIT market, it is equally important to keep in mind the risks that are involved with investing in these ETFs.  To help mitigate these risks, the use of an exit strategy which identifies specific price points at which an upward trend could come to an end is important.  Such a strategy can be found at www.SmartStops.net.

Disclosure: No Positions

Read more here:
Three REIT ETFs That Are Shining




HERE IS YOUR FOOTER

ETF, Real Estate, Uncategorized

Bond Investors Are People Too

October 12th, 2010

Last week, bond prices were so high that a two-year government note yielded a miniscule 0.43%. To get more than one percent interest, you have to accept the five-year Treasury note yield of 1.32%. The ten-year yield? 2.60%. The 30-year long bond? A laughable 3.78%! Hahaha! This is insane!

And, as astronomically high as bond prices are, money is still flowing out of equity funds and pouring into bond funds, which has a lot to do with the price of bonds rising so high that they produce such pathetic, less-than-inflation yields.

It all reminds me of an old cartoon I once saw, which I adapt here. A guy is strapped down on the floor of the desert, baking in the sun. Behind him is a sign that says, “Bond Investor One-Day Training Course.” The guy is looking up and says, “Wow! That sun’s so hot it will bake your brains out in less than a day!” Hahaha!

I know I should not be laughing at bond investors, and jeering at bond investors, and saying cruel things about bond investors like, “You bond investors are idiots!” but instead I should feel sorry for bond investors because of how they are going to pay a terrible price when interest rates rise in response to inflation in prices, and how I should be fearful because losses of such magnitude are so completely catastrophic to the macro-economy.

Instead, I am much more interested in me, me, me, and especially and how can I make a lot of money fast without working.

Of course, being a natural coward, I am loath to take a risk of any kind, and I want only Big Sure-Fire Winners (BSFW) in which to invest and make a lot of money, fast, without working.

And being a naturally angry and cynical guy who understands the Austrian school of economics, I am petrified of the massive inflation caused by the despicable Obama administration deficit-spending So Freaking Much Money (SFMM), making the more-despicable Federal Reserve create more new money with which to soak up all that new debt, over and over, day after day, more and more, a gigantic inflation in the money supply to cause inflation in prices, which will destroy us like a guy in a Godzilla suit stomping on toy trains and model balsawood buildings representing Tokyo! Gaaahhh! I am screaming my Outraged Mogambo Guts (OMG) here!

But I imagine that bond buyers, too, wearily go home at the end of the day, and have a normal family life, not suspecting anything is wrong.

But when a Junior Mogambo Ranger (JMR) comes home after a hard day of work and you find that your family is being extra nice to you (for a welcome change!), you are, thanks to your “suspect everybody” JMR training, instantly on alert for some vile treachery at this unexpected change in the environment.

And do you remember how you told them you were suspicious of them? And do you remember how they denied it, which made you more suspicious, and you called them scheming liars, which they again denied, which only made you even more suspicious?

If you will recall, it was those times, among many, many other times, when you were right to be suspicious! Something was, indeed, going on!

For example, I remember the last time this happened to me, and it was right after I denounced them as “Lying, treacherous vipers out to kill me!” and how “If I had any guts, I’d kill the lot of you right now!” that they stopped being nice to me!

In fact, I would say that they were, as a group, behaving with the exact opposite of their previous “nice and pleasant” demeanor, and were, instead, downright hostile and distrustful! Of me! Their own beloved and loving husband and father! Imagine that!

Obviously, the lesson in all of this is the introduction of “the contrary indicator,” in that their phony façade of “making nice” was obviously a contrary indicator portending future social conditions around the house.

For the record, their usual frosty, snotty attitude became, alas, just another coincident indicator.

Anyway, the reason I bring this up is because if you are looking for a contrary indicator, I may, or may not, have one for you, courtesy of John Stepek at the Money Morning newsletter. But contrary or not, I think it is an indicator of some kind, perhaps significant, too, that just recently some outfit named Capital Economics, which was “formerly moderately bearish on gold,” has now “turned moderately bullish.”

I mean, I am instantly on alert when some guys missed an entire decade of gold rising over 400%, and who now, after missing the entire monster run of gold for 10 straight years, are “moderately bullish” on gold. Hmmm! I don’t know what to think!

Fortunately, I don’t have to think. The Magnificent Mogambo Portfolio (TMMP) was designed just for stupid guys like me, as it requires no thinking at all, and thus there is no chance to make another Big Freaking Mistake (BFM) like that time when you mistakenly asked, “Will you marry me?” and she said “Yes” and then ya made the mistake of actually getting married and then…well, it is too depressing to go on.

Anyway, the TMMP is simplicity itself: Buy gold, silver and oil when the Federal Reserve is creating more money! It’s that easy! And buying gold, silver and oil over the long-term with the glories of dollar-cost-averaging to maximize your profit, what can you do except greedily giggle with girlish glee, “Whee! This investing stuff is easy!”?

The Mogambo Guru
for The Daily Reckoning

Bond Investors Are People Too 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:
Bond Investors Are People Too




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

Bond Investors Are People Too

October 12th, 2010

Last week, bond prices were so high that a two-year government note yielded a miniscule 0.43%. To get more than one percent interest, you have to accept the five-year Treasury note yield of 1.32%. The ten-year yield? 2.60%. The 30-year long bond? A laughable 3.78%! Hahaha! This is insane!

And, as astronomically high as bond prices are, money is still flowing out of equity funds and pouring into bond funds, which has a lot to do with the price of bonds rising so high that they produce such pathetic, less-than-inflation yields.

It all reminds me of an old cartoon I once saw, which I adapt here. A guy is strapped down on the floor of the desert, baking in the sun. Behind him is a sign that says, “Bond Investor One-Day Training Course.” The guy is looking up and says, “Wow! That sun’s so hot it will bake your brains out in less than a day!” Hahaha!

I know I should not be laughing at bond investors, and jeering at bond investors, and saying cruel things about bond investors like, “You bond investors are idiots!” but instead I should feel sorry for bond investors because of how they are going to pay a terrible price when interest rates rise in response to inflation in prices, and how I should be fearful because losses of such magnitude are so completely catastrophic to the macro-economy.

Instead, I am much more interested in me, me, me, and especially and how can I make a lot of money fast without working.

Of course, being a natural coward, I am loath to take a risk of any kind, and I want only Big Sure-Fire Winners (BSFW) in which to invest and make a lot of money, fast, without working.

And being a naturally angry and cynical guy who understands the Austrian school of economics, I am petrified of the massive inflation caused by the despicable Obama administration deficit-spending So Freaking Much Money (SFMM), making the more-despicable Federal Reserve create more new money with which to soak up all that new debt, over and over, day after day, more and more, a gigantic inflation in the money supply to cause inflation in prices, which will destroy us like a guy in a Godzilla suit stomping on toy trains and model balsawood buildings representing Tokyo! Gaaahhh! I am screaming my Outraged Mogambo Guts (OMG) here!

But I imagine that bond buyers, too, wearily go home at the end of the day, and have a normal family life, not suspecting anything is wrong.

But when a Junior Mogambo Ranger (JMR) comes home after a hard day of work and you find that your family is being extra nice to you (for a welcome change!), you are, thanks to your “suspect everybody” JMR training, instantly on alert for some vile treachery at this unexpected change in the environment.

And do you remember how you told them you were suspicious of them? And do you remember how they denied it, which made you more suspicious, and you called them scheming liars, which they again denied, which only made you even more suspicious?

If you will recall, it was those times, among many, many other times, when you were right to be suspicious! Something was, indeed, going on!

For example, I remember the last time this happened to me, and it was right after I denounced them as “Lying, treacherous vipers out to kill me!” and how “If I had any guts, I’d kill the lot of you right now!” that they stopped being nice to me!

In fact, I would say that they were, as a group, behaving with the exact opposite of their previous “nice and pleasant” demeanor, and were, instead, downright hostile and distrustful! Of me! Their own beloved and loving husband and father! Imagine that!

Obviously, the lesson in all of this is the introduction of “the contrary indicator,” in that their phony façade of “making nice” was obviously a contrary indicator portending future social conditions around the house.

For the record, their usual frosty, snotty attitude became, alas, just another coincident indicator.

Anyway, the reason I bring this up is because if you are looking for a contrary indicator, I may, or may not, have one for you, courtesy of John Stepek at the Money Morning newsletter. But contrary or not, I think it is an indicator of some kind, perhaps significant, too, that just recently some outfit named Capital Economics, which was “formerly moderately bearish on gold,” has now “turned moderately bullish.”

I mean, I am instantly on alert when some guys missed an entire decade of gold rising over 400%, and who now, after missing the entire monster run of gold for 10 straight years, are “moderately bullish” on gold. Hmmm! I don’t know what to think!

Fortunately, I don’t have to think. The Magnificent Mogambo Portfolio (TMMP) was designed just for stupid guys like me, as it requires no thinking at all, and thus there is no chance to make another Big Freaking Mistake (BFM) like that time when you mistakenly asked, “Will you marry me?” and she said “Yes” and then ya made the mistake of actually getting married and then…well, it is too depressing to go on.

Anyway, the TMMP is simplicity itself: Buy gold, silver and oil when the Federal Reserve is creating more money! It’s that easy! And buying gold, silver and oil over the long-term with the glories of dollar-cost-averaging to maximize your profit, what can you do except greedily giggle with girlish glee, “Whee! This investing stuff is easy!”?

The Mogambo Guru
for The Daily Reckoning

Bond Investors Are People Too 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:
Bond Investors Are People Too




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

A Global Grain Powerhouse

October 12th, 2010

The appeal of farmland as an investment is pretty clear in a market in which clarity on anything is hard to find. It starts with one basic premise: The global population is expected to reach 8 billion by 2030. There are certain inevitable outcomes we can take from this. The most reliable is that we’ll need to produce a lot more food.

Though not original, I don’t think the market quite realizes the challenge involved in feeding all those mouths. Now, I’m not saying we face mass starvation. I’m not saying it can’t be done. I am only saying there are challenges and constraints more acute now than in the past. And these constraints make for an appealing investment idea.

First, let me sum up the size of the demand. There are a lot of ways to present the same data. The most arresting is perhaps from the USDA projections. These show that the incremental acreage required to feed this population by 2030 is about equal to the planted acreage in the US, Brazil and Argentina!

That’s a lot of acreage and a good reason to own farmland as an investment over the long haul. Arable land per person – which includes both land under cultivation and land that could be farmed – is a dwindling resource.

One other added wrinkle is that so many countries have biofuel mandates. That means the governments of the world are basically forcing industry to burn food to make energy. This is a major force in the markets. For example, just in the US, about one quarter of the corn harvested winds up in an ethanol plant.

All of this simply means we need to get more out of every acre. This gives a nice tail wind to the companies that work up and down the agricultural chain – from irrigation equipment to fertilizers.

One of the best and safest ways to participate in the broad global agri-boom is to own shares of a company like Viterra (TSE:VT; PINK:VTRAF). Remarkably, recent events have pushed the stock price all the way down to where I first recommended it to my subscribers in 2006. The stock has rebounded recently, but remains well below its all-time highs. The stock market has handed investors a gift, and let me tell you why.

Viterra is one of the largest agribusinesses in North America. It is the largest grain handler and agri-retailer in Western Canada and Southern Australia, with 85 grain elevators and 1.9 million tonnes of storage capacity. It stores, handles, processes and markets grain. The second biggest contributor to profits is its 259 retail chains that sell fertilizer, seed, crop protection products and small-scale agricultural equipment.

The market is focusing on near-term earnings weakness, as a number of investment banking firms have ratcheted down their earnings projects for this year. The consensus guess is somewhere around 60-70 cents this year. At the current quote of only $9.45, the stock trades for about 13-15 times this year’s earnings. These same firms have Viterra earning 85 cents for next year.

However, I look at this stock very differently. I’m not focused on the quarter-to-quarter earnings swings. I am interested in the larger story of how Viterra is building a global grain powerhouse.

When I recommended Viterra initially, the company was pretty much limited to Canada and grain handling. But today, it has expanded its menu of offerings and its geography with significant operations in Australia. It has invested a lot of capital in building one of the world’s most efficient grain-handling operations, with access to all the important markets, particularly those in Asia. Book value is about $9.36 per share.

With its strong balance sheet, low valuation and diversified agri-platform, Viterra is my favorite low-risk way to play the agricultural markets. The market seems to trade it like a fertilizer stock, but a better comparable is probably Archer Daniels Midland or Bunge. It’s safer than, say, Archer Daniels Midland, a mainstream favorite. And is considerably less leveraged than, Bunge, a popular Brazilian soybean processor.

Viterra is a buy. I look for it to return to $11-12 per share as we get into early 2011. That $12 target is simply its historical 15 times multiple on a 2011 guess of 85 cents per share in earnings. Longer term, I believe the stock has greater potential as the slow, but sure agricultural story unfolds.

Regards,

Chris Mayer
for The Daily Reckoning

A Global Grain Powerhouse 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:
A Global Grain Powerhouse




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

A Global Grain Powerhouse

October 12th, 2010

The appeal of farmland as an investment is pretty clear in a market in which clarity on anything is hard to find. It starts with one basic premise: The global population is expected to reach 8 billion by 2030. There are certain inevitable outcomes we can take from this. The most reliable is that we’ll need to produce a lot more food.

Though not original, I don’t think the market quite realizes the challenge involved in feeding all those mouths. Now, I’m not saying we face mass starvation. I’m not saying it can’t be done. I am only saying there are challenges and constraints more acute now than in the past. And these constraints make for an appealing investment idea.

First, let me sum up the size of the demand. There are a lot of ways to present the same data. The most arresting is perhaps from the USDA projections. These show that the incremental acreage required to feed this population by 2030 is about equal to the planted acreage in the US, Brazil and Argentina!

That’s a lot of acreage and a good reason to own farmland as an investment over the long haul. Arable land per person – which includes both land under cultivation and land that could be farmed – is a dwindling resource.

One other added wrinkle is that so many countries have biofuel mandates. That means the governments of the world are basically forcing industry to burn food to make energy. This is a major force in the markets. For example, just in the US, about one quarter of the corn harvested winds up in an ethanol plant.

All of this simply means we need to get more out of every acre. This gives a nice tail wind to the companies that work up and down the agricultural chain – from irrigation equipment to fertilizers.

One of the best and safest ways to participate in the broad global agri-boom is to own shares of a company like Viterra (TSE:VT; PINK:VTRAF). Remarkably, recent events have pushed the stock price all the way down to where I first recommended it to my subscribers in 2006. The stock has rebounded recently, but remains well below its all-time highs. The stock market has handed investors a gift, and let me tell you why.

Viterra is one of the largest agribusinesses in North America. It is the largest grain handler and agri-retailer in Western Canada and Southern Australia, with 85 grain elevators and 1.9 million tonnes of storage capacity. It stores, handles, processes and markets grain. The second biggest contributor to profits is its 259 retail chains that sell fertilizer, seed, crop protection products and small-scale agricultural equipment.

The market is focusing on near-term earnings weakness, as a number of investment banking firms have ratcheted down their earnings projects for this year. The consensus guess is somewhere around 60-70 cents this year. At the current quote of only $9.45, the stock trades for about 13-15 times this year’s earnings. These same firms have Viterra earning 85 cents for next year.

However, I look at this stock very differently. I’m not focused on the quarter-to-quarter earnings swings. I am interested in the larger story of how Viterra is building a global grain powerhouse.

When I recommended Viterra initially, the company was pretty much limited to Canada and grain handling. But today, it has expanded its menu of offerings and its geography with significant operations in Australia. It has invested a lot of capital in building one of the world’s most efficient grain-handling operations, with access to all the important markets, particularly those in Asia. Book value is about $9.36 per share.

With its strong balance sheet, low valuation and diversified agri-platform, Viterra is my favorite low-risk way to play the agricultural markets. The market seems to trade it like a fertilizer stock, but a better comparable is probably Archer Daniels Midland or Bunge. It’s safer than, say, Archer Daniels Midland, a mainstream favorite. And is considerably less leveraged than, Bunge, a popular Brazilian soybean processor.

Viterra is a buy. I look for it to return to $11-12 per share as we get into early 2011. That $12 target is simply its historical 15 times multiple on a 2011 guess of 85 cents per share in earnings. Longer term, I believe the stock has greater potential as the slow, but sure agricultural story unfolds.

Regards,

Chris Mayer
for The Daily Reckoning

A Global Grain Powerhouse 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:
A Global Grain Powerhouse




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

VIX Falls as Fear Returns

October 12th, 2010

Fear is looking cheap again.

The Volatility Index fell yesterday to 18.98 – its lowest level since April 29. That date happens to fall a few days after the Dow and the S&P hit their post-2007 highs…and a few days before the May 6 “flash crash.”

If you’re not familiar with the VIX, it’s a measure of fear in the market, based on what people are paying for options on the S&P 500.

VIX Decline

Today, even as fear rises ever so slightly, the VIX struggles to break through 20.

“We are getting close to extreme territory,” said Chris Mayer on April 12, when the VIX sat below 16. “We are near the limits of what that great rubber band of life will absorb before it snaps back. The VIX usually hovers between 10-20. So we are not quite there yet, but the tension is building.”

He went on to cite some of the factors…

“The financial system is still a rather creaky affair. Leverage is still high. Banks remain undercapitalized. The credit cycle has not yet run its full course, as there are still significant credit losses hiding in the cupboards of banks.

“Then there are the governments of the world. The US has awful credit metrics. It is bleeding money and owes huge debts. The states are also bleeding money and have large debts, including giant gaps in unfunded pension liabilities. They are perhaps worse off, because unlike the US government, the states cannot print their own money. Then there is the EU. And Japan.”

We ask this morning: How much of this has changed, six months later to the day?

Addison Wiggin
for The Daily Reckoning

VIX Falls as Fear Returns 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:
VIX Falls as Fear Returns




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.

OPTIONS, Uncategorized

VIX Falls as Fear Returns

October 12th, 2010

Fear is looking cheap again.

The Volatility Index fell yesterday to 18.98 – its lowest level since April 29. That date happens to fall a few days after the Dow and the S&P hit their post-2007 highs…and a few days before the May 6 “flash crash.”

If you’re not familiar with the VIX, it’s a measure of fear in the market, based on what people are paying for options on the S&P 500.

VIX Decline

Today, even as fear rises ever so slightly, the VIX struggles to break through 20.

“We are getting close to extreme territory,” said Chris Mayer on April 12, when the VIX sat below 16. “We are near the limits of what that great rubber band of life will absorb before it snaps back. The VIX usually hovers between 10-20. So we are not quite there yet, but the tension is building.”

He went on to cite some of the factors…

“The financial system is still a rather creaky affair. Leverage is still high. Banks remain undercapitalized. The credit cycle has not yet run its full course, as there are still significant credit losses hiding in the cupboards of banks.

“Then there are the governments of the world. The US has awful credit metrics. It is bleeding money and owes huge debts. The states are also bleeding money and have large debts, including giant gaps in unfunded pension liabilities. They are perhaps worse off, because unlike the US government, the states cannot print their own money. Then there is the EU. And Japan.”

We ask this morning: How much of this has changed, six months later to the day?

Addison Wiggin
for The Daily Reckoning

VIX Falls as Fear Returns 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:
VIX Falls as Fear Returns




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.

OPTIONS, Uncategorized

The Fed’s Teenage Temper Tantrum

October 12th, 2010

Notwithstanding overwhelming evidence to the contrary, the Fed remains steadfast in its refusal to accept any blame whatsoever for the near collapse in 2008 of the financial system it regulates. That said, the Fed is quick to take credit for having saved the system from disaster and for getting the economy back on track. On track? Well, over a year ago, Chairman Bernanke was talking about how the “green shoots” of recovery were increasingly evident. We’re not sure exactly what was green, other than the colossal amounts of freshly printed dollars being thrown at the economy, but just as young plants don’t always survive and thrive, the US economy is clearly struggling again of late, with the broad unemployment rate U6 having risen again to 17.1% in September.

Now it is rare for US central bankers to criticize government economic policy. A quid pro quo of an independent Fed is one that leaves the President and the Congress to their political business, which includes fiscal policy. On occasion, Fed Chairmen have been asked by the President or the Congress to give their opinion on certain policies, in which case they are obliged to offer one up, although normally this is done is an apolitical way.

Even rarer is for a US central banker to voluntarily criticize government policy, rather than as a response to an inquiry on a specific issue. Yet this is exactly what Fed Chairman Bernanke did last week, when he claimed that it would be wise for Congress to systematically exercise more budget restraint, perhaps in the form of explicit budget rules, which have been adopted by a handful of countries and also several US states. That’s right, the Fed’s latest excuse for why the US economy is not performing the way it should is that Congress has been doing a poor job and, as such, business and consumer confidence remain subdued, explaining much of why this recovery has been so weak, notwithstanding the extraordinary degree of stimulus, fiscal and monetary, that has been thrown at the economy since 2008.

While not entirely unprecedented, it is certainly rare for a Fed Chairman to exhort the Congress in this way. One could therefore surmise that Bernanke must feel quite strongly about this matter. By implication, his overt disapproval of chronically high budget deficits implies that he believes it would be better for monetary, rather than fiscal policy, to provide the stimulus necessary to get the economy back on track. While we happen to agree with Bernanke that fiscal policy is not the answer to the current set of US economic woes, we disagree that monetary policy can somehow succeed where fiscal policy fails. This is because US and to some extent global economic problems are structural rather than cyclical in nature. This structural malaise can be seen in various economic “imbalances”, which is econospeak for “unsustainable developments”.

Let’s place the current set of imbalances in context. As we know, the US has long run a current account deficit, implying that it has been consuming and investing more than it has been producing. The net result is a large accumulated debt owed to foreigners, in particular the big savers such as China, Japan, Germany, and a handful of other, primarily manufacturing economies. Now it is one of the basic accounting identities of economics that savings = investment. Money that is saved, even if put in the bank, finds its way into investment, say in the form of a commercial loan which a business then uses to finance new equipment or to hire additional workers. Another identity is that what is not saved/invested is, naturally, consumed. So what we have is: savings + consumption = production (GDP)

Back in the mid-2000s, as the US current account deficit grew and grew, it became fashionable to talk about a “global savings glut” which was “forcing” savings into the US, holding bond yields unusually low and, therefore, stimulating investment in housing and commercial real estate, among other areas. Bernanke himself used this argument in 2005, arguing that high rates of savings, in particular in Asian economies, were responsible for this “glut” of savings. This argument became, for a time, the conventional wisdom. Amongst Bernanke and his mainstream, neo-Keynesian policy and academic colleagues, this remains the explanation to this day for why US aggregate demand is so weak: The world, now including the US, is saving too much.

So when Bernanke was talking about there being too much savings, he was implying either that a) there was too little consumption; or that b) there was too much production. It must be one or the other. Now it is farcical to argue that from 2004-2007, the global economy was consuming too little.  Indeed, this was one of the greatest ever consumption booms in world history, led by the US course, where the household savings rate went outright negative. So therefore it must be the case that, in those years, the global economy was producing too much. Yes, that’s right, by claiming that there was a global savings glut, by implication Bernanke was claiming that the world was producing too much!  That it was, in other words, overheating! So why on earth did Messrs Greenspan and Bernanke not raise interest rates more, in order to slow the global economy?

The answer, we know, was that US consumer price inflation was low, so it seemed that there was no need to raise rates. But do you see the inconsistency in Bernanke’s argument? YOU CAN’T MANAGE THE RISKS OF DANGEROUS IMBALANCES–SAVINGS “GLUTS”, ASSET BUBBLES OR WHATEVER ONE CHOOSES TO CALL THEM–AND TARGET CONSUMER PRICE INFLATION AT THE SAME TIME! In other words, consumer price inflation targeting is a bogus policy, yet one on which Bernanke has staked his academic and profession reputation. And then, when it all blows up in arguably the greatest credit crisis in the history of the world, he has the audacity to assign blame to anywhere, anyone but the Fed itself–Wall Street,  Fannie/Freddie, China, the list grows and grows–and now at the US Congress!

When a young child is caught misbehaving, sometimes they attempt to make some simple excuse to talk their way out of it, only to find the parent knows better than to believe them. As the child grows, the excuses grow ever more complex in an attempt to obfuscate, deceive, bewilder or simply exhaust the parent into retracting an accusation. However, when a teenager is caught, rather than make increasingly elaborate and frequently futile excuses, it becomes more common to simply blame the parent!

Once upon a time the Fed used to make simple excuses such as “no one could see the bubble”, which was used following the dot.com crash in 2001-03. Then the Fed began to make increasingly elaborate, bewildering and, as demonstrated above, internally inconsistent excuses such as there being a “global savings glut” which the Fed could do nothing about. Now the Fed is blaming the Congress that created it and lightly oversees it for US economic woes. We’re sorry, but this sounds like a teenage temper tantrum to us, not the rational voice of a sensible, competent institution ready and willing to take responsibility for its actions past, present or future.  It is a sign of a teenager maturing into an adult when they not only stop making excuses generally but, even to the extent that they feel their parents are to blame in some way for their foibles, they move on, get over it, take responsibility and make the best out of the imperfect situation known as the human condition. If the Fed is indeed on such a path, then maybe there is some hope after all. We need only be patient, as all good parents are.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Fed’s Teenage Temper Tantrum 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 Fed’s Teenage Temper Tantrum




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.

Real Estate, Uncategorized

The Fed’s Teenage Temper Tantrum

October 12th, 2010

Notwithstanding overwhelming evidence to the contrary, the Fed remains steadfast in its refusal to accept any blame whatsoever for the near collapse in 2008 of the financial system it regulates. That said, the Fed is quick to take credit for having saved the system from disaster and for getting the economy back on track. On track? Well, over a year ago, Chairman Bernanke was talking about how the “green shoots” of recovery were increasingly evident. We’re not sure exactly what was green, other than the colossal amounts of freshly printed dollars being thrown at the economy, but just as young plants don’t always survive and thrive, the US economy is clearly struggling again of late, with the broad unemployment rate U6 having risen again to 17.1% in September.

Now it is rare for US central bankers to criticize government economic policy. A quid pro quo of an independent Fed is one that leaves the President and the Congress to their political business, which includes fiscal policy. On occasion, Fed Chairmen have been asked by the President or the Congress to give their opinion on certain policies, in which case they are obliged to offer one up, although normally this is done is an apolitical way.

Even rarer is for a US central banker to voluntarily criticize government policy, rather than as a response to an inquiry on a specific issue. Yet this is exactly what Fed Chairman Bernanke did last week, when he claimed that it would be wise for Congress to systematically exercise more budget restraint, perhaps in the form of explicit budget rules, which have been adopted by a handful of countries and also several US states. That’s right, the Fed’s latest excuse for why the US economy is not performing the way it should is that Congress has been doing a poor job and, as such, business and consumer confidence remain subdued, explaining much of why this recovery has been so weak, notwithstanding the extraordinary degree of stimulus, fiscal and monetary, that has been thrown at the economy since 2008.

While not entirely unprecedented, it is certainly rare for a Fed Chairman to exhort the Congress in this way. One could therefore surmise that Bernanke must feel quite strongly about this matter. By implication, his overt disapproval of chronically high budget deficits implies that he believes it would be better for monetary, rather than fiscal policy, to provide the stimulus necessary to get the economy back on track. While we happen to agree with Bernanke that fiscal policy is not the answer to the current set of US economic woes, we disagree that monetary policy can somehow succeed where fiscal policy fails. This is because US and to some extent global economic problems are structural rather than cyclical in nature. This structural malaise can be seen in various economic “imbalances”, which is econospeak for “unsustainable developments”.

Let’s place the current set of imbalances in context. As we know, the US has long run a current account deficit, implying that it has been consuming and investing more than it has been producing. The net result is a large accumulated debt owed to foreigners, in particular the big savers such as China, Japan, Germany, and a handful of other, primarily manufacturing economies. Now it is one of the basic accounting identities of economics that savings = investment. Money that is saved, even if put in the bank, finds its way into investment, say in the form of a commercial loan which a business then uses to finance new equipment or to hire additional workers. Another identity is that what is not saved/invested is, naturally, consumed. So what we have is: savings + consumption = production (GDP)

Back in the mid-2000s, as the US current account deficit grew and grew, it became fashionable to talk about a “global savings glut” which was “forcing” savings into the US, holding bond yields unusually low and, therefore, stimulating investment in housing and commercial real estate, among other areas. Bernanke himself used this argument in 2005, arguing that high rates of savings, in particular in Asian economies, were responsible for this “glut” of savings. This argument became, for a time, the conventional wisdom. Amongst Bernanke and his mainstream, neo-Keynesian policy and academic colleagues, this remains the explanation to this day for why US aggregate demand is so weak: The world, now including the US, is saving too much.

So when Bernanke was talking about there being too much savings, he was implying either that a) there was too little consumption; or that b) there was too much production. It must be one or the other. Now it is farcical to argue that from 2004-2007, the global economy was consuming too little.  Indeed, this was one of the greatest ever consumption booms in world history, led by the US course, where the household savings rate went outright negative. So therefore it must be the case that, in those years, the global economy was producing too much. Yes, that’s right, by claiming that there was a global savings glut, by implication Bernanke was claiming that the world was producing too much!  That it was, in other words, overheating! So why on earth did Messrs Greenspan and Bernanke not raise interest rates more, in order to slow the global economy?

The answer, we know, was that US consumer price inflation was low, so it seemed that there was no need to raise rates. But do you see the inconsistency in Bernanke’s argument? YOU CAN’T MANAGE THE RISKS OF DANGEROUS IMBALANCES–SAVINGS “GLUTS”, ASSET BUBBLES OR WHATEVER ONE CHOOSES TO CALL THEM–AND TARGET CONSUMER PRICE INFLATION AT THE SAME TIME! In other words, consumer price inflation targeting is a bogus policy, yet one on which Bernanke has staked his academic and profession reputation. And then, when it all blows up in arguably the greatest credit crisis in the history of the world, he has the audacity to assign blame to anywhere, anyone but the Fed itself–Wall Street,  Fannie/Freddie, China, the list grows and grows–and now at the US Congress!

When a young child is caught misbehaving, sometimes they attempt to make some simple excuse to talk their way out of it, only to find the parent knows better than to believe them. As the child grows, the excuses grow ever more complex in an attempt to obfuscate, deceive, bewilder or simply exhaust the parent into retracting an accusation. However, when a teenager is caught, rather than make increasingly elaborate and frequently futile excuses, it becomes more common to simply blame the parent!

Once upon a time the Fed used to make simple excuses such as “no one could see the bubble”, which was used following the dot.com crash in 2001-03. Then the Fed began to make increasingly elaborate, bewildering and, as demonstrated above, internally inconsistent excuses such as there being a “global savings glut” which the Fed could do nothing about. Now the Fed is blaming the Congress that created it and lightly oversees it for US economic woes. We’re sorry, but this sounds like a teenage temper tantrum to us, not the rational voice of a sensible, competent institution ready and willing to take responsibility for its actions past, present or future.  It is a sign of a teenager maturing into an adult when they not only stop making excuses generally but, even to the extent that they feel their parents are to blame in some way for their foibles, they move on, get over it, take responsibility and make the best out of the imperfect situation known as the human condition. If the Fed is indeed on such a path, then maybe there is some hope after all. We need only be patient, as all good parents are.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Fed’s Teenage Temper Tantrum 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 Fed’s Teenage Temper Tantrum




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.

Real Estate, Uncategorized

The Problem With Chasing Yield in a Bond Bubble

October 12th, 2010

There is a debate now as to whether there is a bond bubble or not. I think we are in a bond bubble. This bond bubble is not only for Treasuries and corporate debt, but across the yield spectrum. Too many investors are looking for yield, and their quest will end in tears.

As all these people are looking for yield, they push down those yields. Plus, the Federal Reserve is doing its best to keep interest rates low. So the end result is that IBM can borrow for three years at 1%. But really, these factors affect the whole spectrum of interest rates and yields.

For example, take a look at master limited partnerships, or MLPs. These vehicles are very popular with investors. But they are probably too popular. Mostly these companies own pipelines for oil and gas. They pay out most of their earnings to their unit holders. Yields are now about 5.5% for the popular Alerian MLP Index. A 5.5% yield looks good today. But about a year ago, MLPs paid about 8.8% on average.

But what happens if yields go back to 8.8%? The grim answer is that the price of an MLP yielding 5.5% would have to drop by 40% to produce a yield of 8.8%. In other words, these yields are anything but risk-free.

MLPs are too popular. They are overpriced, in my view. Most everything on the yield spectrum is similarly expensive. Investors are getting paid too little for the risks they are taking.

What’s happening in the junk bond market is another indication of a frothy market. Junk bonds are essentially higher-yielding corporate debt. People can’t get enough of them. In mid-August, we set a weekly record for the issuance of junk debt. For the year, volumes are up 80% compared to a year ago and will easily surpass the 2009 record.

All over, investors are scrambling for yield, and they are pushing down those yields to dangerously low levels. As a recent Wall Street Journal editorial – titled “Chasing Yields, Chasing Our Tails” – put it: “Nearly two years removed from the Lehman Brothers shock, bond investors are again ‘chasing yield,’ taking mounting risk for minimal future gains.”

In the end, I think it will end badly… I know it’s an unpopular message, especially regarding the yields. I get e-mails all the time from people who want yield. Well, I am calling it like I see it. And I’m telling you that you are going to get burned if you chase yield in this market.

Chris Mayer
for The Daily Reckoning

The Problem With Chasing Yield in a Bond Bubble 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 Chasing Yield in a Bond Bubble




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

Copyright 2009-2013 MarketDailyNews.COM

LOG