Housing Market Approaches Inflection Point for Investors

Back in 2006/2007 I speculated upon the seriousness of housing bubble. I also suggested some dates for investors to begin thinking about investing in sub-prime lenders, and home builders.  My July 2007 suggestion was to look at sub-prime lenders two years from then (Jul/09), and three to five years for home builder/developers. (July/10 to July/12)

I probably nailed the sub-prime lending suggestion given the situation with the lenders (since most were apparently in the sub-prime business in one way or another). See Citigroup chart and compare the July/09 price to now.

On the other hand, a recent NYT article suggested that a rising tide of foreclosed homes is still waiting to hit the market. 

Therefore, I have re-thought the timing on the builder/developer suggestion. In fact, given the amount of inventory and so-called "shadow-inventory" out there, it might be another three to five years before you should consider buying home builder's stock, as the economics still have to be poor.

What you might want to consider, however, in the next 12-30 months, is direct home buying. I think by later 2012, almost all of the declines will be behind us. Population growth and household formation are still factors affecting the housing market. However, the severity of the housing bubble and subsequent recession have hidden the importance of these factors in the short run. While the first factor (population growth) tends to be reasonable stable over longish periods, the second (household formation) will be positively impacted by continued improvement on the unemployment front.

If you can pick up a cheap bank-owned REO or two in the next while as an investment, I think you'll be sitting pretty in five to ten years.

On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

Avoiding obvious errors is an important part of investing

Random Roger has written often about avoiding overvalued sectors as an important "value add" that he brings to the investing table on behalf of his clients. He often stated that the banking sector valuation in the 2003-2008 period was out of whack to its traditional ratio of the value of the US stock market. Thus, he avoided that sector during the later part of its run-up and the subsequent decimation of values.

I was similarly reminded of the importance of avoiding obvious investing errors by a recent Globe and Mail article regarding Priszm Income Fund (QSR.UN - Toronto Stock Exchange). This fund owns many KFCs, Taco Bells and Pizza Huts in Canada. When the initial offering was made in 2003 (at $10/share), I remember thinking about the growing discussion of healthy food choices and wondering how in the world a fund like this (focused on fatty fast-foods) could possibly have a sustainable, long-term, future.

After peaking at $13, the fund has declined ever since. They have recently missed several franchise and debt payments, and their future looks bleak, to say the least.

When you buy a stock, ETF, or other investment product, give some thought to the future, and never ignore what you think might happen there. Eyes wide open, so to speak.

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Priszm Income Fund (QSR.UN); closed Friday at $0.15. 
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Self-directed investing takes time, work, thought

So, perhaps you are ready to cut the strings from your advisor - or you already have. Either way, you have to know that successful investing, couch potato portfolios aside (which, I might add, are usually pretty successful over time), takes time, work and thought.

To take an example - let's say you ascribe to all of my lunatic ravings, and think that, yes, climate change is very likely to have an impact on your future returns, and the best way to get ahead of this is to buy a "climate change" ETF or mutual fund.

Humm ... first problem ... can't seem to find any .... oh wait, the Agitated Ecoist says there are apparently some already; just hop over here to the Fund Supermarket, run a screen with "Climate Change", as the specialist sector criteria and boom: three choices pop up.

Um, what to do - no problem, just equal weight all three right? And you are off to the races ... a losing race possibly.

Looking at the screen a bit more deeply, we can see first of all three have a distinct lack of momentum, as they have only turned upwards in the past month or so, with YTD, one, two, and three year returns all being significantly "in the red". OK, so that's one caution factor - fighting the momentum here, AND possibly the underlying possibly over-stretched valuations. Hard to know about the second, without taking a peek under the hood, as Random Roger often advises to do. Again, it takes work, but you wouldn't buy a dishwasher without a bit of investigation, so neither should you buy an investment product without a bit of investigation.

Let's take a quick peek under the hood of at one of these choices for illustrative purposes ... so I choose the first one, and eventually get through to the fund fact sheet. It informs that its investment policy is ...

The sub-fund invests in the FC share class of the DWS Invest Climate Change, which invests mainly in companies that are primarily active in business areas suited to restricting or reducing climate change and its effects: CO2 - efficient or energy-efficient technologies, renewable or alternative energies, climate protection, disaster prevention or management and energy-efficient mobility.

Um, yes, pretty much what I'd expect to see. A very quick scan of the major holdings appear to meet these criteria, for example, Vestas Wind is their largest holding at 4.8%, and there are other names recognizable to me that I think broadly fit this mandate. On the valuation side, the PE ratio isn't given, and let's just say that the past three years haven't been too kind to this theme - which tells me that likely they were or still are overvalued. But I'll leave that for later - I'd likely poke under the hood of four to six of their largest holdings to see what the PE is, to give me a sense of that. But I'll do that later.

And so I look at the second choice, which, despite different companies, looks much the same. Recognizable names that would seemingly benefit from a focus on spending for climate change; a beat-down on the price; and no single company of more than 6.3% of the fund total (Siemens AG in this case). OK.

And looking at the third - well frankly, why bother, the first two seemed more or less the same, right?

Well, that would be a mistake, because the Schroder fund is quite a different beast from the first two ... firstly, it does give some valuation metrics compared to the benchmark, and we can see that the fund does look relatively expensive. However, it's in the company selection where the rails seemingly go off the bus ... one of their largest ten holdings is a car manufacturer, WTF? Honda. It also includes Lowes - you know the one - Lowes Home Improvement. And how about Cisco also as their top holding? And a chemical company in the top ten too?

OK, they might be able to offer a rationale explanation, but on the face of it, and even after further digging, I doubt you could really convince me that Honda should be there - perhaps Bombardier if you are looking to add a transportation component (they make trains). How are Lowes, LOWES? Cannot rationalize that one at all. Investing in this particular fund, migth not exactly meet your personal investment mandate.

Anyway, the point is here ... that investing requires work, takes time, and you have to think. You simply cannot rely on the claims and statements of others, if you truly want to be successful at active self-directed investing.

On that note, may I say, "Happy investing" ...

On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

Please rethink your bond purchases ... please think ...

We just saw money flow out of domestic funds for 19 straight weeks…who is selling? Those who can’t imagine an improving economy, or better investor sentiment, or new and exciting innovations. Certainly there are hardship cases forcing people to cash in stocks to pay expenses, but with prices the same that tells us someone has accepted the risk that the sellers can no longer take.


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Inflation begins - food inflation is the start

When does serious inflation really start? Well, if you had to pick a point, it might be at a point when many pundits believe deflation is likely, as has been widely discussed this spring and summer by professional money managers.

Two to three years ago, many investment talking heads (myself included) spoke of the potential for emerging and developed countries stock markets to diverge in, at least, the strength of their upward market trend. The idea being that the developed country markets would move sideways, while emerging markets would continue to thrive.

The credit crisis which culminated in the stock market plunge of 2008/2009 of course showed how correlated these markets could be during times of panic. However, there is nothing wrong with the general divergence thesis during normal times, with many emerging markets getting close to re-testing their 2007/2008 price levels. Divergence is or will be here, and remains as real a prospect as ever.

However, there is one place where divergence currently exists: the "anticipation" of inflation/deflation. In developed nations, the worry is that future deflation will set these rich economies on a two-decade Japanese-style slump. In developing economies, the worry is the opposite and, rather than an intellectual debate about the future, the issue is immediate and proximate: inflation, which IS (t)here. Especially food inflation.

Large developing nations, such as India, China, and Russia, have all recently reported jumps in their inflation rates, headlined by significant jumps in food inflation (see here, here, and here). This has even resulted in an overall significant jump in global food inflation too (see here). This is the result of climate change generally, which of course plays out via specific "natural events", such as drought, flooding, and "rainfall dosing" (which is a term I am using to describe the phenomenon of growing season rainfall remaining relatively the same, but is concentrated in far fewer days [but does not consist of "flooding", per se]). This is in addition to the lower yields that are produced from heat-stressed plants. Climate-change induced food issues are here, and they are here to stay for some time.

The only reason that inflation remains off the radar screen of many professional investment types is that, in the western world at least, the food budget typically consists of a very low proportion of overall income. Whereas, however, the opposite is true in the developing world (or more so, even, in the undeveloped world), food budgets constitute a much higher proportion of the total income. So, food inflation has a much greater effect in those countries and feeds into the total inflation picture very quickly. In food, the principle of substitution (the idea that, during inflationary times particularly, folks substitute cheaper but roughly similar items for more expensive ones) has only limited applicability: after all, everyone needs to eat.

Food inflation also enters the general inflation cycle very quickly too (especially farther down the income ladder a country is) because, aside from an inflationary element of its own, the inflation knock-on effect is very pernicious, as the factory worker, et.al, marches into the boss' office, and demands a raise to deal with his deteriorating ability to feed his family. This scene plays out exactly the same way, hundreds of millions times, in hundreds of thousands of bosses offices.

The dream that (some may have that) food inflation emanating in one part of the globe won't spill over somewhere else is likely to be met by the insistent ringing of the morning's alarm clock: free trade in food. As pricing for food rises - there and here - the knock-on effect will also be felt as like looking into a mirror - here and there.

Climate change, and its resultant outputs, will have effects ranging from the evisceration of the capital value of, particularly, long-dated low-yielding stripped bonds, to the more pragmatic, of the renewed popularity of the high-yielding home garden.

So, the weather issues of this summer's northern hemisphere's growing season provide a glimpse into the future: a future which is coming fast. For those who want to understand it better, there's no better place to point your binoculars than at the emerging market countries.

On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

Emerging Markets - Are you sufficiently exposed?

Pounding the point home, once again.

I have written a great many times (e.g. 1, 2, 3, 4 or all, 5) since this blog started over four years ago, about the need for any forward-looking, growth-oriented investor to have a very serious weighting in emerging markets. A recent article in the Financial Post, highlighting information from Goldman Sachs Global Economics Paper No. 204, makes the point worth repeating, once again.

They point out that the emerging markets now total some 31% of the global stock market capitalization, and suggest that this will expand to 55% by 2030. Is that shocking? Hardly. According to the OECD, a global club of rich countries, emerging markets already have 49% of the global GDP, on a purchasing power parity basis; and they appear slated to continue growing rapidly. Is it a surprise to think that their stock market valuations are slated to follow their growth?

What is shocking, is that against that, Goldman Sachs estimates that developed market investment funds hold just 6% in emerging market equities, out of their total equity allocation. They believe this will rise to 18%, by 2030. In other words, if you are a typical rich country investor, a peek behind the curtain of investments that YOUR investment advisor has gotten you into, would reveal that you are sitting at just 20% the emerging market exposure you should be at, assuming you simply want to mirror the world economic powers (e.g. 6% divided by 31% = 20% exposure). By 2030, the situation gets somewhat better, but your exposure would still be wildly low, compared either to world GDP then, or emerging market stock market capitalizations.

If you wanted to simply mirror global market returns going forward, then seriously underweighting one of the two most easily visible growth investment themes going forward sure isn't the way to do it. If you wanted outsized returns, then you'd likely seek even more participation in rapidly growing economies, assuming you have decent entry points, e.g. valuations not stretched. (Are they currently too high? Not in my book. They are trading at an average PE ratio of just 12, according to the Financial Times, which compares to a PE on the S&P 500 of 14.7).

The other thing to know here, is that the emerging markets are no longer the wild west. They have solid economic principles they are managing their economies on, and populations of great savers (oh, if only the western world were so lucky now!). This makes it pretty easy to suggest that their stock market volatility is going to continue to move down, especially compared to the overleveraged and overspent rich countries.

If you are a growth investor, go wake up your investment advisor, and demand he or she explain exactly why your emerging market exposure is so darn limited.

Disclosure: Participant in the emerging markets theme via DEM, DGS.

On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

And this is how inflation starts ... climate related food price increases

The Russians have recently decided to continue the ban on wheat exports, until late 2011, as the Russian heat wave and associated drought have reduced this year's harvest to what is currently estimated to be about two-thirds a normal harvest (of course, once they actually harvest and weigh the harvest, I suspect they'll likely find that the actual harvest is less than that; just as happened in America following the 2009 harvest).

In a climate-changed world, this is just what will be one of many stories about inflation arising from food issues. Current estimates are for Russian inflation to increase to 7% from the current 5.5%, due primarily to a "price shock" associated with the reduced harvest. 

A very broad view of a long-term climate-change investment strategy, would be to go long on soft commodities - however, expect lots of volatility, sometimes wild volatility, as part of this equation.

Reuters story here

On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.