Sunday, November 25, 2007

Sectors Still Look Poised for Outperformance

Back in August, right near the bottom of the mini-plunge, I suggested several sectors whose stocks looked poised for outperformance over the longer term, as well as a couple of groups to avoid.

The groups I liked included some of the bigger banks (although I warned that further declines of 10-20% also looked possible), whose yields were then in the 3.4% to 5.0% range or so.

They also included some of the large engineering firms, who I see as prime beneficiaries of the design and oversight work needed to build out the emerging markets infrastructure, and the work needed to replace the aging infrastructure of the western world.

It also included several emerging markets suggestions, and a later posting suggested that distressed credit buyers would have the opportunity to load up their balance sheets with cheap debt, which could fuel earnings for years to come.

Since those predictions, the S&P 500 has bounced up and then down, and is essentially flat over that period.

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The banks mentioned have generally declined, most by about 10-20%, but with Citigroup getting trashed. On the other hand, some have held up pretty well, considering the magnitude of write-offs announced since then. I still like them, and now most of the yields are now in the 5-7% range, making them even more attractive in the face of what I see as a weak market. Maybe it's just me and Warren Buffett who like the bank stocks at these prices.

Engineering firms still look good as a look term-prospect, but this may be somewhat tempered by the fact that most of those discussed have moved sharply upwards, by 10-50% since then.

The emerging markets suggestions have also moved up, by about 15-20% on average of the group discussed.

Finally, a later August 2007 suggestion of looking at some distressed credit buyers is essentially flat as a group.

I still like all of these groups, and think that current prices are likely to look good several years from now.


The Confused Capitalist

Sunday, November 04, 2007

Food Inflation will continue and accelerate

I have written several times about my belief in a movement towards higher food prices in the future, perhaps much higher than in the past. Some commodity experts like the renowned Jim Rogers have stated this belief too.
While I normally enjoy helping investors think about long-term trends that'll help fatten their portfolios, because of the implication this trend has for people everywhere, especially poor people, this posting gives me absolutely no joy.

Nevertheless, here's several ways to invest in what I believe is a long-term trend towards higher food prices:

Van Eck Global's fifth ETF, Market Vectors Agribusiness (AMEX:MOO), which recently debuted and is already up nearly 20% since then. The ETF includes subsectors of the agriculture, such as agricultural chemicals at 34.3% of the index, agriproduct operations, 33.5%, agricultural equipment, 24.3%, livestock operations, 5.6%, and ethanol/biodiesel, 2.3%.

The 40 companies from 13 countries in the index must have a market cap of at least $150 million and a monthly trading volume of 250,000 shares. These companies are primarily engaged in the business of agriculture, and must derive at least 50% of their total revenues from agribusiness. According to information on the fund sponors site (Van Eck), as of Sept 2007, the fund had a PE of ~27, a PB of ~3.5, and a dividend yield of 1.06%.

There are also several ways to invest more directly in the foodstuffs, either through ETFs or ETNs. Two recent products from Barclays (ipathetn) are as follows:

"JJA" tracks the Dow Jones–AIG Agriculture Total Return Sub-Index. The Index is currently composed of seven futures contracts on agricultural commodities traded on U.S. exchanges. The weightings are currently as follows: Coffee 8.0%; Sugar 7.0%; Soybeans 28.0%; Wheat 23.6%; Soybean Oil 9.9%; Cotton 9.3%; Corn 14.3%. According to the information provided by the sponsor, the annual return from the index looks like this: 1yr = 44%; 3yr = 12%; 5 yrs = 6.2%; 10 yrs = -(minus)1.7%.

As you can see, owning the index constituents would have been very good during the past year, and very lousy over the past 10 years.

"JJG" tracks the Dow Jones–AIG Grains Total Return Sub-Index, which has an underlying composition of three futures contracts on grains traded on U.S. exchanges. They are weighted as follows: Soybeans 42.6%; Corn 21.6%; Wheat 35.8%. According to the information provided by the sponsor, the annual return from the index looks like this: 1yr = 64%; 3yr = 14.9%; 5 yr = 6.4%; 10yr = -(minus)1.4%.

Judging by the return differences between the two products over the past year, it appears that the Grains component of the "JJA" ETN (which is 66% of that ETN) has provided almost all of the 44% annual return; in fact, my calculation shows that it's responsible for 41 points of the 44% return.

PowerShares also offers a foodstuff type ETN, DB Agriculture; "DBA".

It tracks the Deutsche Bank Liquid Commodity Index - Optimum Yield Agriculture Excess Return. The index is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities – corn, wheat, soy beans and sugar, in equal weightings (i.e. 25% each). However, the weightings in the fund are only periodically rebalanced, and as of October 25 2007, the weightings had changed to as low as 17% for sugar and as much as 31% for soybeans. Index return history as of September 28 2007; 1Yr = 36%; 3yrs = 15%; 5yrs = 11% and 10yrs = 1.6%.

This ETF started trading in January 2007 at $25 and closed at $29.28 on October 26 2007, providing a 17% return since that date.

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Finally, according to recent press releases and web-articles, ProShares is going to be offering a leveraged ETF tracking the Dow Jones-AIG Agricultural Index. When they start trading, this will offer the opporunity to track the index, but on a double-leveraged basis. The release date of the ETF isn't known at this time. Expect a one to four month delay as typically seen.
I have written previously about the food inflation issue, and it's worth re-visiting two of my postings, here and here for more background.


The Confused Capitalist