WallSt.Net Podcast

Welcome to everybody from WallSt.net who came over here because of the podcast interview with Dennis Olson (Haven't heard it? Go here; it'll be on their site on Wed. Aug. 15th). Thanks to Dennis and WallSt.net.

This posting is essentially related to some stuff I talked about on the podcast.

Firstly, anyone interested in buying my book can go here.

Secondly, in terms of some of the stuff I talked about in the podcast about why this blog is a bit different than many out there, I mentioned specifically, dividend investing, and long-tail investing. Here's a couple of articles I've posted that kind of give you a bit of the flavor of these topics, here, here and here. And for those who know me and my bent towards value investing, I re-submit this evidence ...

Now, in terms of stuff I specifically recommended (either avoiding, or moving towards) ...

AVOID

Real estate stocks, especially home-builders (see the reasons why, in an article I wrote in my other life) and avoid sub-prime lenders; the first for three to five years; the second for two plus years. Pessimism after that will be prevalent and then would be the time to buy. There's still too much optimism in the market.

BIG BANKS

Conversely, the really big banks are getting tarred with the "sub-prime" brush, which isn't warranted, in my view. Many of these institutions are tremendously strong, with great balance sheets and will easily weather this storm, and perhaps come out of it with better than ever opportunities. They're also paying great dividends right now, and most have raised their dividend recently. This is another sign that they are probably being mis-priced in the market. Some to look at would include:

• CITIGROUP - yielding about 4.6%



• Wells Fargo - yielding about 3.4%



• Bank of America - yielding about 4.6%



• Wachovia - yielding about 4.6%



• US Bancorp - yielding about 5.0%

Of course, those risk-takers might wait for the next mini-plunge which, if it occurs, might raise these yields by another 50 to 100 basis points (i.e. prices might fall by another 10-20%). However, I think they're good enough deals as they sit. Don't delay too long on these folks - "on sale" today!

EMERGING MARKETS
Emerging markets remain a very-long-term theme that investors will be able to successfully play for a decade at least (provided the stocks don't get overpriced). On a purchasing power parity (PPP) basis, these economies currently account for about 20-25% of world trade, yet most conventional financial advisers suggest a 5% weighting or so. This is a serious backward-looking mistake. No investor with a 20 year horizon can afford to take such a light weighting in these strong growth markets.

While the conventional BRIC countries have been bandied about as "the" emerging country investment destinations, other countries also have strong profiles too. A personal favourite of mine remains South Korea, with nearly an "emerged" economy, yet very cheaply priced.

Here's some ways to play the emerging markets theme, via ETFs, in my personal order of preference:

• Wisdom Tree's ETF - "DEM" - a dividend-weighted emerging market ETF. This ETF should prove more resilient than many emerging market investments during market corrections, while retaining most of the upside during exuberant bull markets.


• The Claymore Investments ETF - "EEB", which is designed to provide exposure to the BRIC countries, through ADRs. Because ADR issuers tend to be large, liquid companies, this also reduces some risk.


• The iShares S.Korea ETF, "EWY" - a narrow singly country focussed ETF.


• The iShares Emerging Market ETF, "EEM" - a very broadly-based emerging market ETF.

AGRICULTURAL COMMODITIES

I think this sector is going to have a huge tailwind going forward, something I've written about here. In later postings, I'll elaborate on how to play this trend.

Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!


INFRASTRUCTURE BUILD OUT

This is tied in with several other trends, including the re-building of the industrialized world's infrastructure to make it greener (using mass transit for instance, to replace the crappy aging stock of roads and bridges).

Also, the infrastructure build out in the emerging markets is something that's going to continue to occur during the next several decades. For instance, the Chinese GDP per head is about 1/4 of what it is in the US (on a PPP basis), while in India it's about 1/10 (PPP basis). These economies will also obviously be building out their infrastructure. Accordingly, I like some of the very large manufacturers, like General Electric ("GE") & Siemens AG ("SI"), but I especially like the engineering firms that'll obviously be beneficiaries of the design and over-sight work needed here. Some names in this sector include:

• Fluor Corp. - FLR


• Foster-Wheeler - FLWT


• Jacobs Engineering - JEC


• Stantec Inc. - SXC


• SNC Lavalin - SNC (on Canada's Toronto Stock Exchange)
  

Well, that's about all for right now - if you're new to the site, feel free to poke around. If you're a regular, thanks for coming by.

JW

The Confused Capitalist

Food Shortages and Food Inflation: Malthusian future?

Image: Food skyscraper of the future?


Although Malthus has long been laughed at by those convinced that technology will solve any problem, in any finite system, one must reach some sort of system limits, as demand for a resource outstrips that method of producing it.

Although it may happen for slightly different reasons than postulated under the Malthusian catastrophe scenario, it appears this is starting to happen with food and will soon be found in a supermarket near you, via food inflation.

There is a confluence of forces that make serious food inflation, at the minimum, particularly likely over the next five to ten years:

Factor number one is the bee die back, and the effect it is likely to have on food prices over the next few years, as yields are curtailed due to a reduction in pollination. One economist figures that this will put over $15 Billion in North American crops at risk, all adding to potential for food inflation.

Factor number two is the growing wealth of emerging markets, and their propensity to emulate a western-style meat-heavy type diet, as wealth grows. This puts increased pressure on grain crops in particular, as it takes anywhere from about 5-20 pounds of grain to produce a single pound of meat. As large populations in China and India move further away from vegetarian or semi-vegetarian type diets, this strains limited global food stores even further, adding to food inflation.

Note: If you're on a blog aggregator, you can visit the Confused Capitalist here or here (http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

Factor number three is the changing climate. Scientists have long known that food yields can come under pressure in at least two ways as global temperatures climb. Firstly, at higher temperatures, some plants - despite ample water - either cease production, or lower production. In either case, yields are lowered. Secondly, changing climate results in more extreme weather, including droughts, hurricanes, extreme rainfall etc. Total yields are obviously reduced under those circumstances too. (Alt citation, PDF)

This was recently brought home to me by an Australian cousin, who laments the drought his country has been going through for some time: he tells of kids in some parts of the country now entering high school, who have never seen rain.

Factor number four is the number of lunatic politicians, in their bid to never offend anyone while running for office, avoid telling the truth about ethanol from corn: it's doubtful it actually produces any additional (net) energy after it's energy inputs are calculated, AND it's going to (in fact, already has) further increased food costs.

I watched a shameful 20/20 series where every single presidential candidate at a town-hall type meeting claimed that ethanol was part of the solution, rather than more likely to contribute to an even bigger problem. Whatever happened to a "give 'em hell", Harry Truman style candidate? Are they all too meek, too bland, and too gutless for even one of them to stand up and tell the truth? And the truth is, is that ethanol, bio-diesel, or any other fuel made from food sources is only going to add to food inflation, possibly to serious food inflation.

One article also discusses many of these issues and interestingly points out that China, to feed itself, should be adding a quantity of arable land equal to Maine, every year. Instead, it has lost that amount every year over the past decade. Another article, in the respected Popular Science magazine, discusses these looming food questions.

There are, of course, always those head cases who are convinced that technology will solve any problem. However, increasing technological solutions have coincided with increased energy demands and, in a global warming world, one of these trends most likely has to give.

I read a recent article suggesting that food skyscrapers may be the way of the future - but these won't be coming any time soon and, due to costs, may end up with all those other strange Popular Science ideas that never see the light of day due to cost or technical issues that can't reasonably be overcome.

The Confused Capitalist will provide some practical and investment advice on how to deal with this over the coming while.

More reading sources:

• Vertical Farming Dream


• Deeper Thinking About Serious Issues


• Making realistic interim changes


• For the more personally ambitious


• What changes are really needed & how to go about it

JW

The Confused Capitalist

Commodities - Which way? (updated)

The recent direction of the stock markets seem fairly clear, and for anyone who's got any doubts, these two (one, two) recent postings by Barry Ritholtz over at The Big Picture should help clarify things. The market, overall, seems poised to continue moving down - or at best - sideways. Yet, as always, even in soft markets, some stocks - or groups thereof - will continue to make gains.

The largest seemingly identifiable group that is likely to continue significantly differentiating itself from the broader market is commodities - mainly minerals, and oil & gas.

The only question is - which way?

Goldman Sachs analysts Arjun Murti and Brian Singer surprised the markets in March 2005 by calling for $100/barrel oil. While it may have been headline surprise, it was only a reiteration of similar calls for continued oil prices at increasingly elevated levels. More recently, pundits on both sides have pointed to a myriad of evidence supporting both higher and lower prices - pointing to things like increased demand from rapidly industrializing China and India, and potential for disruption from Iran, etc. - and on the other side - speculators keeping the price high. Seemingly authoritative sources on both sides make compelling arguments for both directions.

Other commodities too, had well known prognosticators on both sides of the fence point to imbalances. A recent letter from investment guru Bill Miller of Legg Mason suggests that the boom is more likely to be nearing the end, than in the middle of a tear. Superinvestor Warren Buffett also suggested in verbal comments (use browser tool to search for "commodities" within the article) made at the 2006 annual weekend conflab in Omaha, that commodities were subject to some speculative excesses although the comments were somewhat vague in nature.

Surveying the scene, it's possible to become utterly confused as to which way commodities might move. Investment guru and commodities expert Jim Rogers (co-founder of the Quantum Fund with billionaire George Soros) says that while commodities may in the midst of a "big correction" lasting anywhere from three months to two years, that this is a secular (commodities) bull market with another 15 years to run, "because supply and demand are so out of whack".

One can never be certain of course, and it's difficult to see exactly who's right: well-known conservative investors (i.e. Miller, Buffett, etc.), or other renowned experts like Rogers.

Me, I just keep thinking China and India growing economically at 7-10% a year, with their two and a half billion citizens. That, my friends, is a lot of demand. Are prices out of whack? Frankly, I don't know, but I very much doubt we are in the seventh inning in this particular game.

On the other hand, it's important to remember that even favorable long-term investment winds can't rescue an investor if he/she paid a wild price for their asset. Just ask anyone in the "NASDAQ 5000" club.

N.B. 7:22AM PST May 25 Update:

One thing I personally would NOT do, is to invest directly in the underlying commodity index, as seems so popular these days, by the roll-out of various commodity-indexed ETFs. As CIBC World Markets chief economist Jeffrey Rubin pointed out in some market commentary, the stocks of commodity companies typically lag the leading indicator (the spot price, usually) in a commodity rally for a long period of time.

Both the imputed price of the underlying commodity is much lower (in 2005, Mr. Rubin said most oil companies had a value which imputed oil in the high $20s or low $30s per barrel, for instance). The longer the rally goes on, the more the stock price begins to close the gap, AND begins to experience multiple (i.e. PE ratio) expansion.

This suggests that the best way to invest in a commodity bull market, is in the early phases invest directly in the commodities themselves, and later, through stocks. I personally feel that we're into the second part of that investment thesis, and the best days of the first portion are already behind us.


JW

The Confused Capitalist

Canada: Hiding out the market downturn in the land of rocks and trees

Canada's stock market has often been referred to as market of rocks and trees, a reference to it's reliance on commodities like minerals, lumber and oil to power its economic growth and stock markets.

I have written recently about the bell ringing in the US, my opinion that the market is near the top for the stock market, based on a number of signs I see, not the least of which is unrealistic expectations of capital gains (note, things have only gotten more speculative since this was written), rising interest rates, booming commodity prices (a harbinger of inflation, something particularly bad for the US market), risky assets becoming more popular (note, things have only gotten more speculative since this was written), while quality assets languish (i.e. big cap's continue to be available for bargain prices). All of this common sense information makes me also wonder if another 1972-1974 drop might be in the offing, and if so, can one "hide out" successfully in the Canadian hard asset climate, as Sir John Templeton is reported to have done in the secular bear market lasting from 1968 to 1981.

Culling through the TSE (Toronto Stock Exchange - Canada's largest stock exchange, now renamed as the TSX) statistics, if you were focused on avoiding the 1972-1974 bear market, the escape to Canada wouldn't have provided much comfort. The Dow fell by about 40-45% over that time, and the TSE also fell, by a somewhat similar amount. In 1972, the TSE index closed the year at 1226 (its monthly high close for the year), and by December 1974, closed at 835, a decline of 32%. So over the short term, the two markets were fairly similar.

However, over a slightly longer period, it was definitely favorable to be in the Canadian market, as by mid-1979 it had rallied to double in value over it's 1974 close, while the Dow took until 1982 to close above the 1000 level at year end; this was a level it (the Dow) first pierced in 1964 and closed at year end above that in 1972. Perhaps because inflation was such a factor, companies involved in hard assets (mining, lumber, oil) were the prime beneficiaries of hard asset inflation, and thus the Canadian market rallied through the mid-to-late 1970s. This is a scenario that I think is could again be replicated when the US market softens over the next while and struggles over the period thereafter.

I had always thought that the Canadian market had fared better than the US market during the brutal 1970s bear market. It turned out I was both right and wrong.


JW

The Confused Capitalist

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PS: Changes made, May 3 06, 3:20PM, to correct grammer and erroneous reference to 1972 TSE "low close", when it should have stated "high close".

Long Term Investing and Fighting the Tape

Left: 7' 2", 450lbs, wrestler Andre the Giant. b.1946 d.1993

There's a saying in the stock world, that goes, "Don't fight the tape." What it means is that when there's powerful selling going on against a stock, only the foolish step in and start buying, because the price is likely to continue to decline.

While there's obviously some point at which the selling will stem, and the "tape" may turn (provided there's some underlying positives to the stock), the short-term investor is well-advised to take note. To some extent, it would be like trying to fight Andre the Giant.

While I generally pay very little attention to "fighting the tape" in my own investing over the short term (hey, if I'm willing to buy the stock at the price offered, I don't particularly care whether I've bought at the precise bottom anyway), it makes sense to pay attention to "fighting the tape" over the longer haul.

Where I think one has to be very careful "fighting the tape", is when powerful long-term forces are at work against your investment. In my opinion, an example of this includes things like the computer industry, where costs keep getting driven down, as do margins. Investing in businesses in the midst of commoditization are situations where above average caution is warranted. That's not to say don't do it, just be aware of the forces at work, and be cautious.

I think that this is something to particularly keep in mind these days, as commodities themselves have risen from the ashes, to become a very popular asset class - and commodity oriented companies - and their stock prices - have thrived.

One day this tide will turn (probably when inflation is seen as a benign future factor - unlike today), and commodities and commodity-oriented company's stock will "return to earth". In the interim, some careful thought is warranted, to ensure that you're happy with your level of exposure to any situation based on a commodity product.


JW

The Confused Capitalist

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