 | | The Daily Reckoning | Tuesday, October 12, 2010 |
- Why the global Treasury bond love-affair is headed for a bad breakup,
- Population up, crop yields down: How to play the next food crises,
- Plus, Bill Bonner's thoughts on the hemorrhaging job market, poorer New Yorkers and plenty more...
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|  | | | The Ongoing Ag Story | | And the problem with chasing yield in a bond bubble | |  | | Eric Fry |
Reporting from Laguna Beach, California...
Your editors here at The Daily Reckoning are in the midst of riding various planes, trains and automobiles to various destinations in the Americas, both North and South. So today's issue will rely heavily upon the insights of Chris Mayer - editor of Mayer's Special Situations - who, himself, recently returned to the States from a research trip to South America. Chris was taking an up-close look at agricultural property in the soybean-growing region of Brazil.
As long-time subscribers of Chris' investment services would be well aware, Chris is a tireless advocate of investing in ag-focused companies...and he has amassed a long string of timely recommendations in this sector. From fertilizer companies to irrigation companies to grain-processing companies, Chris has picked a number of big winners over the last few years. But he doesn't think the ag story is over...as he explains in the column below.
On the other hand, the story Chris believes is very much over is the global love-affair with Treasury bonds.
"There is a debate now as to whether there is a bond bubble or not," Chris observes. "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," Chris continues, "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," Chris explains, "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," says Chris. "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," Chris insists. "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," says Chris, "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," Chris winds up, "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."
Fortunately, Chris' message is not one of gloom and doom. He may not like bonds, but he loves hard assets, especially the kind of hard assets that participate in agricultural industries. Read on...
| | | | The Biotech Breakthrough of 2010 |
Word is beginning to leak out in the medical community. Warrior Antibodies that can find and destroy nature's deadliest disease. These "warriors" can even clone themselves and even evolve in lockstep with the disease. "Thirteen of 16 evaluable patients went into molecular complete remission... after one cycle..." says the American Society of Hematology.
This small company's stock is around $7 today. Estimates show it could hit as much as $140.Full report here.
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| | The Daily Reckoning Presents | | A Global Grain Powerhouse | |  | | Chris Mayer |
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
Joel's Note: A quick rifle through the open positions in the Mayer's Special Situations portfolio reveals, among some stellar performers already well above Chris' buy price, a neat little handful of long-term plays with plenty of room left to run. There's an oil and gas play that he expects has at least another 15% upside and a water investment with potential for a solid 45% gain. Check out his Special Situations Resource Report for details.
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| | | | Bill Bonner | | Will the US Economy Ever Again See Full Employment? | |  | | Bill Bonner |
Reckoning from Buenos Aires, Argentina...
How are things on the pampas?
Tolerably fair, it appears...
We just got here. Too soon to rush to judgment. From what we can tell, though, the poor Argentines seem to be shooting themselves in the foot...and the leg...and everywhere else. They're going to be taking out buckshot for years...
It should be a great time for the pampas. They have some of the richest, flattest, best-watered farmland in the world. Farm prices are high. Other prices are fairly low.
But leave it to the politicians to mess things up. Argentine beef - which ought to be the country's most prized export - is losing market share, especially to the Uruguayans. How come? Because the Argentines taxed beef exports in order to keep prices low at home. You see, the gauchos can manage an economy too!
What was the result? Farmers switched from raising cattle to raising soybeans. And wouldn't you know it, then, they had a disastrous drought.
More on that story as we find out more...
In the meantime, let's look at the hottest market in the world - the gold market.
Gold is so hot it's hard to believe it won't melt down. Watch out.
And remember, the bull market in gold is a distraction. The big story now is still the Great Correction. It's here. It continues. And it will take years to sort out.
Consumer credit went down $3.3 billion in August - the 7th month in a row of decline. Just what you'd expect in a correction.
If this is not a Great Correction, it's doing a good impression of one.
The New York Times:
In the one-two punch long feared by many economists, hiring by businesses has slowed while government jobs are disappearing at a record pace.
Companies added just 64,000 jobs last month, a slowdown from 93,000 jobs in August and 117,000 in July, the Labor Department reported Friday. But over all, the economy lost 95,000 nonfarm jobs in September, the result of a 159,000 decline in government jobs at all levels. Local governments in particular cut workers at the fastest rate in almost 30 years.
"We need to wake up to the fact that the end of the stimulus has really hit hard on local governments," said Andrew Stettner, deputy director of the National Employment Law Project. "There is much more of a slide in the job market than what we really need to clearly turn around."
With the waning of the $787 billion Recovery Act passed in 2009 and credited with increasing employment by millions of jobs, finding new policies potent enough to speed up the recovery has proved difficult. Meanwhile, Investors' Business Daily has more bad news. At the present rate it will take another 10 years to get those jobs back:
The US economy lost 95,000 jobs in September, far worse than expectations for no change in employment. More Census-related temp jobs ended, as expected, but state and local governments slashed staff far more than predicted.
So far in 2010, the US has added just 613,000 jobs - for a monthly average of 68,111.
Employment bottomed in December 2009 at 129.588 million - two years after peaking at 137.951 million. At this year's pace, the US won't recoup all those 8.36 million lost jobs until March 2020 - 147 months after the December 2007 high.
That would obliterate the old post-World War II record of 47 months set in the wake of the 2001 recession.
The current jobs slump also is the deepest of any in the post-war era, with payrolls down as much as 6.1%. They are still 5.6% below their December 2007 level.
With state and local governments likely to shed workers for at least the next year or two as budget woes continue, the hiring burden will fall entirely on the private sector.
Private employers did add 64,000 workers last month, but that was a little less than consensus forecasts and far below what's needed.
The US needs to create 125,000-150,000 jobs each month just to absorb new workers and prevent unemployment from rising. So returning to the old peak employment a decade later would hardly suggest a healthy labor market. It is worth pausing a minute to think about that last paragraph. It's not enough just to get back the 8.36 million jobs that were lost in the crisis. The US also needs to create about 15 million MORE jobs over the next 10 years in order to stay even with population growth and return to full employment. That's about 23 million all together.
Well, guess how many jobs were created during the last 4 months. None. Instead, the economy LOST nearly 400,000 jobs. So you could say that at the present rate, Hell will freeze before we recover those 8.36 million jobs...and it be even longer before the economy is back at full employment.
Does that sound like a correction to you? It does to us.
What happens to people in a correction? They get poorer. And here's the evidence... For the first time in 70 years, New York residents are earning less money than they did the year before. This report from Reuters:
The recession put a 3.1 percent dent in the personal incomes of New York state residents, who endured their first full-year decline in more than 70 years, according to a report released Tuesday. Paychecks or net earnings tumbled 5.4 percent, while dividends, interest and rent slid 8.4 percent, to a grand total of nearly $908 billion, the state comptroller's report said.
Not only did New Yorkers' personal incomes fall "almost twice" as much as they did in the nation as a whole, but they have yet to recover to pre-recession levels, Comptroller Thomas DiNapoli said.
The drop occurred even though the job-destroying recession was milder in New York than in the rest of the country.
One reason for the hit to New Yorker's pocketbooks is Wall Street's dominance among the state's employers; pay and job security are often highly volatile in the securities industry. Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | The Last Americanos
There are far too many greasy laws and far too many people ready to obey them. If the Whitmans had had any sense of integrity or loyalty they would have kept poor Nicky on the payroll. Then, when the scalawags in the press found out about it they could have answered honestly: so what?
A Tojo Moment
How to Protect Yourself from More Quantitative Easing | The Duck-Like Noise of a One-Legged Economy
In my email I got a forwarded essay titled “Profit from the Collapse of Debt-Fueled Growth” by a guy named Jim Quinn. It was immediately interesting to me, as I am a guy whose natural lazy and greedy nature makes me instantly attracted by things that start out with the word “Profit,” especially if the word “Easy” is also included.
The Mogambo Golden-Real Estate Project
What the Hectare?! How to Produce Food With Fewer Resources | A letter to Senator Scott Brown – The Fed’s Political Interference Must Be Stopped
Dear Senator Brown: I am writing because the Federal Reserve has interfered with the November elections to an unprecedented degree. I know this, having read Federal Reserve officials’ speeches, their testimony, and the warnings of senators (in committee) to not loosen or tighten money in the weeks before forthcoming elections.
After China, the Fed’s Now the Largest Owner of US Treasuries
Consumer Deleveraging to Topple the Commercial Real Estate Market | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  |
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