 | | The Daily Reckoning | Monday, October 18, 2010 | - Disruptive technologies and investing in the digital frontier,
- “I think we have a food crisis right now” warns this expert,
- Plus, the largest voluntary collection of free individuals on the planet...
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|  | | | Profits in the Fastest Growing "Country" in the World | | How to make money in the Internet age | |  | | Joel Bowman |
Reporting from Montevideo, Uruguay...
“It’s technology, not business or government, that’s the real driving force behind large-scale societal shifts.”
– Sean Parker, Social Networking’s Miracle Man
It will come as no surprise to readers of these pages that the freest marketplace on earth is also the most rapidly advancing. Although there have been many attempts to regulate the Internet, with varying degrees of “success,” the fact remains that cyberspace, with its amorphous jurisdictions, whizz kid engineers and lightening fast evolutionary pace, is notoriously difficult to police. That leaves, for the most part, meddlers and do-gooders flailing in the wake as trailblazing entrepreneurs rewrite the rules and social conditions of what some have taken to calling the “4th dimension.”
For freedom lovers, that laissez faire environment is something that ought to be both celebrated and, well, left alone. Philosophical and sociological points aside for the moment, the technological hyper-leaps playing out right now online have implications that are very real, and very far-reaching for the investment world.
Consider, for example, the impact new communication technologies have had on the print media industry. Americans today have access to some 5,500 magazines and a similarly paltry number of newspapers...but well over 1 billion web pages. Over the past quarter century, newspaper circulation has fallen by about 7 million, even as the population jumped from 250 million in 1990, to 310 million today. By stark contrast, the number of unique readers of online newspapers has grown by over 30 million...in the past five years alone.
As a result of this shift, traditional advertising in both newspapers and magazines has suffered a sustained decline, down about 18% and 15% respectively in the past year alone. Digital advertising, meanwhile, is experiencing almost unabated growth. Online advertising has increased by about 9% over the same time, while advertising to mobile devices such as cell and smart phones is up about twice that much.
But even these impressive statistics pale in comparison to those posted by the Web’s Social Networking giants. The undisputed leader in this field, at least for the moment, is Facebook. Having passed the 500 million-member mark this summer, the online behemoth boasts a voluntary population about the size of Brazil and Indonesia combined. That makes it the third most populous “country” on the planet. And it doesn’t even operate in China...yet.
For skeptics, the thought of a company “posting” or “poking” its way to success is difficult to comprehend. But the Facebook site, through which users share more than 30 billion pieces of information every month, is also finding ways to monetize its enormous online presence. According to Google Finance, “Facebook runs more banner advertisements than any other Web site (176 billion a quarter) and drives more US visitor traffic to some sites than even Google. Revenues this year could reach $2 billion.”
Remember that Google Inc., weighing in with a market cap of almost $200 billion today, was not without its share of naysayers along the way.
Even Twitter, the center of the “microblogging” universe, is finding ways to muscle in on the highly competitive virtual stage. The site, with some 130 million registered users (roughly equal to the population of Japan), is currently growing its membership by over 300,000 per day. People “tweet” – or post limited-character blogs – more than one billion times per month and search Twitter over 800 million times a day.
That’s not to say that skepticism of the rapidly evolving industry is not warranted. For many investors, the wounds of the last tech crash are still too tender to even think about the lofty promises of the virtual realm. When the dot-com bubble burst in 2000-’01, Silicon Valley became a kind of high tech tar pit, littered with the remains of flashy start-ups that had reached absurd valuations. But in the mini-recession that followed, no government agency swooped in to save eBay Inc. or Amazon.com or any of the other outfits that saw their stock prices cut in half, or worse. Nobody in the halls of Congress were shouting that Microsoft was “too big to fail,” even though the stock slid almost 66% in that single year. Instead, the industry consolidated and myriad weak companies perished in the process. The bad apples were left to rot, in other words, and the good apples... Well, if you own anything “i-Related” (including shares of that particu lar company) you already know what happened to them.
The fact that the digital realm is so very hard to police and to regulate may be a continuous source of consternation for meddlers and do-gooders alike, but for frontier investors and unapologetic entrepreneurs, that freedom may just be the environment’s greatest draw card. More on this later in the week...
[Ed. Note: As it so happens, these transformational technologies – like the Internet – are exactly the kind of investments our own technology experts, Patrick Cox and Ray Blanco, focus on when they seek out opportunities for members of their newly-released Technology Profits Confidential. They’re not interested in a cell phone with a light bulb on it, for instance...they’re interested in truly revolutionary technologies, like the six groundbreaking companies they brought to their readers’ attention just last week. If you’re interested in taking a look at their research, check out this presentation they recorded for Agora Financial readers.]
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| | The Daily Reckoning Presents | | The Food Crisis of 2010 | |  | | Chris Mayer |
“I think we have a food crisis right now.”
– Hussein Allidina, head of commodities research, Morgan Stanley
The leaves have turned all shades of red and gold. The air is crisp and cool. The fall beers are tapped. The brats are on the grill. It’s autumn. That means it’s time to talk about the harvest, in particular for corn.
Corn was the big news in markets on Friday. What some called a “harvest shocker” sent corn up 6% on the day. The USDA cut its harvest projections by nearly 4%, which took the market by surprise. And that’s just one of the reasons why the corn price has soared to $5.30 a bushel from $3.30 a bushel last July.
The shares of most ag-based companies are responding in kind. Fertilizer stocks are soaring, for example, as are the shares of irrigation equipment companies like Lindsay (NYSE:LNN). By contrast, the market has been hammering the stocks of meat producers. Tyson Foods has been falling on the theory that higher prices for corn means higher feed prices to fatten up those chickens, cows, sheep and pigs.
By historical standards, the US corn harvest is still a mighty pile – 12.7 billion bushels. It’s the third largest ever. But demand is also near record levels. And that’s why supplies are still tight.
The USDA said that US corn held in reserve will fall 47%. This means the US will have the tightest reserves since the mid-’90s. However, the US also has a lot less idle farmland than it did then, which means it’s not going to be as easy to replenish lost reserves through US production.
Of course, there are spillover effects, too. This doesn’t affect just corn. Soybeans jumped nearly 7%, and wheat was up 9%. What affects one crop affects others. They all compete for arable land and the farmer’s investment dollar. If more farmers plant corn, that could mean fewer farmers plant soybeans.
Also, in the shadows lingers the possibility of another 2008 food crisis. Some think it’s already here. Some of the largest grain exporters, like Russia and the Ukraine, have imposed export restrictions. Meanwhile, many of the chronically large grain importers in the Middle East and North Africa are starting to hoard supplies. This drama resembles the one we saw in 2008.
So I think we’ll see a mega-corn planting for next year. That will be good for fertilizer and ag equipment stocks, as farmers load up on what they need. But from this point, the best-performing stocks might be the ones getting mauled today.
The old saw in the commodity pits reminds us that the cure for high prices is high prices. The market will bring us a lot of grain next year. My guess is that corn will be cheaper in the spring than it is today.
Meat prices will continue to rise, too, and are already climbing this year. Beef prices are already the highest in a quarter-century. In this scenario, the best plays would be the beaten-down Tyson Foods of the world that turn the world’s grain into meat.
In the meantime, it’s worth noting that agricultural commodities are not the only ones rising. Metals also helped the benchmark index for raw materials hit its highest level in two years on Friday. Tin hit an all-time high of $26,780 a tonne. Copper hit a two-year peak of $8,349.50 per tonne.
Beyond the industrial metals, precious metals are also soaring. Gold hit a new all-time high of $1,364.60 an ounce. All the big gold producers are closing their hedge books. Meaning, they think the price of gold will go higher. So rather than sell gold forward at today’s prices, they will take their chances. AngloGold Ashanti was the latest to do this.
On top of this, central banks around the world keep buying gold. Overseas, governments are actually encouraging their citizens to own gold. Most recently, the Vietnamese central bank said it was thinking about lifting a ban on gold imports, which has been in place since May 2008. The market took this as bullish, because Vietnam is one of Asia’s largest consumers of gold.
Silver is putting in 30-year highs.
When all these commodities start hitting their highs together, something greater is at work than just supply and demand issues.
As the FT notes: “Investors are pouring money into commodities as fear intensifies that competitive currency devaluations and quantitative easing – in effect, pumping money into the economy – by the world’s central banks will lead to the debasement of paper currencies and to runaway inflation.”
This is exactly it. Investors are not as dumb as they sometimes seem. They see the world’s governments fighting over currency issues. They see that the likely outcome is that these governments weaken their currencies. As one does it, the other weakens in response. Then the other weakens it more. And so on and so forth.
And before you know it, you need a $20 bill to buy a cup of coffee.
Commodities trade on world markets – at least the major ones do. Prices adjust to the fall in currencies. So as the dollar weakens, the price of gold or oil ought to rise in dollar terms, everything else being equal.
Companies that produce these commodities could do even better, because their costs – such as for labor – don’t rise as fast. When you get your annual raise – if you are a salaried worker – inflation may well have already chomped 10-15% of your purchasing power.
Also, commodity producers who have already spent the large dollars to get a project up and running will find they have a big advantage over new projects. Inflation will make new projects much more expensive by comparison. This also stimulates the merger and acquisition activity we’ve seen.
Management teams will sit in their backrooms and do the math on a white board. They will see that it is often cheaper these days to buy what they want in the stock market, rather than build it themselves. This is what BHP decided when it bid for PotashCorp; it’s what Robbins & Myers did when they decided to bid for T3. So my advice is to stay with tangible assets that won’t lose value as currencies depreciate.
For the last few years, I’ve been recommending the shares of tangible asset companies like PotashCorp and T3 to the subscribers of Mayer’s Special Situations. Most of these recommendations have performed very well. But I think there’s still a lot more investment success to be had by buying into the companies that feed and power the world.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel’s Note: Did you catch Mr. Mayer’s newest presentation yet? Last week Chris released a video detailing how the spectacular crash of a nuclear-armed, American B-52 bomber over Greenland half a century ago has handed one tiny penny stock company the opportunity to deliver up to 2,000% profits. It’s a truly fascinating tale. If you haven’t yet given this presentation a listen, you can hear the entire story here. (Don’t forget to turn on your speakers.)
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| | | | And finally... | | Our Reckon-in-Chief, Bill Bonner, is trekking the northern reaches of Argentina this week, planting capers and checking in on his “sand-fed” beef. You know...just the kind of thing you’d expect the founder and president of a publishing company with operations around the world and offices in eight countries to be doing about this time of year. Totally normal.
We’ll return tomorrow with more of your usual reckonings...
Regards,
Joel Bowman,
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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Matt Taibbi, political reporter and financial journalist for Rolling Stone, has made a recent appearance on MSNBC show The Young Turks, hosted by Cenk Uygur. He’s on to discuss just how desperate the Fed has become. After countless failed government efforts, including slashed interest rates and government work programs, the fed’s back to manning the the printing press, to “print a whole bunch of money and buy stuff with it.”
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| | 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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