Archive for April, 2008

Recently, at a party in New York, I mentioned that I had been talking to various groups in the United States and Europe about investment opportunities in the commodities market. Before I could get out one more word, a woman interrupted me. “Commodities!” she exclaimed, with the kind of incredulity in her voice that Manhattanites reserve for people moving to Los Angeles. “But my brother invested in pork bellies and lost his shirt. And he’s an economist!”

Everyone seems to have a relative who took a beating in the commodities market, and this fact (or fiction) is considered sufficient reason that no sane person would ever risk playing around with such dangerous things. That this particular victim was also a professional economist makes the warning seem even more ominous. I, however, couldn’t help laughing.

Billions of dollars are invested in the commodities market every day. Without the commodity futures markets, many of the things that you depend on in life, from that first cup of coffee in the morning to the aluminum in your storm door to the wool in your new suit, would be either scarce or nonexistent, and certainly more expensive.

To be sure, investing in anything has its risks. A lot of Ph.D.s in economics lost money in the dot-com debacle, too. (On New Year’s Day in 2002, the Wall Street Journal published its annual survey of economists for the upcoming year. Although the economy had been sagging for almost a year, not one of the 55 economists thought that it was in for a serious decline. One hundred percent were wrong – and proof that Ph.D. economists are as prone to mob psychology as the rest of us.)

There are several other bromides out there for why “ordinary people” should not invest in commodities, and I want to lay these myths to rest, once and for all, so that we can get on with the more interesting business of how you can begin to make some money investing in the next-generation asset class.

About That Relative of Yours Who Got Wiped Out – He was inexperienced. You can learn. Most likely, he was buying on thin margin – the minimum deposit a broker requires to take a position in a particular commodity – and when the market went against him he lost big-time.

Here’s how it happens: Like stocks, commodities can be bought on margin. Unlike stocks, however, where by law you have to put up at least 50 percent of the price of the shares, the margins on commodities can be even lower than 5 percent: You can buy $100 worth of soybeans for $5. If soybeans go up to $105, you’ve doubled your money. Beautiful. But if soybeans go down $5, you’re wiped out. Not so beautiful.

Experienced, smart speculators can make tons of money buying on margin. They also know that they can lose tons, too. But they can usually afford it. Your relative was in over his head. If he had bought $100 worth of soybeans in the same way that he can buy IBM – for $100 (or maybe even $50) – he would be happy when it goes up $5 and a lot less sad should it go down $5.

Whenever I mention commodities in public, someone always points out that we now live in a high-tech world where natural resources will never be as valuable as they were when we had a smokestack economy. But if you read your history you’ll discover that technological advances are as old as history itself: The introduction of the sleek and beautiful Yankee clipper ship dazzled the world in the mid-nineteenth century, loaded with cargo, sailing down the trade winds at 20 knots and more, averaging more than 400 miles in 24 hours and able to make it from U.S. ports around Cape Horn to Hong Kong in 80 days; within a decade, the clippers had been replaced by the steamship, no faster but not dependent on wind power; and before long the next big thing in transport had taken over, the railroad, which, of course, was the original Internet – and prices in the commodities market still went up.

In the twentieth century came electricity, the telephone, and radio (three more Internets) and then television (a fourth Internet). There was also the automobile, the airplane, the semiconductor – and in the midst of all of these truly revolutionary technological breakthroughs came periodic, multiyear commodity bull markets.

Even a revolutionary technological breakthrough in a particular commodity-related industry will not necessarily lower prices. For decades, drilling below 5,000 feet or offshore was virtually impossible. Then in the 1960s the Hughes diamond drill bit was invented and an explosion of technological advances in oil drilling and exploration followed. Drilling efficiency – and oil deposits – were available that had been unthinkable before this technological breakthrough. Soon there were wells 25,000 feet deep and offshore oilrigs multiplied around the world. Yet oil prices went up more than 1,000 percent in the 15-year period between 1965 and 1980.

When the supply and demand in raw materials is seriously out of whack, the emergence of new technology will not necessarily restore the balance quickly. To be sure, changes in technology, for example, have made the economy less dependent on oil. But we still use plenty of it, and whenever there isn’t enough prices will rise. Computers or robots may do amazing things, but they cannot find oil or copper where there is none or make sugar, cotton, coffee, or livestock grow faster than nature allows. We can put in orders all day long on our computers for lead, but all that Internet technology will be in vain if there are no new lead mines. Technology can neither feed us nor keep us warm, and the demand for commodities will never disappear.

“But Isn’t It Only Speculation and the Lower Dollar That Are Inflating Prices?”

Certainly, speculators who jump in and out of commodities can push up prices. And the dollar has been a pale remnant of itself – down against the euro almost 40 percent from the beginning of 2002 until the start of 2004 and at a three-year low against the Japanese yen. Since commodities are traded in dollars, a weak dollar will make prices appear higher. Crude oil rose 64 percent in dollars over that two-year period, but only 16 percent in euros.

But the dollar strengthened in the spring of 2004, and a funny thing happened: Commodity prices kept going up. The global recovery, particularly in Asia, was for real. We are now watching a fundamental structural shift in commodities markets, and it is called “supply” – and “China,” a nation that will be consuming extraordinary supplies of all kinds of commodities for years to come. I will explain why in more detail in a later chapter. For now, however, here’s the story: dwindling supplies and increasing demand.

And the dollar has nothing to do with either. Let me also re-mind you of the 1970s, when inflation in the U.S. was about 10 percent a year, the dollar wasn’t buying anywhere near what it used to, and the economy was in a major recession – and commodity prices kept rising. We’re talking another long-term bull market in commodities, and neither speculators nor a weak dollar can make that happen. Speculators can have a short-term effect only. For example, if they drive up the price of oil artificially, oil producers with excess supplies will gleefully dump their oil on the market driving the price back down. Both the dollar and speculation can have a marginal effect, but the market itself is bigger than they are.

“But My Stock Broker Tells Me That Investing in Commodities Is Risky.”

Tell me again about all those Cisco shares you owned back in 2000. Or JDS Uniphase, or Global Crossing? So many risky stocks made the turning of the new millennium a not so happy time for many, who watched their portfolios evaporate.

If you do your homework and remain rational and responsible, you can invest in commodities with perhaps less risk than playing the stock market. You don’t need me to emphasize that investing in anything is a risky business. But let me point out something that you might not have realized: There has been more volatility in the NASDAQ in recent years than in any commodities index. Cisco, Yahoo!, and even Microsoft have been much more volatile than soybeans, sugar, or metals. Compared with the risk record of most tech stocks, commodities look safe enough to be part of any organization’s “widows and orphans fund.”

According to “Facts and Fantasies About Commodity Futures,” the Yale study cited in the first chapter, the “high risk” of investing in commodities does not square with the facts. Comparing returns for stocks, commodities, and bonds between 1959 and 2004, the authors found that the average annual return on their commodities index “has been comparable to the return on the SP500.” The returns from the commodities market and the S&P 500 beat those from corporate bonds during that same period. They found that the volatility of the commodities futures under analysis was slightly below that of the stock in the S&P 500. They also found evidence that “equities have more downside risk relative to commodities.”

How about buying shares in commodity-producing companies instead of buying commodities themselves? That’s about as far as some financial advisers will go in the direction of commodities. But investing in commodity-producing companies can turn out to be an even riskier bet than sticking with buying the things outright. Supply and demand will move the price of copper, for instance, while the share prices of Phelps Dodge, the world’s largest publicly traded copper company, can depend on such less predictable factors as the overall condition of the stock market, the company’s balance sheet, its executive team, labor problems, environmental issues, and so on. Oil skyrocketed in the 1970s, but some oil stocks did not do that well. The Yale study found that investing in commodities companies is not necessarily a substitute for commodities futures. The authors found that from 1962 to 2003, “the cumulative performance of futures has been triple the cumulative performance of ‘matching’ equities.”

And let me remind you of one more important difference between commodities and stocks: Commodities cannot go to zero, while shares in Enron can (and did).

God Bless;


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Waste Management (NYSE: WMI, $35.76) is the largest provider of municipal solid waste management in the U.S. with a roughly 26% share of the $52 billion industry.

Roughly 64% of revenues come from waste collection fees, 22% from landfill-related tipping fees, 9% from recycling and 5% from WMI’s waste-to-energy operation, Wheelabrator.

Competitive Advantages:  WMI’s primary competitive advantage lies in its unparalleled network of landfill capacity. In total, WMI owns or operates 283 landfills in the U.S. — capable of handling some 116 million tons of waste per year. This represents the largest number of landfills of any U.S. waste management firm.

Even better, WMI’s landfills are far from full — the company estimates that its facilities have 30 years of life left. That means WMI could keep collecting and depositing waste at its current rate for roughly three decades without running out of capacity. Currently, WMI has filed for expansion permits for more than 50 of its existing facilities; if all those permits are granted, then WMI’s remaining landfill life will top 37 years.

And WMI’s landfills are well-diversified geographically, meaning WMI has access to landfill capacity in just about every imaginable market for waste disposal. In total, about 70% of WMI’s markets include both collection and landfill capacity.

And in addition to plain vanilla landfills, WMI has a huge network of other waste disposal facilities. The list includes 131 waste recycling centers capable of handling 8 million tons of recyclable materials per year — the largest network of recycling capacity of any waste management firm. And WMI also owns 370 transfer facilities used to temporarily hold and consolidate waste before transport to landfills.

Given the extensive regulatory barriers for building new landfill, recycling, and transfer station capacity, it would be very difficult, time-consuming, and expensive for a competitor to recreate WMI’s asset base. And since the top three waste management players own nearly two-thirds of U.S. landfill capacity, it would be impossible for a competitor to buy up small landfill owners to recreate WMI’s capacity.

This gives WMI two key advantages. First, the company internalizes the majority of its waste volumes, meaning it both collects and landfills its own waste. In addition, the company can charge lucrative tipping fees for competitors to dispose of waste on its properties or in its recycling centers.

Growth Drivers:  The main growth driver for WMI is a renewed focus on profitability over volume growth. WMI has been purposely giving up business and waste volumes in recent years.

The reason is simple — WMI is allowing marginally profitable collection contracts to expire, and management has refused to bid aggressively just to win business. Instead, the company has been refocusing attention only on markets where it has a competitive advantage because it owns both landfill capacity and collection infrastructure. Due to the size of WMI’s landfill network, this focus still leaves plenty of high-potential markets, and the end result of these measures has been strong growth in profitability.

Since total waste volumes processed by WMI have been falling over the past couple of years, the firm’s recent growth is a direct result of efforts to increase pricing and focus only on the most profitable contracts. Overall operating margins — a measure of operating profits divided by total revenues — jumped from 15.6% in 2006 to 16.9% in 2007. With a significant number of important contracts due to reset in 2008, WMI has plenty of additional room to fuel growth by raising prices in markets where it has a near-monopolistic position.

Valuation and Outlook:  WMI trades at 14 times estimated 2009 earnings and sports a long-term growth rate of +11%. That yields a P/E-to-growth ratio (PEG) of 1.3 — a cheap valuation for a company with such a steady earnings profile.

Even better, WMI’s renewed focus on its most profitable markets has led to a surge in free cash flow generation. WMI generated nearly $1.2 billion in free cash flow for 2007. In 2008, WMI expects to generate enough free cash flow to pay $530 million in total dividends and manage $870 million in stock repurchases. Both repurchases and rising dividend payouts are shareholder-friendly moves for WMI.

Finally, while WMI’s Wheelabrator waste-to-energy business accounts for only a small chunk of total revenues, it’s still the second-largest waste-to-energy player in the world. Wheelabrator is expecting decisions on five new waste-to-energy projects for 2008; contract wins for this business could expand its importance to WMI’s revenue pie and offer an additional upside catalyst for the shares.

With all of these factors in mind, WMI looks like a solid recession-proof “Buy” at any price below $45 per share.

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Brick-throwing crowds have been reported in Egypt, Cameroon, Cote d’Ivoire, Senegal and Ethiopia. But these are not your usual protestors or hooligans…

Meanwhile, the army has been called out in Pakistan and Thailand to protect against thefts from stores, fields and warehouses. Ministers from around the world are meeting under the aegis of the World Bank and IMF to determine a course of “immediate action.”

What has sparked such energy from bureaucrats better known for their plodding nature? Nothing sets a fire under such folks like a good food riot.

In Mexico City, the masses protest tortilla pricing. In West Bengal, they fight over food rations. Across Africa, we see riots over grain. And in Yemen and Haiti, ill-shod children march in rank and file to call attention to their hunger.

Not Production, but Price

It’s not quite the same as the bad old days, when there simply wasn’t enough food to go around. Green revolutions in India and China took care of mass starvation issues decades ago. And here in the “bread basket to the world,” known as the U.S.A., crop rotation issues have gone by the wayside, too. Massive agrifactories and small farmers alike will plow record acreage this season.

If production isn’t the issue, then what’s got the mobs’ collective knickers in a twist? The answer, pure and simple, is price. For those who can least afford it, food has gotten too expensive. Commodity prices across the board — and across the planet — are soaring.

In a press conference last week, World Bank president Robert Zoellick held up a 2 kilo bag of rice (that’s about 4.4 pounds). Zoellick noted that in Bangladesh, the bag of rice he held was worth half a poor family’s daily income. Zoellick further added, “Poor people in Yemen are now spending more than a quarter of their incomes just on bread.”

An Appalling Crime?

So who’s to blame for this bad news? The favorite whipping boy is easy to spot. In a word, it’s ethanol. The trouble, the critics tell us, is a short-sighted U.S. energy policy that throws billions of dollars at biofuels, turning a feedstock (corn) into a crude oil substitute. America’s fertile soils have been hijacked by gas-guzzling SUVs.

The critics do not mince words. India’s Palaniappan Chidambaram complains that “when millions of people are going hungry, it’s a crime against humanity that food should be diverted to biofuels.” Turkey’s Mehmet Simsek describes the use of food for biofuel as “appalling.”

James Connaughton of the White House Council on Environmental Quality retorts that biofuel production is only one cause for rising food prices. He points a diverting finger in the direction of rising oil prices and expanding Chinese food demand.

Guess Who’s Really to Blame…

While the breathless media coverage is new, it’s not as if the trend of rising food prices is new. In fact, World Bank studies peg the start of this doubling (in some cases tripling!) of food prices as early as 2001.


Overall Food Prices


When it comes to matters of price, many of us see things in terms of currency value. And when it comes to global commodities, there is one currency that matters more than all others — the U.S. dollar. So when I read of grand sea changes like the one taking place here and now, I like to refer back to my histories of U.S. exchange rates and minting habits.

Lo and behold, on January 3, 2001, citing “further weakening of sales and production,” “lower consumer confidence,” “high energy prices,” and so on, the US Federal Reserve commenced a dollar destruction campaign that would see the discount rate bottom out at 1% some three years later. The Fed dropped rates to the floor… and left them there. Nearly four years later, the discount rate was a mere 2%.


U.S. Dollar Index Nearest Futures


Throughout this period of super-stimulus, most every Fed statement argued with a straight face that “inflation pressures remain contained.” This was a bald-faced lie, of course, as the price of virtually all dollar-traded goods has been climbing the entire time.

Might as Well Profit

What to do now? Since the Fed shows no sign of wising up, the Chinese remain intent on eating dinner each night, and Congress continues to insist on burning corn in the gas tank, we may as well cash in on a trend that ain’t going away anytime soon.

Hopefully you’re already holding shares of the Powershares DB Agricultural Index (DBA:AMEX), as well as call options against same. DBA took a hit during the recent pause in commodities’ upward march. The position is once again approaching par, however, and ought to ride further price increases to our projected gains.

Now it’s time to add another big international food player to your roster (albeit one that masquerades as a good U.S. corporate citizen): Archer Daniels Midland (ADM: NYSE) may be headquartered in Decatur, Illinois, but its global network of agricultural sourcing, processing, transportation and financial services is spread out over six continents.

For an ag company, this sort of diversity has many advantages. Not only does it put ADM squarely on top of the demand curve, it also lets them accept strong foreign currency in exchange for US product.

On a plain old valuation model, the consensus growth estimate for the current quarter (quarter over quarter) is 35% and 19% for the year. For comparison, ADM’s compadres in the Farm Products industry are only slated to grow some 4% (quarter over quarter) and 11% for the year.




Chart-wise, ADM is on the verge of surpassing its all-time high at $47.33. (In point of fact, it may very well have done so by the time you read this.) A surge to $54.95 over the next four to six weeks is quite probable. Follow-on action over the course of the summer could see that gain double, if not triple.


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Brother, can you spare a pat of butter?

That’s no idle question in Japan, as Mariko Watanabe has discovered. The Tokyo housewife went to the local supermarket for butter this week, intent on baking a cake. Much to her surprise, the shelves were bare.

“I went to another supermarket, and then another, and there was no butter at those either,” she said. “Everywhere I went there were notices saying Japan has run out of butter. I couldn’t believe it — this is the first time in my life I’ve wanted to try baking cakes and I can’t get any butter.”

The Age, a respected Aussie newspaper, reports, “Japan’s acute butter shortage… is the latest unforeseen result of the global agricultural commodities crisis.”

With news like this, the old question of “guns or butter” takes on a strange new meaning. It’s kind of funny in a way — but in other ways it’s not funny at all. Could a nation really get up in arms over something as innocuous as, well, butter? Hmmm… Why not? How many basic staples can a citizenry be deprived of before the food hits the fan?

Shortage has hit the USA, too. The New York Post reports, “Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply.”

Yikes. We’re headed for frightening territory here. It’s one thing to hear about food riots in faraway places. It’s another to hear about troubles at the corner grocery.

In a way, though, this twist is good news for the poor countries of the world. It brings a sense of urgency to the problem that might not have existed before. When push comes to shove, the world’s wealthy have trouble embracing issues that don’t directly affect them… and so poor country troubles are observed with raised eyebrow, but mostly shrugged off.

It takes a real battering ram to break through the twin logjams of politics and complacency. Perhaps the wakeup call of bare shelves in rich-world supermarkets could serve as that battering ram. Will European farm subsidies and U.S. biofuel subsidies be rethought? Let’s hope so.


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The United Nations’ Food and Agriculture Organization (FAO) said that world cereal production may jump a record 2.6% this year as farmers boost plantings.

In other words, supply is fine.

Except … wait a minute … what’s that other report I read last month? The one that said world cereal demand is growing at 3% a year.

Today, I’ll explain why this seemingly insignificant gap between supply and demand scares the bejeezus out of me, and how you can protect yourself.

The gap is only four-tenths of a percent. What could possibly go wrong, you ask?

Well, for starters …

The World’s Food Supplies Have Collapsed …

Worldwide stockpiles of cereals (wheat, corn, etc.) are expected to fall to a 25-year-low of 405 million tonnes in 2008. That’s down 21 million tonnes, or 5%, from their already reduced level last year.

U.S. wheat stockpiles are at a 62-year low, even though farmers are planting from fence-to-fence. And with the U.S. dollar falling fast, foreign buyers are lining up to scoop up as much of Uncle Sam’s grain as they can carry away. Wheat recently soared to the highest price in 28 years.

Food Prices

Meanwhile rice, a staple food for three billion people, is becoming increasingly scarce. World stores of rice have shrunk from 130 million tons eight years ago to today’s stockpile of 72 million tons — enough for only 17% of annual global demand. Result — the price of rice is up 70% in the past year.

And as for corn — well, more and more of that is used for ethanol. The price of corn is up over 70% in the past year and has more than doubled in the past two years.

So to summarize — stockpiles are at record lows. The supply on hand can be measured in days! And growth in production can’t keep up with growth demand.

Now, let me ask you this question …

What If Something Goes Wrong?

What if the increasingly freaky weather the world has been enduring causes droughts on one side of the world and floods on the other? What if there’s blight or some other major crop failure?

Rising Food Prices

You can see why I believe we are one bad harvest away from a serious global food crisis!

People will put up with a lot, but they won’t put up with going hungry … not when they have guns. In fact, blood is already being spilled over food …

Arrow Egypt — food riots! In the time of Julius Caesar and Cleopatra, Egypt was the bread basket of the Mediterranean. Boy, how times have changed. Food inflation is so bad in Egypt that people are rioting over sky-high prices. The government-owned Egyptian Gazette newspaper says that seven people have died since the beginning of the year in brawls in bread lines.

And it’s not just Egypt. The World Bank says 33 countries from Mexico to Yemen have already experienced unrest because of spiraling food costs, and 37 countries may face more social upheavals if food prices continue to rise.

Arrow China says “no” to hungry Filipinos. The Philippine government recently asked China to provide 200,000 metric tons of milling wheat, equivalent to about 10% of annual consumption. Beijing declined, leaving the Philippines scrambling to find more wheat.

Trouble in Uncle Sam’s breadbasket. Cold weather is chilling the fields in the Midwest, and too much rain is sending rivers near their flood levels. Farmers who try to till or plant in soils that are too wet will risk compacting their crops and other problems that result in lower yields. Last week, I’ve seen   a note from a farmer who complained that he STILL can’t get a crop in the ground:

“In 2006, we finished planting my crops on April 23. In 2007, we were done on April 18. I don’t want to be the first guy planting, but I don’t like being third, either. Early (timely) planting won’t happen this year if the weather forecast for the coming weekend proves accurate. Soils are completely saturated to the point of that erosion has already occurred and will get worse with additional heavy rains, and are COLD. I can’t tell you how cold because I’ve not even checked temps yet. If planting is not done by May 1, there will be some nervous farmers in LaSalle County and I’ll be one of them.”

Now sure, that’s a local story, but it’s not the only one. In fact, just this week, the USDA reported that corn and rice plantings are being delayed by excessive rain. A hungry world is depending on a good U.S. crop — if we don’t get one, those 37 countries the World Bank is talking about could erupt in food riots.

How We Got Here …

Global food prices surged 57% last month from a year earlier, according to the FAO. There are a number of forces driving that price explosion …

Weather: Part of it is weather. Too much rain in the U.S. in 2007, flooding in Indonesia and Bangladesh and drought in Canada and Australia curbed world stockpiles. As a result, the poorest countries may spend 56% more on grains this year than a year ago. Global warming will affect crop yields, and mostly not in a good way.

Food or fuel? Ethanol production is on course to account for some 30% of the U.S. corn crop by 2010. The International Monetary Fund estimates that corn ethanol production in the U.S. fueled at least half the rise in world corn demand in each of the past three years. As corn prices go up, animal feed goes up, and prices of other crops rise as farmers switch their fields over to government-supported corn.

As the economic boom in China raises the standard of living, 1.3 billion people have drastically increased their consumption of meat.
As the economic boom in China raises the standard of living, 1.3 billion people have drastically increased their consumption of meat.

Rising Demand: World Bank President Robert Zoellick recently told a conference: “As the Indian commerce minister said to me, going from one meal a day to two meals a day for 300 million people increases demand a lot.”

And he’s only talking about the poorest of the poor. There are 1.1 billion people in India, and they’re all improving their diets and eating more Western foods. Meanwhile, 1.3 billion people in China are eating a lot better and eating a lot more meat — and it takes 7 pounds of grain to make one pound of meat! It’s no wonder why food prices in China jumped 28% in February.

Political pressures: China isn’t the only large, populous country that is curbing exports to ease prices — and internal unrest — at home.

  • Vietnam, one of the world’s three biggest rice exporters, will reduce shipments by a million tons this year to 3.5 million tons to ensure supplies domestically and curb its highest inflation in more than a decade (20% year over year — ouch!). The government also said it’s considering a tax on rice exports. Egypt, Cambodia and Guyana have all also put export bans on rice in place.

  • Kazakhstan just suspended its wheat exports to tame domestic inflation. Kazakhstan is the breadbasket of Central Asia, and the only state in the region that exports grain, about 50% of the 21 million tons it says it harvested last year.
  • Ukraine stopped wheat exports this month and reduced barley exports.
  • Argentina — the world’s fourth largest wheat exporter — has effectively pushed back the date that new shipments can leave the country.
  • India has already put restrictions on its rice imports. And its wheat output, second only to that of China, may drop 1 million tons to 74.81 million tons in the March-April harvest because of a drop in acreage.
  • Coming Next — Hoarding!
    Food Prices

    What’s more, India may import up to two million tons to build stockpiles — up from imports of 1.8 million tons in 2007 — with an eye on creating a strategic reserve of five million tons of wheat and rice to meet emergencies. Pakistan is also talking about doubling its wheat imports this year.

    If other countries start building strategic reserves, it could send prices skyrocketing. And that raises the specter of countries fighting each other over food reserves.

    Speaking of reserves, since China reportedly has as much as 200 million tons of grain reserves, you have to wonder why they turned down the Philippines’ request for wheat exports … unless, maybe, they don’t have as much as they say they have.

    Why would they lie? How about a powder keg with 1.3 billion hungry people sitting on it!

    Or maybe the Chinese can see the way that forces in the agriculture market are falling into place and they believe that no stockpile can be big enough!

    How You Can Protect Your Portfolio …

    No one wants to get rich off hunger. But you do want to protect your portfolio from market turmoil, and the profits on agriculture could cushion the blow for other sectors you own that might be getting hurt.

    One way to do it is with the PowerShares DB Agriculture ETF (DBA). It tracks an index composed of futures contracts on corn, wheat, soybeans and sugar. It’s up 17% year-to-date — pretty good compared to the 9.5% loss for the S&P 500.

Good luck, and GOD Bless!

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Is there anything the U.S. Federal Reserve WON’T do? That’s the question I’m asking myself here as I watch it go further and further down the “extreme activism” road.

As I’ve pointed out, it’s not just the Fed, either. Congress and the Bush administration are stepping up their plans to intervene and support the housing and mortgage markets, too.

I’m half-expecting to wake up one day and read that the government has decided to buy and then bulldoze every foreclosed house in the country to rid us of the inventory overhang.

Seriously, though, I’m fine with some of the things being done. They make sense.

But …

Other measures are a clear violation of the free market principles this country was founded on. And some may not even be legal!

Not to keep flogging the Wall Street Journal or anything, but there was another great story this week called “Fed Weighs Its Options in Easing Crunch.” It said the Treasury Department might sell excess debt — beyond what it needs to keep the government running — and deposit the money at the Fed. The Fed would take those funds and buy Treasuries in the open market.

The Fed’s aim? To replenish its rapidly dwindling pile of top-quality debt securities. It’s shrinking because the Fed has opened the door to just about any old crummy paper Wall Street and the nation’s top banks can throw its way (More on this in a minute).

Federal Reserve Chairman Ben Bernanke is confident that government regulations and incentives will compel Wall Street participants to be more honest.
Federal Reserve Chairman Ben Bernanke is confident that government regulations and incentives will compel Wall Street participants to be more honest.

The Journal also said the Fed is considering selling its own debt securities, then using the money to buy assets or make loans.

Some on Wall Street want the Fed to go even further — actually buying mortgage-backed securities outright as opposed to temporarily taking them off the hands of primary dealers and banks.

But if you can believe it, the Fed might not even stop there. There’s the possibility the Fed could go the route of the Bank of Japan in a real emergency. Specifically, it could print vast amounts of money, drive the federal funds rate to near-zero percent, and go hog-wild buying securities or making loans — a process called “quantitative easing” in econo-speak.

The fact these measures are even being discussed shows just how serious this credit crisis is.

And That’s Just the Half of It!

Take the Term Securities Lending Facility, or TSLF. That’s the series of auctions at which the Fed swaps its Treasuries for other debt securities.

The auctions were initially going to be focused on things like residential mortgage backed securities. The idea was that investors were irrationally dumping everything, including top-quality debt backed by prime-credit, conventional mortgages. So the Fed “had” to step in and help liquefy things to enable mainstream borrowers to purchase homes.

Sounds good, right? But since then, the TSLF plan has morphed into something else. It appears that after some lobbying and coaxing from self-interested parties, the Fed decided to expand the eligible collateral to include commercial mortgage backed securities (CMBS).

What do CMBS have to do with the housing crisis? Nothing. But Wall Street is taking a pounding on the value of those securities — which they made billions of dollars bundling and selling over the past few years, by the way. So the call for relief from the Fed went out, and voila, the Fed obliged.

But that’s not all. A Bloomberg story this week, citing analysts at Morgan Stanley, chronicled how Wall Street firms are apparently starting to bundle corporate buyout loans into securities for the express purpose of turning around and using those securities to borrow from the Fed!

Specifically, Morgan Stanley noted that at least one Collateralized Loan Obligation (a bundle of loans, including those used to fund takeovers) appeared to have been structured so that it could be used as collateral at the Fed’s Primary Dealer Credit Facility. The PDCF was just rolled out to allow non-bank institutions to access Fed liquidity — something that hasn’t happened since the Great Depression.

What do these new moves mean? In plain English, the Fed has gone from ostensibly trying to help poor, little old ladies on Main Street who are facing foreclosure … to greasing the credit wheels for developers who want to build high-rise office properties and Wall Street dealmakers who spend their days plotting the takeover and restructuring of America’s corporations.

And don’t even get me started on a provision in the Senate’s latest housing and mortgage reform bill. It would allow corporate home builders to take losses they’ve racked up in recent times and use them to offset profits earned up to four years ago.

In other words, they’d be able to qualify for potentially billions of dollars in refunds of taxes they paid during the bubble days!

After intense lobbying efforts, the National Association of Home Builders was recently rewarded as Congress rolled out a proposal designed to bailout builders.
After intense lobbying efforts, the National Association of Home Builders was recently rewarded as Congress rolled out a proposal designed to bailout builders.

Why did this provision find its way into the Senate bill? Does it make good policy? The line from the home building lobby is that this is good for the housing market and will save jobs.

But I don’t believe it — the last thing we need is for builders to continue operating on taxpayer-funded life support. We need to cull the weak from the herd. That will help further reduce construction activity, and get inventories under control — the only recipe for stabilizing prices in the long run.

One more sidebar here: The National Association of Home Builders announced in mid-February that it would “cease all approvals and disbursements of BUILD-PAC contributions to federal congressional candidates and their PACs until further notice.”

I’m sure it’s pure coincidence that this builder bailout proposal was rolled out just a few weeks after the home building lobby said it will stop funneling reelection money to Congress.

Where Does It All End?

Look, I get that we’re in a crisis here. The International Monetary Fund — a group not exactly known for exaggeration and hyperbolic predictions — just released a report pegging the total cost of the credit crisis at an eye-popping $945 billion! Said Jaime Caruana, head of the IMF’s Monetary and Capital Markets Department:

“Financial markets remain under considerable stress because of a combination of three factors … First, the balance sheets of financial institutions have weakened; second, the deleveraging process continues and asset prices continue to fall; and, finally, the macroeconomic environment is more challenging because of the weakening global growth.”

So maybe this is just a case of desperate times calling for desperate measures. But don’t we have to stand up and ask: “Where does it all end?” How far are we going to allow the Fed to go to subsidize Wall Street? What the heck happened to free markets? Capitalism?

Maybe investors aren’t being irrational. Maybe they’re shunning all the paper Wall Street is burdened with because they’re making a perfectly rational investment decision: Namely, they’ve decided it’s not worth much.

They can see house prices falling … commercial real estate values starting to decline … the economy slumping into recession … and the multi-year credit binge we’ve been on coming to an end. So they’re not buying crummy, complicated debt securities anymore. Maybe, just maybe, the Fed shouldn’t be standing in the way of the crunching of all those debts.

Legendary former Chairman of the Fed Paul Volcker warned in a speech earlier this week that the Federal Reserve is at the very edge of its lawful powers.
Legendary former Chairman of the Fed Paul Volcker warned in a speech earlier this week that the Federal Reserve is at the very edge of its lawful powers.

I’m not the only one that’s concerned about what is going on here, either. The legendary former Chairman of the Fed itself — Paul Volcker — gave a speech this week warning about what the Fed is doing, as well as its consequences. A key quote:

“The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices.”

And he took no prisoners when critiquing the Bear Stearns bailout, saying:

“What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return.”

Moreover, it’s not like what the Fed is doing is consequence-free …

Dangerous Precedents Are Being Set …

Look at what has happened to the dollar … to oil prices … to food prices and so on. There are fundamental economic reasons for the moves we’re seeing in commodities. But those moves are being turbocharged by the easy-money policies of the Fed.

Indeed, one measure of U.S. money supply — M2 — surged at a 17.9% annualized rate in February. I have a Bloomberg chart that goes all the way back to 1959 on this indicator. It has only risen this quickly a handful of times in U.S. history.

The Fed is clearly playing a perilous game by slashing rates and shifting the presses into overdrive at a time when inflation pressures are high, the dollar is weak, and commodities are through the roof.

So Wall Street may appreciate what the Fed is doing. They may like the fact that they’re on the receiving end of all this Fed largesse. But the rest of us are taking a real hit to our standard of living as a result … and we’re setting some dangerous precedents for the future.

Until next time, GOD Bless;

Bridges to Hope Foundation Newsletter and Blog


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The heated debate continues. Are commodities merely enjoying the pause that refreshes, or has the bubble burst? 

To gain some perspective on this question, let’s look to some commodity bull markets of the past.

When most folks think of a big commodity bull run, their minds turn to the 1970’s. They remember OPEC, long gas lines, high silver prices, and the Hunt brothers’ spectacular rise and fall. All told, the 1970s commodity bull market was about 9 years in duration. 

But now let’s go even further back — and I mean way, way back. If you could get your hands on commodity price charts going back to the 1700’s, you would soon see that nine years is a historically short time frame for a commodity bull. The majority of cycles over the last 200 years have been longer. Looking back at soybean prices, corn, cotton, gold, silver, base metals and so on, the historic evidence suggests that 18 to 23 years is a much better benchmark for how long a commodity bull can last. 
A Fact to Remember

So where does that leave us today? For starters, the trend is still young. We are only 8 years into a potential twenty-year cycle.

Furthermore, we’ve got explosive demand growth in the developing world — newly minted consumers clamoring for all the comforts the West takes for granted.

The key fact to remember is this: we have one billion people hogging two thirds of the world’s available natural resources. Another 5.6 billion people get by on the other third.

It’s that 5.6 billion that want more of the essentials. More calories. More protein. Heating and lighting and air conditioning. Cars to drive and garages to park them in.

Fast-growing, emerging market countries need infrastructure to accommodate all this. It will take massive natural resource commitments to build out the necessary transportation links, power plants, buildings, ports, and so on. The challenge is easy to see: demand is huge and resources are limited. That’s what makes a bull market.

Globetrotting for Winners
From rural poverty to new industrial opportunity, China’s people are flooding into cities and creating wealth in the process. As these new urbanites increase their discretionary spending, the demand for housing and transportation shoots up. The same storyline is playing out in other countries too. This translates to major demand for base metals. 

Mining companies are fully aware of these mega trends, and the raging demand for base metals that follows. As a result, big mergers and buyout deals are sweeping the mining world. These deals aren’t just big. They’re very, very big. 

For example Marius Kloppers, CEO of the largest mining company in the world, wants his company to get even bigger. BHP Billiton, the $218 billion dollar mining giant run by Kloppers, is currently bidding for the $171 billion dollar Rio Tinto (another mining monster). Should this deal goes through, it will be the second largest merger in all of corporate history. When put together, BHP Billiton and Rio Tinto would become the world’s single largest producer of copper and aluminum, and the second largest producer of iron ore. 

Rio Tinto jumped on the merger bandwagon recently with their purchase of Alcan, the large aluminum company. And they’re not the only ones to get bitten by the merger bug. A major iron ore producer, Companhia Vale do Rio Doce, has snapped up Canada’s Inco Ltd., a major nickel producer. There’s also the Swiss-based player Xstrata, who acquired Canada’s Falconbridge in 2006. 

Top Hedge Funds Want In

Ospraie Management, a highly regarded $9 billion hedge fund, sees big things ahead for commodities too. They are getting into the agricultural business in a big way. Through their “Special Opportunities Fund”, Ospraie paid billions of dollars for a highly profitable “trading and merchandising” unit of ConAgra Foods.

This multi-billion dollar purchase is very a smart move. It gives Ospraie a direct window of visibility into the world of commercial grain markets. For a savvy fund that knows how to make use of information, new access could prove very profitable indeed.

Better still, the ConAgra buy puts Ospraie on a level playing field with the “big boys” — the deep-pocketed commercial players who know grains inside and out. By getting heavily involved with physical commerce, as opposed to just staying on the derivative side of things, Ospraie gets an up close and personal look at just who’s doing what in the grain business. That could give them a trading edge that will last for years to come. 
Still on Course
Last but not least, don’t forget about inflation. Economic stimulus, falling interest rates and a pumped-up money supply are the clear trends. And according to the Wall Street Journal, global inflation levels are at new  decade highs:

“Consumer prices in the U.S., Europe and other rich countries are projected to rise 2.6% this year, the highest inflation rate since 1995…. In the U.S., consumer prices in February were 4% above year-ago levels. The 15 countries that share the euro currently see inflation of 3.5%, a decade high and well above the European Central Bank’s preferred range. Even Japan, long plagued by flat or falling prices, is seeing modest inflation.”

When you put it all together, the twenty-year commodity cycle looks quite intact. Perhaps this is why legendary investor Jim Rogers argues that “we’re in the 4th inning of a 9 inning game.” 

Commodity markets can certainly be volatile. We could see more crazy ups and downs as the “weak hands” get shaken out. Some commodities may break while others rally… and commodity markets in general can occasionally go sideways for a while (especially after big upside moves).

But make no mistake — regardless of the bumps along the way, this powerful trend will endure for many years to come.
Bridges to Hope Foundation Newsletter and Blog


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