Why Food Prices Are Set To Surge
by Sean Brodrick on July 31, 2009
 |
China leads the world in many things, including the amount of ground lost to desertification or ecological disaster.
At the same time, the Chinese are changing their eating habits … eating more food and especially more beef. As a result, despite bumper crops, China is becoming more at risk of being unable to feed itself.
According to China’s General Administration of Customs, for the first six months of this year, China’s soybean imports rose 28 percent to 22.09 million tons. In June alone, it shot up 31 percent!
And since Argentina, one of the world’s major soybean exporters, is suffering from a severe drought, China is buying more and more soybeans from the U.S.
I have no problem with the U.S. selling soybeans to China. Likewise, it’s fine with me that China is the world’s biggest wheat-consuming country. To keep up with the demand, wheat imports soared 172 percent in June to hit the highest monthly volume (192,905 metric tonnes) since 2005. And the U.S. is selling them a lot of that grain.
In fact, when it comes to exports, the U.S. is a major exporter of wheat … as well as soybeans and other grains. China exports a little, but imports much more than it exports. Moreover, severe droughts in China’s wheat growing areas have also caused grains imports to accelerate.
It’s expected that the rest of the world’s farmers will produce wheat and soybean surpluses this year. What worries me, though, is when we DON’T have surpluses. And according to researchers, if China’s grain harvest falls by just five percent, the world’s surpluses would vanish.
So what we’ve got here are the ingredients for incredible price volatility. And when you throw in the expectation that the world’s grain harvest should fall this year … I see incredible profit opportunities!
On top of that … prices for wheat, soy, and other grains are well off their highs, which tells me that the great agriculture boom that started in 2007 is about to get its second wind.
Here’s the good news: You can start profiting now. There are a small handful of select companies that will ride the next surge higher in grain prices. Many are already racking up nice gains, but there’s a lot more to come … a LOT more.
I’ll get to those companies in a bit. First, let’s talk about some other things that’ll drive food prices going forward …
The New Threat:
A Global Wheat Killer
A destructive black stem rust known as Ug99 is spreading out of Africa. Carried by the wind, Ug99 jumped the Red Sea, the Persian Gulf and Saudi Arabia to land 700 miles away in western Iran.
Everywhere it goes, it damages up to 70 percent of the wheat crop and, according to UN’s Food and Agriculture Organization, Ug99 has become more destructive since it started to spread.
 |
| “Ug99 is really tough because so much of the world’s wheat, including ours domestically, is susceptible to this, and it is dangerous.”
— Dr. Michael Edwards, USDA research leader |
To stem this path of agricultural peril, wheat breeders are going to cross a newly developed strain with commercial varieties. But that can cause other complications, and it still remains to be proven as a cure.
The last time stem rust plagued North America was in the 1950s. It ruined 42 percent of the North Dakota crop and smaller portions of the rest of the U.S. crop.
On a global level, five of the countries now in Ug99’s path produce about 160 million acres of wheat annually, or about 25 percent of the world wheat crop. About 80 percent of the varieties available there are based on the SR24 gene, which actually makes stem rust more resistant!
According to a United Nations report, the fungus “recently invaded Iran faster than predicted and could cause mass starvation if it hits India before new resistant strains are ready.”
Now, 17 international research organizations have joined forces to find an answer for Ug99.
The saving grace for the U.S. is the vast distance from current Ug99 outbreaks.
However, if the disease did find its way to the Northern Plains, it would find fertile fields in which to spread. Every one of the wheat varieties raised in North Dakota, South Dakota and Minnesota are based on that same SR24 gene that Ug99 is destroying in African and the Middle East.
Ug99 is a new threat and a virulent one. But there is already a triple-threat to the global food supply …
The 1-2-3 Problem:
Drought, Rising Population,
And Shrinking Farmland
Heat and drought have been hammering, on-and-off, the bread baskets of Australia, Argentina, China and other major grain growers.
In Texas, crop losses have tallied $2.6 billion, and livestock producers have lost another $974 million since the drought began, according to state figures. If losses continue to mount, some expect that they could surpass the $4.1 billion record set in Texas in 2006.
 |
| In Texas, the worst drought in 50 years has cost farmers $2.6 billion. |
Meanwhile, many parts of Europe are alternately suffering from floods or droughts. The situation is so bad that the U.S. Foreign Agricultural Service (FAS) recently released a grain production report slashing 5.5 million tonnes (1.9 percent) off its previous estimate of two months ago for the European Union.
Of course, there have been severe droughts and floods before. The problem now is that we have a lot more people. So when something goes wrong in one of the world’s major breadbaskets, a lot more of us are suddenly going hungry.
This problem will only get worse …
While population growth is slowing down, we are still adding 77 million hungry mouths to the planet every year.
In 1950, the world had 2.5 billion inhabitants. In 1999, it passed 6 billion, and we’re quickly working on 7 billion. Most of this population growth is in developing countries.
At the same time, the world’s arable land — land that is used for farming — is shrinking. Right now, only 10 percent of the world’s surface is arable land. Good land is lost to urbanization and other uses every day. As a result, the world is losing one hectare (about 2.5 acres) of arable land every 7.67 seconds.
Of course, all the land in the world won’t save you if nature won’t cooperate. Guess what? Mother Nature is acting really hacked off!
The Big Picture:
Weather Weirding
It’s been a weird summer in North America. Parts of the Midwest have experienced their coolest summer in 42 years, while places in the Southwest, like Phoenix, are having their hottest summer since records have been kept.
South Central Texas is in the grip of a drought so severe that lakes have dried up. While here in Maine, there has been so much rain, a local farmer said that plowing the water-saturated earth was “like cutting into fudge brownies.”
So let’s not use the phrase “global warming.” Let’s use the phrase “weather weirding,” because the weather seems to be getting weirder all the time. That said …
- On average, U.S. temperatures have increased by almost 2 degrees over the past 50 years.
- NOAA announced that the world’s ocean surface temperature in June 2009 was the warmest on record.
- Worldwide, land surface temperature for June 2009 was 1.26 degrees F (0.70 degree C) above the 20th century average of 55.9 degrees F (13.3 degrees C), and ranked as the sixth-warmest June on record.
- MIT climate modelers, averaging 400 possible scenarios, have calculated that Earth’s surface temperatures will jump 9.4 degrees Fahrenheit by the end of this century unless rapid and massive measures are taken to slash greenhouse gas emissions.
I doubt that that’s going to happen, so get ready for a warmer world. Will this increase drought and lower crop yields? You betcha!
- Researchers say that yields for the six most widely grown crops in the world — wheat, rice, corn, soybeans, barley and sorghum — fall by 3 percent to 5 percent for every 1 degree Fahrenheit increase in temperature.
These are just some of the problems threatening global agriculture; I cover more of them in my new report “Harvest of Gains.” The important thing is that, while there are problems, there are also solutions … big, fat, profitable solutions.
The Solution:
New Seeds, More Fertilizer
The “Green revolution” was about using modern farming methods and high-yield seeds to grow more food per acre. Between 1950 and 1990, world grain yield per hectare climbed by 2.1 percent a year, ensuring rapid growth in the world grain harvest. However, revolutions have their limits …
From 1990 to 2008, grain yields rose only 1.3 percent annually. This is partly because the yield response to the additional application of fertilizer is diminishing and partly because irrigation water is limited.
Meanwhile, the global population keeps growing. Today, grain yields are rising at something like 0.7 percent, scarcely half that of the preceding decade and far behind world population growth.
But now we’re entering a second green revolution. Agriculture scientists are starting to create new seeds that increase yields while making plants more drought resistant and more able to resist pests.
Plant breeders now know the sequence of nearly all of the 50,000 or so genes in corn and soybean plants and are using that knowledge in ways that were unimaginable only four or five years ago.
Biotech is already making it possible to breed crops with beneficial traits from other species. This will lead to new varieties with higher yields, reduced fertilizer needs, and increased drought tolerance.
 |
| Farmers are using more and more fertilizer in order to maximize production from each acre of arable land. |
Those new seeds are on the way. In the meantime, farmers turn to fertilizer to make plants grow faster and have higher yields. So they’re using a LOT of it.
This year, there was an eyeballing contest between farmers and fertilizer suppliers … the farmers stopped buying fertilizer until fertilizer manufacturers lowered their prices.
The farmers won — prices went down — but now their fertilizer stockpiles are depleted. And that means that fertilizer suppliers are probably going to do a booming business.
How You Can
Play This Trend …
There are lots of good agricultural stocks to choose from. You can also use exchange-traded funds (ETFs) or exchange-traded notes (ETNs) that track grains or commodities.
For example, the iPath DJ AIG Grains TR Sub-Index ETN, symbol JJG, tracks a basket of grains, and it looks cheap now. Caution: This is a thinly traded ETF, so you have to be careful getting in and out.
Yours for trading profits,
Sean
The Recession is OVER ??? no way
You read that right … the worst recession since the 1930s may already be over!1
At least that’s the opinion of one research article I read recently, from an independent firm with a fairly decent track record of forecasting.
Granted, the economy has pulled back from the brink and financial markets have enjoyed a healthy rebound … unfortunately this improvement may be only temporary. The fundamental forces facing our economy remain daunting …
The unemployment rate, now at 9.5%, is still rising and may soon break double-digits.
The government’s debt binge due to unprecedented stimulus carry severe unintended consequences for the economy that could take years to surface.
While the housing market has improved, mortgage defaults and both consumer and business bankruptcies are still rising So perhaps the key question to ask is not whether the recession is “officially” over, but what kind of recovery will we see. And perhaps more important, how long will it last?
On Friday morning, we’ll see how the U.S. economy fared during the second quarter ended June. Economists expect an output decline of about -1.5%. This comes after a back to back plunge of -6.3% to end 2008, and -5.5% in the first quarter of this year. That was the worst six-month economic contraction in 50 years.2
Forecasters are now betting on a “V” shaped bottom in the economy.
The rationale is that the magnitude of the rebound is often similar to that of the decline … and we have certainly witnessed a spectacular decline … no question.
Typically, business responds more quickly than consumers in a recession. Companies slash overhead costs, reduce payrolls and cut excess inventories to the bone. During the early stages of recovery, production usually rebounds first too, as businesses restock their depleted inventories.
In fact, starting late last year and continuing early into 2009, U.S. businesses cut output so far below the level of consumption — according to some economists — (even below today’s reduced level of consumer and business spending), that companies have little choice but to ramp up production later this year just to rebuild depleted inventories.3
This inventory rebuild is what the fabled second-half economic recovery is really all about … but then what?
Production vs. Demand Driven Recovery
The ultimate test is whether this production-led recovery can turn into sustainable growth in the economy moving into 2010 … and beyond. And the key to sustainable recovery is still the U.S. consumer … accounting for about 70% of the economy’s total output.
What we know about the consumer is that we are collectively in much worse shape now than after the relatively mild 2001 recession. The loss in household net worth this time around has been much more severe, thanks to a sharp drop in the value of our stock portfolios AND in our home values.
The dramatic loss in wealth shows up most dramatically in the unprecedented fall in consumption.
Retail sales were plunging at a record rate of nearly -10% annually into mid-July. Business sales also fell -18% year-over-year through the end of May, and have improved only modestly since then.4
Unemployment has risen at a much faster rate this time than during any recession in memory. As a result, wages and salaries, which make up nearly 60% of total after-tax income in the U.S., have fallen at a -3% annual rate.5
Some of this shortfall in income has been made up through tax cuts and other “transfer” payments by Uncle Sam, but such stimulus has a very fleeting impact. In fact, most Americans are saving their tax cuts rather than spending. While an increase in the U.S. savings rate is long-term positive, the near term impact can be very deflationary. Indeed, among baby-boomers a rising savings rate will drain $400 billion out of consumer spending.6
Without strong consumer demand, the shape of this recovery remains uncertain. Sure, we are likely to see an inventory rebuild in the second half of the year that will boost growth … temporarily. But recovery is likely to be fragile until incomes start growing again, and consumers become more willing to spend than save.
This may not happen until labor markets stabilize.
Jobless Recovery?
Most investors can tell you that the unemployment rate is a lagging indicator. Job losses are likely to continue even AFTER the economy begins to recover, and it won’t be a surprise to a see double-digit unemployment rate soon, perhaps before year end. All of this is true … and it has likely already been discounted by investors with the Dow at 9,000.
What investors may not be prepared for, though, and the market hasn’t fully discounted, is the possibility that we could be facing the mother-of-all jobless recoveries. In fact, I may STILL be writing to you about double-digit unemployment many MONTHS from now … if not longer.
The impact on our deleveraging economy in terms of consumption and GDP growth shouldn’t be too hard to guess.
For those looking for a “V” shaped path to rapid recovery in our economy, it may be instructive to look back to the last recession we experienced in 2001.
That recession was a comparatively mild, non-event compared to the epic wealth destruction we’ve seen this time around. Still, the recession ended in November, 2001, but the economy didn’t recover quickly. It took another year or more for the economy to really gain traction. For instance, the unemployment rate kept rising for almost two-years thereafter … until June 2003. 7 How did markets react?
Stocks enjoyed a robust rally in late 2001 (post 9-11), which continued several months, with the S&P 500 climbing almost to the 1,200 level in March, 2002. But then fears that the economy could relapse into recession again sent stocks into another tail-spin. The S&P 500 lost nearly -34% from March through the final bottom in October 2002 (that low was “retested” again in March 2003).8
Investment Opportunities for the “New Normal”
We’re likely to see much lower sustainable growth in the U.S. than at any time in modern history. This is what we and other investment professionals have referred to as a “new normal” for our economy.
We are cautiously Bullish on a number of asset classes in this new economic reality, and we have been taking steps to invest accordingly.
A number of our strategies at Weiss Capital Management have increased exposure to certain opportunistic assets selectively over the last several weeks. Likewise, we have also reduced our hedges by closing out or reducing inverse mutual fund positions.
We have also selectively increased exposure to high-quality U.S. stocks, and some overseas markets … including faster-growing emerging markets … in an effort to participate in this rally phase as long as it lasts. In addition, we view the commodity Bull market as still in place from a secular perspective, and are taking action by increasing investments in these areas.
In our view, many investors remain skeptical of the current rally in stocks, and institutional investors — based on our independent analysis — don’t appear to be fully invested. From a contrarian perspective, this could add further fuel to this rally in the short run. However, we will continue to maintain some hedges in many of our growth-oriented managed account programs, to guard against the possibility of another sharp market reversal to the downside, which could come at any time.
Longer term, we will need to see stronger evidence of a sustainable rebound in consumption and business sales before we can rule out a double-dip decline in financial markets and the economy. Stay tuned.
Good investing,
Mike Burnick
Director of Research & Client Communications
Weiss Capital Management, Inc.
A New Fundamental Change in China That Could Make You Rich
The Chinese market could definately do very well based on growing population and wealth. I like Tony’s analysis as posted on his blog.
I am dipping my toes into Chinese shares mainly the FXI etf. I think we will see a big pullback since the FXI seems a bit over extended. However long term I think China is a good bet along with most of Asian markets.
Tony Sagami on July 29, 2009
 |
They say the only thing constant in this world is change. That’s certainly true in Asia where some big changes are brewing.
1.4 billion — the population of China — is a lot of people. And for the last 30 years, Chinese couples have been limited to just one child.
The problem is, like the U.S., China is worried about the size of its aging population relative to its working class. So it’s taking steps to increase its working-age population …
Shanghai city officials are now aggressively encouraging its married residents to go forth and multiply. City officials are making personal visits to homes, distributing leaflets, offering emotional counseling and even financial incentives to have a second child.
You know me. Whenever I see an important, fundamental change … I look for the investment opportunity.
And the way I see it, all of those new Chinese babies will mean more diaper sales, which is great for Proctor & Gamble who does big business in China. However, the bigger opportunity will come from the tidal wave of Chinese consumers down the road.
The best way to explain that opportunity is to show you five long-term investment strategies that others, including the Chinese, are using to prepare for the forthcoming demand …
Long-Term Investment Strategy #1:
You may not have heard of the British beverage giant Diageo. But you’ve certainly heard of some of its best selling brands: Guinness, Smirnoff, Crown Royal, Cuervo, Tanqueray, and Bailey’s Irish Cream. Just last week, China’s sovereign investment fund bought a $365 million stake in Diageo.
Asians are very label conscious, and that applies to their adult beverages. And nobody understands that better than the people running China’s sovereign investment fund.
Long-Term Investment Strategy #2:
One thing that surprised me during my last trip to China was the huge number of black Audi sedans. They were everywhere! The German carmaker recently reported that its sales to China increased by 11 percent in the first six months of 2009 to 67,000 cars. What’s more, June’s sales of 13,265 cars, set a new record and was a 28 percent increase over the same period last year.
China is one of the few countries in the world where auto sales are growing — not shrinking — and Audi is pouring its resources and money into tapping that market.
Long-Term Investment Strategy #3:
 |
| China’s sovereign wealth fund just put up $1.5 billion for a 17.2 percent stake in Teck Resources, a diversified Canadian-based mining company. |
Quietly, slowly and steadily China is buying access to strategic natural resources, which it needs to fuel its growth. China Investment Corporation, the Chinese government’s sovereign wealth fund, purchased a 17.2 percent stake in Canada-based Teck Resources for $1.5 billion. Teck owns copper, gold, zinc, and coal mines in North and South America.
The Chinese used 13 percent (about 1.8 million tons) of the global supply of cooper in 2000. That number shot up to 28.5 percent (nearly 5 million tons) in 2008.
By the way, China also gobbles up more aluminum, zinc, lead and nickel than any country in the world! So you can bet that the Teck purchase is far from the last natural resource investment you’ll see China make.
Long-Term Investment Strategy #4:
To fund all those natural resource purchases, China is building up its foreign exchange reserves.
In fact, China’s mountain of cash topped $2 TRILLION for the first time ever. That’s even after spending $586 billion on its stimulus plan!
Long-Term Investment Strategy #5:
 |
| As China’s population explodes in the coming years, you can expect consumer spending to explode as well. |
The giant Swiss cement-maker Holcim AG is buying the Australian operations of Cemex for $1.64 billion. Holcim is also investing $234 million in Huaxin Cement, the fourth largest cement company in China. Even the Australian purchase is based upon the anticipation of doing some big, BIG business in China.
I mention the Holcim investments because you should consider doing exactly what they’re doing — investing in the companies that sell what China wants.
Whether it’s natural resources (BHP Billiton, Vale S.A.) agriculture (Potash, Bunge), fashion (Tiffany’s, Nike), restaurants (Yum Brands, Starbucks), construction (ABB Ltd, Shaw Group), or pollution control (Fuel Tech) …
… get ‘long’ whatever the Chinese are buying. Because the Chinese are going to buy a lot, lot more for a long, long time.
Best regards,
Tony
Update on Crude Oil
Important Update on Crude Oil
by Sean Brodrick on July 17, 2009 at 8:30 AM
 |
The early part of July saw crude oil tumble 19 percent from its June highs. This led many investors to wonder: “Is the rally in crude over?”
Probably not. While oil may bounce around between $54 and $64 for a bit, it’s probably going higher. The good news is you can make some nice money on the move.
First, let’s start with a chart of crude oil …
A weekly chart of oil shows that despite the recent pullback, its uptrend remains intact. Momentum is positive. Technically speaking, there’s nothing to prevent oil from rising to $77 or even $90.
Now, that doesn’t have to happen. Oil could go down to test support at $50, and if that breaks, go even lower. The frustrating thing about oil is that it has disconnected from fundamentals. We are swimming in oil … there are tankers filled to the brim with oil, floating off our shores.
So what drives oil? Two things …
- The U.S. dollar. Oil has become the counter-trade to the greenback — even more than gold — as traders use crude to hedge their dollar exposure.
- Expectations of global boom or bust. Depending on the outlook for the global economy, traders will buy oil if they think they can see the light at the end of the recessionary tunnel.
All that other stuff — barrels in storage, amount of demand — is secondary. Sure, oil prices weakened when gasoline usage over the July 4th holiday hit a five-year low, and dropped 3.3 percent from last year. But that’s really a function of how traders view the global recovery (or lack of one).
So let’s look at these two forces — starting with the U.S. dollar.
The Dollar: Two Peaks and a Plunge
My view on the U.S. dollar is bearish, starting with its chart …
Looking at this chart, you can see the dollar formed a double top and slid lower. It is now tightening in a range, a “pennant” pattern. The saying goes that “flags and pennants fly at half mast.” In other words, the next leg down for the dollar could be a real doozy.
The fundamentals that will likely drive the buck lower are simple. The Good-Time Charlies in Washington are printing new dollars by the metric tonne. They are doing this to pay for the ballooning deficit.
$1 trillion in the hole … so far! In case you missed it, the Federal budget deficit rose by $94.3 billion in June, pushing the total shortfall for the current fiscal year (which began in October) to $1.09 trillion.
Much worse than that, tax receipts keep sinking while spending keeps expanding. We’ll probably be much deeper in the hole by the end of the year.
New rejection of the dollar overseas. In previous columns, I (and Larry) have told you how China, Russia and Brazil all talked about how they own too many U.S. Treasuries and need to move away from the dollar. Then India got into the act recently.
And now Japan is getting onboard. On Monday, Japan’s opposition party, leading in polls two months ahead of elections, said the nation should consider shifting its $1 trillion of foreign reserves away from the dollar and buying International Monetary Fund bonds.
Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo on July 9 that: “In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing.” He added: “Many countries are starting to diversify their reserves.”
Then on Tuesday, Japan’s finance minister rushed out to say Japan LOVED the dollar and it wasn’t going to diversify away from the greenback at all. Ri-i-i-i-ght! This has been the case time and again in China, Russia and other countries … one guy speaks the truth, and then another official comes out and smoothes things over.
The fact is that our government is going to have to issue about $2 trillion dollars in new debt this year and then AT LEAST another $1.5 trillion next year. If foreigners don’t buy that debt, the Treasury will be forced to buy its own debt. This puts more weight on the dollar, and could lead to a serious and sharp correction, maybe even a collapse.
So, basically, I think the dollar is going lower. That’s one force that should drive oil higher. But how about expectations for the global economy?
Will Asia Lead The World Out of the Recession?
The economies of the United States, Europe, and other developed nations seem to be stuck in low gear. Not so the economies of Asia. Some examples …
- India’s industrial production rose 2.7 percent in May, up from 1.2 percent in April. That was much better than expectations of a 1.3 percent rise. At the same time, India’s consumer goods production was up 12.4 percent , a level of growth that U.S. manufacturers can only envy.
- China saw its imports fall 13.2 percent in June. That sounds bad, but it was much better than expectations for a 20 percent drop and a big improvement over the 25.2 percent drop in May. In fact, China’s imports are up 70 percent since they bottomed in January.
- It appears that global trade is picking up, and that is very good news for China.
- Singapore saw its economy surge to an annualized 20.4 percent growth rate in the most-recent quarter from the previous three months, the first growth in a year. What’s more, the Singapore government raised its economic forecast for 2009.
- South Korea last month raised its GDP estimate for 2009 and 2010, saying fiscal stimulus and interest-rate cuts stoked consumer confidence.
And now let’s talk about real growth in oil demand. Not here in the United States — where it’s still flat. But in China.
Vehicle sales in China jumped 36.5 percent in June from a year ago. That’s the fourth straight month that vehicle sales have topped 1.1 million units, according the China Association of Automobile Manufacturers.
China is on track to see more than 11 million vehicles sold this year. That’s more than the number of cars that will be sold in the United States.
What’s more, almost all the cars sold in the United States are replacement vehicles. Almost all the cars sold in China are to new buyers. So, that implies a huge increase in China’s gasoline and oil demand.
The International Energy Agency recently upgraded its 2009 forecast for Chinese demand to 7.98 million barrels a day, from 7.86 million barrels a day in its previous report on June 11. China’s oil demand rose 9.5 percent in May, the second monthly increase.
Short-Term and Long-Term Outlook
In the short-term, we could see lower crude oil prices. One force hanging over the market is all those millions of barrels of oil in storage at sea. However, there’s not as much as there was in April, when oil stored in tankers peaked at 100 million barrels, according to reports from oil brokers.
Since then, trading firms have sold about 30 million barrels into the market. The remaining oil in tanker storage should drop by another 15 percent by the end of this month.
The selling of that oil has helped make up for production cuts by OPEC. But it can’t last forever.
And as that oil in storage is used up, the longer-term fundamentals for crude — which are very bullish — should come back into play. Add in the fact that the economies of Asia are shifting into higher gear and that the U.S. dollar could be cruising for a bruising, and yes, I think the next move to the upside in oil could be quite explosive.
Three Ways to Play Oil’s Big Trend
If oil breaks out to the upside, I’d recommend using ETFs that hold baskets of oil stocks to play that move. Oil industry stocks should be leveraged to the price of oil, which should give them an even bigger move percentage-wise.
Some choices include …
- The SPDR Energy Sector ETF (XLE) — the granddaddy of oil ETFs holds famous names including Chevron, and Exxon (22 percent of the fund) and ConocoPhillips.
- The SPDR S&P Oil & Gas Exploration and Production ETF (XOP) — this holds explorers and producers including Tesoro, Holly, Frontier Oil and more.
- The Oil Service HOLDRS (OIH) — this is stuffed with oil service names, including Schlumberger, Halliburton and Transocean.
All of these funds have pros and cons. Just do your own due diligence, have the stomach for volatility, and be ready to get out when the gettin’s good. It’s a trader’s market, and oil is more explosive than ever — but you can ride it to potentially big gains.
Yours for trading profits,
Sean
The 3 worst and 3 Best sectors for next Five Years
Larry Edelson on July 6, 2009 at 8:30 AM
 |
I often get the question, “Larry, what do you think will be the best and worst sectors to invest in for the next five years?”
So this morning, I’m going to answer that question. For many of you, my answer won’t come as a surprise. For many, it will. Either way, it’s important you know my longer-term forecasts.
Keep in mind, my long-term forecasts don’t change very often, chiefly because the major trends we’re witnessing are almost etched in stone, resulting from powerful economic and investment cycles that no one can alter. Not even Washington or the Federal Reserve.
And I think it’s clear that given the state of our economy and financial markets, there are a lot more lousy investments than there are good ones.
But don’t worry: It’s not all bad. There are plenty of great investments out there. Plus, today there are a myriad of ways to even make money on lousy investments — via instruments such as inverse ETFs and more.
So, let’s get right to what I believe are the worst three, then the best three, sectors to invest in for the next five years …
The Three Worst Sectors
For the Next Five Years
These are major asset classes where I believe — based on all my indicators and analysis — you will either …
Suffer massive depreciation in the purchasing power of your investment. You may get a nominal rate of return of say 5 percent or 6 percent, but after accounting for the “real” rate of inflation — and yes, there is still inflation out there — you will be losing purchasing power.
Or …
Incur the worst of both worlds: Lose in terms of purchasing power AND in terms of the nominal value of the dollars you invest. In other words, you could invest $10,000 today and get back only $5,000 at the end of five years. But that $5,000 you get back in five years is only worth $2,000 in terms of purchasing power (because of the falling dollar).
So what are the sectors where you could get absolutely hammered over the next five years?
Worst Sector #1: Long-term Bonds
I mean corporate, municipal, bonds of Government Sponsored Entities (GSEs) like Fannie Mae and Freddie Mac, longer-term U.S. Treasury bonds, and long-term sovereign bonds of other countries.
The reasons are pretty simple: It’s going to take years for the world to recover from the current financial crisis and the damage it’s done.
All the while, there will be loads of uncertainty surrounding the bond markets. Uncertainty due to the unprecedented crisis the world is going through, not to mention massive price pressure on bonds due to the veritable tsunami of government bond offerings that are coming down the pike as governments everywhere borrow money like crazy to try and stimulate growth.
At times, all this will come through in the form of sharply rising interest rates, meaning the principal of the bonds will have to decline.
At other times, it will arise from the lack of liquidity now surrounding the credit markets, the falling value of the dollar, uncertainty in corporate earnings, companies going bankrupt, and more.
No matter how you look at it, all of these forces will negatively affect the value of most, if not all, bond markets — and cause you to incur massive losses.
The worst bond investments of all, in my opinion, will most likely be the U.S. Treasury bond market. Five-year and longer-dated Treasuries.
Reason: Washington has to borrow an estimated $3 trillion over the next two years, and there’s simply no way that the offering of those IOUs is going to do anything but depress bond prices.
Plus, U.S. Treasury bond prices are inextricably intertwined with the value of the dollar and its perceived credit-worthiness.
As we all know, the dollar is not what it used to be. A long time ago, it was backed by gold. Then it was backed by the full faith and credit of the U.S. government. That wasn’t so bad, until the credit crisis hit.
Today, the faith part is losing respect all over the world.
And the credit part of the equation is also crumbling as Washington bails out one company after another, printing paper money like crazy, and accepting junk bonds as collateral.
In fact, I estimate that as much as 40% of the Treasury’s balance sheet is now comprised of junk bonds. That devalues the dollar and the Treasury bonds that are issued based on the dollar.
So I strongly suggest you stay away from the bond markets. Period. Their prices are only going to fall as interest rates are forced higher by investors willing to lend governments and companies, and even municipalities, money, but at much higher yields.
You don’t want to be in bonds as that process unfolds. Indeed, U.S. Treasury bonds have already plunged more than 12%, just since the start of the year.
Instead, consider buying an inverse position on the bond market when bonds offer up a rally, a good time to effectively go short the bond market, with an inverse fund such as the Rydex Inverse Government Long Bond Fund (RYJUX).
Worst Sector #2: European Stock Markets
Yes, the euro currency is very strong. And it could get even stronger as the dollar continues to head south in its massive, long-term bear market.
But a strong euro isn’t good for Europe (a strong currency isn’t good for any country right now).
Strong currencies import deflation into a country, and when you have systemic, antiquated kinds of institutions … a fractured central banking system … a barely 5-year old constitution … and more than $1.7 trillion in estimated loans hanging out to flap in the wind issued to countries such as Russia and older Eastern communist-bloc countries such as Bulgaria, Poland, and Romania — a strong currency is a killer for the economy.
For a variety of reasons based on substantial objective research, I believe Europe’s economy and stock markets are headed into two lost decades, much like Japan has experienced.
Bottom line: I’d steer clear of Europe’s markets with a 10-foot pole. And instead, as I noted with bonds above, I’d look to buy an inverse ETF on Europe, with the goal of profiting from Europe’s long slide into as much as two lost decades of sinking into the mud. An inverse ETF like the new ProShares UltraShort MSCI Europe ETF (EPV), an ETF that is designed to rise when Europe’s markets fall.
What about U.S. stock markets? They’re likely to head lower again, once the current bear market rally is over. But remember, we’re talking mainly about the next five years. And five years from now I expect the Dow Jones Industrials will be at new record highs (in nominal terms) — whereas I believe Europe could be at new record lows!
(I’ll have more on this in an upcoming Real Wealth Report issue. So be sure you’re a subscriber. The report will shatter everything you thought you knew about economics … the dollar … deflation … inflation … and more.)
Worst Sector #3: The U.S. Dollar
Don’t get me wrong, I am not being unpatriotic. But a strong dollar is the last thing the United States needs now.
Instead, it needs a weak dollar. Federal Reserve Chairman Ben Bernanke knows this and, despite what he says publicly about the value of the dollar, will do everything in his power to ensure the dollar heads lower for several years.
But Bernanke also has the wind in his sails with the dollar: Our biggest creditors, namely China, want the dollar replaced as a reserve currency. And it will likely happen a few years from now.
So my best recommendation here: I believe that as much as 80% of your money should be OUT OF THE DOLLAR … and instead, invested in currencies such as the Australian dollar, the New Zealand dollar, and even the Swiss franc which, despite all the hoopla about Switzerland losing its tax advantages and privacy laws, remains one of the strongest currencies in the world.
With speculative money, I’d look to play the dollar on the short side with an ETF such as the PowerShares DB US Dollar Bear (UDN).
Now, let’s move on to …
The Three Best Sectors
For the Next Five Years
These are my three best sectors to invest in for the years ahead …
Best Sector #1: Gold
There’s no doubt in my mind: If you want to preserve the purchasing power of your dollars and make some healthy profits to boot, by far the best investment of all is pure, honest, real money that has stood the test of time for more than 6,000 years — gold.
Gold has always preserved its purchasing power. And today, more than ever before …
You need an asset that cannot be manipulated by the powers that be … that has no politician to answer to … no board of directors to dilute it by issuing stock and stock options … and no gimmicky accounting to establish its fair market value.
My core recommendation for the long haul: Physical gold and a gold ETF, like the SPDR Gold Trust (GLD).
Best Sector #2: Energy
Not just crude oil and gas, but also alternative energy.
Right now, the price of crude oil is hovering in the high $60, low $70 range. It will likely soon take another dip down to around $50.
But I believe the entire correction in the oil and energy market is over, and five years from now we’ll be looking at substantially higher prices for oil and gas.
The dollar’s decline will be a major reason why. So will growth in Asia, which continues to steam ahead. Especially China (be sure to see the July issue of Real Wealth Report featuring China, which publishes on July 17).
Oil and gas companies will once again become awesome long-term investments. Ditto for alternative energy plays in solar, ocean motion, nuclear energy, and wind.
My suggestion here: A good energy ETF for the long haul, like the Energy Select SPDR (XLE).
Best Sector #3: Natural Resources
In this category I group all other natural resources including agricultural commodities; soft commodities such as coffee, cocoa and sugar; base metals such as aluminum, copper, nickel and zinc, fertilizers; and last, but not least, water.
All are assets where supplies are limited and where demand (largely due to Asia’s growth) continues to grow at a rapid pace.
And all are tangible assets with intrinsic value, where real wealth is accumulated on a long-term basis.
Plus, they all stand to benefit as the dollar heads lower in its long-term bear market.
My core recommendation here: I like the ELEMENTS Rogers Intl Commodity ETN (RJI), an Exchange Traded Note that is similar to an ETF.
Well-rounded with investments in metals, agriculture, and energy, this ETN seeks to track the Rogers International Commodity Index and is a great way to invest in natural resources for the longer-term.
In addition, I recommend select plays in country-based ETFs … in select natural resource stocks around the world … and especially in countries like India, China, Indonesia, Thailand, and Malaysia.
Best wishes,
Larry
avatar
