The Winds of Change (Mobius)

Wednesday, September 12th, 2012

by Mark Mobius, Franklin Templeton Investments

As we cross the mid-way point of the year, you might say the equity and fixed income markets have been a lot like the recent weather in much of the world: uncertain, and tending toward extremes. The perception of a stormy economic climate has driven some equity valuations to extremely low levels, particularly in Europe, and investors have been pouring into fixed income despite extremely low yields.

For a temperature check of Europe and emerging markets, we turned to Dr. Mark Mobius, executive chairman of Templeton Emerging Markets Group, and Dr. Michael Hasenstab, co-director of Franklin Templeton Fixed Income Group’s® International Bond Department, for their long-term perspective on where shifts in the changeable economic climate could occur.
Mark Mobius

• There’s no question the status of economies in Europe is weighing on the entire financial system, but my view is that the situation should get better with time.
• Looking at companies around the world generally, we are finding valuations looking rather cheap right now.
• Despite the possibility of somewhat slower growth in the Chinese economy this year, there are a lot of companies with what we believe are good valuations and good earnings growth potential in China.
• In my opinion if Greece can privatize state-owned enterprises, collect unpaid taxes and reduce the size of the government, it should have no need to raise taxes.

As Mobius sees it, emerging markets are generally in a good fiscal position right now compared with some of the more debt-laden developed markets, and going forward, he believes economic growth rates in emerging markets should outperform developed markets.

“There’s no question that the status of economies in Europe is weighing on the entire financial system. Emerging markets have been reducing their exports to the U.S. and to the EU, although economic problems (in the U.S. and EU) going forward could still bear significant impact. Eastern Europe of course has been affected by what’s happening in the rest of Europe. We are finding a lot of the opportunities there from companies where valuations have dramatically wiped out, many unfairly, and provide opportunities for long-term holdings.

My view of the European situation is quite different from a number of economists. My view is that the situation should get better with time and as the Europeans solve their fiscal problems. A case in point, of course, is Greece. Greece was originally part of the emerging markets realm until it joined the European Union, so we therefore have had some past experience investing in Greece. The challenge for the government now is to make some giant steps toward reform. This means privatization of state-owned enterprises that have been a drag on productivity and government finances, collection of taxes that are owed but not paid, and reducing the size of the government. If those three measures are taken, in my opinion there should be no need to actually raise taxes. Moreover, entrepreneurship should be encouraged. Greece has very strong tourism and shipping industries which I think can be the launching pad for growth in the future.

Looking at companies around the world generally, we are finding that valuations look rather cheap right now. The price-earnings ratios of emerging markets averaged about 9.6 ( based on the MSCI Emerging Markets Index 12-month forward P/E), compared to a world index of 11.4 (based on the MSCI World Index 12-month forward P/E) and the U.S. average of 11.9 (based on the MSCI US Index 12-month forward P/E), as of July.¹ The dividend yield average for emerging markets was 3.0%, while the world average was 2.9% and the U.S. was 2.2%, as of July, based on the MSCI EM Index, World Index and US Index.¹ So, as value investors, our team has been finding lots of opportunities in these markets that we think should bode well longer term.

Despite the possibility of somewhat slower growth in China’s economy this year, there are a lot of companies in China with what we believe are good valuations and good earnings growth potential. Southeast Asian countries are also doing very well in our view, particularly Thailand, because the economy has been growing at a good pace and it is benefiting from China’s expansion.”

Some other markets on Mobius’ radar screen include places less adventurous investors may not even be considering right now.

“We believe taking a bottom-up, company-oriented approach is best because we can find opportunities in places other people are ignoring. We are excited about frontier markets, particularly Africa, because African countries have been growing at a fast pace. Of the 10 fastest growing economies in the world in the last 10 years to 2010, six of those were African.² And in a country like Pakistan, which many people consider to be a very risky place, we are still finding opportunities simply because it’s so unpopular.”

Michael Hasenstab

• Some of the markets that traded off pure contagion and ‘Armageddon’ fear have now begun to recover.
• We see a lot of value in many emerging countries, but need to be cognizant of possible inflation risks longer term.
• Emerging markets are probably the most vulnerable to the immediate inflationary impacts of massive global quantitative easing.
• We don’t see value in the countries that are printing money and debasing the value of their currencies.

The Eurozone crisis whipped up quite a market storm this year, but Hasenstab has held steadfast in his belief that leaders there would find solutions, and that sky-falling forecasts were probably not warranted. He’s not ruling out more market chop for the rest of the year, but is seeing signs of calmer conditions.

“I think the recovery has been somewhat apprehensive thus far and really has not returned full fair value to a lot of these markets, but clearly we are on that path. We still think there’s a long way to go, but just about 10 or 11 months ago we were in a period of much greater uncertainty. It was during that period that we really highlighted our long-term conviction that the eurozone wouldn’t split apart because the European Central Bank (ECB) ultimately would be the lender of last resort (despite ongoing problems in Greece), and that China’s growth rate would moderate but would not face a hard landing. As the year progressed, we saw increased evidence that those core convictions were holding. I think now we’re moving closer to further clarity that the ECB will likely prevent breakup of the Eurozone, and the key countries such as Spain and Italy are taking some steps to improve their long-term finances. The fact that ECB support will likely be conditional is good for two reasons: it can help prevent a vicious cycle and provides liquidity, and it provides some sort of fiscal discipline. This has given a bit of calm to markets and as a result, some of the markets that traded off pure contagion and ‘Armageddon’ fear have now begun to recover.

In a world where there are no risk-free assets anymore, I think one has to accept some degree of market volatility, but I think our ability to hold onto our long-term convictions and not panic, not flip around because of market volatility, has been beneficial.”

Turning our Doppler radar back to China, a market some predict is heading for a crash-landing, Hasenstab believes that, toward year-end, growth there should gain a bit more altitude or at least stay on a stable course. Structural changes in the economy are creating new challenges, he says, but notes China has “more powder,” should it need to engage in further stimulative measures.

“In China, there are some very important long-term structural reforms that are underway. The reforms in China that began in the late 1970s are now entering their fourth phase. The first phase was the reform of the agricultural sector, the second phase was the reform of state-owned enterprises, the third was the opening of free trade, and this next, close-to-the-final phase would be the liberalization of the financial markets. It’s probably one of the most exciting phases of their reform, and if China can succeed in this—and we have every reason to believe that China should —it really has the potential to elevate China from a middle-income to a high-income country over the next decade or so.”

Like Mobius, Hasenstab sees value in many emerging markets right now. However, he’s cautious about taking longer-term interest rate exposures there because the easy monetary policies many central banks around the world have been engaging in for years could leave emerging economies vulnerable to trickle-down inflation.

“These emerging countries generally do not have the indebtedness problems that developed countries in general currently have, and even though their absolute growth is slowing on a relative basis, emerging growth rates remain much healthier than developed growth rates. There are exceptions, but by and large we see a lot of value in many of these countries, but we would be cautious that there are going to be inflationary risks. We think it’ll be good for currencies but we would be cautious about taking a lot of interest rate risk.

We have the Bank of England, the Federal Reserve in the U.S., the Bank of Japan, the ECB, the Swiss National Bank, all printing an unprecedented amount of money. Never in the history of central banks have we experimented with this amount of printing, and to think that there are no longer-term consequences would be naïve. Those effects may not be felt immediately, but ultimately the money that is printed in those countries will flow globally. Emerging markets are probably the most vulnerable to the immediate inflationary impacts of this massive quantitative easing.

On the currency side, we don’t see value in the countries that are printing money and debasing the value of their currencies—we continue to look for opportunities in countries which are not printing money.”

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What are the Risks?

All investments involve risks, including potential loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability, and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Current political uncertainty surrounding the European Union (EU) and its membership may increase market volatility. The financial instability of some countries in the EU, including Greece, Italy and Spain, together with the risk of that impacting other more stable countries may increase the economic risk of investing in companies in Europe.

1. Source: MSCI Emerging Markets Index, MSCI Emerging Markets World Index, MSCI US Index, July 2012. Indexes are unmanaged and one cannot directly invest in an index. All MSCI data is provided “as is.” MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI. Past performance is not indicative of future results.

The price-to-earnings (P/E) ratio for an individual stock compares the stock price to the company’s earnings per share. (This figure is often calculated using trailing 12-month earnings, but some use forecasted earnings.) The P/E indicates how much the market will pay for a company’s earnings. A high P/E can indicate a strong belief in the company’s ability to increase those earnings. A low P/E indicates the market has less confidence that the company’s earnings will increase.

The dividend yield is the sum of a company’s annual dividends per share, divided by the current price per share. It is often expressed as a percentage.

2. Source: International Monetary Fund; 2001-2010.

Copyright © Franklin Templeton Investments

Tags: agricultural, China, Emerging Markets, Indices
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Copper Rises as China Greenlights New Infrastructure Projects

Saturday, September 8th, 2012

Energy and Natural Resources Market Radar (September 10, 2012)

Strengths

• The Global Resources Fund (PSPFX) moved above its 200 day moving average this week.
• After China approved new infrastructure projects which supported the demand outlook in the world’s biggest consumer of copper, the metal gained over 3 percent this week making this the biggest weekly gain in 10 weeks.
• The Chinese government backed construction plans including roads and warehouses, according to statements on the National Development and Reform Commission’s (NDRC) website. Copper also rose after the ECB announced a bond- buying plan on Thursday to combat the debt crisis that threatens demand.

Weaknesses

• Consol Energy (CNX) announced it is idling two Appalachian coking coal operations in response to the slump in hard coking coal prices. U.S. coking coal exporters are the marginal cost producers for the seaborne market, so coking coal prices could start to see some support if further Appalachian shutdowns are announced. The current hard coking coal spot price is $159 per ton and has fallen 30 percent since mid-June.
• The worst U.S. drought in more than half a century helped drive down rates for Panamax vessels shipping grains to the lowest rates in more than 3 1/2 years as the drought results in a slump in cereal cargoes. The ships hauling about 60,000 metric tons of grains and other commodities including coal and iron ore slid 5.7 percent to $5,141 a day, the lowest since January 2009, according to data from the Baltic Exchange in London. The Baltic Dry Index, a wider measure of costs, fell 1.3 percent to 684 points. Global grain exports will fall the most in 27 years in the 2012-13 marketing year as the drought curbs shipments from the world’s largest supply country, according to U.S. Department of Agriculture data.
• China steel futures fell to an all-time low as poor demand in the world’s top steel market kept the pressure on prices, sending iron ore further below $90 a ton to its weakest level since October 2009. Iron ore prices have dropped 36 percent since early July, the main casualty among industrial commodities of China’s slowdown, and analysts say they have further to fall.

Opportunities

• China’s central government has announced an estimated $156 billion in infrastructure approvals in an effort to stimulate a stagnating domestic economy. The projects, spanning subway, highway, port, waterway, airport, and energy investments are scheduled to progress over the next four years.
• Meat consumption in China will continue to expand even as the economy slows, sustaining demand for feeds made from corn and soybeans, according to Cargill Inc., the biggest U.S. agricultural company. “We are looking at a mega-trend of increasing consumption of meat, milk, eggs,” Christopher Langholz, president of Cargill Animal Protein China, said in an interview, without giving specific forecasts. Rising incomes in China, the world’s second-largest economy, have increased demand for meat including pork, making the nation the largest buyer of soybeans, which are crushed to feed pigs and chicken. Soybeans and corn surged to records in Chicago last month as the worst U.S. drought in half a century cut supplies.

Threats

• China’s coal prices, already near a two-year low, are likely to fall further as industrial demand growth slows and imports add to pressure on domestic stocks, industry officials said Tuesday. Hou Wenjin, a coal industry official with the Shanxi provincial government, the country’s second biggest coal producing region, predicted China’s 2012 imports could top 200 million tons as coastal utilities lock in cheaper foreign supplies. “Overall inventories, at over 80 million tons, are still much higher than normal levels, so I don’t think there will big demand even for winter restocking,” he said.
• Peru’s mining industry will invest 33 percent less than previously expected next year as social unrest delays projects, according to the country’s National Society of Mining, Petroleum & Energy. Miners including Aluminum Corp. of China and HudBay Minerals will invest about $4 billion next year, compared with $6 billion planned previously and down from $7.2 billion this year, according to a presentation by the industry group. “We’re worried by what’s happening,” the group’s President Pedro Martinez said. “If investment continues to be scared away, many mines will reach the end of their productive lives and there will nothing we can do about it,” he added.

Tags: agricultural, energy
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Emerging Markets Radar (September 2, 2o12)

Saturday, September 1st, 2012

Emerging Markets Radar (September 2, 2o12)

Strengths

• Central Huijin Investment, China’s government wealth management entity, picked up more A-shares of Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China in the second quarter, in hopes of boosting the market sentiment in China as regulators also called on companies to buy back their shares as their share price approaches book value.
• China’s third-quarter economy may rebound and be “slightly” higher than the second quarter as stable growth policies start to take effect, Xinhua reported, citing Hou Yunchun, a researcher at the State Council’s State Development Research Center.
• China will overtake the U.S. as the world’s largest smartphone market this year. China will account for 26.5 percent of smartphone shipments in 2012, compared with 17.8 percent for the U.S., research firm IDC said.

Weaknesses

• About 2,453 publicly listed Chinese companies combined first-half profits falling 0.38 percent with no growth on a year-over-year basis, China Securities Journal said. For the second half of the year, Bank of America Merrill Lynch Global Research and CICC believe corporate earnings growth could accelerate as they think China will step up easing policies.
• High commodity prices have played a significant role in depressing Indian equities’ price performance. Lower commodity prices will help stabilize India’s relative performance against other emerging markets because they will at the margin boost profit margins as well as domestic liquidity, according to BCA.
• Thailand’s July exports fell 4.46 percent, lower than the consensus of -3.8 percent, but imports surged 13.7 percent on a year-over-year basis, resulting in a widening trade deficit of $1.75 billion.

Opportunities

• Here is a case in point that government policy is a precursor to change. In the Philippines, both monetary and fiscal policies are in favor of property and construction and consumer income growth, as the country is cutting interest rates and allocating the budget toward building infrastructure in the country. The chart below shows capital goods imports increased, an indication that construction is booming.

• Indian relative equity valuations are no longer excessive given that India’s return on equity and return on assets exceed, and will likely remain, above those of emerging markets counterparts, maintains BCA Research.

• Now that anti-corruption allegations have largely subsided, BCA Research expects the Indian government to approve a pipeline of pending projects. After a prolonged and messy hold up, this is not only positive for India’s power problems, but also for the nation’s banks, which have a sizable exposure to the power industry.

Threats

• Indonesia’s current account deficit widened to 3.1 percent GDP in the first half of the year as export commodity prices fell, while the domestic economy and consumptions were booming. Directly impacted by current account deficit, Indonesia’s currency was weakened, which, though not a structural issue, caused some market volatility lately.
• On the heels of the Republican convention, a Citibank strategist opined that a victory for Romney could drive the Russian equity market down by 5 to 10 percent. Romney’s foreign policy stance differs in two key areas that could damage the Russian market: 1) the ‘number one geopolitical foe’ rhetoric would elicit an equal and opposite reaction; and 2) a greater push for U.S. energy independence has important consequences for global oil markets.
• On the other hand, Romney’s foreign policy platform would bolster relationships with traditional bulwarks against aggressive behavior on the part of Russia, such as Poland and Turkey. He plans to decrease European energy reliance on Russia by helping to speed up development of shale gas in Poland. He would also aim to free Central Asian gas with construction of the Nabucco pipeline through Georgia and Turkey.

Tags: agricultural, Emerging Markets, India, Russia
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Seasonality, Odds for ‘Easing Disappointment’ Warrant Caution in Broader Markets

Wednesday, August 29th, 2012

Seasonality, Odds for ‘Easing Disappointment’ Warrant Caution in Broader Markets

by Don Vialoux, EquityClock.com

Upcoming US Events for Today:

1. Q2 GDP Estimate will be released at 8:30am. The market expects an increase of 1.7% versus an increase of 1.5% previous.
2. Pending Home Sales for July will be released at 10:00am. The market expects an increase of 1.0% versus a decline of 1.4% previous.
3. Weekly Crude Inventories will be released at 10:30am.
4. The Fed’s Beige Book for August will be released at 2:00pm.

Upcoming International Events for Today:

1. German Consumer Price Index for August will be released at 8:00am EST. The market expects a year-over-year increase of 1.9% versus 1.7% previous.
2. Japanese Retail Sales fro July will be released at 7:50pm EST. The market expects a year-over-year decline of 0.3% versus an increase of 0.2% previous.

The Markets
Markets traded flat on Tuesday as investors held the tape steady ahead of Ben Bernanke’s speech in Jackson Hole at the end of this week. Economic news was mixed with the Case Shiller Home Price Index and the Richmond Fed Manufacturing Index both beating expectations, while Consumer Confidence showed a significant miss. The Case Shiller report showed a year-over-year gain of 0.5% for the month of June, beating estimates of 0.0%, in a sign that the housing market continues to improve. The Richmond Fed received a boost from last months low of –17 to report a –9, still in contractionary mode but better than the analyst estimate of –10. And perhaps the most important indicator given the time of year is Consumer Confidence, which reported a 9-month low of 60.6, well below estimates of 65.8. Consumer confidence has been trending lower since last Christmas and it is not a very optimistic sign that the lows of the year are becoming realized as we enter the period of seasonal strength for retail, with back-to-school, Thanksgiving, and Christmas spending expected to give the economy a boost. Retail is a key driver of the economy in the last few months of the year and if consumers are not confident, they may not spend. Here is what Econoday.com had to say regarding this report:

Weakness in today’s report is centered in the assessment of future conditions where components make up 60 percent of the composite index. The three components all show deterioration especially in the degree of pessimism on future business conditions, employment, and income. Pessimism for these readings, particularly income, poses an early warning for retailers as they prepare for the holiday shopping season.

So analysts for the past week have been providing their guess as to what Ben Bernanke will reveal in this week’s speech and more importantly, what will the Fed and the ECB will offer at their upcoming meetings: Will additional monetary stimulus be offered as is widely anticipated? Additional stimulus seems to be a foregone conclusion by the market and many analysts expect that something will be offered, perhaps in the coming days. Unfortunately, the chances of further monetary stimulus at this point in time are very low for one reason: rates. It is commonly known that the Fed follows the 5-year breakeven rate, which gauges the level of inflation in the economy. Back at the last FOMC meeting at the end of July, the rate of inflation was essentially within a downward trend channel, suggesting disinflation. In order to correct the trend, further accommodation appeared appropriate, which is what the Fed’s notes indicated. However, since the meeting, the rate of inflation has broken out of this 5-month declining trend and has now moved closer to 2% (1.98% as of Tuesday’s close). Back in January the Fed set an inflation target of 2%, noting that an inflation rate of 2 percent is best aligned with its congressionally mandated goals of price stability and full employment. Looking at the 5-year chart and the points where previous quantitative easing programs were initiated, you can clearly see that the additional easing was offered when inflation was significantly low (or negative as in the case of the end of 2008). With Inflation seemingly stabilizing over the past year around the informal target range of roughly 1.7 percent to 2 percent under the current Operation Twist program, it is probably unreasonable for the Fed to act further at this time in order to push the limit.

But let’s not forget that the ECB is also expected to act. Back at their last meeting, yields on Spanish an Italian debt were in a firm uptrend, posing a significant threat to destabilization in the Euro zone and prompting the ECB President to stand behind the struggling currency. Since those comments, yields have broken a 5-month rising trend, bringing calm to the area. And lets not forget that the next ECB meeting (September 6) happens before the German court ruling on the constitutionality of the ESM (September 12), potentially constraining European Central Bank officials until the judgment is received. With markets at resistance and expectations of further easing likely to prove unrealistic, the chance of a market selloff based upon disappointment is greater than the chance of a market surge higher based on additional stimulus. Keep in mind that anything is still possible as central banks can be known to surprise, but the probability favours a disappointment, which puts the market at risk of a shock event given the complacency that is prevalent within equities. Caution is prudent.

Now, on to today’s warning signal. In each of the reports this week we have indentified reasons to be cautious due technical indicators diverging from the recent market strength. Today we focus on copper. Commodities have no doubt been strong recently, helped by a weaker US dollar. This has allowed breakouts to be realized in Gold, Platinum, and Silver. Energy commodities remain on a positive trend, holding near the highs of the summer. And agricultural commodities certainly have a bid to them with drought conditions fueling speculation of supply disruptions. However, as all of these commodities hover around the highs of the summer/quarter, copper has failed to participate. The commodity has been unable to break through the highs set at the beginning of July as it holds within an underperforming trend that began in February. Copper is often referred to as Dr. Copper due to its ability to predict market strength as a result of the cyclical nature of the commodity. Copper has also underperformed gold since April, just as equity markets were peaking. In fact, the relative performance of Copper (the risk-on trade) and Gold (the risk-off trade) has been very indicative of equity market strength. Copper bottomed relative to Gold in October of 2011, moving higher through to April 2012, just as the equity market peaked. Similarly, copper bottomed relative to gold in the summer of 2010, just before the Fed induced stimulus rally that lasted through to early 2011. The relative performance then declined through Q2 and Q3 of 2011, almost forecasting the negative move to come for equities from July through October. Results are similar in past occurrences as well. The recent divergence between Copper relative to Gold and equities suggests that risk aversion continues to persist, a bearish setup that could lead to market declines. The period of seasonal strength for copper runs from December all the way through to July as manufacturing activity picks up in the first half of the year.

Sentiment on Tuesday, as gauged by the put-call ratio, ended bullish at 0.83.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

Horizons Seasonal Rotation ETF (TSX:HAC)

• Closing Market Value: $12.45 (up 0.16%)
• Closing NAV/Unit: $12.44 (down 0.04%)

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Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.

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Tags: agricultural, ETF, ETFs, Seasonal, Seasonal Trades, Seasonality, Thackray, Vialoux
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Something is Spooking Consumers Enough Cancel Out Effects of Market Rally? (Sober Look)

Wednesday, August 29th, 2012

by SoberLook.com

The weak consumer sentiment number today was a surprise. After all, the S&P500 index is up 13.7% year to date (including dividend). The recent equity market rally should have boosted the consumer net worth and improved consumer confidence.

A quick empirical analysis (below) shows that a large portion (r^2 =84%, beta = .33) of the change in consumer net worth is explained by the moves in the stock market. This is a recent relationship, as the US consumer exposure to equities has been larger over the past 20 years than previously (the relationship was weaker during the previous 30 years: r^2 = 68%, beta = .18).

Source: Bloomberg

In fact the US consumer wealth has increased considerably since the financial crisis, to a large extent driven by the stock market (particularly given that housing has been stagnant until very recently).

Source: ISI Group

But increased wealth does not seem to be improving how consumers feel. Actually over the past few months the divergence between consumer sentiment and the equity market (which reflects improved net worth) is quite striking.

Source: Bloomberg

Something is spooking the consumer enough to cancel out the effects of the market rally. And the divergence is not just with the market. The recent uptick in the Citi Economic Surprise Index – indicating better overall economic data – is also not reflected in the sentiment trend.

WSJ: – Perhaps more worrisome, though, is the divergence between some of the hard economic data – such as jobs, manufacturing and housing reports – compared to soft data such as sentiment surveys. Much of the hard data have gotten better this summer, as measured by Citigroup’s Economic Surprise Index, which has risen in each of the last four straight weeks. But sentiment surveys are still lagging.

Part of the explanation is that the consumer is not as worried about the current situation (including a strong stock market) as she is about the future. The “present situation” portion of the Conference Board index was basically flat, while the “expectations” component was down 7.9. The consumer is not confident in her ability to retain this improved net worth.

LA Times: There was little change in how consumers viewed their current situation. For example, 34.4% of people surveyed said business conditions right now were bad, the same percentage as in July. And 40.7% of those surveyed in August described jobs as “hard to get,” down slightly from 41% a month earlier.

But consumers’ long-term view headed south. The percentage of respondents who expected business conditions to improve over the next six months dropped to 16.5%, from 19% in July. And 23.4% of those surveyed in August said they expected the economy to produce fewer jobs in the same upcoming period, up from 20.6%.

Not surprisingly the poor “forward looking” sentiment is also visible in the increased steepness of the VIX curve (discussed earlier).

The US fiscal cliff (see discussion), the Eurozone uncertainty (particularly with the scary looking September calendar), the upcoming election, and weak labor markets are some of the more common explanations for poor consumer expectations.

WSJ: – “Households continue to worry about a difficult job market, the European debt crisis, the upcoming ‘fiscal cliff,’ and the political wrangling in Washington and in the presidential campaign,” says Steven Wood, chief economist at Insight Economics.

But the spike in gasoline prices and the expectation of rising food prices due to the drought could be even more damaging to confidence, because consumers face these cost increases on a daily basis. Related to this, the US consumers are also concerned about the possibility of QE3, which may exacerbate the “headline inflation” (fresh in consumers’ memory from 2011). As discussed before (see this post), even the anticipation of asset purchases by the Fed could have negative ramifications on the US consumer (in spite of driving equity prices higher).

Whatever the case, the divergence between economic indicators that have trended up recently (particularly the equity markets) and consumer confidence can not continue indefinitely. Something’s got to give. The concern of course is that consumer sentiment in the long run could end up being more accurate than other forward looking indicators.

WSJ: – At some point, both sets of data points will start moving closer in tandem. “By its very nature this divergence is unlikely to persist,” … “Our expectation is that the convergence will be toward the sentiment indicators, suggesting that the current upturn in economic momentum could prove fleeting.”

Copyright © SoberLook.com

Tags: agricultural
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Don Vialoux: 9 Rewarding Seasonal Equity Trades

Friday, August 10th, 2012

by Don Vialoux, Tech Talk

(Based on reports published by www.globeandmail.com. Reports were forwarded to Globe and Mail each weekend and published early in the following week).

June 11:Accumulate the Leisure & Entertainment sector

ETF:PEJ at$20.73. Current price: $21.57

Comment: Continue to hold. Technical profile remains positive. Units continue to trade above their 20, 50 and 200 day moving averages. Short term momentum indicators continue to trend higher.

June 22: Accumulate the Fertilizer sector

ETF: SOIL at $12.20. Current price: $13.94

Comment: Continue to hold. Technical profile remains positive. Units continue to trade above their 20, 50 and 200 day moving averages. Units hit a new high yesterday. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive.

July 2: Accumulate the Software sector

ETF: IGV at $62.18. Current price: $62.32

Comment: Continue to hold. Technical profile remains positive. Units remain above their 20, 50 and 200 day moving averages. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index turned positive at the beginning of July.

July 6^: Accumulate gold bullion

Gold price: $1,578.90. Current price: $1620.20

Comment: Continue to hold. Technical profile continues to improve. Gold recently broke above a triangle pattern and moved above their 20 and 50 day moving averages. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index is neutral.

July 13: Accumulate Canadian gold equities

ETF: XGD at $18.01. Current price: $18.45

Comment: Continue to hold. Technical profile continues to improve. The TSX Gold Index recently moved above its 20 day moving average. Short term momentum indicators are trending higher. Strength relative to the TSX Composite Index has been positive since mid-July.

July 20: Accumulate the Canadian energy sector

ETF: XEG at $15.12. Current price: $16.16

Comment: Continue to hold. Technical profile continues to improve. The TSX Energy Index recently broke above a reverse head and shoulders pattern. The Energy Index remains above its 20 and 50 day moving averages and just moved above its 200 day moving average. Short term momentum indicators are trending higher. Strength relative to the TSX Composite has been positive since the last week in June.

July 27: Sell the U.S. Transportation sector

Dow Jones Transportation Average at 5,126.65. Current price:5,048.23

ETF:IYT at $91.56. Current price: $90.17

Comment: Continue to avoid (hold short). The Dow Jones Transportation Average fell below its 20, 50 and 200 day moving averages during the past few days. Strength relative to the S&P 500 Index remains negative.

August 6: Sell the Airline sector

ETF: FAA at $28.66. Current price: $28.43

Comment: Continue to avoid (hold short). A break below $27.94 completes a double top pattern. Units trade below their 20 and 50 day moving average and moved below its 200 day moving average during the past few days. Strength relative to the S&P 500 Index has been negative since early July.

Eric Wheatley’s Column

Preamble: Every time I mention the fact that I’ve written options and investment guides or write something particularly controversial (not liking hockey is a salient example) I get a bunch of emails, which means SOMEONE is reading these ramblings. When I DO get messages, folks seem to think they’re bothering me so, to be clear: I work from home, have the business channel on all day, read financial stuff, work on spreadsheets for the Boss and myself and otherwise crave human interaction. We’re a long-term investing company, so contrary to your average broker, we don’t really need to spend all our time calling clients asking them to sell their BMO to buy BNS. If anyone is curious about options or investing and has questions, I promise to respond with joyful alacrity.

…yeah, there was no way this preamble was going to be anything less than full-on pathetic.

*****************

Good morning,

We’re continuing with our options basics lessons which started a few weeks ago. We’ve already looked at the factors which affect options prices and how buying in-the-money calls is an efficient, low-cost alternative to buying shares outright. This week, let’s look at what really happens when options expire.

(Please note that I’ll be skipping over the few weekly options that are listed on the CBOE and sticking with regular, plain-vanilla options in this commentary).

All normal stock options expire on the Saturday following the third Friday of the expiry month (or on the Friday if it falls on a holiday on which the markets are closed). To illustrate, this month, the third Friday is the 17^th, so all trading in August options will cease at the close of the markets on that day and contract holders will be able to order their brokerages to strike the options or to let them expire until the following day at noon.

The preceding statement is one of the frequent justifications for not using options. “They’re too complicated” or “they require me to always look at them! I don’t have the time”. False. Even the most indolent loafer can use options because there is a safety switch built into the system. If you hold an option at expiry and you completely forget, the clearing corporation will automatically strike your option if it’s in-the-money (in Canada, it has to be in-the-money by at least five cents). This means that, for a call option, you will receive 100 shares per contract in your account three business days later. For put options, you have to deliver 100 shares (your brokerage will handle things if the shares aren’t in your account, but you should check with it to determine its procedures).

Fine and dandy. You can lounge by the pool in full-on lethargy mode knowing that the system works. Except…

So, you own a call option. It has a strike price of $50. You’re swimming with your dog in the pool having a grand time and your spouse enjoys making his/her horribly addictive margaritas for you and you’ve completely ignored the call’s expiration. At the close, the stock is at $50.25. “Great!” you tell yourself. “The call’ll be struck with or without my intervention and I’ll make a quarter. I’ll have another please honey. Go easy on salting the rim though. Please. Love you”.

…slight problem, though: you’ll be getting the shares in three business days. When you finally get them, who knows where the stock will be at? The smart thing (which is done by professional options traders in this situation) would be to short-sell the shares which will be delivered to you. This locks in the current price, which means that when you eventually get your shares a few days hence, you’ll be able to deliver the shares, close the short sale and pocket the amount the shares were in-the-money when you shorted them. Of course, all this adds up in terms of transaction costs. The easy way out? Before diving into the pool, sell your options prior to expiry.

Now, what happens if your call expires out-of-the-money, but news comes out at 4:05 p.m. on expiry Friday? Really, really good news. News which will almost certainly lead to a big open the following Monday. As mentioned before, the options’ official expiration is at noon on the SATURDAY following the third Friday. This means that you can call up your brokerage and put in an order to have them strike your call, which you can do even if they’re out-of-the-money. You’ll get the shares in three business days and be able to sell them at a nice profit.

The point to remember is that whether or not your option is in-the-money or out-of-the-money by a small amount at expiration is of little relevance. Unless you lock-in the current price, you can’t be assured of making money. This also means that there are NEVER any straight lines in options trading, even on those hockey stick graphs that bug me so much.

In this week’s French-language blog: explaining lending rates with references to agricultural tractors and a colourful red-eyed cousin.

Cheers!

P.S. You’ll notice that, as of this week, I’ve added a Twitter address to my signature line (@jchood_eric). Yes, I’ve joined the silly-update revolution. It’ll be bilingual and, for now, I’m just having fun with the medium, but if you can tolerate a bit of French in your feed, help me spread the gospel of proper investing techniques! (You’ll be assured that my tendency to go on forever in my writing will be constrained).

Éric Wheatley, MBA, CIM

Associate Portfolio Manager, J.C. Hood Investment Counsel Inc.

eric@jchood.com

514.604.2829; 1.855.348.2829

Twitter: @jchood_eric

Blogue en français : gbsfinancier.blogspot.ca

*****************

Little known fact about John Charles Hood #38

John Charles Hood goes on forever too. In a completely different context, but still.

(Clarification: I was referring to his passion for big-game hunting and the subsequent verbosity if you ask him about it).

*****

Special Free Services available through www.equityclock.com

Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.

To login, simply go to http://www.equityclock.com/charts/

Following is an example:

Agnico-Eagle Mines Ltd. (TSE:AEM) Seasonal Chart

FP Trading Desk Headline

FP Trading Desk headline reads, “Small cap golds on a run”. Following is a link to the report:

http://business.financialpost.com/2012/08/09/small-cap-golds-on-a-run/

Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.

Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc

Horizons Seasonal Rotation ETF HAC August 9^th 2012

Copyright © Don Vialoux, Tech Talk

Tags: agricultural, Bullion Gold, Canadian, Canadian Energy, Canadian Market, Don Vialoux, energy sector, ETF, ETFs, fertilizer, Globe And Mail, Gold Bullion, Gold Equities, Gold Index, Gold Price, Momentum Indicators, Moving Averages, oil, Pej, Price 1, Software Sector, Technical Profile, Triangle Pattern, Tsx Composite Index, Xeg, Xgd
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Jeremy Grantham: Investment Outlook (Q2 2012)

Wednesday, August 1st, 2012

GMO Quarterly Q2 – July 2012

Welcome to Dystopia!¹
Entering a long-term and politically dangerous food crisis²

by Jeremy Grantham, GMO

“Them belly full but we hungry …
… A hungry man is a angry man …
… A hungry mob is a angry mob.”
—Bob Marley, “Them Belly Full”

“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.”
—Kenneth Boulding, Economist

Summary of the Summary

We are five years into a severe global food crisis that is very unlikely to go away.  It will threaten poor countries with increased malnutrition and starvation and even collapse.  Resource squabbles and waves of food-induced migration will threaten global stability and global growth.  This threat is badly underestimated by almost everybody and all institutions with the possible exception of some military establishments.

Summary

1. Last year we reported the data that showed that we are 10 years into a paradigm shift or phase change from falling resource prices into quite rapidly rising real prices.

2. It now appears that we are also about five years into a chronic global food crisis that is unlikely to fade for many decades, at least until the global population has considerably declined from its likely peak of over nine billion in 2050.

3. The general assumption is that we need to increase food production by 60% to 100% by 2050 to feed at least a modest sufficiency of calories to all 9 billion+ people plus to deliver much more meat to the rapidly increasing middle classes of the developing world.

4. It is also widely assumed that at least the lower end of this target will be achieved.  I believe that this is substantially optimistic.  At very best, if we reach that level we will not be able to hold it.  Much more likely, we will not come close because there are too many factors that will make growth in food output increasingly difficult where it used to be easy:

- Grain productivity has fallen decade by decade since 1970 from 3.5% to 1.5%.  Quite probably, the most efficient grain producers are approaching a “glass ceiling” where further increases in productivity per acre approach zero at the grain species’ limit (just as race horses do not run materially faster now than in the 1920s).  Remarkably, investment in agricultural research has steadily fallen globally, as a percent of GDP.

- Water problems will increase to a point where gains from increased irrigation will be offset by the loss of underground water and the salination of the soil.

- Persistent bad farming practices perpetuate land degradation, which will continue to undermine our longterm sustainable productive capacity.

- Incremental returns from increasing fertilizer use will steadily decline on the margin for fertilizer use has increased five-fold in the last 50 years and the easy pickings are behind us.

- There will be increased weather instability, notably floods and droughts, but also steadily increasing heat. The last three years of global weather were so bad that to draw three such years randomly would have been a remote possibility.  The climate is changing.

- The costs of fertilizer and fuel will rise rapidly.

5. Even if we could produce enough food globally to feed everyone satisfactorily, the continued steady rise in the cost of inputs will mean increasing numbers will not be able to afford the food we produce.  This is a key point that is often missed.

6. On the positive side, scientists are now very optimistic that they will be able to engineer more efficient photosynthesizing “C4” genes (corn belongs to that family) into relatively inefficient but vital “C3” plants such as rice and wheat, in 20 to 30 years.  If successful this would increase output up to 50% and would buy time for a less painful transition to a sustainable population.

7. Many of these increasing difficulties were reflected in the original 2008 food crisis and the 2011 rebound. The last six weeks’ price rise is more threatening because it occurred despite very much larger plantings than were available in 2008. Global demand is now so high and rising so fast and reserves are so low that price sensitivity to weather setbacks has become extreme.

8. It seems likely that several countries dependent on foreign grain imports have in fact never recovered from the 2008 shock.  Countries like Egypt saw the percent of their consumer budget for food rise to 40%.  At this level, social pressures may be at an extreme and probably have already contributed to the Arab Spring. Any price increases from here may cause social collapse and a wave of immigration on a scale never before experienced in peacetime.  Another doubling in grain prices would be catastrophic.

9. Strong countermeasures to prevent a food crisis would be effective in curtailing the current crisis and preventing the development of a much greater crisis, but these measures will likely not be taken.  This is because the price signals for the rich countries are too weak – they can afford the higher price – and there is inertia in all parts of the system. Also, the problems of malnutrition in distant countries are not generally felt as high-order priorities in the richer countries.

10. If food pressures recur  and are reinforced by fuel price increases, the risks of social collapse and global instability increase to a point where they probably become the major source of international confrontations. China is particularly concerned (even slightly desperate) about resource scarcity, especially food.

11. The general public, the media, the financial markets, and governments badly underestimate these risks.  Only the military of some countries, including the U.S. and the U.K., seem to appreciate them appropriately.

12. Natural gas supply increases buy some time, mainly for the U.S., but seem more likely to create complacency and continued dependence on hydrocarbons.  The energy situation is less pressing globally in the short term than is the food problem.  Supplies are sufficient to cause merely a slow and erratic price increase.  The main problem with oil is in its contribution to the food problem through higher farming costs and generally increasing cost pressures on poorer countries.

13. In the longer term, in contrast, energy costs and absolute shortage in the case of oil form a serious problem second only to food shortages and will result in prices so high that they will impact global growth and even the viability of modern, rather fragile, economies.

14. On paper, though, the energy problem can be relatively easily addressed through very large investments in renewables and smart grids.  Those countries that do this will, in several decades, eventually emerge with large advantages in lower marginal costs and in energy security.  Most countries including the U.S. will not muster the political will to overcome inertia, wishful thinking, and the enormous political power of the energy interests to embark on these expensive programs.  They risk being left behind in competiveness.

15. Availability of metals is, in contrast, a minor problem in the next few decades.  The prices will steadily rise but the consequences will be less.  In the long run though, metals are the most intractable problem.  There is no brain-intensive solution as there is for agriculture (i.e., organic farming), nor is there any capital-intensive or technology-intensive solution as there is for energy.  We will just slowly run out and prices will rise.

16. The results of these problems will be felt mainly as price pressure in rich countries.  The need to obtain adequate resources will squeeze national budgets, profit margins, and economic growth.  For poor countries, though, it is literally a matter of survival.

17. We are badly designed to deal with this problem:  regrettably we are not the efficient species of investment theory, but ill-informed, manipulated, full of inertia, and corruptible.  Only once in a blue moon – like World War II – do we perform anywhere near our theoretical capabilities and this time the enemy is amorphous and delivers its attack very, very slowly.  But the stakes globally are very high indeed.  We must try harder.

18. The following comments on this topic are mine personally and reflect my Foundation’s portfolio (and a total lack of career risk!).  These comments are based on a time horizon of 10 years and beyond.  The portfolio investment implications are that investors should expect resource stocks – those with resources in the ground – to outperform over the next several decades as real prices of the resources rise.  Farming and forestry, though, are at the top of the list.  Serious long-term investors should have a very substantial overweighting in a resource package.  I suggest for long-term investors a resource position of at least 30%.  Another relative beneficiary of resource pressure is the quality group of equities.  Resources are a smaller fraction of final sales than average and higher profit margins make them more resilient to margin pressures.

19. Perhaps more importantly, the resource squeeze, coupled with other growth-reducing factors (to be discussed next quarter), is likely to reduce the return from the balance of the portfolio. P.S. A 24-minute video of similar material from a recent interview at University of Cambridge, Programme for Sustainability Leadership, can be accessed at www.gmo.com; however, only those qualified investors with client IDs will be able to access it.

You can read or download the complete quarterly letter in the slidedeck below:

GMOQ2Lettern – Jeremy Grantham – Welcome to Dystopia

Footnotes:

1  Dystopia:  a society characterized by human misery, disease, oppression, and overcrowding.

2 This report is an update and extension of “Time to Wake Up,” April 2011 and “Resource Limitations 2: Separating the Dangerous from the Merely Serious,” July 2011.  Each is available with registration at www.gmo.com

Tags: agricultural
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Gold (GLD) is Sneaking Up

Thursday, July 26th, 2012

by Mark Hanna, Market Montage

Gold has been sidelined for many months as it has been in an intermediate term downtrend.  Since the Hilsenrath article it has shown some strength.  As you can see below it has made a series of lower highs throughout most of 2012, and it is now coming to touch the trend line.  If we see gold begin to blast off it would put credence into the idea that action from the Federal Reserve is imminent.

As for the general market, we have a rally in the Euro and weakness in the dollar.  With that this incredibly strong relationship continues to be rooted in the market and equity buyers step in.  S&P 1340 continues to be an incredibly strong magnet.  While this selloff has been sharp the S&P 500 did not actually create a new lower low.  So the potential remains for the range bound action we have seen for the past 2 months…

That said I mentioned housing related as a relatively immune sector, and true to form this is an area seeing a lot of selling today.  It continues to be impossible to buy almost any strength as these areas get attacked.   At this point the only theme I see working ok is perhaps agricultural stocks, due to the U.S. drought.  A few REITs also stand out but the way things are going, those will be the next area for selling to occur.  The lack of themes or groups working in concert showcases an underlying weakness in the tape.

Tags: agricultural, Amp, Blast, Credence, Drought, Federal Reserve, GLD, Gold, Magnet, Mark Hanna, Nbsp, Rally, Reits, Relationship, Selling Today, Selloff, Showcases, Stocks, Term Downtrend, Trend Line
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A Growing Water Crisis Creates Investment Opportunities in Agriculture

Wednesday, July 25th, 2012

by Geoffrey Lutz and Jon Brorson, Mesirow Financial

Water is ubiquitous, the ultimate source for life and the most important commodity for human existence. No less importantly, water is a critical input for food. Yet only a small fraction of total global water – less than 1% – is usable for food production, due to salinity and glaciers¹. As a result, water represents one of the single most important determinants of the value of today’s investment opportunities in food production and farmland.

Water Crisis

Although water is used, it is neither created nor destroyed, meaning that the total existing amount remains constant. That total must be shared by a global population that is expected to increase from 7 billion today to more than 9 billion by 2050, according to United Nations estimates. What’s more, over the past 100 years, increases in water demand have outpaced overall population growth by a factor of two². In 1990, 10,000 cubic meters of fresh water was available for each person; by 2010 that amount had dropped to 7,770 cubic meters³.

An equally powerful related trend is increasing urbanization, which can lead to higher pollution in fresh water supplies from the byproducts of industrialization and development.⁴ Half of the word’s population now lives in an urban area, and that fraction is expected to grow to over 60% in the next two decades.

By the year 2025, an estimated 1.8 billion people may face water scarcity⁵ as world demand for water is expected to exceed supply by approximately 40%⁶, By 2050, the excess demand may be as high as 140%, according to the consulting firm McKinsey.

Strong desire by populations worldwide for on-demand water has led to widespread over-allocation of existing supplies. Three of the world’s major rivers, the Nile, Colorado and Yellow, are now so heavily utilized that they often do not reach the sea⁷. Aquifers and other ground water sources are also being depleted – most notably in areas where water is most critically needed⁸. What’s more, as aquifer water levels drop, the quality of the remaining water can become compromised by natural substances – such as salt, arsenic and fluoride⁹ – that can harm crops.

While attempts have been made to manage water flow systems and aquifers, the knowledge to successfully counter a growing water crisis remains woefully insufficient, even in the world’s most developed regions. In Australia, for example, where water withdrawal is monitored through sophisticated accounting systems, engineers have not been able to prevent net losses in the country’s important Murray-Darling Basin¹⁰. Closer to home, the well known and heavily used Ogallala Aquifer in the Western United States faces inexorable rates of depletion¹¹. Urban effluent and desalination may add to fresh water supplies, but these efforts are expensive and the quantities produced are insignificant relative to demand, particularly in the context of agriculture¹².

Water and Food Production

Food production requires significant amounts of water, in some cases as much as 1,000 times the weight of food produced¹³. But that water is needed at specific points in the production cycle – too much or too little at any given time can be catastrophic. That delicate balance is often achieved through irrigation, which is vital to agriculture. China, where 70% of grain production depends on irrigation, exemplifies the emerging threat. Currently China is home to 21% of the world’s population, but only 6% of the fresh water, and its water resources are expected to drop 10% in the next 20 years¹⁴. But China isn’t alone. Almost half of all irrigated land in the world¹⁵ is located in Pakistan, India and China. As nations are beginning to become aware of the risks of restricted water supplies, aquifers and dams in rivers that cross political boundaries may represent significant sources of potential conflict¹⁶.

As water becomes an increasingly scare resource, its allocation will likely be based on the highest return from use. In most cases, the value of output per unit of water will be higher for a factory or energy producer than a food producer. As a result, agriculture’s claim on fresh water supplies will often be subordinate to that from industry, as well as from human consumption, sanitation, environmental and navigation needs. In other words, Los Angeles will get water for residents, at the expense of the farmers in the Central Valley.

Agriculture Opportunities

As these current global trends accelerate, we expect several significant shifts in farmland values over time.

1. Agricultural regions with adequate fresh water to grow food should experience greater demand for these products from consumers in water-stressed areas. Given its low value-to-weight and -volume ratios, food distribution may represent the most profitable way of transporting water (in some form) from regions with adequate supplies to those without.
2. Irrigated properties with a politically secure source of water should increase in value relative to water -deficient areas that are accessible to industry and urban populations.
3. Regions with adequate and reliable rainfall should experience an even greater increase in demand than irrigation-dependent regions.

Currently, water may not be fully priced into land valuations. This relative mispricing represents significant agriculture investment opportunities in areas where rainfall is frequent and predictable, and where there are no other claims on water. However, the calculus is not simple. When attempting to exploit disparities between water-constrained and water-abundant properties, it is critical to consider water from multiple perspectives – including historical sources, variability, quality and the potential for future access – as well as a variety of other variables. These factors will vary widely, not only between continents, but also within regions and even between individual properties. For example, in many locations, water rights may be determined by the political process, or subject to sharing arrangements with neighboring properties, or completely separated from the surface rights of the property.

¹ U.S. Geological Survey, Where is Earth’s Water Located?
² FAO, United Nations, Water News: water scarcity
³ Bloomberg, Peak Water: The Rise and Fall of Cheap, Clean H2O, February 6, 2012
⁴ United Nations, International Decade for Action “Water for Life” 2005 – 2015
⁵ National Geographic, Water: Our Thirsty World, April 2010
⁶ Financial Times, Earth Talks “in need of vision and direction”, April 24, 2012
⁷ Bloomberg, ibid
⁸ FAO, United Nations, Water Report: Climate change, water and food security
⁹ U.S. Geological Survey/FAO, United Nations ibid
¹⁰ FAO, United Nations, ibid
¹¹ USDA, NRCS, 2012 Ogallala Aquifer Initiative
¹² U.S. Geological Survey
¹³ United Nations, World Water Day 2012 and Farm Journal, January 2012
¹⁴ FAO, United Nations, ibid
¹⁵ FAO, United Nations, ibid
¹⁶ University of Nebraska, Cornhusker Economics, May 9, 2012

Mesirow Financial Agriculture Management (“MFAM”) is an investment management division of Mesirow Financial Holdings, Inc. MFAM serves as the investment advisor for limited partnerships. Partnerships, which MFAM serves as the investment manager, are only open to accredited investors. The information contained herein is intended for accredited clients and is for informational purposes only. This information has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. Any opinions expressed are subject to change without notice. It should not be assumed that any recommendations incorporated herein will be profitable or will equal past performance. Performance information that is provided gross of fees does not reflect the deduction of management and/or incentive fees. Client returns will be reduced by such fees and other expenses that may be incurred in the management of this account. Mesirow Financial does not render tax or legal advice. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy an interest in any Mesirow Financial investment vehicle(s). Any offer can only be made to accredited investors and through the appropriate Offering Memorandum. The Memorandum contains important information concerning risk factors and other material aspects of the investment and should be read carefully before an investment decision is made. This communication may contain privileged and/or confidential information. It is intended solely for the use of the addressee. If this information was received in error, you are strictly prohibited from disclosing, copying, distributing or using any of this information and are requested to contact the sender immediately and destroy the material in its entirety, whether electronic or hardcopy. Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that a strategy’s returns or volatility will be similar to the indexes. The strategy is compared to the indices because they are widely used performance benchmarks.

Mesirow Financial refers to Mesirow Financial Holdings, Inc. and its divisions, subsidiaries and affiliates. The Mesirow Financial Name and logo are registered service marks of Mesirow Financial Holdings, Inc. C 2012, Mesirow Financial Holdings, Inc. All rights reserved.

Tags: agricultural, Aquifers, Byproducts, Critical Input, Cubic Meters, Demand Water, Excess Demand, Food Production, Global Population, Global Water, Ground Water Sources, Human Existence, Industrialization, Investment Opportunities, Jon Brorson, Mckinsey, Population Growth, Strong Desire, Water Crisis, Water Demand, Water Scarcity
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Canadian Buys: Value Expert’s Trio

Friday, July 20th, 2012

by J. Royden Ward, editor Cabot Benjamin Graham Value Letter, via The Stock Advisors

I screened my Benjamin Graham Database to find Canadian companies with rapidly growing earnings and strong balance sheets.

I believe many outstanding buying opportunities exist. Here a look at three of our picks — in agriculture, energy and information services. Each offers excellent appreciation potential during the next six to 12 months.

The Canadian economy has performed much better than the U.S. economy during the past three years and better than many foreign economies.

Canada banks were not allowed to sell risky loans or buy unsafe investments. And the nation’s housing market remains solid, its economic growth continues to climb, and its debt remains low.

Based in Calgary, Agrium (AGU) is a leading producer, wholesaler and retailer of agricultural nutrients and industrial products in North and South America. Products include nitrogen, phosphate and potash fertilizers; herbicides, insecticides and fungicides; and seeds.

Nitrogen fertilizers account for 37% of Agrium’s wholesale business and are enjoying increased profits because of low natural gas prices. Demand is rising for crop protection products in North America, and potash exports to Brazil and China are increasing.

The semi-annual dividend was recently increased to $0.50 from $0.055 a year ago, and now provides a yield of 1.1%. After a slow year ahead, future earnings growth will be erratic but should average 12 to 15% per year. Buy below $100.51 or below. Our minimum sell price target is is $155.38

Based in Calgary, Suncor (SU) is focused on Alberta’s vast Athabasca oil sands, with complementary operations in re ning and marketing.

Suncor is spending heavily to ramp up its lucrative oil sands production in Canada. Proceeds from seven sales of various assets are being used to expand production and to pay down debt incurred in the 2010 purchase of Petro-Canada.

In addition to oil sands development, Suncor’s diversification includes drilling operations in the North Sea, Libya and Syria; refineries in Canada and the U.S.; and 1,500 gas stations throughout Canada.

At just 9.3 times my forward EPS estimate of $3.17, SU shares are clearly undervalued. The recently increased dividend provides a yield of 1.8%. SU is medium risk. Buy below $38 for a minimum sell price target of $58.63.

Domiciled in Toronto, Thomson Reuters (TRI) is a leading provider of information and technology to professionals and users in the fields of financial services, law, higher education and scientific research. About 90% of 2011 revenues were derived from electronically delivered products over the Internet.

Management’s restructuring plan is going well. More efficient operations, cost cuts and new accounting software will bring about accelerating earnings during the next couple of years.

Also, the company has divested its healthcare information segment, while three recent acquisitions have bolstered its offerings in the rapidly growing governance, risk and compliance fields.

At 13.4 times my forward 12-month EPS estimate of $2.18, Thomson Reuters shares are undervalued. The dividend yields a handsome 4.4% yield. TRI is low risk. Buy below $28.29. Our minimum sell price target is $37.02.

Learn more about this financial newsletter at J. Royden Ward’s Cabot Benjamin Graham Value Letter.

Tags: agricultural
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