Print this articleA while ago I wrote an article looking at ways to capitalise on the high food prices How to make Money from Higher Food Prices. We haven't really experienced much in the way of upside and to be honest I don't expect to see much for maybe another 6 months or so.
As I pointed out in the above article one of the drivers that I saw for investing in livestock was the rising cost of corn and feedstuffs.What is currently happening is that some farmers are selling or in some cases even slaughtering some of their herd because that cost them less than having to buy the feed to keep them alive.
While this slaughtering is going on I don't expect to see much of an increase in prices of Hogs or Cattle, after about 6 months or so of this slaughtering I think we will start to see a shortage of supply driving the market prices of livestock higher.
Until we see a realisation that the slaughtering is starting to create a shortage I don't see there being much short term movement to the upside, if however you are looking for a good longer term play on rising food prices I would still be considering the CATL ETF for Cattle and the HOG ETF for Live Hogs. It is certainly my opinion that they are a strong buy on any further weakness.
Best Wishes
Alan
Around the world, rising food prices have made basic staples like rice and corn unaffordable for many people, pushing the worlds poor in places such as Africa and Asia to breaking point. It is incredible listening to the news these days to hear the headlines about Global Food Shortages and riots in countries like Haiti and Mexico. We have become so used to the availability of food in our stores that it is sometimes easy to forget that for some people it is not just a case of heading to the nearest store to get food for their table.For some it is a matter of life and death to be able to get staple items such as wheat and rice.
It has become such a problem that some of the worlds governments have had to step in to try to protect the stock that they hold.Just yesterday India placed a ban on futures trading in several commodities, including soybean oil, chickpeas and potatoes.This was an attempt to preserve supplies and keep down the rampant inflation that is being caused by the increase in food prices.
In Asia the problem is just as acute with rice continuing to make new highs on world exchanges.The demand placed on the prices of rice due to the huge populations of China and India has seen it reach astronomical levels with the price more than doubling in the last year.
As well as the impact on populations desperate to feed themselves, we are seeing the impact on countries as farmers try to capitalise on the current high prices by seeking land wherever they can to grow the crops that are being demanded across the globe.
Until the end of the last century, soybeans were practically unknown in the Amazon basin. It was not until the grain terminal was built that soybean farmers came to the region from farther south. The land there was cheaper, the banks were offering low-interest loans and sales were guaranteed.
Villages, rubber plantations and grazing land for cattle were transformed into bean fields. The farmers cut enormous swathes into the rainforest, until environmentalists put a temporary stop to the unchecked rash of clearcutting. In Mato Grosso, the most important farming region, producers and environmental activists agreed on a two-year moratorium on the purchase of soybeans from the Amazon basin.
From the Río de la Plata to the Amazon, the Chinese are sucking the markets for soybeans dry. Large segments of the state of Mato Grosso are already covered with a green, pesticide-drenched monoculture. In the dry season between August and November, a cloud of smoke descends on Cuiabá, the capital of Mato Grosso. Despite a government ban, many farmers burn down sections of the rainforest to gain more farmland.
In Brazil we see huge swathes of land being used to grow Soybeans to satisfy the demand from China
.Brazil is one of China's major trading partners. Long-term contracts between the two countries are intended to secure raw materials for China -- and, more recently, food products in particular.
This rising world power, with its population of 1.3 billion, must take steps to ensure that it too does not become a victim of the Food Crisis .However it has a competitor on the horizon.India home to 1.1 billion people, has caught up with China in terms of the power it wields as a massive market. Together, the two Asian nations must feed more than a third of the world's population. In times of exploding food prices, their sheer size alone makes the crisis even worse.
It isn't difficult to imagine what happens to prices when the world's two most populous countries buy up other food products in a similarly aggressive fashion. In more and more dangerously poor countries, wheat and meat have become an almost unaffordable luxury, while famine and hunger riots are only likely to get worse.
Over the next few years I can only see these challenges becoming worse and prices continuing to rise.
In order to invest in these commodities we need to look once again at our favoured ETFs, I have a position in DBA the Powershares Agriculture Fund.You could also look at the AIGG Grains ETF (AIGC) or the individual ETFS for Soybeans (SOYB) or Wheat (WEAT).
There is likely to be volatility in these markets so I would not bethinking short term and I will place stop losses of around 20% on any positions that I have or buy in to. Over a 3-5 year period I think these holdings will do very well.
Best Wishes
Alan
On Tuesday I wrote a post about the prediction from a Goldman Sachs Analyst that Crude Oil could hit $200 a barrel, $200 Crude Oil-surely not ? today I want to spend a bit more time looking at some of the reasons why that is not a crazy prediction and may even be on the low side.
The world’s known supply of crude oil has decreased by about 13% since 2001 It was estimated that the total world supply of Crude Oil was around 2 trillion barrels. We have already used around half that in about 150 years. As the planet’s supply of oil slips below one trillion barrels, and America’s pile of liabilities soars above 54 trillion dollars, crazy things might start to happen – crazy things like $200 oil.
But crude oil is not the only natural resource that is depleting and/or in short supply. And the U.S. dollar is not the only currency on fertility drugs. So a forward-looking investor could expect to see the prices of most major commodities rise in terms of most major currencies. But this simple conclusion is easy to miss when most of the relevant data points contain nine to twelve zeros.
Most of us have some vague idea that one trillion is the number that lies somewhere north of one billion ,beyond that, we have no clue. So how much is one trillion anyway?
• 1 trillion seconds = 31,546 years.
• 1 trillion dollar bills placed end to end would reach 96.9 million miles, far enough to reach the Sun.
• The average new car costs $28,400. $1 trillion would buy more than 35 million cars.
• The entire Federal budget is $2.8 trillion. A stack of that many dollar bills would circle the Earth more than 7 times.
• Gross Federal debt is more than $8.7 trillion, which would make a stack of dollar bills that would reach from the Earth to the Moon and back with some to spare.
• $8.7 trillion in one-dollar bills would cover an area larger than each U.S. state except for Alaska and Texas.”
But there is something else at play that doesn't help the situation-the weakening of the US dollar which helps pay off the US debt but it also has some undesirable results in the form of $1000 gold and $120 crude oil.
In other words, the skyrocketing oil price is as much a monetary phenomenon as a geophysical one. Paper currencies and debts proliferate rapidly. Natural resources do not. That’s why the prices of natural resources like crude oil MUST increase over time. And that’s why you should listen to that little voice inside your head when it tells you: “$200 crude oil may be crazy, but not nearly as crazy as the size of the US Deficit.”
We are running out of Natural Resources there is no doubt, it is unlikely that we will see them completely depleted in most of my readers lifetimes,however if the Dollar continues lower (or is allowed to weaken to cover up for poor fiscal policies) then it will accelerate the incessant rise of these Natural Resources.Since the vast majority of Natural Resources are paid for in Dollars it stand to reason that as the resources become scarcer and the dollar becomes worth less that suppliers will be demanding more of them for whatever it is they have to sell.
Best Wishes
Alan
I am sure we have all been following the rise of gold in the last 6 months or so peaking at just over $1000 per oz.Gold has now worked its way back down and is sitting today just shy of $870.There could be many reasons for this including the whispers about concerted Central Banks efforts to push the price down. One thing that stands out though is that even when Gold shot up to over $1000 the Gold Producers didn't follow along
America's largest gold producer, Newmont Mining (NEM), announced its first-quarter earnings towards the end of April. The company's revenue was 60% higher than the same quarter last year. Its average selling price for Gold was $933 per ounce during the quarter, up 40% from the same time in 2007. Unbelievably Newmont's share price fell !!
This seems to be common across the industry currently... and I think it just might be fantastic opportunity to get into these stocks.Gold prices have doubled since April 2005 to today. However the share prices of major gold producers have hardly moved. Newmont Mining's shares rose only 6% over the same period.
Usually Gold Producers shares perform even better than Gold... meaning that if gold doubles in price, gold stocks often quadruple in price. It all comes down to the "leverage effect"...
If a Gold Company can mine gold for $200 an ounce and sell that gold for $300 an ounce, it makes a profit of $100 an ounce. However, if the gold price jumps to $500 an ounce, the profit per ounce increases from $100 to $300... Now let's say the price of gold really gets rocking, increasing $800 an ounce profits increase dramatically. You would therefore expect that the share price would respond in expectation of these profits .However, it hasn't quite worked out that way in the past few years. Due to the soaring costs of fuel, equipment, and upgrading facilities, the costs to mine gold have risen nearly as much as the gold itself!
On May 1, 2006, the AMEX Gold Bugs index (HUI), which tracks the big gold mining companies, closed at 380. Today it closed at 407. The index has hardly moved during a period in which gold gained more than 30%. But I think the news from Newmont is the latest sign that gold miners are 
now really starting to rake in the cash. Newmont's quarterly profit rose 444% over the first quarter of 2007. The elevated gold price is finally kicking in. And the situation is the same with other big miners, including Barrick and Goldcorp... But like Newmont, these stocks are sitting dormant right now.
If you don't have exposure to gold stocks yet, now is the time to get some. I think we are still in a raging bull market for gold and that the current prices for the Gold stocks are way off where they should be if that is true.
Best Wishes
Alan
It wasn't that long ago that Goldman Sachs printed the "crazy prediction that Crude oil would reach over $100 a barrel .well they are at it again and who would dare doubt them this time. The story below from Bloomberg quotes the analyst behind that earlier prediction Arjun Murti as saying that within two years we could be seeing oil hitting between $150 and $200 a barrel. I wrote about Peak Oil and its impact in this article Has Oil Peaked ?
Based on this prediction it most definitely looks like there is a growing acceptance(unless you are a Politician or in Saudi Arabia) that we may actually be running out of oil. If this prediction comes true (like the last one did) then it really will have some ramifications for the world economy and possibly also stability.
May 6 (Bloomberg) -- Crude oil may rise to between $150 and $200 a barrel within two years as growth in supply fails to keep pace with increased demand from developing nations, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a report.
The price of crude traded in New York averaged $56.71 in 2005, $66.23 in 2006 and $72.36 in 2007. Oil rose to an intraday record $120.93 today on speculation demand will rise during the peak U.S. summer driving season.
``The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,'' the Goldman analysts wrote in the report dated May 5.
A report yesterday showed U.S. service industries expanded in April, signaling higher energy use. The Institute for Supply Management said its index of non-manufacturing businesses, which make up almost 90 percent of the economy, grew for the first time since December. China is increasing refining capacity and boosting imports to meet rising demand for the Olympic Games.
U.S. gasoline demand typically climbs going into the summer season when Americans take to the highways for vacations. The peak-consumption period lasts from the Memorial Day weekend in late May to Labor Day in early September. Monthly fuel sales were the highest during August in five of the last six years, according to data from the Department of Energy.
China Consumption
China, the world's fastest-growing major economy, has more than doubled oil use since New York crude oil dropped to this decade's low of $16.70 a barrel on Nov. 19, 2001. Record prices have failed to stem rising consumption in developing nations, with demand led by China, India and the Middle East.
Price forecasts for spot U.S. benchmark West Texas Intermediate crude oil for 2008 to 2011 were revised higher by Goldman. The 2008 price estimate was raised to $108 a barrel from $96, the 2009 forecast to $110 from $105, and 2010 to 2011 estimates are projected at $120 from $110, the analysts said, citing slowing supply growth in Mexico and Russia, and low spare production capacity in OPEC.
Oil has also rallied amid a dispute between the U.S. and Iran regarding the Persian Gulf oil producer's plan to develop nuclear energy.
In Nigeria, Africa's biggest oil exporter, militants have attacked oil installations and kidnapped workers since the beginning of 2006, forcing Royal Dutch Shell Plc to halt output.
Venezuela Slump
In Venezuela, production has slumped to about 2.34 million barrels a day from almost 3 million barrels a day in 2002, according to Bloomberg's estimates, before President Hugo Chavez fired almost 20,000 workers who had closed the state oil company in an attempt to overthrow the government.
Iraq's oil production has yet to reach levels attained before the U.S.-led invasion of 2003 as the country struggles with sectarian fighting and attacks on its energy infrastructure.
Mexico's production has fallen below 3 million barrels a day since October as Petroleos Mexicanos, the state-owned oil company, failed to compensate for a 30 percent drop at Cantarell, its largest field, which accounts for 40 percent of output.
``There are supply constraints with many producers, especially from non-OPEC struggling to find new reserves and China and Middle East demand keeps growing,'' said Victor Shum, senior principal at energy consultant Purvin & Gertz Inc. in Singapore. ``The fundamentals are prompting investors to get into oil in a big way and all that points to higher prices.''
OPEC Capacity
Spare production capacity of the Organization of Petroleum Exporting Countries is low and the group's exports may fall because of ``lackluster'' supply growth and rising domestic consumption in member countries, the Goldman analysts said.
``Non-OPEC supply is struggling to grow, with notable declines being seen in Mexico and Russia showing signs of rolling over following an extended period of rapid growth,'' said the analysts from Goldman, the world's biggest securities firm by market value.
Prices are also poised to gain as major oil-exporting countries restrict foreign investments, limiting supply growth, while demand from developing countries, or ``non-OECD'' nations is rising on economic expansion and power shortages, prompting higher demand for gasoil and fuel oil, the Goldman analysts said.
Crude oil for June delivery was trading at $120.47 a barrel, up 50 cents, at 8:42 a.m. in London in after-hours trading on the New York Mercantile Exchange. Yesterday, futures closed 3.1 percent up at $119.97 a barrel, the highest closing price since trading began in 1983.
`Super-Spike'
``The core of our super-spike view has been that a lack of adequate supply growth coupled with price-insulated non-OECD demand growth'' is leading to higher prices, the analysts said. That could result in a ``sharp correction in oil demand,'' the Goldman analysts said.
Crude oil's increase above $100 a barrel was partly because of the dollar's decline against the euro, which boosted oil prices because it made commodities cheaper for buyers outside the U.S. and attracted investors as a hedge against inflation. Oil in New York touched $100 a barrel on Jan. 2.
The U.S. currency has declined 5.4 percent against the euro so far this year, and 11 percent last year.
Members of OPEC, which supplies about 40 percent of the world's oil, have said supplies are adequate and blamed speculators for pushing prices up to records. The producer group won't consider raising output before it meets in September as the market is well supplied, Qatari Oil Minister Abdullah al-Attiyah said on May 2.
There's a fundamental misperception that so-called speculators are driving prices to unjustified levels, the Goldman analysts said. ``Unfortunately, we do not think the energy crisis will be solved by finding and punishing the big bad speculator.''
Commodity investors, the Goldman analysts wrote, are ``helping to solve the energy crisis'' by speeding up the process for oil companies to spend more on energy projects and at the same time encourage efficiency.
As if most people are not struggling enough with the increases in Gas and Food prices which I wrote about here (Higher Food Prices) but the latest blow comes in the form of increases from the utility companies to the price of your electricity.
In a recent article the Associated Press writes "NEW YORK (AP) — "Consumers struggling with high gas prices, rising food costs and falling home values have something new to worry about: Sharply rising electricity rates due to a surge in coal prices over the past year."
As the article highlights the increase in the price of coal has meant that there have been hikes by the utility companies in the price of Electricity to the end user.One of the main reasons for the increase in coal prices is the demand from emerging countries(yes China again !!)
for coal to fire their increased demand for Steel.
U.S. coal exports jumped 19.2 percent last year, according to the Energy Department, and are expected to rise another 15 percent this year.
"As more of the world develops and uses more energy, and supply tries to keep up with demand, we're going to have these pinch points," said Carol Pfeiffer, director of fuels for the U.S. for utility giant E.On AG.
Coking coal is the type of coal used in steelmaking. Demand from steelmakers is driving prices higher. In fact, many steelmakers, including the world's second-largest producer (Nippon Steel), recently agreed to pay triple what they previously paid for coking coal.
The chart above shows the price of coal over the last five and a half years up an 450%.The above index doesn't contain any U.S. coal – it's 60% South African, 30% Colombian, and 10% Australian. But the market for coal, like oil, is global. When the price of foreign coal spikes, the U.S. exports more of its coal... resulting in higher U.S. prices.There are a limited number of ways to bet on the price of coal but you can do it mainly through coal stocks... but they are expensive right now.A few of the big names are Peabody (BTU), Consol (CNX), Massey (MEE), and Arch (ACI).
My favourite play would probably be buy a basket of coal producers with the Market Vectors Coal ETF (KOL).Currently prices are high and I would wait for a pullback maybe to around the $43 dollar level at support before considering a purchase. There is no doubt that high energy costs are here to stay whether the cost of our gas in the tank or the price of our electricity one way to mitigate the impact is by buying the companies an sectors that will benefit from us paying them more.
Best Wishes
Alan
I was working recently in Lisbon in Portugal and was talking to some of the locals about the weather,being from Scotland I was looking forward to some of the Lisbon sunshine and warm temperatures.Unfortunately for the three days that I was there the weather was similar to my native Glasgow- wet and windy. The locals had commented that they had a lot of rain so far this year but not enough to make an impact on water prices.
Now being from Scotland as I mentioned it is strange to me that people pay for water usage-in Scotland we pay a local tax for sewerage and treatment facilities but not the amount of water that we use.What struck me as I thought about it was the wastage that there is in countries like Scotland compared to other countries in the world where water is a much scarcer commodity. Loch Katrine which supplies most of Glasgow's water has a capacity of approx 64.6 million litres and is regularly topped up by the Scottish Weather. 
Listening to my colleagues in Lisbon I realised that we could do a lot more such as not having the tap running constantly when brushing our teeth and not using running hot water to do dishes .These practices are fairy common in Scotland but in other parts of the world would be considered crazy and wasteful. We are in the privileged position in Scotland( but not all of the UK where some areas do suffer from droughts and water restrictions) of not having to worry about a plentiful supply of clean water.In the rest of the world it is a very different story. The world's immediate need for fresh water remains paramount.
Loch Katrine: Scotland
In China, for example, two out of every three major cities have less water than they need. Cities in northeast China have roughly six years left before they run completely dry.
A recent report on the water situation in China says up to 300 million people are drinking contaminated water every day, and 190 million are suffering from water related illnesses each year. If air pollution is not controlled, it says, there will be 600,000 premature deaths in urban areas and 20m cases of respiratory illness a year within 15 years.One third of the length of all China's rivers are now "highly polluted" as are 75% of its major lakes and 25% of all its coastal waters. Nearly 30,000 children die from diarrhoea due to polluted water each year
Although China is the world's fourth largest economy, growing 10% a year and closing rapidly on the US, Japan and Germany, its environmental standards are often closer to those in some of the poorest countries in the world, says the report. More than 17,000 towns have no sewage works at all and the human waste from nearly one billion people is barely collected or treated. Nearly 70% of the rural population has no access to safe sanitation.
"A majority of the water flowing through China's urban areas is unsuitable for drinking or fishing. Some 300 million people drink contaminated water on a daily basis," says the report.
Although China has tried to improve its air quality, it has not invested enough to keep up with the flood of people to its cities, many of which have some of the worst pollution in the world. The burning of more than 2bn tonnes of the dirtiest coal a year is costing the economy the equivalent of 3-7% of GDP (£8-15bn a year), according to the report. While no specific figure is given for the overall cost of China's pollution, in 2004 it was thought to be in the region of £32bn.
Songhua River in Harbin China
The report estimates that 27% of the landmass of the country is now becoming desertified. Much of the country already suffers from water shortages, but the Chinese Academy of Sciences expects water demand to increase by nearly 50% in the next 40 years. Industry's share of this is expected to grow from 16% to 41%.
Low environmental standards are now making people wary of buying Chinese goods, said Lorents Lorentsen, OECD's environmental director in Beijing yesterday. "If you have a reputation for being a polluted country, then you have a bad trademark abroad. It's very hard to sell pharmaceuticals, to sell food and feed from a country that has a reputation for being polluted," he said.
A lot of westerners, however, take water for granted. We simply turn on the tap and it flows. But that's certainly not the case the world over. And from they way things are looking, that may not be the case here much longer. Lakes around the U.S. are running dry. In the West, we see this happening at Lake Mead. In the East, it's Lake Lanier.
While it may not be traded in Chicago, water is a commodity. When scarce, it's the one commodity even more valuable than oil or gold.So when Big Oil starts pouring money into water rights and alternative energy, we want to pay special attention. We tend to believe that water rights will be valued in this century much as oil rights were in the last.
Companies that invest in cleaning up water I believe will do well in the years to come as the world realises that it has to do more to ensure clean drinking water for all.Countries like China are a huge market for these companies.
One of my favourite stocks in this area is Veoila Environment (NYSE:VE) they are a a world leader in environmental services and stand to do well out of the shortage of clean water in the future.
We can see from the chart that the trend is most definitely up but there has been a pullback since the beginning of the year which may present a good buying opportunity.
Best Wishes
Alan
For a long time now we have been exposed to the US President ,Treasury Secretary and various Senators talking about the benefits of a strong Dollar and how that is in the interests of America.This is really all just political rhetoric the reality is somewhat different . 
In its current situation the last thing that the US needs or wants is a strong dollar- but unfortunately it just isn't politically the right thing to say.So why is a weak dollar good for America ?
Well if anyone has been to the US recently or if you are indeed a US citizen you cannot fail to have noticed the increased prevalence of foreign accents that seem to be in every restaurant or store.It seems that America is on sale and the rest of the world is buying. Since 2002 the dollar is down about 25% and the rest of the world is taking advantage .Not only do they flock in their droves to the US to spend their money but it is good for exporters as well who find that demand for their goods increases the more the dollar weakens.
Tourism is a huge industry for the US but not only for attracting foreigners to its shores but as the dollar weakens and it becomes more expensive to go abroad more and more Americans are opting for Disneyland Florida and not Disneyland Paris. Not only does the weaker dollar make it more attractive to vacation there but it also makes it far more attractive for foreign investors -whether it is the huge cash piles of some of the Far East and Middle Eastern Sovereign Wealth funds or someone looking for a US holiday or retirement home
Foreign ventures put $407 billion to work in the U.S. in 2007. That was a 93% increase over 2006. The Chinese, in particular, were an active bunch. Chinese investment soared from only $66 million in 2006 to $9.6 billion last year.American assets should attract even more foreign buyers this year. The Chinese are eyeing American timberlands, for example. American farmland, mines and other hard assets must also seem cheap.The weak dollar affects things in a couple of ways. On the one hand, it makes imports more expensive. So far, a weak dollar has not stopped imports from growing nationally, though it has slowed the pace. On the other hand, the weak dollar has really benefited America's export engine as I indicated above.
Exports grew twice as fast as imports in 2007. For the first time since 1995, the gap between the two narrowed. America's commodity producers get a lot of help when the dollar falls. They incur their costs in dollars. Yet they sell into the global market for metals, minerals and other commodities. Global prices are all near multiyear highs, thanks in some measure to the weak purchasing power of the dollar.
America's manufacturers - what's left of them - also gain. Strong demand from overseas drives their sales. Suddenly, America's goods look cheap. "Foreign demand for advanced machinery is huge," reports The Economist. "Civilian aircraft, drilling tools, agricultural machinery and excavators all rose at double-digit rates in 2007."
So in terms of investment opportunities we should be thinking about companies that export a lot of their goods overseas and possibly those in the Hospitality and tourist industries. So no matter what Hank Paulson and his cronies trot out at each press conference the weaker the US dollar gets the more likely they are to be able to find a way out of their current situation and to reduce the Current Account deficit.
Best Wishes
Alan
It is well known that the worlds developed nations are increasingly struggling with the Health Crisis caused by Obesity. Type II Diabetes is on the rise and is increasingly being seen in younger and younger patients. Previously a disease of middle age ,it is not uncommon to see cases now in teenagers in the US and the UK.
It seems now though that this epidemic is spreading its wings beyond the UK and US and is going Global
The World Health Organisation projects that 2.3 billion people will be overweight by 2015 and a
further 700 million will be obese – a staggering 45% and 75% increase from current levels.
What is the main underlying cause of this problem ? Well for the most part, it’s poor lifestyle. As developing economies grow rapidly, more and more people around the world are becoming richer and leading more urban lifestyles. That generally means eating more and doing less physical work compared with an agrarian lifestyle. In addition, stressed and harassed workers spending more and more time at work or their desks are increasingly defaulting to processed and prepacked food which is generally less good for you than freshly prepared meals.Longevity is another factor, as we get older and live longer more sedentary lives after retiring from work we can expect obesity levels to rise further.
According to the International Obesity Task Force, the percentage of overweight and obese children in England has more than tripled since the mid-1980s to around 25%. As research suggests that around 70% of overweight children go on to become overweight adults, this is clearly storing up problems for the future.
The Rand Corporation, a US think-tank, estimates that if current trends continue, obesity could account for 20% of US healthcare costs by 2020. Of course, where there’s a problem, there’s someone trying to solve it – and that means investment opportunities.Given today’s tendency to try to solve problems by popping pills, the most promising way to make money from our expanding waistlines is via the pharmaceutical sector.
A drug that can melt off the pounds is a holy grail for the pharmaceutical industry and several firms are trying to develop one. Two are already available – Roche/GSK’s Xenical and Abbott’s Meridia – but both have unpleasant side effects. Sanofi-Aventis had high hopes for Acomplia, but last year withdrew its application to market the drug in the US for weight-loss purposes after suggestions of increased suicide risks.
So we are possibly some way away from a safe well tolerated "Fat Busting Pill" there is also debate as to whether the financial pressures on the Worlds Healthcare systems will allow for funding to be generally available to pay for drugs that treat what can be a preventable disease .
Currently some of the best ways to play this trend is via the companies that treat diabetes. There are three or four companies that are well established in the market and would warrant further investigation, there are also one or two higher risk/reward plays that might be worth looking at if you are less risk averse
One established play is Denmark’s Novo Nordisk (US: NVO) around three quarters of its revenues are from the $21bn diabetes-care market.It isn’t the cheapest pharmaceutical stock on the market, but offers a record of strong growth and high-quality management.
A shift towards higher-margin treatments, such as insulin substitutes, growth hormones and blood-clotting drugs is paying off, and double-digit profit growth should be sustainable – as long as new drug Liraglutide, which stimulates insulin production, performs well against a long-acting version of Eli Lilly’s Byetta.
Riskier, but with the potential for far higher rewards is Arena Pharmaceuticals (US: ARNA) one of many firms trying to develop that blockbuster weight-loss drug. Its drug, Lorcaserin, stimulates a protein in the brain that makes people feel full – the same approach used by a previous drug called Fen-phen, developed by Wyeth. Fen-phen was withdrawn in 1997 after causing heart-valve damage in some patients, but the latest trials suggest that Lorcaserin will not cause the same problem. Further studies are continuing, but if all goes well, Arena plans to seek US regulatory approval in 2009.
If it comes to market the analysts view is that it will likely be a $1 billion drug and will make a real difference to the bottom line for Arena which currently has no products on the market
For those who are looking for a more steady and possibly safer play then you may want to look at GlaxoSmithkline (GSK).Over the last year they have had a real rough ride with their Diabetes drug Avandia after an article indicating it could cause cardiovascular problems . This resulted in a number of patents being switched to their rival Takeda's drug Actos.
Recent indications have been that the loss of prescriptions has slowed and may be reversing, Takeda are a lot smaller than their UK rival and they cannot match GSK in terms of Investment or resource so may find it increasingly difficult to hold off a sustained marketing onslaught from GSK.
Best Wishes
Alan
A recent poll in Barron’s suggested that amongst its readers the most hated asset class (not surprisingly) was real estate investments and the most loved class was Latin American stocks so most of us would think that the right trade is to buy Latin stocks and sell real estate stocks.
Funny, then, that real estate stocks are now the best-performing sector this year... Simon Property Group – the benchmark real estate stock – is up more than 20% year-to-date.
Meanwhile, the Latin American Discovery Fund (LDF) a collection of South American blue chips, is down for the year.
How does this work ??
Quite simple really when everyone is bearish then there are little or no sellers available as everyone of any size has got out of the markets previously.When there is no one selling then the price stops going down-simple really !!
So as an example : In the second week of March Simon Property Group (SPG) traded for around $86. Now – just six weeks later – it's at $105.
Conversely the Latin American Discovery Fund peaked at the end of April and has treaded water ever since... Why hasn't it gone up? For the opposite reason -there's nobody left to buy – Everyone who wanted to be invested in Latin America had already bought.
You have to wait for the extremes in sentiment. The old saying is, "The crowd is wrong at the extremes, and right in between."
If we look at the Barrons poll... Only 3.6% of investors are bullish on 10-year Treasury bonds. So nearly everyone believes long-term interest rates are going up.
Currently Long term Interest Rates are less than 4% so most pople (based on theri past experiences thinks they are unlikely to go any lower. Lets cast our eyes over to the Far East, in 1990 Japan's Interest rates were about 7% when the property market crashed the rates fell to below 1% . Today they are still only 1.5%
All the talk is about the potential for inflation... and everyone expects interest rates to head higher. however it is entirely possible that long-term interest rates could surprise us all and head lower. Already, interest rates on 10-year Treasuries have fallen from more than 5% in the summer of 2006 to below 4% now.
If you want to follow the crowd , bet against real estate stocks and bet that interest rates will head higher. But if you are a contrarian then to get extraordinary" returns, you must be willing to do something extraordinary.
I am buying the IShares Home Construction Index (ITB) I don't expect it to move up overnight but I think over 6 months it will be a good call.
Best Wishes
Alan
A little while back I looked at whether you should buy Starbucks or the Coffee ETF-Should I buy Coffee or Starbucks ?
My conclusion was that I thought Coffee would go higher and that as I favour for most commodity related stocks I prefer (if you can to buy the Commodity as there are a number of factors that can negatively impact on a stock that are not related to supply and demand. That proved to be a fairly good call as Starbucks unveiled weaker-than-expected estimates for its fiscal second quarter and year--sending shares down a whopping ten percent last Thursday.
Like a lot of successful companies Starbucks in a bid to grow started to expand and diversify away from its core business-selling coffee.
Starbucks CEO Howard Schultz is trying to get Starbucks focused on coffee--which means the entertainment business it's been building up over the past four years is now due to be pared down.
After the market close last week, the company announced it will no longer be managing its Hear Music record label, which launched just over a year ago with Paul McCartney on board.
Schultz is also shaking up the entertainment division's management -- Ken Lombard, an SVP and president of Starbucks Entertainment "has left the company," which usually means code for "pushed out." Now the division will be run by Chris Bruzzo, Starbucks' Chief Technology Officer, indicating the division the direction is moving towards-- digital downloads, and away from old fashioned CD sales.
Last year Starbucks made a deal to offer access to Apple's iTunes music store, in 600 plus of its stores through WiFi networks, and just last week it announced that it'll be handing out cards to allow customers to access songs and music videos online-- for free.
Starbucks isn't getting rid of this division. It just doesn't want to be in the business of producing music. It'll keep selling music in stores, though it's unclear if the company will change the style or variety of music it sells. The company is trying to learn from its mistakes. It has no more plans to market movies again as the two films it promoted in-store had quite disappointing box office performance, so there doesn't seem to be incentive on either end.
But Starbucks will continue selling books in stores and working with William Morris Agency to find projects they think will sell. And Starbucks is powerful in the publishing industry--almost like when Oprah picks a book, getting chosen to be sold by Starbucks register almost always guarantees that a book becomes a best-seller.
AS I said in my previous posts my personal preference is for Coffee itself and I am looking for an opportune time to buy the Coffee ETF (COFF) which is building a nice base at the moment around the $3.15-$3.20 area.
Best Wishes
Alan
For a while there have been a substantial number of ETF's that track the major currencies around the world. These give investors the opportunity to be able to position themselves based on Global Macro Economic views.Over the past few years you would have dine very well being invested in the higher yielding "Commodity based Currencies such as the Australian Dollar.
What Are They?
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Currency ETFs (exchange-traded funds) track a singe foreign currency or basket of currencies by using foreign cash deposits or futures contracts. For the ETFs that use futures, excess cash is usually invested in high quality bonds, typically US Treasury bonds. The management fee is deducted from the interest earned on the bonds.
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Currency ETNs (exchange traded notes) are non-interest paying debt instruments whose price fluctuates (by contractual commitment) with an underlying currency exchange rate. Because they are debt obligations, ETNs are subject to the solvency of the issuer.
It is also a useful way to hedge a portfolio if you are heavily invested in a currency that is not your home currency. It means you can reduce the currency based risk when you repatriate your funds back to your home bank account.
Over the past few years I have suffered as a UK investor with a substantial number of positions in the US dollar. To my knowledge there are no US brokers that will allow you to hold your funds in any other currency beside US dollars.That is not too major an issue if you are a US investor or plan to retire there or make any major purchases in US dollars.
However if you are based outside the US then it can turn a good portfolio performance in to a poor one or even a loss when you try to bring your funds back to your own Country.
Using Currency ETF's can help manage this risk-in the last little while there has been an increasing number of these ETF's launched and I have listed them below
Australian Dollar
CurrencyShares Australian Dollar Trust (FXA)
ELEMENTS Australian Dollar (ADE)British Pound
CurrencyShares British Pound Sterling Trust (FXB)
ELEMENTS British Pound (EGB)
iPath GBP/USD Exchange Rate ETN (GBB)Canadian Dollar
CurrencyShares Canadian Dollar Trust (FXC)
ELEMENTS Canadian Dollar (CUD)Chinese Renminbi
Market Vectors - Chinese Renminbi/USD ETN (CNY)Euro
CurrencyShares Euro Trust (FXE)
ELEMENTS Euro (ERE)
iPath EUR/USD Exchange Rate ETN (ERO)Indian Rupee
Market Vectors - Indian Rupee/USD ETN (INR)Japanese Yen
CurrencyShares Japanese Yen Trust (FXY)
iPath JPY/USD Exchange Rate ETN (JYN)Mexican Peso
CurrencyShares Mexican Peso Trust (FXM)Swedish Krona
CurrencyShares Swedish Krona Trust (FXS)Swiss Franc
CurrencyShares Swiss Franc Trust (FXF)
ELEMENTS Swiss Franc (SZE)
Recently there have been two new exotic additions to the Currency ETF/ETN portfolio's namely an ETN that tracks the Indian Rupee and and ETN that tracks the Chinese Yuan.
Since it is not easy to directly invest in either of those currencies then the ETN may be a good way to go if you wish to get in early particularly on the Chinese Yuan which most people are thinking about going long on with the expectations of the continued revaluation against the US Dollar in the years to come.
Best Wishes
Alan
Some of you may know that I am Scottish and still live in Scotland which is why today's post is of particular interest and relevance to me. It is not often that Scotland gets a mention in terms of the Global Economy but today we have been all over the news.
The reason for this is that oil workers at the Grangemouth oil refinery in Scotland 
are going on a two day strike starting on Sunday. The dispute is not about pay so much as pensions. The Wall Street Journal reports
It reminds me of when I was much younger and the last time that Labour was in power in the UK-we had the so called "Winter of Discontent" and the Miners and Dustbin Men Strikes.
“It was the decade of strikes, electricity shortages and piles of rotting rubbish on the street,” recalls a BBC report.
I was fairly young at the time but I can remember fairly frequent power cuts and problems getting coal for the fire we used to heat my parents Central heating System.It was also the time when arguably one of the UK's most militant Union Leaders
Arthur Scargill head of the National Union of Mineworkers came to prominence.
Then in ‘73 the oil crisis broke. Arab OPEC members were outraged at the West’s support for Israel in the Yom Kippur war . They ceased shipments of oil to the US and Western Europe. At the same time all of OPEC decided to increase its prices following earlier failed negotiations with the “seven sisters” – the seven biggest Western oil companies at the time.
The result of this action was a damaging blow to the heart of the oil-dependent industrialised world. The price of crude went up fourfold (to $12!) and sent Britain’s already troubled economy into a tailspin. Growth stalled and inflation rose from 5% in 1970 to a high of almost 27% by August 1975. From a low of 5% in 1971, interest rates soon rose into double digits and hit 15% by 1976.
It is spookily similar to what we are seeing today history may not exactly repeat itself, but today oil’s and food prices have been shooting up and workers industrial action is once again making the news.
The question I guess is why is some relatively small refinery in Scotland making the news anyway? Well it is the receiving end of the major artery in the North Sea oil pipeline network. An artery that stretches from Grangemouth, south of Edinburgh, at one end to the Forties oil field over 200 miles away out in the North Sea at the other.
This pipeline transports crude from around 70 oil fields in the North Sea, amounting to over 40% of the UK’s entire crude production . It means BP -(BP-LSE) may have to close the pipe, with costing approx £50m per day ,the strike may only be for two days but it will take a week to boot up the refinery again afterwards.
So after more than three decades, with another Labour Government in power oil prices are high, food prices are going up and now, strikes are back. In the ‘70s the food/fuel double whammy led to stagflation . Deflation in the housing market forces consumers to tighten their belts and their resultant lower spending crimps growth.
So not only does it look like the UK is heading down the path of the US but the Global oil situation that I discussed in an earlier post this week- Has Oil Peaked ? is of severe enough dimensions that a 2 day strike in a refinery in the East Coast of Scotland merits Global headlines on the likes of Bloomberg- U.K. Braces for Fuel Cuts and CNBC Pipeline Strike
Break out the Candles-there may be trouble ahead !!
Best Wishes
Alan
Interestingly after my post earlier this week (Investing in Brazil) this appeared on CNBC yesterday-just goes to show reading this blog keeps you ahead of the Crowd :-)
Brazil's Booming Economy Drawing More Investors - Markets * US * News * Story - CNBC.com
It further reinforces my view that Brazil is a worthwhile longer term opportunity to consider for your portfolio.
Best Wishes
Alan
A lot of you will be familiar with the Peak Oil theory -for those who are not then you can read more about it here-Peak Oil. Oil reached more or less $120 a barrel recently but today backed off and was at one point down $4.
A recent Reuters report quoting Saudi's King Abdullah did not seem to be reported much but could have big implications for the Peak Oil story and Oil prices in general it said:
Saudi Arabia's King Abdullah said he had ordered some new oil discoveries left untapped to preserve oil wealth in the world's top exporter for future generations?
"When there were some new finds, I told them, 'no, leave it in the ground, with grace from god, our children need it'," King Abdullah said?
Saudi production capacity stands at around 11.3 million bpd, and is scheduled to rise to 12.5 million bpd next year
Al-Shaybah oil field, southeastern Saudi Arabia
If , as you could interpret by these comments there may be a reduction in available oil to the world from the Saudi's in years to come then this could have major global macro economic ramifications.
Currently the US relies heavily on Middle Eastern Oil and this has been reasoned as one of the major drivers of the conflicts in that area, namely control of Oil supplies or at least ensuring they do not fall into the hands of states that the US may find difficulty dealing with.
Whatever the reasons for any conflicts ion the Middle East it has been well documented that the US is keen to reduce its reliance on Oil from the Gulf.So where can it go to get alternative supplies?
We are all aware of the claims being made on the Arctic and Antarctic driven a lot by the belief of huge reserves in these areas, Alaska is another area where there is the potential for some large finds.Politically though these areas are going to come up against a lot of resistance from the Conservationist lobby's and there could easily be a lot of the NIMBY (not in my backyard) fraternity unhappy as well.
A less problematic solution particularly with the price of Oil at $115-$120 a barrel is the Tar Sands of Canada.
The most talked about of these is in the country's Alberta region.Over the past few years, companies like Suncor, Canadian Oil Sands Trust, and Western Oil Sands have all shot up more than 1,000% by literally extracting valuable crude oil from the province's sandy Northern terrain.Alberta was the first province to set up a regulatory framework and workforce infrastructure. Today, nearly two-dozen companies have a stake in Alberta's oil sands.
However there's a region of Canada that geologists believe holds even richer oil deposits than Alberta.
In fact, it's the province right next to Alberta... Saskatchewan.
- The Saskatoon StarPhoenix reports, the "Saskatchewan side of the oil sands formation could lead to a long-term economic bonanza for this Province."
- The National Post writes, the "bitumen find in Saskatchewan could spawn a new industry."
- The Regina Leader-Post writes, "Although the Alberta oil sands tend to get most of the publicity, the oil sands in Saskatchewan contain ‘significant world class deposits' that are of ‘top quality.'"
How much oil is in Saskatchewan?
Preliminary estimates are 60 BILLION barrels of oil.
Thing is, less than 5% of Saskatchewan's oil property has been fully explored! So there could potentially be even more undiscovered oil!
For more than 40 years Saskatchewan has sat idle—untapped—chock-full of rich oil sands because the Saskatchewan government had refused the necessary permits to allow exploration
Recently the Saskatchewan government finally granted access to this region.Without a doubt the Canadian Oil Sands would solve a lot of the issues facing the US
Canada is sitting on a huge oil reserve with a "no risk" transport route to the world's largest consumer. Currently with Oil priced as it is then extraction is a worthwhile exercise compared to when Oil was at $50 a barrel.
I believe that in years to come the Canadian Tar sands will become a key plank of the US strategy for reducing its reliance on the Gulf for its Oil. This can only bode well for the companies that are involved such as :
Suncor
Western Oil Sands
Canadian Oil Sands Trust
Nexen Inc.
Imperial Oil
Statoilhydro
Encana
Shell
Exxon.
I would look for some pullbacks on some of these companies and start tucking away small amounts at a time when the price has dropped back.I believe that companies such as these will continue to grow at the rates that they have done in the last 5-10 years.
Best Wishes
Alan
Continuing on my recent themes of investing in emerging Markets, it may be worth looking at the Deutsche Bank x-trackers these will give you exposure to numerous emerging markets including India, Vietnam, Korea, Taiwan, Brazil and Russia.
You can find details at www.dbxtrackers.com
Best Wishes
Alan
A few Years ago Morgan Stanley came up with the original idea that four big countries – Brazil, Russia, India and China – would together soon become so important in the world economy that they could be viewed as a single group, much as we think of Europe or Latin America.
They dubbed the group BRIC, after the first letters of their names, saying that their combined economies, from being just 15 per cent the size of the world’s six most advanced countries’ – including the US and Japan -- would grow to become even larger than them in combination in fewer than 40 years.
There has been a lot of focus on India and China and I have written about these countries in past articles Broken China ?? & Investing in India The challenge with both these countries is that they do seem to still be linked to the fortunes of Wall Street and have suffered along with the US Markets
Brazil and Russia, by contrast, are among the handful of countries best situated to supply those increasingly valuable natural resources and so are fairing a lot better and seem less exposed to the US story and more exposed to the Commodities and Energy story that is doing well in the face of the US recession.
Russia is a huge exporter of oil and natural gas, nickel and platinum group metals. Brazil is the world’s biggest supplier of internationally-traded agricultural products such as sugar, soybeans, coffee, corn, orange juice, beef and poultry.
Both still have enormous resources that can be developed to meet Asia’s growing demands.
No shortages of energy, food or water
Last year Brazil’s main stockmarket index rose 71 per cent in US dollar terms, or even faster than India’s, suggesting that international investors are awakening to the potential of the South American giant.
Much of that interest was focused on Brazil’s two biggest stocks – Vale (NYSE:RIO) and Petrobras (NYSE:PZE). Vale is the world’s biggest exporter of iron ore; Petrobras has just made the world’s second-largest oil/gas discovery in 20 years, deep beneath Atlantic waters.
But it’s renewable resources, rather than minerals, that are increasingly attracting investor interest.
The well-known British investor, Jim Slater, says Brazil is “insulated against the world’s main shortages – fresh water, agricultural commodities and energy.”
It contains nearly a fifth of the world’s fresh water, available to expand agricultural production and carbon-free electricity generation. Hydro-power already provides 80 per cent of Brazil’s electricity needs, and two big new dams are being built on the Amazon at a cost of $10 billion.
Because it can produce alcohol fuel from sugarcane, without subsidies, for prices competitive with petrol, Brazil has been dubbed “the Saudi-Arabia of ethanol.”
David Fuller, the London-based analyst, says: “No country is better positioned to benefit from the agricultural boom than Brazil, with its large and fertile land mass, absence of any desertification, and ample supply of fresh water.”
Other commentators point to the nation’s economic growth rate (around 5 per cent a year), a foreign trade surplus (running at about $40 billion a year), large foreign reserves, a strong currency and a buoyant stock market.
Last year Brazil attracted FDI (foreign direct investment in factories and business operations) of $37 billion, or twice as much as India. It was the world’s third biggest raiser of investment capital via equity issues after the US and China. And its international bonds are expected to be granted investment-grade status within two years.
Brazil has a flourishing middle class of 20 million – depending how you define “middle class,” five times larger than India’s – as well as political stability, a favourable environment for foreign investment, and strong job creation (5 million new jobs since 2000).
Years of favourable international environment, combined with good policies such as more disciplined public finances and trade liberalization, have delivered low inflation and falling interest rates. One result is the emergence from poverty of a new lower-middle class, so the nation’s notorious income inequality has been declining.
Sensitive to foreign capital flows
What are the negatives?
The public sector is bloated and corrupt, packed with time-servers with jobs for life and fat pensions to look forward to. Taxes to pay for it gobble up more than a third of national output – a proportion much higher than in other emerging markets and out of proportion to the low quality of services provided.
As is commonplace in countries where planning, building and operating infrastructure is almost entirely in the hands of bureaucrats, Brazil has some serious infrastructural problems, including power-supply shortages. The regulatory environment is not sufficiently clear to attract private investment.
Labour laws are highly restrictive, with welfare and other compulsory contributions adding 60 to 100 per cent to employers’ payrolls.
The stockmarket is very sensitive to flows of foreign capital, therefore exposed to adverse money shifts that may be triggered by developments unconnected with conditions in Brazil itself, such as the US sub-prime crisis.
Finally, remember that although Goldman Sachs’ BRIC study projected good per capita growth rates for the Brazilian economy over the coming decades, it suggested the three other nations in the group would grow even faster.
If you are interested in adding Brazil to your international portfolio to provide balance, the best way to do so is probably via one of the exchange traded funds listed in London or New York. There is an iShares MSCI Brazil Fund in London which I would favour as it is priced in Sterling and not Dollars or there is the Brazil Fund (BZF) that trades in new York if you are looking for a dollar denominated fund.
Best wishes
Alan
Yesterday I looked at the story behind Russia and outlined some of the positives and negatives for investing there.From Russia with Love ? Today I am going to look at some of the ways you can invest in Russia if you feel positive about the potential in that emerging market.
Since we discussed the story behind Natural Gas then the most obvious play is Gazprom (LSE : OGZD). Its former chairman is now the Russian president ..........so you do the math re the environment for Gazprom going forward !! There have also been recent increases in Domestic gas prices in Russia which are going to be of benefit. I also mentioned the deal that Vladimir Putin had struck with companies in the Caspian Sea area and Gazprom will also be a beneficiary of that.
The increased need to get more out of the worlds agricultural supplies is having a big impact on fertiliser companies-just look at Mosaic (MOS) over the last few days. Russia's answer to Mosaic is Uralkali (LSE: URKA) and it should do well over demand from China for fertilisers in the medium term.
The need to improve the railways will also impact positively on Evraz Group (LSE: EVR).
If you are uncomfortable picking individual stocks then Lyxor have a Russia ETF (LRUS) which will give broad exposure to the Russian Titans 10 index.
In my next post I will look at Brazil and the opportunities that may be there for investors looking to invest in South America and its economies.
Best Wishes
Alan
Vladimir Putin has taken leave of office and is being "replaced" by Dmitry Medvedev.Despite what some may think in the West ,Putin is extremely popular in Russia.During his premiership Russia has had a remarkable economic transformation . Since the early nineties the Russian Economy has been growing at a remarkable rate of 8% per annum.
Most of this growth has been down to the massive reserves of Natural resources that it can draw on particularly Oil, Gas and Precious Metals.The demand for these Natural resources from the emerging countries such as China and India has fuelled a boom that has seen a thriving middle class developing in Russia.
Like all middle classes these Russians are splashing out on cars, holidays and electronic goods. There is no doubt that some people may have concerns about investing in Russia, we can all remember when the Russian government was seizing power of Yukos and we were hearing stories of the "Red Mafia" running wild.However those who have invested in Russia in the past few years have seen some serious returns.
Russia is amongst the cheapest of the emerging market economies, it has huge resources of natural commodities that the world is crying out for and importantly at the moment has little or no exposure to the credit crisis that is impacting on a number of the rest of the worlds major economies. Some people may not like Vladimir Putin but you cannot fault what he has achieved in the economy.
The Case for Investing
The case for investing in Russia is based mainly on energy.It has vast oil reserves in its Western States and a third of the Worlds gas reserves sit in Siberia, this makes Russia by far the worlds biggest gas exporter and producer. On top of this its neighbours have an increasing reliance on buying from Russia. Over 20% of the EU's natural gas comes from Russia.
The current record prices for oil means that the Kremlin is generating a fortune in taxes that it has levied on the oil producers. It is estimated that Russia takes in over 80% of every dollar that the price of oil increases at the current levels.Learning from the past where they squandered the wealth that these Natural Resources generated Russia has created its own Sovereign Wealth Fund which is known as the Stabilisation Fund.The current estimates are that this fund has something in the region of $150bn.Russia also must be the envy of many economists and politicians in the west in that it is estimated to have a budget surplus of 5-6% of GDP.
Downside Risks
As with all things where there is the potential of high reward there is attached risk, there is no doubt that there are risks associated with investing in Russia.State ownership has always meant that investment levels tend to lag behind what you would expect from private ownership.This is certainly the case in Russia, the limited investment in the Siberian Oil fields has seen an impact over the years in the levels of production growth.In the late 90's estimates were that production growth was around 10% per annum, the estimates now are that this has dropped to around 1%.
The picture with gas however is more rosy the Kremlin has been very active encouraging ( some would say bullying) big Gas companies such as BP into investing in infrastructure in Central Asia.Putin has also got agreement from countries in the Caspian Region which allow Russia to get access to the reserves in the area for a fraction of what they are worth to the West so when selling these on to countries in the EU Russia is guaranteed a tidy mark-up.
One of the other potential downsides for to consider for the future is infrastructure, since the collapse of the Soviet Union there has been a major decline in the maintenance of Russia infrastructure, transport networks are very underdeveloped and this will have an impact on its competitiveness if plans are not soon put in place to invest in the road and rail network a
s well as the oil and gas pipelines.
The Russian government has recognised this and plans to throw around $1trn at the problem. The Kremlin has committed around $200bn with the rest coming from the private sector.
What to Buy ?
In my next post I will look at some of the ways and companies that could do well on the back of the continued boom in Russia .
Best Wishes
Alan
I am going to look at some of the emerging markets over the next few post specifically to understand the opportunities , the mid term outlook and some of the ways that you could invest in these markets should you feel that they are worth doing so.
I plan to look at three markets in the next few posts: Russia, Brazil and Africa, I will take a look at Russia either tomorrow or over the weekend .
Meantime the markets today sold off sharply in the last hour, this may be as a result of how much was borrowed at the FED Discount Window or a some rumours that may have been circulating this afternoon.It could also have been triggered by those in the know “front running” the releases in the morning.
Interestingly enough there was another big drop on the back of major puts purchases in Lehman brothers, this may be just pure speculation or there may be someone in the know regarding some issues or problems at Lehman.
Currently the S&P index is tracking for the worst opening quarter since 2001, even with the usual window dressing that occurs at the end of a quarter, this could see the early days in April showing more declines as the quarter closes.
Tomorrow there is potential for more bad news with a number of economic reports coming out including Personal Income and Personal Spending data.
Look out for the Russia report in the next couple of days.
Best Wishes
Alan
In the last part of this series I will look at the final piece of the puzzle of whether to buy Coffee or Starbucks by talking about the Coffee ETF (COFF).
We can see from the chart below that coffee has dropped off fairly sharply from the recent highs but seems to be forming a base around the 320 mark :
The stock to use ratio of coffee has been pretty low compared to where it has been in the last two decades this would indicate that we should be seeing prices being supported at least and probably moving higher.Coffee is being increasingly drunk throughout the world and the rising affluence of the emerging markets middle classes is likely to see an increase in their coffee consumption as the big chains start to open franchises and people look to emulate what they see in coffee drinking as a sign of western affluence.
In one of the biggest emerging markets I.e. China, the consumption of coffee is on the rise .It’s been estimated that China’s coffee consumption was approximately 45,000 tons in 2006. But that number could jump five-fold or even six-fold to reach 300,000 tons annually in the next 10 years. China's coffee consumption is growing at rate of 10% to 15% each year. And with a population of 1.3 billion, it won’t be long before China becomes the No. 2 coffee consumer in the world.
I believe that the medium term outlook for coffee is very positive, it is however very volatile and reacts violently to changes in weather, for that reason I would steer away from the Futures market, however the ETF is not leveraged so will allow you to stay in for the long term and not worry too much about volatility.
I would like to see it building a bit of a base here then moving higher and I would be buying with a longer term view for my Pension. I would likely leg in to the position a third at a time and place a 25% stop loss.
So to answer the question, would I buy coffee or Starbucks ? For me personally where there is an option to buy into the commodity I would always favour the commodity as it is less susceptible to other forces beyond supply and demand Stocks can still suffer due to poor management or with the market in general, this is less likely with the commodity so I will be buying Coffee and not Starbucks.
I like coffee for the longer term and will buy the ETF when I see the price moving back up again from here.
I would be interested in your views: Coffee or Starbucks ?
Best Wishes
Alan
The precious metals are taking a breather at the moment pulling back off their highs, Palladium is no exception, having reached a 6 year high recently of $580 an ounce, it has now pulled back by over $100 an ounce.
The long term outlook for the metal however still looks promising and since it is not as high profile as Gold and Platinum may also offer some real potential in the mid to long term.One of the major countries that mines Palladium is South Africa.The recent problems regarding power cuts in the country have had an impact in the mining of Palladium, South Africa accounts for about 30% of the worlds production of Palladium so any disruptions to the supply here have a major impact on the price.
The power situation in South Africa is still fragile and any further disruptions would certainly cause another spike in the price, power issues aside, there are other fundamental issues which also give support to the view that Palladium is likely to go higher in the medium term.The recent run up in Platinum is a key factor here with the record prices seen recently making Palladium an attractive option for the autocatalyst market as well as the jewellery market.With the increasing purchase of cars in the emerging markets such as China and India then the demand for Palladium to be used in catalytic converters is only likely to increase .
The other major supplier of Palladium is Russia, in recent years they have been keeping the market well supplied but lately these supplies have been slowing ,adding further constraints into the supply chain, there are some who believe that the Russian supplies are starting to run out if that is the case then this will be another reason for Palladium to start to move higher. The increasing interest in Precious Metals is also likely to create demand as people look to other metals beyond Gold as the fear of inflation and a sinking dollar add to the safe haven status of Precious Metals.
The best way to take advantage of buying Palladium is via the London traded ETF (PHPD), it is also possible to gain exposure to Palladium via the ETF (PHPP) which gives exposure to all 4 metals, Gold, Silver, Platinum and Palladium.I added some PHPD to my portfolio today at $48.77 as well as some more of the Silver ETF (SLV) .A chart of the recent prices showing the latest pullback is below.I think this pullback may be a good buying opportunity for anyone who believes in the metals longer term.
Best Wishes
Alan
In my last post I asked the question re buying Starbucks or the Coffee ETF, I will look today at the Bear and Bull scenarios for Starbucks (SBUX) and my next post will look at Coffee (COFF).At the beginning of this year The chairman of Starbucks -Howard Schultz took back the reins as CEO. The idea being that he help the chain out of its recent slump.The stock has fallen over 45% in the last 12 months and recently was trading down near 4 year lows .The main concerns were that the chain has overexpanded and was suffering from major competition.The economic slowdown may also make people think twice about the cost of that Double tall Skinny Mocha on their way to work every day.
Bear Case
The vast amount of the growth in Starbucks was from adding new stores, but there comes a point when this is not going to be the best way of generating future revenues and profits, particularly as margins have declined in line with increased labour and rent costs.There is also increasing competition from the fast food chains such as McDonalds. In the short term Starbucks has to do something about its profitability and investing in new stores may not be the best way of doing this , sure Howard Schultz built the brand from the early days but a major slowdown in the economy is going to really hurt in this sort of industry.It may be a real challenge for them recovering particularly in the teeth of a recession
Bull Case
Currently Starbucks shares are trading at a historic low for Forward Earnings. Howard Schultz is probably the best placed person to engineer a turnaround, he has the experience to know what the organisation needs to do to be able to turn the current position round. They currently have around 11,000 stores in the US and have cut back dramatically on planned store openings with less than 1000 planned for 2009.They re looking to expand internationally where the growth potential is much higher than in the US.Longer term they may actually be able to get back on track.
In my next post I will look at the situation for Coffee and then give you my verdict .
Best Wishes
Alan
Having just got back from a work trip I was sitting in the airports(as seems to be happening more and more often) with my Cafe Latte and Double chocolate chip muffin-which had cost about £5 ($10) and reflected on how busy it was with not a spare seat to be found. being a regular coffee drinker, I started to wonder on the best way to invest in my favourite beverage.I have traded futures before and coffee can be one of the most volatile with violent weather related swings-it is definitely not for the faint hearted. So over the next couple of days I am going to look at the outlook for Starbucks and also at ways that you can invest in coffee without having to get involved in the highly leveraged and often manipulated futures markets.
We will see that Starbucks is not necessarily correlated with the price of Coffee, as with all commodities versus shares that are related to or have an interest in commodities there are many things that come in to play that can impact a share like management costs etc that do not affect the prices of a commodity which are driven mainly by the fundamentals of supply and demand, this makes them easier to predict over the medium term.
In my next post I will look at Starbucks and in the post after that the Coffee ETF.
Best Wishes
Alan
The Credit card company Visa (V) set a record yesterday for the biggest-ever initial public offering (IPO) in U.S. history, bringing in an estimated $17.3 billion. The company offered 406 million shares at $44 per share, . The company will begin trading on the New York Stock Exchange under the ticker symbol V. Goldman Sachs and Lehman reported results yesterday that beat Market expectations but were substantially down on previous quarters reflecting the challenges in the market currently but since expectations were for a lot worse this had the impact of assisting the markets to another 400 point upside yesterday.The Fed helped hugely cutting rates by a huge 0.75% ,this was still below some market expectations of a 1 % cut, the market however rallied on the news.Today we are seeing numerous statements from the likes of Morgan Stanley (MMS) and Goldman Sachs (GS) stating that they took advantage of the Fed discount window, bearing in mind the secret nature of these institutions this can only be seen as blatant PR to try to remove the stigma that would be associated with people finding out that Banks are in need of capital.The thought no doubt being that if the likes of Goldman and Morgan Stanley are using it then it doesn't mean there is a problem. On the contrary my view is that if they did indeed use the window it just goes to show the depth of the problem.
After earlier appearing to probably open to the downside the markets opened slightly to the upside although at the time of writing they are back in negative territory.Rumours in the UK that HBOS(HBOS-LSE) are having liquidity problems-(which they have denied )are keeping the fear in the markets. The dollar is stronger and this is having a negative impact on Gold and Silver, with April Gold futures off 45 points currently . If we see Gold down around the $900 mark then I may consider adding ore to my portfolio. Those of you who read my article on Silver yesterday (Should I buy Silver or Gold ? ) will note that Silver is holding up much better only off 0.13 at $19.71 for the June Futures.
I own both Gold and Silver but as I said yesterday if I was only looking to buy one I believe that Silver has the most catching up to do and that would be the one that I would favour I would use the Silver ETF (SLV) and look to leg in on pullbacks.
Best Wishes
Alan