Real Estate Market Overview 2009

The Condensed Version: Serious dislocation has resulted in the following challenges:

1. A huge capital gap has been created (most debt has vanished, and all the available equity is not enough to fill the hole).
2. No one expects surviving financial institutions to ramp up lending once they finally stop their own mammoth balance sheet bleeding (even with gargantuan government bailouts).
3. Persistent risk aversion and new regulation could limit debt capital flows for the foreseeable future, muting transaction activity.
4. Many owners needing to roll over mortgages in the coming years can expect to face substantial refinancing hurdles, including higher lending rates, more stringent underwriting, increased equity requirements, and recourse terms.
5. The aftershocks of rampant “over-the-top lending” that batter the entire credit system leave property markets substantially overleveraged and vulnerable to significant depreciation.
a. Real estate value losses will average 15 to 20 percent off mid-2007 peaks, and could be more severe for lesser-quality commercial properties in secondary and tertiary locations.
b. For 2009, U.S. commercial real estate faces its worst year since the wrenching 1991–1992 industry depression:
i. Values will drop substantially
ii. Foreclosures and delinquency rates will increase sharply
iii. The limping economy will likely crimp property cash flows
iv. Lower growth going forward
6. In 2009, expected total real estate private equity investment returns will likely register in negative territory for the first time in nearly two decades.
7. In a classic flight to quality, those interviewed continue to favor familiar coastal global pathway cities as investment outlooks grow bleak—ratings uniformly decline for almost all markets.
8. Only apartments show some enduring strength—increasing numbers of young adults and people pushed out of the housing market keep rent rolls relatively healthy.
9. Always favored, industrial properties may weaken in the consumer downturn—fewer goods are shipped and distributed.
10. Businesses stop expanding or downsize, hurting office.
11. Hotels suffer as business and tourist travel is cut back in the recessionary environment.
12. Retail really hits the skids — cash-strapped Americans struggle with credit card debt, the mortgage mess, and gloomy employment environment.
13. Already savaged, homebuilders see little hope for improvement until mortgage markets come back and the job picture brightens—not in 2009.

Current prognostication: Expect financial and property markets to hit bottom in 2009 and flounder well into 2010.

Los Angeles Summary: Holding up the best in housing-ravaged southern California, L.A. benefits from a well-diversified economy and dense infill environment with higher barriers to entry than in nearby suburban markets like Orange County and the Inland Empire. An office building wave could weaken the market into 2010 after a falloff in demand—the financial services crash hurts prime west Los Angeles in particular. Downtown continues to benefit from condominium and apartment projects, which help nurture a more 24-hour environment amid hulking office towers, but Pasadena, Glendale, and west L.A. commercial centers still retain an upper hand closer to premier family-friendly executive neighborhoods. Driving to downtown gets more challenging every year and gas prices increase commuting angst. Overall, multifamily has legs: “It’s almost
impossible to lose money on apartment investments, if you have a five- to ten-year investment horizon.” Hotels benefit from the city’s global pathway location. But housing woes devastate homebuilders in previously high-flying San Bernardino and Riverside, where foreclosures spiral and home values drop like rocks. The once white-hot Inland Empire industrial market
cools temporarily—as nationwide consumer contraction hits warehouse demand near the nation’s largest port, L.A./Long Beach. “Bigbox warehouse developers pushed too far,” “building to the horizon.” Upscale Orange County—“ground zero for the mortgage collapse”—gets nailed by its exposure to home lenders, some of which go belly up. Absorbing shadow office
space “could take three to four years.” The O.C. housing picture looks even worse—prices dive. Weak household credit dampens shopping center outlooks throughout southern California.

DETAILED BREAKDOWN
1. Capital Deficiencies: For 2009, the multibillion-dollar questions become: When will money return to the suddenly strangled real estate markets, and who will be investing and at what levels? As markets deleverage and correct, the length and severity of the repricing process will influence the resumption and intensity of capital flows.

Markets went from inundated in capital to drastically undersupplied, especially for precious debt:
2. Credit Gridlock: The nation’s economic prospects and credit markets remained completely gridlocked with no signs of imminent recovery.
Most wish that financial institutions would “take their inevitable writedowns and clear the market,” but understand that the potential severity of losses in a sudden reaccounting could undermine more companies and crater confidence in a suddenly fragile banking system. Instead, lenders grasp for government handouts and buy time—letting buyers quietly cherry-pick
nonperforming loans and making allowances to many borrowers.

Not surprisingly in light of the credit cataclysm, it appears certain that capital availability for both debt and equity will be constrained in 2009 and investment will be “rather muted.” (See Exhibit 2-3.) In fact, overall capital availability ratings (on a one-to-nine scale) are the lowest in the survey’s history. Only opportunity funds and mezzanine lenders will have more
money to invest than in 2008, according to the surveys. Significantly, expectations sink for financing from commercial banks and CMBS. Many previously active private syndicates and tax exchange buyers without leverage leave the scene.
3. Transactions:
(A) Risk Adversion: Some wonder how they ever embraced the alluring notion that secular change in the capital markets had eliminated most cyclical investment risk. In hindsight, “there was never any structural change, just a temporary surge of capital into the markets.”
(B) Muted Transaction Activity: There is a vast bid-ask chasm separating buyers and sellers. 2008 deal volumes are 20 percent of those of 2007, and 2009 may not be much better. “It’s a terrible time for transaction people” after “some incredible years.” Most agree that sellers will blink first—“they need to get reality.” Underwater owners will almost certainly cave toward buyer expectations, hoping enough dollars come off the sidelines to buffer pricing in bidding for
distressed assets. Unlike in recent years, cash buyers will have the advantage—leveraged buyers and financial engineers “are gone.”
4. Refinancing Issues – Buy, Hold, or Sell:
(A) Significant Depreciation: “As long as you can sit with what you have you’ll be fine.” Taking all the bad news in stride, most real estate players, including homeowners, should uncomfortably ride out the storm. Owners who locked in debt on a long-term basis or shied away from heavy leverage—like pension funds and real estate investment trusts (REITs) — should have the staying power and cash flows to cover obligations to lenders and stomach paper losses.
For private equity real estate owners, “It’s too late to sell.” In fact, Emerging Trends surveys register the lowest sell signal in the report’s 30-year history (see Exhibit 1-1). Survey buy ratings continue to rebound off 2006 lows (when players should have retreated) as investors hopefully expect seller capitulation to meet their increased yield expectations. Many real estate owners just focus on holding on through the “rough sledding,” comprehending that
transactions are beside the point until the market takes its bitter medicine and suffers pain. “The best bet at this point is to ride out the cycle.”
5. Value Depreciation
(A) Cap Rates Readjusting: An interviewee consensus calculates that cap rates need to increase about 150 to 200 basis points on average from their recent lows to more normal 7.5 to 8.5 percent territory depending on property sector, market, and asset quality. That translates into a possible 15 to 20 percent value haircut. Trophy, 24-hour city properties should have less exposure—with their cap rates rising 50 to 75 basis points—while B and C product could
see increases of 200 to 300 points. Inflation and rising interest rates pose additional downside risk. Through 2008, Fed policy makers continued to keep interest rates well below historic norms to stave off economic turmoil despite energy cost–driven inflation and blame on low rates for creating baleful asset bubbles. Over the longer term, interest rates should rise, putting more upward pressure on cap rates.
(B) Buyers and Sellers can’t agree: “Sellers want prices available a year ago, while buyers want prices anticipated a year from now.” While lenders dithered and sidestepped marking down their convoluted portfolios, appraisers and private equity fund managers also avoided taking significant writedowns through most of 2008 despite the handwriting on the wall. They
pointed to the lack of meaningful transactions to gauge value declines and the yawning gap between buyers’ and sellers’ expectations, reminiscent of the housing markets circa 2006. Various opportunity funds have raised “a ton” of money—rumored at upwards of $300 billion—but managers don’t want to start acquiring anything before the market has finished sliding, and some commitments may not stick after the downturn. The dearth of transactions, however,
stymies devaluations. Owners won’t sell at “liquidation prices” if not forced, and lenders haven’t pushed troubled borrowers for fear of exacerbating recognition of their own problems. This circle will likely only be broken when banks and special servicers ramp up foreclosures. From the trickle of transactions, interviewees suggest that pricing levels had declined at least 10 percent off 2007 highs by midyear 2008.
(C) Limping Economy: Optimists had been hoping for offsets from rising property net operating incomes to help counter depreciation from rising cap rates. But the lackluster economy compromises their projections. Instead of rents rising or at least holding steady, owners resign themselves to a deteriorating leasing environment where concessions and tenant inducements proliferate. Higher energy costs and inflationary pressures ramp up operating costs, shrinking
bottom lines further. Total returns cannot escape negative territory—the depth and severity of the recession will determine the extent of losses. This downturn “looks like a long doubleheader,” bemoans an interviewee. “The first game is the credit crisis and we’re only in the middle innings. And now we have another game to play and that’s the poor economy.” “Every day that goes by without economic improvement increases the risk for real estate.”
(D) Lower Growth: Without as much leverage in the market, any pricing increases over time will be more “moderate.”
“The impact of lower debt levels and more expensive debt is lower growth assumptions.” Underwriting will be based on 12-month trailing cash flows, not dreamy forward projections. “
6. Private Equity Model: Opportunity funds need to reorient their formulas and expectations—returns and promotes won’t be as high without a boost from debt. Money will be made on riding markets back to recovery and releasing properties, not on cap rate compression and financing structures.
• Cash and low-leverage buyers will be king;
• Surviving banks will impose strict lending guidelines, requiring more recourse and equity;
• Left-for-dead commercial mortgage–backed securities (CMBS) markets will revive, but in a more regulated form;
• Opportunity funds will need new investment models that can’t rely on massive leverage and cap rate compression to boost returns and promotes.
7. Global Pathway: The favored 24-hour coastal cities—D.C., San Francisco, New York, L.A., Boston, and Seattle—will hold value better and bounce back more quickly. Core players and offshore investors gravitate to these elite business and cultural centers linked directly to Asia and Europe commercial capitals. Hot-growth Texas markets—Houston and Dallas—show temporary strength as long as oil prices stay high.
8. Buy or Hold Multifamily: Apartment investments get a boost from a host of significant trends: increasing numbers of young adults who leave their parents’ homes, more aging baby boomers looking to downsize from suburban lifestyles, and stiffer mortgage costs/requirements that make homeownership too expensive for some prospective buyers. Increasing renter demand helps blunt ongoing recessionary impacts and ensures solid cash flow increases when the economy improves.
9. Buy or Hold Industrial: Despite near-term softness in availability rates, coastal gateways and primary international airport hubs will consolidate their positions as prime warehouse markets operating along global pathways. Watch for distressed owners and pick off bargains in top markets.
10. Hold Office: Long-term leases can bridge the downturn.
11. Hold Hotels: Occupancies decline and room rates suffer—it’s no time to sell.
12. Pray for Retail: Mall owners hope consumers haven’t collectively shopped till they dropped. Neighborhood centers with stronger grocery anchors and chain drugstores should fare best: people still need to eat and purchase more Advil for all their headaches.
13. Buy Residential Building Lots: The market collapse mauls homebuilders—increasingly, they capitulate and give up inventoried land tracts in bankruptcies and foreclosures. Prices are cents on the dollar from market peaks. But investors must be prepared to hold for a while.
Purchase Distressed Condos: At the right prices, these projects can be transformed into profitable rentals. Properties in urban areas near transit hubs make the best bets. Once markets recover, units can be converted back for sales.
Dire Effect of Jobs Market: The dreary jobs picture stirs particular apprehension about the country’s ability to bounce back from its current slump. Although overall U.S. employment had been healthy from 2002 to 2007, job creation and wage growth trailed other economic expansions. High-paying manufacturing jobs continued to migrate overseas, replaced
by lower-wage/lesser-benefit service sector “discount store” jobs. At the margins, many white-collar companies steadily transferred more “knowledge-based” work overseas to lower-cost markets thanks to telecommunications and Internet technologies. While high-tech jobs have rebounded off 2001 lows, the important financial services industry “is a train wreck” and its prodigious Wall Street bonus machine in shambles. To make matters worse, the government sector will scale back in 2009, as state and local agencies face severe declines in tax revenues. Slashed budgets translate into reduced government hiring and layoffs as well as reductions in contracts to private firms and funding for nonprofits. For the short term, rising unemployment and additional consumer distress appear unavoidable. Interviewees, meanwhile, continue to
scratch their heads about new job growth engines; most mention energy, health care, and education. Initiatives to recast the country’s increasingly obsolete infrastructure (roads, rails, transit, airports, electric grid, water/sewage systems) as well as securing greater energy independence through new technologies may key an eventual resurgence. But such programs have no chance to gain immediate traction, given various political, business, and financing roadblocks — certainly not in time to help in 2009.
Check out deals on Commercial real , single-family homes and even cheap hunting land.

Funds Copy Buffett!

Fancy the opportunity to invest with international investment gurus such as Warren Buffett, Mark Mobius or Bill Gross? Krung Thai Asset Management wants to give local Thais the chance.

The KTAM Investment Legends Fund (KTIL), the first equity foreign investment fund launched this year, is a feeder fund investing in Warren Buffett's famed investment holding company Berkshire Hathaway, the Templeton Emerging Markets Fund run by Mark Mobius and Pimco's Total Return Bond Fund under Bill Gross.

Somchai Boonnamsiri, the chief executive of KTAM, said the fund will hold its initial public offering from Jan 19-30, with an investment strategy aimed at undervalued stocks worldwide and a projected long-term return of 7 percent per year.

The KTAM fund will invest in the Investment Legends Fund, a subfund investing in Celsius Fund run by Barclays Capital Fund Solutions.

The master fund aito maintain 40 percent of assets in equities, 40 percent in commodities and 20 percent in fixed income. KTIL will invest at least 80 percent of assets, and also structure investments in the Singapore dollar to avoid future weakness in the US dollar.

Somchai said the market volatility of the past year offered a "tremendous opportunity for investors".

He said current low valuations across most asset classes, the solid track record of investors such as Buffett, Mobius and Gross and the diversified structure of KTIL made the fund a solid option for investors.

"This will be the good time to buy high-quality assets at low price. We expect the economy to begin to recover starting in the second half, and equities always rebound faster [than the broad economy]. So investors should begin taking advantage now," Somchai said.

KTAM is co-operating with Citibank to promote the new FIF. Citibank is also serving as a selling agent for the KTIL fund.

Pavin Rodloytuk, retail banking director for Citibank N.A., said the partnership with KTAM reflected the bank's confidence in ample investment opportunities currently in the markets.

Jas Lim, investment and marketing head for Citibank N.A., said the investment outlook for next year would be a year of two halves.

"Following unique turmoil in the global financial system, the world is now in the middle of a slowdown, with major industrial economics expected to contract well into 2009," she said.

Slowing economic growth, tight credit conditions and deleveraging will dominate the first half of the year, resulting in uncertain equity and credit markets.

But some relief was expected in the latter half of 2009, as credit conditions and risk aversion ease.

Lim said Citi recommended investors to consider infrastructure and distressed assets as key investment themes, together with value investing in equities and fixed income.

The bank maintains a global investment portfolio recommendation of 44 percent in developed-market equities, 36 percent government bonds, 9 percent corporate bonds, 6 percent emerging-market equities and 3 percent high-yield bonds.

"From a total wealth portfolio perspective, investor needs to stick with the basic principles of investing like dollar cost averaging," Lim said.

"We remain overweight on equities for numerous reasons, including attractive valuations and fiscal stimulus policies. As seen in past recessions, it is the best time to build and accumulate and one should not miss that a diversified approach to investment will protect you for now and lead to handsome yields once the market eventually recovers."

GM Stock Downgraded To Zero

Continuing on our theme of bankrupt US Auto manufactureres, here's a report from MarketWatch:

Deutsche Bank downgraded General Motors Corp. to sell from hold, with a price target of $0, saying the car maker may not be able to fund its U.S. operations beyond December without government intervention.

Deutsche Bank said it believes the U.S. government will be compelled to intervene through a capital infusion or loan. "Without government assistance, we believe that GM's collapse would be inevitable, and that it would precipitate systemic risk that would be difficult to overcome for automakers, suppliers, retailers, and sectors of the U.S. economy," the broker said.

Even if GM avoids bankruptcy, equity shareholders are unlikely to get anything back.

Soon after General Motors announced a huge third-quarter loss of $4.2 billion, and that it was burning through an additional $2.3 billion a month, CNBC host Larry Kudlow said automakers should not be given any more taxpayer cash.

"We should not be pouring bad money after bad money" Kudlow said on the financial news channel.

"They should have to make major, surgical, structural changes."

Kudlow's comments follow a report in The New York Times that automakers would ask Congress for double their previous request to as much as $50 billion in government-backed loans so that they can build more fuel-efficient cars.

"The taxpayers cannot possibly finance their burn rate cash problems," Kudlow said. "They need to go into bankruptcy."

US Auto-Makers In Trouble

Kirk Kerkorian is still dumping Ford shares. Tracinda, Kerkorian's investment vehicle, pared its position to 4.89% from 6.09% on October 20. At its peak, Tracinda owned 6.43% of the company.

The National Automobile Dealers Association estimates 700 new-car dealerships will close this year, and 37,100 jobs will go with them. The country's 20,700 dealerships accounted for $693 billion in sales last year, 18% of all retail sales. Dealership salaries make up 13% of the country's retail payroll.

Despite the obvious effects these closures will have on the economy, they could also make things worse for the Big Three. As their biggest dealerships shutter, GM, Ford, and Chrysler will have fewer avenues to push their vehicles.

However, Porsche still seems to be doing fine. Porsche a 74.1% stake in fellow German automaker Volkswagen. Shares rose as much as 93% on the news. Volkswagen soared so much due to heavy short covering. No one expected Porsche to have increased its stake from 35% to 74%. Hedge-fund managers were literally in tears, according to the Financial Times.

The rise makes Volkswagen the world's largest publicly traded company. Volkswagen had a peak market cap of $370 billion, more than ExxonMobil's $343 billion as of Monday.

I wonder how other luxury sports car manufacturers are faring?

What Should Gold Bugs Do?

“I believe the gold juniors offer the best value for your paper dollar going forward,” says Ed Bugos of the violently beaten-down junior mining sector. The Canadian Venture Index, the bellwether of juniors, is down a nauseating 70% from its 2007 high.

Ed sent over a lists of what gold bugs should NOT do:

* Don't be overly short the stock market at this stage of the collapse.
* Don’t slow down your gold buying just because the market is down. Buy a lot of gold - coins and bars. Buy as much as you can before it breaks through $1,000. Then hide it.
* Don't buy the GLD streetTRACKS, unless you're just trading.
* Don't buy gold from your bank.
* Don’t put all your eggs in one basket. Diversify your wealth between tangible assets, like gold, silver and platinum, or even real estate, and continue selectively accumulating bargains in the equity sphere. Diversify geographically.
* Don’t invest more than 20% of your wealth in junior miners. It is not a safe-haven panacea. The rewards are potentially high, but the risks are, too.
* Don't keep all your wealth in gold, because the government will one day probably come for it.

The New Communism: Capitalism!

The US ban on short-selling financial stocks just expired last week. And during most of the 2-week duration stocks plummeted anyway. The WSJ had an article on it where several large financial bigwigs admitted it was a farce and a bit like "having a big glass of orange juice only to have a sugar crash a few hours later".

But while the rest of the world is scrambling to shore up its financial markets through bailouts, short-selling bans, and de-leveraging balance sheets, China announced a trial introduction of margin trading and short selling.

In the announcement, the China Securities Regulatory Commission didn't refer to the current global economic crisis, but said it plans to introduce "new vitality" into the stock market.

Isn't is ironic that even the "communist" Chinese have a stock market more open and free than our own?

Billionaires Prefer Moscow

In 1998, Moscow was in crisis. More than 100,000 Russians took to the streets as a slew of banks – and the life savings of millions of citizens – went bust.

But just a decade later, the global commodities boom has made Russia flush with cash, and Moscow has become a pricey place to live.

That's the finding in Mercer's 2008 Worldwide Cost of Living Survey. Moscow tops the list with a score of 142.4, up 6% from last year – and 42% higher than New York, the most expensive city in the U.S. The Russian capital is followed by Tokyo; London; Oslo and Seoul, South Korea.

Moscow is home to 74 billionaires, the most of any city in the world.

The Best Place To Buy Investment Real Estate

I've been an avid real estate investor in the past and I still keep abreast of the market and good places to invest. Here's an interesting email I received recently.

The Cheapest "Nice" Country in the World Right Now
By Doug Casey, editor, The Casey Report

I've been to about 175 countries, and lived in 12. All the while, I've felt the U.S. and Western Europe in particular (but also Canada, to a somewhat lesser degree) are on a slippery slope. So I've always had an eye open for a real second home.

My longtime subscribers will recall my enthusiasm for New Zealand back in the late '90s. Since then, its currency has risen about 75% against the dollar, and well-selected property has roughly doubled or tripled in addition.

New Zealand is still a great place to hang out. I bought a bunch of property and still go there about three months of the year, mainly to play polo and just enjoy the mellow lifestyle. But New Zealand is no longer the bargain it once was; far from it.

I think it's imperative to have a crib outside your home country in today's world. I don't want to get into a detailed discussion of all the possibilities here; that would take a book. But my bottom line is that Argentina is simply the best place in the world right now, all things considered.

It's certainly the cheapest "nice" country in the world. Indeed, Buenos Aires is absolutely one of the world's greatest and most livable cities. The country is running a massive balance of trade surplus. The government (most surprising of all) is running a big fiscal surplus. Rich Europeans are piling in, since Argentina is now ethnically and culturally the most European country in the world. And it should be fairly insulated from WW3. All the stars are aligned for this place. Even as stupid as Argentina's government has traditionally been since the days of Peron, the bull market has a long way to run.

So I'm looking to spend around half the year there. Along with a partner, I bought a ranch in Patagonia 10 years ago, and it's been a spectacular investment.

But if I'd been familiar with Salta province – in the northwest – at the time, I'd never have bothered. The province averages about 5,000 feet in altitude, but is at about the same latitude south as Cuba is north. As a consequence, the climate is perpetually mild. And it's dry. Most of it is indistinguishable from Northern Arizona, New Mexico, or Colorado.

It's possible to buy huge parcels of land very cheaply (e.g. 100,000 acres for US$1,000,000), but that's literally in the middle of nowhere and of very little practical value. You're a feudal lord for the people living there. But if you want a latte and an International Herald Tribune, or anything to eat besides an animal some of the peons have butchered, forget about it.

It's a long-standing tradition at Casey Research that we eat our own cooking, so we've bought a lot of property in Argentina in the last few years. But frankly, I wasn't looking for a bunch more trading sardines; that's what stock certificates are for. I really wanted something I could personally use and enjoy. What we did, therefore, was buy 1,200 acres on the edge of the town of Cafayate, in the south of Salta.

Like San Martin de los Andes in Patagonia, Cafayate is going to become another Aspen. Or maybe the resort town of Taos, New Mexico, is a better analog. Located in a huge bowl, surrounded by the high Andes, it's quaint and picturesque. Especially since it's the center of a large wine region. So the area is really more like a "Taos meets Napa."

What we're doing on this land is putting in a world-class golf course, spa, health club, vineyard, equestrian facilities, and, in fact, lifestyle amenities of all types. A library, billiard room, cigar bar – you get the idea. Since good workers go for $200 a month, costs will be low, and services will be excellent. My personal vision is to take the best features from developments I know all over the world and put them together here.

I think we've got the right place, the right idea, and the right time. I also think the cost will be right. I expect it will, initially, go for something like 10%-20% of what something similar – but not even close to as nice – would go for in the U.S.

I hope early buyers will be successful people of a libertarian character; no jerks need apply. Then, as soon as possible, we're going to raise prices as high as possible to keep out the riff-raff.

So that's the story right now. For traveling or an outright real estate purchase, Argentina, all things considered, is my favorite place in the world.

Regards,

Doug Casey

Of course, if you'd like to buy cheap real estate in the US, there are a lot of places to chose from. Make sure you check out this site that aggregates cheap residential and commercial properties for sale.

Drilling In The Artic?

The Arctic holds as many as 90bn barrels of undiscovered oil and has as much undiscovered gas as all the reserves known to exist in Russia, US government scientists have said in the first state assessment of the region.

The estimates could fuel the race among polar nations, such as Russia, the US, Denmark, Norway and Canada, vying for control of the region, though the study said Russia and the Alaska platform appeared to have the most undiscovered resources.

The 90bn barrels of undiscovered oil the US Geological Survey believes the Arctic holds is 13 per cent of the world's undiscovered oil – about the known reserves of the United Arab Emirates. The 1,669,000bn cubic feet of natural gas are equivalent to 30 per cent of undiscovered gas reserves.

There's Still No Recession

Even though its been feeling like a recession for 6 months, economics keep telling us that it isn't so. I guess they must be right!

Coal Companies Cleaning Up?

Today, the Financial stocks were in complete meltdown. Stocks like Washing Mutual(WM) were down 35% along with Freddie Mac (FRE) and Fannie Mae (FNM). The one sector that did pretty well today was Coal. And why wouldn't it?

According to newsletter editor Byron King, the future for coal is promising;
“The U.S. Air Force is putting together a program to develop a domestic synthetic jet fuel. Just as the Air Force does not employ many geologists, neither does it run refineries. So the USAF has proposed to lease acreage on its vast land holdings to private industry. The idea is that private investment will build U.S. plants to convert U.S. coal to liquid fuels.

“The U.S. Air Force wants to leverage private industry and capital to construct a synthetic jet fuel industry. And then the USAF will become the final buyer for the product.

“The USAF is among the world’s largest fuel users… it is behind about 10% of all the jet fuel that gets burned in the U.S. So just selling jet fuel to the USAF constitutes a major market.”

In other words, the government is looking to solve a big chunk of our oil dilemma with coal, a naturally abundant resource in the U.S.

Looks like those coal mining stocks should see a light at the end of the tunnel!

Investing In Vanadium: What's That?

“Ultra high-strength and super-light steels are the plastics of the 21st century,” says Chris Mayer, editor of a popular investment newsletter. “There is high demand for these steels for use in everything from jet engines to rail components. In turn, there is a big push for the quirky metals so critical in making them. And in those quirky metals are good opportunities for investors.”

“Vanadium’s primary use: to strengthen steel. Combine it with titanium and you get the best strength-to-weight ratio of any engineered material. That makes it practically irreplaceable in aerospace and other industries. Companies also use vanadium to produce sulfuric acid, and in nuclear power plants. Vanadium also promises new advances in battery technology. Giant vanadium batteries power wind farms and solar power plants.

“The vanadium market also has some interesting quirks. For example, 98% of the world’s vanadium comes from only three countries -- China, Russia and South Africa.

“South Africa, we know, has power issues. China is becoming more a consumer than producer of vanadium. Last year, China ended its export credits for vanadium because it needed the metal more at home. This year, China went further and put an export tariff in place.

“In the great infrastructure boom, vanadium takes its place at the table of other rare and obscure metals that are growing much more important. The price of vanadium, as with many of these metals, is way up… and rising”

Investing In Infrastructure Companies

The U.S. has been lagging in infrastructure spending for decades. At present, America spends less than 2.4% of its GDP on infrastructure, compared to 5% in Europe and 9% in China. At the same time, the U.S. population is expected to grow 50% by 2050.

According to an estimate from the American Society of Civil Engineers, its suggested that the U.S. government will need to spend $1.6 trillion over the next five years just to bring existing infrastructure into solid working condition.

The flooding in the Midwest has pushed this issue even closer to center stage. Pictures like these are popping up in every paper:



Even though the housing and construction industry may be tanking, companies that deal in infrastructure development should do very well for the next several years.

According to one newsletter editor,

The next president, whoever it is, will feel a lot of heat next year -- the Highway Trust Fund runs out of money in 2009, for example -- and a big spending package on infrastructure seems likely.

The Cheapest In 25 Years

According to Steve Sjuggerud, Japanese stocks are cheaper than they've been at any time in the last quarter-century. I started buying Japanese small cap stocks via the ETF last year, but I was early to the party.

You have to go back to the beginning of 1983 to find price-to-earnings ratios and price-to-book values this low... and dividend yields this high.

If you were bold enough to buy Japanese stocks at the beginning of 1983, and hold them for seven years, you'd have made five times your money... The Nikkei – Japan's main stock index – started 1983 at 8,000 and closed 1989 near 39,000.

Just to give you an idea of what that means, consider the Dow Jones Average in the States... Today it's around 12,000. Can you imagine it rising to just under 60,000 in seven years? That's how much Japanese stocks moved starting in 1983, the last time they were this cheap.

Of course, Japan was undergoing an extraordinary transformation at the time. And it had to pay for that spectacular move higher... It's now nearly 20 years after the peak. And the market is still down more than 50%! The Nikkei bottomed most recently at around 12,000 in mid-March. Today it's closer to 14,000. So we might just be seeing the start of an uptrend here...



When you size it up under our True Wealth lens, Japan is:

1) The cheapest it's been in over a quarter-century.
2) Ignored, because it's performed so darn badly for so darn long.
3) Quite possibly in the beginning of an uptrend.

Bold speculators could step in today. A broad-market index fund for Japan (like EWJ) is the simplest way to go. Smaller stocks are even cheaper than the ones in the broad index. But speculators could get burned now...
Related Articles

Someone Will Make a Lot of Money on This Market Anomaly
The Last Time Around, This Asian Stock Market Gained 990%

Look, if this is truly the beginning of a major bull market in Japan, like 1983 to 1989, then we don't have to be the first ones in. We're conservative. We'll give it just a little more time to develop... to prove itself. Right now, we have no particular catalyst... and no uptrend. So we're in no hurry.

It's not often you get to say something is the cheapest it's been in a quarter-century. But you can say that about Japanese stocks today.

Someday soon, we'll be buying Japanese stocks.

Good investing,

Steve.

Pork Prices Are Increasing

According to the Des Moines Register, it seems that Pork prices are next on the list of inflationary increases. Even though there's still no inflation, isn't it funny how everything is increasing in price!

For consumers feeling the pinch of higher food prices, the flooding of prime Midwest farmland will bring more bad news in supermarkets through next year.

By wiping out corn and soybean crops across Iowa, Illinois and other states, the flood is driving up prices that were already at historic highs and increasing the cost of feed for cattle, hogs and poultry.

"I have no choice: going broke or increase prices," said Heinz Kramer, who expects to have to charge more for the pork and beef that he processes at a family-owned company in La Porte City.

Pork prices could be up as much as 30 percent next year because of production cutbacks, said John Lawrence, an economist at Iowa State University. Prices of beef and poultry products are likely to be at least 10 percent higher by the end of this year, he said.

Even the Wall Street Journal has an article on soaring meat prices:

Livestock farmers and meat producers across the country have been dealing with soaring feed costs for nearly two years. Now, heavy flooding in Iowa is sending corn prices even higher. Thursday, the corn futures contract for July delivery closed at $7.27 a bushel on the Chicago Board of Trade, up about 13% from two weeks ago.

The floodwaters, grain prices, worried Wall Street debt raters and sticker-shocked consumers have combined in recent days to slice millions of dollars in value from shares of protein giants such as Smithfield Foods Inc., Tyson Foods Inc. and Pilgrim's Pride Corp.

Tyson shares perked up Thursday after BMO Capital, noting the recent slide, called the company "our favorite ag/protein idea." Tyson shares were up 5.8% at $14.47 in 4 p.m. New York Stock Exchange composite trading.

Although meat prices have been climbing of late, the meatpackers and the farmers who supply them haven't been able to offset the huge increase in grain expenses. That is being exacerbated by expected crop losses from flooding and harsh weather.

Time To Buy Airlines!

One of my favorite investors and long-time commodities bull, Jim Rogers, gave an interview to Bloomberg this week, and his story's largely unchanged... Jim is still short all investment banks through an ETF. He's specifically short Citibank and Fannie Mae.

Rogers also announced he purchased airlines. His reason... "Everybody's very bearish." He said flights are full, fares are increasing, and if you ordered a new plane today, you couldn't get it for several years due to problems at manufacturers. Also, 24 airlines have declared bankruptcy and "bankruptcies are signs of bottoms, not signs of tops."

There you have it - it's time to short Fannie Mae and buy airline stocks

US Exports Explode

According to the International Herald Tribune:

As U.S. exporters scramble to meet the increased demand for their products created by the weak dollar, they are running into an unexpected snag: Space on ships leaving American ports has suddenly become scarce.

So the country's farmers, chemical companies, machinery makers and other exporters are facing delays at the docks that erode the currency advantage they enjoy over their foreign rivals. Or they end up paying a premium for space that, until recently, shippers were almost giving away, producers and shippers say.

Timothy Powers, chief executive of Hubbell, an electronics maker based in Orange, Connecticut, told investors this week that in March, his company saw East Coast waiting times for cargo space jump from two days to three weeks.

I guess its time to look at shipping company stocks.

Dow Chemical To Raise Prices 20%

Global chemical producer Dow Chemical Co. (DOW) announced Wednesday that it would raise prices on all 3,200 of its products – some by as much as 20% – beginning at the start of the third quarter.

Bloomberg News said it's the single-biggest price increase in the Michigan-based company's 111-year history. But Dow Chief Executive Officer Andrew Liveris said the price hike was made necessary by "unparalleled" increases in the costs of energy, transportation and raw materials, which together boosted Dow's expenses 42% in the first quarter.

Does anyone actually believe the US Governments 3% inflation numbers?

Food Inflation At Record Levels

According to USA Today, Food inflation is the highest in almost two decades, driven by record prices for oil, gas and mounting global demand for staples such as wheat and corn, and for proteins such as chicken. And that's reaching into Americans' backyards.

Basic economics account for most of the increase: Bad weather has hurt crops, economic prosperity has driven up demand in developing countries, and surging fuel prices have raised transportation costs.

Economists and food scientists have argued that biofuel production is also a major factor in rising food costs, particularly corn, and that it should be scaled back. Meat and poultry executives have come out against federal ethanol mandates, which they say is driving the cost of corn higher.

Carol Tucker-Foreman, food policy expert at Consumer Federation of America, said high-fructose corn syrup can be found in just about anything you'd find at a cookout or picnic.

"The backyard barbecue is where you'll see the most impact from the government's decision to subsidize the use of food to put fuel in our cars," she said."
This year, the price for a pack of hot dogs has climbed almost 7% to $4.29. A 2-liter bottle of soda and a 16-ounce bag of potato chips both jumped more than 10% to $1.33 and $3.89, respectively, while a package of eight hamburger buns costs $1.61, 17% more.

Attractive Brazilian Stocks To Consider

According to Martin Hutchinson, there are more than 30 Brazilian companies with full American Depository Receipt (ADR) listings on the New York Stock Exchange, plus 40-50 more that are traded in the over-the-counter market. Here are a few attractive examples to consider:

* Banco Itau Holding Financeira SA, referred to usually as Banco Itau (ADR: ITU), has a Price/Earnings ratio of 14 and dividend yield of 2.4%. Brazilian banks earn very high returns, primarily from domestic market lending in reals. Including Banco Itau, there are three large ones listed on the Big Board in New York; the other two are Banco Bradesco SA (ADR: BBD) and Uniao Bancos Brasile SA (Unibanco) (ADR: UBB). However, Itau is the cheapest of the three, though only slightly.

* Companhia Vale do Rio Doce, now referred to only as Vale (ADR: RIO), is one of the true global blue chips, with a market capitalization of almost $200 billion. An iron-ore company with ancillary operations in gold, nickel, copper and other metals, its shares trade at a reasonably valued 13 times earnings, though its dividend yield is only 1.2%.

* Petrobras (ADR: PBR) is one of the few emerging market oil companies with access to modern technology - and the willingness to work with the oil majors. Its shares are up 168% in the past year, but the stock’s P/E still is only 16. It has a 1.3% yield. The possible upside: It finds another gigantic offshore oilfield. The possible downside: Oil drops back to $50 a barrel. If the world’s monetary authorities get serious about imposing higher interest rates to fight inflation, PBR and RIO would probably suffer as commodities prices fall back to earth.

* Companhia de Saneamento Basico (Sabesp) (ADR: SBS) is the water and sewage system provider for Sao Paulo. Now that’s a growth business, and not dependent on commodity prices. With a P/E of only 9.2 and a yield of 2.7%, this is one stock I have to say I love.

* TNE (ADR: TNE) There are a bunch of Brazilian cell phone companies, but TNE appears to be the cheapest. It’s concentrated in the populous southeast and northeast regions of Brazil, with a P/E ratio of only 7 and yield of 4.25%.

* Telecomunicacoes de Sao Paulo SA, or Telesp (ADR: TSP) provides the fixed line telephone system for Sao Paulo. Before you sneer, consider this: the company has a dividend yield of 9.8% and a P/E ratio of 10 (which means the dividend is only just covered). And it’s majority owned by Spain’s Telefonica.

* Voturantim Cellulose (ADR: VCP) is a pulp and paper company, with a P/E ratio of 14 and a dividend yield of 2.8%. Trees grow fast in the tropics and VCP definitely benefits from that!