Uncommon Wisdom : Prices

To Catch a Trophy Fish, You Have to Fish in a Trophy Lake

Tony Sagami — Fri, 27 May 2011 08:05:00 GMT

HSBC Holdings, the U.K.-based banking behemoth, said it was going to hire 2,000 employees in China and Singapore. Since over 50% of its profits come from Asia, HSBC knows a thing or two about the region.

“Opportunities for growth are many in China. We forecast that the combined middle-class population of India and China will exceed the population of the U.S. by 2025,” the company said.

HSBC already has more than 5,000 employees working at its Chinese banks and clearly expects to make a mountain of money there by offering wealth management and insurance in addition to traditional banking services.

I know a thing or two about the wealth management business because I’ve been doing this for almost 30 years.

My first investment job wasn’t what I was expecting, but I had to start somewhere. That job was as a commissioned stockbroker at Merrill Lynch. I thought I was going to be an investment professional, but truth is I spent most of my day pestering strangers on the telephone.

Yes, I was one of those pesky phone solicitors who interrupted your dinner or favorite TV show with an unwelcome sales pitch. I hated that part of the job.

That job wasn’t a total waste, however, because I learned that the key to making big bucks in the investment business was to focus on wealthy multi-millionaires.

That lesson was reinforced by Bing Carlin, one of my early heroes in the investment business and manager of the highly-rated IAI Regional fund.

Bing was the spitting image of the legendary football coach Bo Schembechler, and he was one of the brightest investment minds I’ve ever met. Morningstar regularly gave his fund its highest rating until he retired in the early 1990s.

Fortunately for me, Bing took the time to share some of his knowledge with me and helped me become a much better investor.

One lesson I will never forget was Bing’s exhortation that the key to big profits was to invest in the right market. “If you want to catch a trophy fish, you got to fish in a trophy lake,” he said.

In the 1990s, the “trophy lake” was technology stocks.

Today, the new trophy lake is China.

The reason is simple: China has been the fastest-growing economy in the world. Over the last five years, China’s gross domestic product has grown between 8% to 12% each year, and all that growth has created a mountain of Chinese millionaires. Those new millionaires need guidance on how to invest.

Noah Holdings (NOAH), is one Chinese stock that is the profitable combination of the lessons I learned at Merrill Lynch and from Bing Carlin.

Noah Holdings is the largest independent-wealth manager in China, and it is making a mountain of money catering to new multi-millionaires. Investing in Noah today is analogous to investing in Fidelity 20 years ago.

The best thing about the money management business is the recurring revenues you earn on money under management. As long as Noah keeps accumulating a big pile of money, it will accumulate a mountain of recurring profits.

Source: publicradio.org
China’s rapid economic growth has helped create loads of new millionaires.

Noah has 300 relationship managers spread across 28 branch offices, has more than 12,000 clients and sells four types of products: (1) fixed income; (2) private-equity fund with underlying assets in unlisted private companies; (3) publicly traded stocks; and (4) investment-linked insurance products.

Here’s why I think Noah’s future looks so bright.

Reason #1: New Millionaires. If you want to be in the money management business, China is the best place in the world to set up shop because it’s creating millionaires (as well as billionaires) at an amazing pace. Those millionaires are super savers and have mountains of money to invest.

According to a new report from Huran Research Institute, there are now 875,000 millionaires in China and 128 billionaires, the second largest number in the world only behind the United States.

China created 48 new billionaires in the last year, proof that the rich are getting richer in China.

How’s that compare to the United States? The United States had 2.9 million millionaires in 2009, or about one in every 106 people. We had 391 billionaires or roughly one in 785,166 people.

That is why China is currently ranked fourth in the world by its number of high-net-worth individuals with investable assets of $1 million or more. China’s wealthy had about $5.6 trillion in assets in 2009.

How much of that money will Noah Holdings eventually grab? There is no way to know but I think the number is very, very BIG.

Reason #2: Just Scratching the Surface. I said above that investing in Noah today is like investing in Fidelity 20 years ago. Fidelity is a private company you can’t invest in, but the opportunity is the same. Fidelity understood the need for professional money management and became the largest mutual fund manager in the world by being in the right industry at the right time.

The same is true of Noah Holdings.

Noah is growing like mad, but its number of clients with more than $400,000 of investable assets accounted for 2.5% of China’s total. It is the other 97.5% that presents the great growth opportunity.

When I was a child, about the only investment options my parents had was real estate, bank savings accounts, insurance policies, and savings bonds.

Until recently, the Chinese had ever fewer options. About the only alternatives were little gold figurines/ingots or stuffing money under a futon. Heck, the Chinese weren’t even allowed to own homes under the older, strict communist regimes.

Today’s Chinese investor has more options, and like wide-eyed Americans in the 1970s and 1980s, they need guidance and help. Noah is in the best position to deliver that assistance — and make a bundle in the process.

Reason #3: Absence of Any Meaningful Competition. The wealth management business in China is at an early stage of development and is highly fragmented.

Most of the competition is from Chinese banks that have an in-house sales force, but Chinese banks are mediocre at best at anything other than their core banking business and unlikely to mount any serious competition to Noah.

What about American or European money managers? While western money managers are salivating at the opportunity in China, they don’t have a chance at making it big in China. Why not?

Most Chinese prefer to do business with Chinese companies. Sure, they like designer labels when it comes to fashion, cars, or luxury goods, but when it comes to their life savings, they will stick with who they know. Even a bank as big and well-known as HSBC is going to find it tough going.

Reason #4: Brand Name Means Everything in China. Remember those old E.F. Hutton TV commercials? Two people in a crowded area and one says to the other “Well my broker is E.F. Hutton and he says” at which point everyone stops and leans in to listen.

Source: efhuttonalumni.org

The brokerage industry was different 30 years ago, and there was a certain cachet to doing business with high-profile, branded brokers like E.F. Hutton.

That is even more true in China. Whether you’re talking about Louis Vuitton handbags, a Tiffany wedding ring, or an Apple iPhone, Chinese consumers are obsessed with brand names.

Noah Holdings is becoming the established brand for wealth management among the country’s high-net-worth population. Noah is seen as an independent, personalized wealth manager with sophisticated products and is well on its way to becoming the first company China’s wealthy think of when they need help managing their millions.

Reason #5: Recurring Revenue. One of the big attractions of the money management business is recurring revenue on money under management. Noah’s revenues are fairly evenly split between its fixed income and private-equity fund products. While the conservative fixed income funds are less affected by market swings and provide a steady stream of revenue, the equity side is where the big home runs can be hit.

Reason #6: IPO to Fuel Expansion. Noah Holdings raised around $90 million from its IPO, and it is going to use those funds to expand its already rapidly growing business.

$15.0 million to set up new branch offices and expand coverage network, including hiring additional relationship managers

$15.0 million to upgrade IT infrastructure

$15.0 million for capital contributions to funds of funds formed by the Company

Don’t forget that the key metric to the money management business is assets under management and the forthcoming expansion should send revenues and profits to the moon.

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WARNING: There is another Chinese company listed on the NYSE with a very similar name: Noah Education Holdings. Its symbol is NED, so make sure you don’t mix up the two when placing your order.

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Source: wsj.net
Noah Holdings CEO Jingbo Wang outside the NYSE.

Noah is traded on the New York Stock Exchange, but has only been publicly traded since November when it sold its IPO for $12. It initially shot up to $20, but is now trading around $15 a share.

And as you know, timing is everything when it comes to investing, so you should wait for it to go on sale before jumping in or wait for my buy signal in Asia Stock Alert.

As always, you need to do your homework and decide whether any of the securities I talked about in this column are appropriate for your personal situation and financial goals.

Best wishes,

Tony

P.S. If you are looking for more specific buy/sell recommendations on my favorite Asian stocks, please consider a subscription to my Asia Stock Alert for only $199 a year. I think it may be the best investment you’ll ever make

Investing Lessons From A Hamburger

Tony Sagami — Fri, 06 May 2011 17:17:00 GMT

What can a hamburger teach you about investing? An awful lot if you peak underneath the pickles and lettuce and listen carefully to what the world’s biggest hamburger company tells you.

I’m talking about McDonald’s (MCD).

McDonald’s recently reported first quarter results that were pretty darn good. Sales increased by 9% to $6.1 BILLION. That’s a whole lot of Big Macs.

Profits increased to $1.2 billion, an 11% increase over the $1.1 billion during the same period last year. That worked out to $1.15 a share, which was slightly above Wall Street expectations. Same-store sales increased by 2.9% in the United States and by 4.2% at non-U.S. stores.

Those are just the headline numbers, but there were a handful of important facts that got my attention.

High Gas Prices May Help? Did you know that 60% of McDonald’s sales in the United States are purchased from drive-through windows?

Since all of us are spending more money on gasoline, that leaves less money for other things — like dining out. Will that be bad news for McDonald’s?

The company believes that pinched households will still eat out at lower-cost restaurants and expects high gasoline prices to have little effect on its business.

Hamburger Clue #1: There is no question that Americans will be forced to cut back on their dining out budgets but the value-oriented restaurants — McDonald’s (MCD) and Yum! Brands (YUM) — will be the least affected while mid-priced restaurants chains — Darden (DRI), Brinker International (EAT), and DineEquity (DIN) — may struggle.

The Pain Of Inflation. McDonald’s says it’s paying a lot more for three things: (1) taxes, (2) interest expense on debt, and (3) food. McDonald’s said its tax rate will rise from 29.3% it paid in 2010 to 30-32% in 2011 and moaned that its interest-rate expenses will rise from 5% to 6%.

The company buys a lot of beef, buns, potatoes, and dairy products and all of them cost more today. It all adds up “to significant increases in three months in virtually every item in our basket,” McDonald’s warned.

“Yes, we’ve got some headwinds,” said CEO Jim Skinner, who expects its food costs to increase by 4% to 4.5% this year.

Hamburger Clue #2: I’ve talked about food inflation several times in this column and talked about various ways to profit from rising food prices: 2 ETFs To Play China’s Inflation Problem and Three Ways To Gain From Grains.
Would You Like Fries With That? My teenage children tell me that fast food jobs are the worst, but I’ve always admired the training and promotion opportunities that McDonald’s offers its best workers. I know several high-level and well-paid McDonald’s managers who started off making hamburgers and french fries.

McDonald’s announced a national hiring spree that will add as many as 50,000 employees to its workforce. The company will add an average of three and four new staff at each store and increase McDonald’s workforce by 7% to 700,000 staff.

Hamburger Clue #3: Sadly, the United States continues to grow its service and government workforce but little else. The well-paying manufacturing and blue collar jobs have left for good. I have little faith in the jobless recovery that has recently been powering the U.S. stock market this year.

The Big Mac Index. Yup, there is such a thing. The Economist magazine uses the price of a Big Mac to evaluate the purchasing power parity of various currencies. If all currencies were fairly valued, the price of a Big Mac would be roughly equal in all countries.

A Big Mac costs $3.71 in the United States, according to The Economist. But it costs the equivalent of $2.18 in China and $1.90 in Hong Kong. That means a Big Mac is 41% cheaper in China than the United States and is 49% cheaper in Hong Kong than the United States.

Perhaps that is why the International Monetary Fund said last month that the Chinese yuan is “substantially below levels consistent with medium-term fundamentals.” Clearly, the Chinese yuan is undervalued and headed higher.

Hamburger Clue #4: The most direct way to profit from a rising yuan is to invest in the WisdomTree China Yuan ETF (CYB). Disclosure: My Asia Stock Alert subscribers already own CYB.

Look East For Growth. McDonald’s has 32,700 restaurants around the world with 14,000 of those in the United States. Clearly, McDonald’s is a global company, but it is becoming very Asian these days.

“McDonald’s is expanding faster in China than in any other market in the world,” said Kenneth Chan, CEO of McDonald’s China. The company plans to build 700 new restaurants in China within two years, which will bring its total Chinese locations to 2,000 stores.

McDonald’s has been in China for 20 years and understands that China will power its future growth.

Hamburger Clue #5: McDonald’s is doing well in China but Yum! Brands (YUM) is taking China by storm. Yum! Brands has 3,400 Pizza Hut and KFC stores in China and is building more as fast as it can.

McDonald’s is just one company, but because it has such a large international footprint, you can deduce a lot of investment clues from its results.

Best wishes,

Tony

Two Rules For Trading Pink Sheet Stocks

Tony Sagami — Mon, 02 May 2011 18:39:27 GMT

I have been touting Asian stocks for years not because I was born in Japan but because that is where the best stock market opportunities are to be found.

There are three ways to invest in foreign stocks:

Option #1: Buy American Depositary Receipts, or ADRs. ADRs represent ownership in the shares of a non-U.S. company that trades in the United States. ADRs enable U.S. investors to buy shares in foreign companies without the inconveniences of cross-border and cross-currency transactions.

They carry prices in U.S. dollars, pay dividends in U.S. dollars, and can be traded like the shares of U.S.-based companies. Many Asian companies, including Toyota, Honda, China Mobile and Sony — trade on the New York Stock Exchange through ADRs.

China, India and Japan offer the most of all the Asian countries.

Option #2: Buy on the Home Exchange. There are hundreds of Asian ADRs traded on the NYSE and Nasdaq, but that is just the tip of the Asian iceberg. There are TENS OF THOUSANDS of other Asian stocks traded on their home exchanges in Tokyo, Hong Kong, Singapore, Seoul, Jakarta, and other major Asian cities.

While ‘most’ Asian countries welcome your investment business, there are exceptions:

CLOSED DOOR: Taiwan and mainland China allow only large institutional investors. U.S. investors are not allowed to invest directly into the Taiwan Stock Exchange.

RESTRICTED LIQUIDITY: Vietnam requires that you leave your money in the country for at least a year. I don’t know about you, but I will not invest in anything that restricts my liquidity.

NO RESTRICTIONS AND SIMPLE: Hong Kong, Singapore, South Korea, Japan, Indonesia, Malaysia, and Thailand.

NO RESTRICTIONS BUT NOT-SO-SIMPLE: India, Cambodia, Pakistan and the Philippines.

I don’t know why, but most investors I talk to seem to have a phobia about buying stocks on a non-U.S. exchange. They mistakenly think that investing in foreign stocks is difficult and expensive.

It costs a couple more dollars to trade foreign stocks but no more than $20 or $30 per trade if you use the right broker. Bottom line: Buying foreign stocks is simple, easy, and inexpensive.

Option #3: Buy on the U.S. Over-The-Counter Market. The over-the-counter market is also known as the “Pink Sheets” market. The Pink Sheets are a daily publication compiled by the National Quotation Bureau with bid and ask prices of over-the-counter stocks.

Unlike companies on a stock exchange, companies quoted on the Pink Sheets system do not need to meet minimum requirements or file with the Securities and Exchange Commission (SEC). The name “Pink Sheets” comes from the paper color that quotes were historically printed on.

The Pink Sheets have a horrible reputation. Whenever you hear about a stock getting de-listed from the NYSE or Nasdaq, it ends up on Pink Sheets, a marketplace primarily filled with penny stocks and borderline insolvent companies.

However, there is a wide range in the quality of issuers whose securities are traded on the Pink Sheets — from major international conglomerates to very small, highly speculative, often worthless companies.

The Pink Sheets: Hide and Seeking the World’s Best Foreign Stocks

There are roughly 15,000 stocks traded on the Pink Sheets, and most of them are worthless.

But there is one sub-category of Pink Sheet stocks that is worth your time and is the source of some of the very best values.

Any stock that trades on the Pink Sheets falls into one of these two categories: (1) companies that don’t meet the listing requirements of the New York, American or Nasdaq stock exchanges or (2) companies — usually foreign — that are unwilling to jump through the regulatory, legal, and accounting filings that accompany listing on the major exchanges.

The second category is foreign companies. For example, everybody has heard of Nintendo, and it is certainly not some crappy penny stock.

The only reason Nintendo is on the Pink Sheets is that it — like many foreign companies such as Volkswagen and Nestle — sees no reason to create a duplicitous legal and accounting department just to be traded on the NYSE.

These huge international companies already meet the filing and regulatory requirements of their home countries, but they would have to open and maintain an English-speaking version of those same offices.

A double legal team, double accounting team, as well as staff that are experts at U.S. securities regulations requires a huge financial and time obligation that a lot of foreign companies are unwilling to undertake.

Plus, these foreign companies have already met all those legal, regulatory, and accounting requirements in their own country and feel that the burden is on YOU to read/translate their home country filings.

Clearly, companies such as Nintendo, Volkswagen or Nestle are not borderline insolvent pieces of financial junk. They are thriving, profitable, household-name companies that are every bit as reputable as any U.S. blue chip company.

The biggest problem for most of the 15,000 stocks that trade on the Pink Sheets is that the U.S. companies on the Pink Sheets are indeed borderline insolvent pieces of financial junk. The foreign companies, however, can be hidden gold mines.

Here are my two rules for investing in Pink Sheet stocks.

Rule #1: Stick to non-U.S. companies.

Rule #2: Always use limit orders when buying/selling. Many stocks, both foreign and domestic, suffer from a lack of trading volume. Many of the Pink Sheet stocks don’t trade for days or even weeks at a time and suffer from Grand Canyon-sized bid/ask spreads. It is pretty hard to make money on a stock when the market maker is killing you for a 10% to 25% bid/ask spread on both sides of the trade.

Market Order: A market order does not have a set price and is therefore executed immediately at the current ‘market’ price. Markets, especially OTC markets, can be highly volatile, and the price of execution may differ dramatically from the price at time of order entry. Those who use market orders are more concerned about the speed of the execution as opposed to the price.

Limit Order: A limit order has a set price and may only be executed at the set price; however, a limit order may never get executed because the market may move away from the set price. Those who use limit orders risk not having an order executed.

As long as you follow those two rules, the Pink Sheets is an underappreciated market filled with some of the best bargains you will ever find.

Best wishes,

Tony

Good Economic Times Are Back ... Think Again!

Tony Sagami — Sat, 09 Apr 2011 16:59:00 GMT

The United States created more than 200,000 jobs in March and pushed the unemployment rate down to 8.8%, according to the Labor Department.

On top of that, the stock market ended the quarter with a bang and ended up as the best first quarter for stocks in 12 years. The Wall Street crowd was impressed and seems to think good times are here again.

But I don’t think so!

If you’ve read my column for very long, you know I’ve been harping about the dangers of inflation. At the expense of sounding like the boy who cried wolf, the warning signals are getting louder.

Maybe I’m just a loud mouth with a couple hundred thousand readers, but one person on the consumer frontlines who probably knows better than anybody else is Wal-Mart CEO Bill Simon.

As head of the largest U.S. retailer, Simon is in a unique position to see firsthand the effects of inflation traveling through the supply chain.

That is why I paid very rapt attention to his warning last week that inflation is “... going to be serious. We’re seeing cost increases starting to come through at a pretty rapid rate.”

Simon also warned that Wal-Mart will soon pass higher costs on to shoppers. This is the tip of the iceberg.

Here are some examples of price increases from other companies:

Hershey, the maker of Kit Kat and Reese’s Peanut Butter Cups, announced that it will raise the prices for most of its candy products by 9.7% to cover rising raw material costs, fuel and transportation.

The price of coffee has nearly doubled in the last year, reaching a 14-year high. In response, Starbucks raised the price of its packaged coffee products by 12%.

Nike announced that it will raise the price of its shoes by an average of 5.2% due to rising prices for cotton and rubber.

Instead of raising prices directly, Kraft Foods is responding to rising costs with smaller portions and reduced serving sizes. A Kraft American Cheese package, for example, now contains 22 slices instead of 24 slices. That’s the same as increasing prices by 8.3%.

U.S. Inflation on the Rise

The Consumer Price Index rose at an annualized rate of 2.1% in February (the most-recent statistics available), according to the Bureau of Labor Statistics.

Fresh vegetables and meats rose the fastest, and dairy products are at their highest level since 2008. Fruit is up 10.6%; pork up 9.9%; ground beef up 9.9%; and potatoes up 5.9%.

The short-term picture looks ever more worrisome. The annual rate of price change for the six months ended in February was 3.9%. Using the last three months, the annual rate of change is 5.6%.

Conditions will get even worse now that oil has crossed the $100 threshold and looks to stay high — if not move higher — because of Middle East unrest.

The national average for a gallon of gasoline hit $3.61, but it’s even higher in some parts of the United States, according to AAA. Gasoline prices in California, for example, hit an average of $4.04 last week.

Gas prices are roughly $1 a gallon higher than they were a year ago, and since the average American family uses about 1,200 gallons of gasoline a year, that’s an extra $1,200 a year out of their pockets and a major hit to household budgets.

Consumer Confidence Takes a Hit;
Higher Interest Rates Are Coming

All this inflation is eating away at consumer confidence. The Conference Board’s Consumer Confidence Index fell more than expected in March to 63.4 from 72.0 in February. A reading of 90 indicates a healthy economy, so we are way below that benchmark and ready to go even lower.

I say “lower” because the Federal Reserve Bank will soon be forced to adjust its zero interest rate policy to battle the inflation problem it caused with absurdly low interest rates and money printing.

Two of the Federal Reserve Bank officials are giving clear advance warning signs. Richmond Fed President Jeffrey Lacker said in a CNBC interview that he “wouldn’t be surprised” if the central bank raised interest rates by the end of the year.

Minneapolis Fed President Narayana Kocherlakota told The Wall Street Journal that benchmark borrowing costs could rise by three-quarters of a percentage point by the end of the year.

The big Wall Street money already knows this. Treasury bonds suffered their second quarterly loss in a row. Treasury bonds lost 0.1% in the first quarter of 2011 following a 2.7% drop in the final three months of 2010.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Company (PIMCO), warned that Treasury bonds “have little value.”

Warren Buffett feels the same way. “I would recommend against buying long-term fixed-dollar investments,” he warned during his March trip to India.

How To Play Higher Interest Rates

How can you make money if Gross, Buffett, and I are correct about interest rates? There are several options to consider:

There is a special breed of bond funds that are designed to make money when interest rates go up:

Rydex Inverse Govt Long Bond (RYJUX), for example, aims to deliver the inverse return of a 30-year Treasury bond.

ProFunds Rising Rates Opportunity (RRPIX) sets 125% of the inverse of the long bond as its goal. Warning: both of these funds will lose money if interest rates actually decline.

There are several exchange traded funds that also profit from rising interest rates: iPath U.S. Treasury 10-Year Bear ETN (DTYS), iPath U.S. Treasury Long Bond Bear ETN (DLBS), and ProShares Short 20+ Year Treasury (TBF).

And if you really want to make an aggressive bet that interest rates are going to rise, you could invest in a LEVERAGED INVERSE exchange traded fund such as the PowerShares DB 3X Short 25+ Year Treasury Bond ETN (SBND) or Direxion Daily 30-Year Treasury Bear 3X (TMV).

More conservative investors could look at Treasury Inflation-Protected Securities or TIPS, which are bonds that adjust their interest rate every six months, according to fluctuations in the Consumer Price Index (CPI). A TIPS bond fund will perform well if both interest rates and inflation are on the rise.

Funds to consider are: Vanguard Inflation-Protected Securities (VIPSX); American Century Inflation-Adjusted Bond Fund (ACITX); Fidelity Inflation-Protected Bond (FINPX); and T. Rowe Price Inflation-Protected Bond (PRIPX).

I’m not suggesting that you rush out and buy any of these ETFs or bond funds. As always, you need to do your homework and decide whether any of them are appropriate for your personal situation and financial goals.

And as you know, timing is everything when it comes to investing, so you should wait for these to go on sale before jumping in.

Best wishes,

Tony

Three Ways To Gain From Grains

Tony Sagami — Fri, 01 Apr 2011 16:58:11 GMT

I have talked about inflation, especially rising food prices, several times this year, and while I don’t want to sound like a broken record, the evidence continues to mount AND the opportunity to make to a lot of money is growing.

What happened last week in the grains market is especially telling.

First, let’s deal with the definition of the “grains” market. Most people think of wheat when they think of grain, but the investment and agricultural definition includes barley, sorghum, rice, corn and soybeans.

There was big news about the grains market last week from China.

China increased its grain imports to 60 million metric tons in 2010, according to the U.S. Department of Agriculture (USDA). That’s the biggest on record.

How big is a metric ton?

A metric ton is equal to 1,000 kilograms or 2,204 pounds.

The 60 million metric tons mentioned in the above statement translates into 66 million American tons.

Out of the 60 million metric tons 54.8 million metric tons were soybeans, according to the Chinese Ministry of Agriculture. More impressively, that is roughly 60% of global soybean production in the entire year.

In case you're wondering, most of those soybeans were used for animal feed — cow, pork, and poultry — not tofu and soy sauce.

China also imported 1.57 million metric tons of corn and 1.2 million metric tons of wheat.

Demand Is Not Slowing

Like a squirrel preparing for winter, China is importing all those gains to beef up reserves to protect its population against a food shortage.

“Some 200 million tonnes of grain are now in storage,” said Chen Xiwen, the director of China Central Committee’s Leading Group on Rural Work.

And there are no signs of that Chinese demand slowing down.

For the week ending March 17 (the most-recent data), China bought an additional 116,000 metric tons of grain from the United States. That is the most for any week since July 2005, according to the USDA.

With all that buying pressure, it is no surprise that grain prices have surged. Over the last 12 months, the price of grain has jumped by 56%.

To be fair, some of that price increase is because of a severe drought in Russia (which temporarily banned grain exports) as well as floods in Canada and Australia.

But make no mistake that most of the price increase is from rising global demand, especially in China.

All that grain purchasing is even more staggering when you realize that China itself produced 115.1 million metric tons in 2010, according to statistics from the China National Grain and Oils Information Center.

Historically, China has largely been able to feed itself. In 2010, China produced 546 million metric tons of grain, a 2.9% year-on-year increase, and it was the seventh year in a row the country increased its grain harvest.

That is changing because China is rapidly converting its farmland into homes, office buildings and factories. Limited available arable land, scarce water resources and rapid urbanization will make it difficult if not impossible for it to meaningfully expand its grain production.

China is currently able to meet about 95% of its grain needs, but I expect it to import more in the coming years.

The U.S. Grains Council recently forecast that China will import 2.5 million metric tons of corn in 2011 — the largest amount in 15 years.

As a result, corn futures came close to breaking $7 a bushel last week and are up by 90% in the last year.

China, by the way, is the world's second-largest corn producer.

Even though grain prices have soared, I have ZERO doubt that they are headed much higher.

Three Ways To Play
The Grains Market

Here are three ways to invest in grains, wheat, soybeans, corn and other agricultural products:

Option #1: Futures: You can buy futures contracts on wheat and other agriculture commodities. Investing in futures is complicated, requires knowledge of the futures market, and extremely risk. Futures are inappropriate for almost all investors.

Option #2: Exchange Traded Funds. There are several exchange traded funds (ETFs) and exchange traded notes (ETNs) that should profit from rising agricultural commodity prices.

PowerShares DB Agriculture (DBA) actually holds futures contracts on wheat, corn, soybeans, sugar, and other agricultural commodities and is a very direct way to profit from rising food prices.

iPath Dow Jones UBS Grains Total Return (JJG) is the closest you can get to investing in wheat without actually buying grains (wheat, soybeans, and corn) futures.

ELEMENTS MLCX Grains Index (GRU) is similar to JJG but includes soybeans and soy meal.

Elements Rogers Intl Commodity Agriculture (RJA) mirrors the performance of the Rogers International Commodity Index, which represents the value of a basket of 20 agricultural commodity futures contracts.

iPath Dow Jones UBS Agriculture Total Return Sub-index (JJA) is an ETN that holds seven agriculture futures contracts: Wheat, corn, soybeans, cotton, soybean oil, coffee and sugar.

Market Vectors Agribusiness (MOO) invests in stocks of U.S. and foreign companies that derive at least 50% of their revenues from agriculture business.

Option #3: Agriculture Stocks. You can invest in companies that sell agriculture equipment, seeds, crops or fertilizer such as:

John Deere (DE). Most people know Deere as the company that sells farm equipment like tractors, but they also provide combines and other harvesting equipment, seeding equipment, sprayers and even agriculture software.

Bunge (BG) is the largest soybean distributor in the world and is involved in several other agri-business related products.

Potash (POT) and Mosaic (MOS) are huge fertilizer — and other agriculture products — producers.

AGCO (AGCO) sells farm machinery.

I'm not suggesting that you rush out and buy any of these ETFs, ETNs or stocks today. You need to do your own homework and decide whether any of them are appropriate for your personal situation and financial goals.

And as you know, timing is everything when it comes to investing so you should wait for these to go on sale before jumping in. However, if feeding the world's growing appetite is a sector that you want to include in your portfolio, the grain business is something that is very worthy of your attention.

Best wishes,

Tony

2 ETFs to Play China's Inflation Problem

Tony Sagami — Fri, 18 Mar 2011 16:00:08 GMT

On March 2, I wrote about the uncomfortably rapid increase in food prices and how you could profit from the forthcoming food inflation boom. I said:

“Over the last year, global food prices have increased by 29% partially due to weather shocks such as the Russian drought and floods in China. The real culprit is just old fashioned booming demand as the growing middle class in emerging markets, like India and China, simply are eating more and better.”

Stock market investing is always a moving target, so you have to regularly re-check your investment thesis to make sure that the fundamental drivers behind your strategy remain in force.

So let’s look at China’s newest inflation numbers, see if they are a problem and if they are getting worse.

The Chinese National Bureau of Statistics reported that its consumer price index rose 4.9% in February. That was a little worse than expected and it is identical to the January number. The details behind that headline number, however, paint a more ominous picture.

The government’s target rate is 4%, so the current figure means you can expect more foot stomping on the inflation brakes.

The Producer Price Index, or wholesale inflation rate, jumped to 7.2% in February. For the first two months of this year, PPI is increasing at a 6.9% annualized rate.

Food prices surged 11% on an annualized basis in February. That’s way above the comfort zone and high enough to cause some serious hardship.

Food isn’t the only commodity going nuts. Non-ferrous metals and fuel were up 14.8% and 8.9%, respectively.

I think the most-alarming news was that the government of China lowered its GDP growth target down to 7% for 2011. That is well below 2010’s 10.3% growth, and more importantly, tells me that China’s leaders are going to take some drastic and perhaps even painful action to kill off inflation.

Chart: The Wall Street Journal

Don’t take my word for it. Listen to what two Chinese leaders had to say:

HINT #1: “Following our economy’s successful recovery from the global economic crisis, inflation has also risen. In this situation, interest-rate policy is definitely an important tool that needs to be used,” said People’s Bank of China Governor Zhou Xiaochuan.

ACTION #1: China has already raised interest rates three times since October and steadily ratcheted up the share of deposits banks must hold in reserve to 19.5%.

But Mr. Zhou is pretty clear that more interest-rate hikes are on the way. Do you remember that old Wall Street adage about three steps and a stumble OR don’t fight the Fed?

For decades, academics and investment experts warned that the stock market was headed for trouble once the Fed embarks on a restrictive interest rate policy.

China isn't the only country worried about inflation.

It is essential that the recent rise in inflation does not give rise to broad-based inflationary pressures over the medium term. The governing council remains prepared to act in a firm and timely manner to ensure that upside risks to price stability over the medium term do not materialize.

— European Central Bank President Jean-Claude Trichet

There is no doubt that inflation is the most important issue which is to be addressed adequately.

— India Finance Minister Pranab Mukherjee

The increase in inflation that Russia has seen since the middle of last year has gone beyond the supply-side shock driven by the drought. We are currently updating our macro projections for Russia, and it is likely that the 2011 inflation projection will be revised upwards.

— International Monetary Fund

HINT #2: In a speech to open the annual National People’s Congress, Premier Wen Jiabao said the government would “make it our top priority in macroeconomic control to keep overall price levels stable.”

ACTION #2: On top of raising interest rates, China has raised down-payment requirements and instituted new property taxes. It has yet to use the biggest arrow in its quiver, which is to start using price controls.

You see, the Communist party runs a command economy and can do whatever it pleases. The fastest way to kill inflation is to make it illegal to raise prices.

The situation in China is pretty clear. Inflation is indeed a problem and China’s leaders are ready to take some serious action. I expect two things to happen as a result: (1) the Chinese economy is going to slow down and (2) China’s leaders may be able to slow inflation down a little but it won’t be able to stop it.

If those two scenarios are correct, there are two exchange traded funds that could do very well.
Lowering the 2011 GDP forecast to 7% already confirms that the Chinese economy is slowing, but if is slows significantly more than that, the Chinese stock market could be headed for a rough patch.

The ProShares Short FTSE Xinhua China 25 (YXI) is an ETF that’s designed to deliver the inverse of the daily performance of the FTSE China 25 Index. If China stocks slide, this ETF makes money.

Investing in inverse ETFs is a risky strategy, and betting against the Chinese economy has proven to be a dangerous bet. Therefore, this ETF isn’t appropriate for everyone. Heck, it isn’t appropriate for MOST investors, so think twice before you climb into this fund.
We live in a global economy, and even though China is trying to cool down its economy/inflation, most western countries are trying to inflate themselves out of their economic funk. Most European economies are struggling, and the spendthrifts running our country seem to have an unlimited capacity to print money.

The Global X China Materials ETF (CHIM) invests in companies that provide materials and commodities such as Zhaojin Mining, Jiangxi Copper, Shanghai Petroleum, Yingde Gases, Zijin Mining, Real Gold Mining, Sinofert Holdings, and Angang New Steel.

As you know, timing is everything when it comes to investing, and I am not suggesting that you rush out and buy either of these ETFs tomorrow morning. Do your homework and decide for yourself if these are appropriate for your personal situation, tolerance for risk, and especially whether or not you see inflation becoming a problem or not.

Best wishes,

Tony

4 ETFs To Play Rising Food Prices

Tony Sagami — Fri, 04 Mar 2011 16:17:00 GMT

The finance chiefs of the world's 20 most-developed economies recently gathered in Paris to discuss the challenges facing the global economy. One of those challenges is inflation — especially food inflation.

"International commodity prices are rising. Food situation is a major issue which is going to affect the international economy and trade," said Finance Minister Pranab Mukherjee of India.

John Lipsky, the Deputy Managing Director of the International Monetary Fund, urged the G-20 to find a remedy. "There is great concern over the obvious high volatility of basic commodity prices especially food and serious supply shortages of meat, vegetables, sugar, salt, and dairy products," Lipsky said.

The G-20

The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established in 1999 to bring together industrialized and developing economies to discuss key issues in the global economy.

The G-20 is made up of the finance ministers and central bank governors of 19 countries and the European Union: Argentina, Australia, Brazil, Canada, China, European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, and the United States.

"Global food prices are rising to dangerous levels and threaten tens of millions of poor people around the world," said World Bank President Robert Zoellick. About 44 million people in emerging markets have fallen into poverty because of rising food prices, according to the World Bank.

The World Bank's Global Food Price Index jumped 15% between October 2010 and the end of January.

Over the last year, global food prices have increased by 29% partially due to weather shocks such as the Russian drought and floods in China. The real culprit is just old fashioned booming demand as the growing middle class in emerging markets, like India and China, simply are eating more and better.

In China, for example, the consumer price index rose 4.9% in January from a year earlier. That's a pretty high inflation rate by itself, but it was especially disturbing to hear that food prices have jumped by 10.3% in the last year.

Many important foods were up even more: grain up by 15%; sugar by 20%; eggs by 20%; cooking oil up 22%; and fresh fruit surged 34%.

China has taken some aggressive steps to curb its inflation.

It just raised the amount of money banks must keep in reserve. The People's Bank of China raised the reserve requirement ratio by 50 basis points to 19.5%, which is a record high and the second time this year it has boosted the reserve requirement.

Plus, the PBOC has raised key interest rates three times in the last four months.

Supply Shortages Are A Big Concern

Rising food prices are a big problem, but supply shortages are an even bigger concern in countries, such as China, that consume more food than they produce.

FACT: China became the top importer of U.S. agriculture goods in 2010 for the first time in history.

Yup, China passed Canada, who imported $16.9 billion of U.S. food in 2010, by buying $17.5 billion worth of agricultural goods.

Agriculture is big business in the United States. All totaled, the United States sold $115.8 billion in agricultural products worldwide last year.

One of the U.S.'s largest agricultural exports is soybeans, and China is buying just about all we can produce. In 2000, China bought 19% of our soybean exports but that number soared to 58% in 2010.

It may surprise you because you may think China uses those soybeans to make soy sauce and tofu, but those soybeans are being used primarily as feed for livestock. China is consuming more meat than ever, and it needs to feed its livestock with U.S. soybeans and grains.

And those soybean exports are going to grow. The U.S. Department of Agriculture predicts that by 2020 demand for soybeans in China will increase to 88.3 metric tons a year, up from 50.3 metric tons last year — that's a 75% increase.

China may have taken the U.S. manufacturing industry for shoes, clothes, electronics, furniture and clothes, but it cannot steal our agricultural industry, so the United States will remain a dominant global food player.

China will overtake the United States to become the world's biggest grocery market next year.

There are several ways you can profit from the rising demand and prices of foods.

Last week, I wrote about three fertilizer companies, and my good friend Larry Edelson wrote about two U.S. food producers in his February 7 column to consider.

4 ETFS To Consider

If you're more of an ETF investor, here are four to consider:

PowerShares DB Agriculture (DBA) is more of a pure food commodity play as it invests in a basket of agricultural futures such as corn, soybeans, sugar, cattle, cocoa, coffee, cotton, lean hogs and wheat.
Market Vectors Agribusiness (MOO) invests in agricultural commodity producers such as Deere & Company, Potash and Archer Daniels Midland.
PowerShares Dynamic Food & Beverage (PBJ) invests in companies that distribute food to consumers such as Starbucks, Yum! Brands, General Mills, HJ Heinz and Kroger.
Consumer Staples Select Sector SPDR (XLP) invests in companies such as Wal-Mart, Kraft Foods, Kellogg and Sara Lee.

As you can see, there are lots of ways to invest in food. That doesn't mean you should rush out and buy any of those stocks or ETFs tomorrow.

As always, you need to do your own due diligence, and given the big moves that many of these stocks have recently made, you may be better off waiting for them to go 'on sale' before jumping on board.

Make no mistake, however, the long-term prospects for food companies is bright.

Best wishes,

Tony