by Steve McDonald, Bond Strategist, The Oxford Club
Friday, November 9, 2012
In focus this week; time to be more cautious about emerging market corporate bonds, farmland and the SITFA.
I don’t normally take a negative position in this segment but this one has gotten so crazy I feel compelled to address it.
Companies in emerging markets are issuing debt at record levels, and the world is buying them at record levels, too. In fact, buyers are acting as crazily in this market as anything I have ever seen.
Telefonica Colombia hoped to raise $750 million dollars in a recent bond offering. They had $7.5 billion in offers.
Mexichem recently offered a new bond that had 15 times as many buyers as they had bonds to sell.
Bond issues are up 10 times in the EM’s in just 10 years; from $20 billion in 2002 to $200 billion this year.
Fueling this frenzy is the fact that dollar denominated government issued bonds from the EM’s are hitting record low yields, so yield starved investors are pouring money into the corporates.
Robert Abad, an emerging market bond specialist from Western Asset Management said in a recent interview that lower quality companies are getting scads of cash that in a normal market wouldn’t get a penny.
Add to this bond buying craziness the fact that many of these developing countries do not have the bankruptcy protection we are accustomed to here at home, and the lack transparency, and you have all the components for a real disaster.
Never in all the years I have been in the markets have I seen any investment where people were throwing money at it, at this rate, with as many risks as these bonds carry, that wasn’t a prelude to a black swan event, or at least a major selloff.
It may take some time for it to fully develop, but this is one area where I would take profits and avoid. There are better places to be.
Next up, Farmland
Well, from negative to positive, farmland is really, really hot.
Everything is lining up for a huge future for American and Canadian farmland.
Food prices in most of the world have exceeded those that resulted in riots in 2008 and the UN is predicting more of the same unrest.
The key food producing nations of the world have had record droughts this past season and John Taylor, a national farm and ranch executive for US Trust said in a Journal article, the demand for US crops is increasing past supply. Even the US can’t keep up with the worldwide demand for food.
Demand has been rising so quickly that corn prices were up 50% at one point in 2012.
Increasing world population, an exploding middle class in the EM’s that is demanding higher quality food, decreasing acreage under the plow, in parts of the world that least afford it, and the record drought of 2012 have put enormous pressures on supplies and the suppliers.
It’s a great time to be a farmer! I’ve been saying it for almost five years; food, farmland, fertilizer and seed.
But owning or buying a farm isn’t for everyone and there are virtually no ETF’s or even managed funds that buy farmland.
Market Vectors Agribusiness ETF (NYSE:MOO), the agriculture ETF, is usually where most go to play this segment, but it is not a pure land play. Still, it has done very well.
There are services that will assist you in buying and running a farm, but the Journal warns: do your due diligence before picking one. Make sure you use one that has operations in place and a history of success in the fields.
Search farmland investment for some ideas of where to start.
Running a farm is not what most of us know how to do.
As my father used to say; a farmer has to be half farmer, half CPA, half veterinarian and half engineer, and that’s a lot of halves.
But, if you have the where with all to do it, this is like buying shares in Standard Oil in the early 20th century. It will take time, but it is that much of a sure thing.
The exploding population of the world has to eat. Demand is already outstripping supplies. US and Canadian farms will be supplying a big part of the food the world has to have to survive, and all of it, all of it will come from farmland.
Next up, the Slap-in-the-Face-Award
This has nothing to do with the markets, but I really love this kind of story.
Everyone by now has heard about the painting by Renoir that was purchased by a lady at a yard sale for $7. The value was guesstimated in the hundreds of thousands of dollars.
Who hasn’t dreamed of lucking out in a situation like that?
Well, it the picture ended up at an auction house outside of Washington, D.C. where, of course, the new owner was expecting to sell it for a small fortune.
Things like this are just too rich for words. A Renoir at a yard sale!
And, as all reputable auction houses do, they submitted information about the painting to the FBI to make sure it wasn’t stolen.
Well, guess what? It seems the painting was reported missing by the Baltimore Museum of Art in 1951. It had been in a storage container in the basement since the late 20’s and just walked off one day.
The museum was reimbursed about $2100 for the loss by an insurance company, and that was when $2100 was a lot of money.
The question now, who owns the painting?
At present the FBI has it and the smart money is betting it won’t go to the lady who saved it from the trash heap at the yard sale.
The insurance company seems like the likely winner.
So close and yet so far!
Now that’s a real slap in the face.Beware These "Bond Bombs" In Your Portfolio,