Few investors' newsletters make our "must read" list. But Jeremy Grantham, the highly regarded head of GMO, is one.
You may remember Grantham's April letter, where he called for a "paradigm shift" in commodity prices…
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The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly. |
We commented on Grantham's letter in the April 26 Digest…
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Jeremy Grantham is a brilliant investor. He correctly called the top of stocks in 2007. And he re-entered the market near the bottom. In addition to excellent fundamental analysis, Grantham also relies on "mean reversion" to form his investment theses. "Mean reversion" simply means things tend to revert to their historical averages. |
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Whether it's market prices, equity valuations, or profit margins... Grantham knows trees don't grow to the sky and the world never comes to an end. For example, Grantham forecast the technology bubble, noting how far from the "mean" technology stock prices had wandered. They must, he posed, return to earth. He was right. |
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But with his most recent investor letter, Jeremy Grantham has left his wheelhouse. Instead of the value investing he's known for, Grantham drones on like a typical Wall Street government shill about Peak Oil, global warming, income redistribution, and the world's need for a strict energy policy. And he says commodity prices have made a "paradigm shift"... Or in other words, high and rising commodity prices are here to stay. They will not revert to the mean. – Sean Goldsmith, April 26, 2011 Digest. |
Since Grantham's call, many commodities – like oil and coper – have corrected. One commodity investment many mainstream finance people are still super-bullish on is agriculture. Corn is up 130% in the past year. Cotton is up 62%. Wheat is up over 75%. And U.S. farmland is selling for record prices...
Hedge funds are largely responsible for the increase. According to Grant's Interest Rate Observer, an April 8 farmland auction set a new record of $11,080 an acre in one Iowa county. But farmers dropped out of the bidding at $9,000 an acre. Two hedge funds bid the land up, in $25 increments, to its final price.
This love affair with agriculture is a function of a low-interest rate world. Sitting in leather chairs in air-conditioned offices, investors are scrambling to buy farmable land at sub-4% crop yields (near record lows). And then they must pay someone to farm that land, which eats another percent or two. Ask yourself what will happen when these same investors can earn 2%-3% in a bank account.
A 3.5% crop yield values first-class farmland around 25 times earnings. Meanwhile, the Market Vectors Agribusiness ETF (MOO) – which consists of agribusiness giants Deere & Co, Potash, and Monsanto among others – trades for 14 times earnings. But you don't have to pay annual taxes on MOO, you don't have to farm MOO, and you can exit MOO with the click of a button.
I e-mailed one of our "farm watchers," Editor in Chief Brian Hunt, who grew up on a farm in Iowa. He said buying farmland between 2003-2005 – before corn and soybeans skyrocketed – was a great idea. But today, folks are paying far too much money for good land. Many of his friends back home are saying they can't believe investors are paying that much for that ground. The numbers will never work for them.
"Investors buying farmland today are taking on large risks for the possible rewards going forward," Brian says. "Prices are at record highs. Cash yields are at record lows. Farmland is illiquid. The current buyers are simply momentum trading right now. Most of these new buyers are just idiots who heard Jim Rogers say something about farming on CNBC."
Like most any asset, you don't want to be buying farmland when it's "hot." You want to buy when most folks can't stand the thought of owning that asset… which brings us to an even better "land play": natural gas.
While hedge funds are buying farmland at record high prices, we're buying some of the world's best natural gas reserves at record low prices. We already noted the International Energy Agency (IEA) calling for the "golden age of gas."
Penny Stock Specialist editor Frank Curzio is currently covering the natural gas "megatrend" in his newsletter. He sees natural gas being increasingly used as fuel for transportation and power generation. The shift to natural gas will change the American economy... and send many natural gas stocks soaring. Frank covers his favorite ways to play this trend in a recent special report. To learn more, click here...
Bond King Bill Gross appeared in Barron's latest roundtable discussion, recommending a stock we've covered for a decade...
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I recommended Annaly Capital Management [NLY] in January. The price is up a little since then, and the stock yields 14%, so that is about a 6% return for the first six months. Pimco Corporate Opportunity Fund [PTY], my other pick, also has done well but still yields about 10%. I would stay with both. You're not going to get your pocket picked with a 10% closed-end fund, and Annaly will continue to do well if interest rates stay low. |
In his most recent Retirement Millionaire update, Doc Eifrig discussed his views on Annaly (and why Porter recently sold the stock):
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Regarding Annaly, while I share some of Porter's worries, I think the bond markets and the company will perform better than he does. Also, he doesn't like to own these mortgage REITs above book value. And since he thinks interest rates are going higher, this could drive the price of REITs like NLY down. |
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Annaly currently trades for $18.14, $2.38 above its most recently reported book value of $15.76. But interest rates have dropped since the company announced its most recent numbers (thus book value might be higher). I estimate book value closer to $16.40. |
Gross also recommended the PIMCO Income Strategy Fund (PFL), "a portfolio of corporate bonds rated Baa, with 20% leverage. The 12-month yield is 9.6%."
The annual "power lunch" with Warren Buffett – an auction to benefit the poor and homeless – went for a record $2.63 million this year. The auction ended last Friday. On a side note, shares of Berkshire Hathaway, Buffett's investment vehicle, hit a new 52-week low on Friday.
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New 52-week highs (as of 6/10/11): Forest Laboratories (FRX).
As always, we invite all your comments for our mailbag... good and bad. How have we offended your, dear sir... or madam? Please send all feedback to feedback@stansberryresearch.com.
"I of course am conflicted – My biggest urge right now that many of my positions have dropped 15% or more in the last few weeks is to run to cash and hide – 'Here it comes ... recession part 2' – At the Same time – Sjugg is saying buy – and that scares me – and in my personal experience, when I have sold when I was scared – I got raked – and when I bought when exhuberence was high – I got raked. So in Summary – The fact that I am scared to death to hold my position tells me I should keep on holding..." – Paid-up subscriber Jared L.
"I find it interesting that the article in mention is written for men. Do you not find you have women readers and investors. The phrase, if you are a dessert man, then try the cheesecake, I find rather offensive. While I would likely agree most of your readers are men, there are some women out there who invest and are interetsed in investment , and most certainly are interested in good food also. I happen to be one of the lonely few women. So... just to let you know we are out there and also would appreciate acknowledgement in the men's society. After all , we are not in the dark ages here ... I do not think ????" – Anonymous
Goldsmith comment: I used the phrase "dessert guy." Considering I wrote a direct response to a male subscriber, I see no issues. I suppose we should be happy this is your greatest complaint about our work.
Good investing,
Sean Goldsmith
Baltimore, Maryland
June 13, 2011
Grantham's 'paradigm shift'... Record farmland prices... Our favorite land to buy... Bill Gross' favorite stock... Lunch-with-Buffett auction over... Are we sexist?...