The S&A Digest: Not Enough Wheat - Agriculture Is Soaring

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Repo tours... More pain to come in subprime and banking... Financial stock bonanza... Buffett offers a backstop... Goldman Sachs now offers free sex-change surgery... Agriculture plays catch-up...

 It's called a "repo tour."

A repo tour is when you fill a bus with prospective home buyers and take them on a tour of homes in or near foreclosure that sell for "below market" prices. Last week, the first repo tour ever made its way through Jackson County, Oregon, my neck of the woods. They called it "The Tour of Hot Deals."

The tour included breakfast and lunch, courtesy of two local brokers.

Nearby Medford, Oregon, was in the Wall Street Journal a couple years back as one of the top 10 cities most likely to experience a dramatic drop in home prices. The median home price in Jackson County fell 9.1% in the quarter ended January 31. Over the last five years, median home prices in the area have increased by 50% on average. If I could sell my house for 10% less than the most recent transactions in my neighborhood, it would return 65% over what I paid for it in December 2002.

I still haven't found out if anybody actually made any offers after the tour. They're planning another one for later this month. With the way things are around here these days, I have no desire to get into real estate, but the tour-bus business is certainly looking attractive.

 Yesterday, I spoke with a friend who runs a subprime-mortgage company. Before he became head honcho, he pounded the table for his company to stop all loan origination and finally triumphed in late 2006. At that point, he took over and deleveraged the company. He's got beaucoup lines of credit, but he didn't spend a penny of it in 2007. He says it's too early to buy the banks because a lot more pain is yet to come and it's hard to tell who has quality assets and who doesn't.

 My friend is a smaller investor. But some of the biggest investors are jumping into financial stocks...

On the equity side: Hedge-fund manager Barton Biggs is increasing his holdings of financials because he doesn't expect a recession and shares are "very, very cheap." Biggs said the market is "at or very close to an important bottom" and expects some financial companies to rally 20%-30% in a matter of weeks.

On the debt side: Pimco, the world's largest bond fund, is buying Bank of America and Citigroup bonds. "The fact that the banking sector has attracted fresh capital in the last couple of months is huge," said Mark Kiesel, an executive vice president at Pimco. "We've been playing defense for the better part of two years, and the question we've been asking ourselves is when to go on offense. In the banking sector, we've started to do that." Yields on bank debt reached 272 basis points higher than Treasuries on January 23, the highest since at least 1996.

 Warren Buffett is putting some of his $40 billion war chest to use in financials, too... on the insurance side. Buffett offered to help troubled bond insurers Ambac, MBIA, and FGIC by offering a second level of insurance on up to $800 billion in municipal bonds. "It would solve it in one stroke of a pen," Buffett said. "Our proposal puts the municipals at the front of the line." Berkshire would put up $5 billion as part of the plan, Buffett said. The companies would be left with a portfolio of riskier instruments, but they'd have more capital to back them up. Buffett's offer comes with a 30-day clause that allows the bond insurers to find a better deal.

One of the bond insurers, believe it or not, has already turned down Buffett's offer, though nobody's saying which one it was. The other two haven't responded yet.

Meanwhile, folks from around the financial community – from Whitney Tilson to James Cramer – are saying the bond insurers will wind up in Chapter 11 or in runoff, which is where insolvent insurance companies often end up. MBIA and Ambac are both down 10%-11% today.

 Goldman Sachs is now offering free sex-change surgery to attract new employees. I kid you not. Goldman added sex-change surgery to its medical plan last year. Goldman employees can undergo the surgery, which costs between $5,000 and $150,000, and insurance will foot the entire bill.

 New high: Raytheon (RTN).

 Write in and tell us what your local real estate market looks like. Or perhaps you know someone who's underwater on an ARM loan. Or tell us what business you're in and whether or not it has slowed way down the past 12 months. If you're in a business that's booming, let's hear about your experiences there, too. Write to us at feedback@stansberryresearch.com.

 "I no sooner read your comment about BusinessWeek putting 'MELTDOWN: For Housing The Worst Is Yet to Come' on its cover, than I read the editorial page of my Orlando Sentinel and found the following quote from Will Rogers: 'I hope we never live to see the day when a thing is as bad as some of our newspapers make it.' Not as good as his 'We have the best Congress that money can buy,' but still good." – Paid-up subscriber Don

Ferris comment: People who sell news are always selling fear. If you're not afraid of something, you're not dependent on them for information. The government has to keep you scared for the same reason. That's why Al Gore is selling global warming, so he can scare you. Funny thing, though, ever since I sounded the alarm on the magazine-cover indicator, I've heard some smart people saying, "It's going to get worse..."

 "I am interested in buying one of the MITTS you recommended. Do I need to sell it before its expiration date or will it simply expire on that date and whatever money/profit it makes will automatically be deposited into my brokerage cash account?" – Paid-up subscriber Steve L.

Sjuggerud comment: You want to hold to maturity... The money just gets deposited into your account at full value. If you sell early, you generally sell at a discount AND pay a commission. You don't want to do that! Hold to maturity.

 "You are most likely well familiar with the person I recommend Tom Dyson touch base with if he is interested in Investment Opportunities in Brazil. He is Dr. Martin Weiss, who produces the Safe Money Report. It is my understanding that he spent his childhood and early years in Brazil, he and/or his wife own property in Brazil and he travels there about once or twice a year. Now, my question, 'Are you familiar with DreamBuilder Investments LLC?' It is a private-investment company located at 65 Broadway, Suite 1805, New York, NY 10006-2503. It holds a portfolio of nonperforming assets with rates of return from 15% (APY) to 19% (APY). Investments with DreamBuilder are secured by a revolving pool of notes owned by DreamBuilder at 30% over its investment amount. The goal of DreamBuilder is to acquire mortgages at 65% loan to value. DreamBuilder will buy mortgage notes for $0.07 to $0.25 on the dollar with the goal of making them perform. It seems to me that investment returns of 15% to 19% in a market of nonperforming mortgages in the current debacle of subprime loan defaults and CDO defaults is almost irrational." – Paid-up subscriber Tom Scott

Ferris comment: Yes, it does sound irrational. If anyone has ever had any dealings with DreamBuilder Investments, LLC, write to us at: feedback@stansberryresearch.com.

Regards,

Dan Ferris

Medford, Oregon

February 12, 2008

Not Enough Wheat: Agriculture Is Soaring

By Ian Davis

According to Simon Roberts of Australia and New Zealand Banking Group, "There isn't enough spring wheat to meet ongoing shipment demands of Asian customers."

U.S. inventories have sunk to their lowest levels since the era after World War II, when farmers grew less wheat and shipped more supplies overseas to help war-ravished nations.

Here are the facts:

1) Wheat futures just hit an all-time high, passing $11 a bushel for the first time.

2) Wheat has gone limit-up for six straight days. This means the futures price of wheat has reached the exchange-imposed daily price limit. Exchanges only allow futures prices to move by a certain amount per day. Once a future goes limit-up, trading is halted for the rest of the day.

3) The Chicago Board of Trade doubled its limit-up amount for wheat after the commodity hit the limit for five straight days.

4) The U.S. forecast for wheat inventories fell to 272 million bushels, its lowest level in 60 years.

The following chart shows the change in the price of wheat since the beginning of 2002.

Wheat Futures Climb to Record Highs

Wheat has made impressive gains in the last 1.5 years. The grain is up about 130% since it bottomed in March 2006.

And it's not alone...

 Take a look at the Dow Jones AIG Agricultural Index, which tracks the futures price of the so-called "softs" – soybeans, wheat, corn, soybean oil, cotton, coffee, and sugar. This index, which is most heavily weighted in soybeans (31%), is up 54% in two years.

However – despite their impressive run – agricultural commodities are still trying to catch up to many other industries...

Agricultural Commodities are Playing Catch-Up

For the next leg of the commodities bull market, agriculture may take center stage. The costs for many food producers, like General Mills (GIS) and Kellogg (K), will increase dramatically as a result.

The rise in agriculture prices is also a signal that inflation is spreading. Metals and energy prices have soared two- to threefold since 2002, and now food prices are on the rise as well.

As an investor, you can hedge yourself against the rising inflation by buying gold... but now may be a good time to make a bet on agriculture. In my next issue of The Quant Trader, which Alliance members will be receiving on Friday, I'll be discussing an easy and direct way to play soft commodities.

Until next time...

Good investing,

Ian Davis

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