Friday, June 26, 2015

I am buying housing stocks as a medium term trade

This is a chart of ITB the iShares Dow Jones US Home Construction ETF. The news in housing has been getting better with a couple of large home builders reporting some recent good news.

Lennar Homes

Stuart Miller, Chief Executive Officer of Lennar Corporation, said, "The homebuilding market continued its steady improvement throughout our second quarter. Driven by higher wages and employment, reasonable affordability levels, supply shortages and favorable monthly payment comparisons to rentals, the homebuilding market is well positioned for multi-year growth ahead."
Mr. Miller continued, "Our core homebuilding business had gross and operating margins of 23.8% and 13.8% in the second quarter, respectively, which exceeded our previously stated guidance. Our average sales price of homes delivered increased to $348,000, the highest in the Company's history, from $326,000 in the first quarter of 2015 and $322,000 in the second quarter of 2014. Our new home deliveries and new order sales dollar value increased 21% and 28% in the second quarter, respectively, compared to the same period last year. Our sales backlog dollar value increased 23% from the second quarter of last year to approximately $2.9 billion, keeping us well positioned going forward.

KB Homes

 Our strong net order performance during the spring selling season underscores the success of our community expansion initiative and the broad appeal of our products and distinctive home-buying experience, as well as healthy demand in our served markets, said Jeffrey Mezger, president and chief executive officer of KB Home. With the positive momentum we have generated across our business, we ended the second quarter with significantly higher backlog levels in each of our four regions relative to a year ago, providing excellent visibility on our deliveries and revenues for the remainder of the year. We are confident that we have the strategic drivers in place to produce measurable year-over-year earnings growth in the second half of 2015 as we realize higher revenues from our larger operational platform and anticipate generating further sequential margin improvement from our recently opened communities and additional scale as the year progresses. 

The overall news for the housing industry continues to improve.

Groundbreakings on new homes fell by a 11.1% in May but building permits hit a new eight-year high, the U.S. Commerce Department said Tuesday. The numbers are one positive sign that the inventory shortage holding back the housing recovery could ease.

I think that the start were down in May due to weather as the spring was very wet across a lot of the country. However permits and home builder confidence is up. I think most people have a negative bias towards housing as an after effect of the 2008 housing debacle. However, as we know things do not stay down or up forever. There has been too little house building over the last few years and the inventory of housing is insufficient for the new buyers that are emerging. I am not anticipating a huge pre-2008 boom but a change at the margin which should be sufficient to move housing stocks higher. I think this trade will move to the upside as the housing numbers surprise many economistsover the upcoming quarters.

Sunday, June 14, 2015

California's Farmers Suffer More Water Cuts


California farmers who’ve held rights to siphon water from two key rivers in the state’s Central Valley for more than 100 years have been ordered to cut back as one of the most severe droughts in state history intensifies.

About 100 senior water rights holders with claims dating back to 1903 will have to stop pumping from the San Joaquin and Sacramento watersheds and surrounding delta to ensure those with even older rights have enough, the State Water Resources Control Board said Friday in a news release.

This is terrible news for California farmers and workers whose jobs depend on agriculture. However the longer the drought persists the better it will be for Australian almond grower Select Harvests. 

Saturday, June 13, 2015

Bank Of Cyprus turns profit and continues to turn corner


Profit after tax attributable to the owners of the bank compares with a loss of 337 million euros in the last quarter of 2014.

BoC said it had reduced emergency liquidity assistance (ELA) in Q1 by 500 million euros to 6.9 billion euros at March 31 2015, with a further reduction to 6.4 billion euros as of May 29.

"Depending on market conditions and investor appetite, the bank will assess the possibility of raising wholesale funding, with the proceeds of such funding used to reduce ELA," CEO John Patrick Hourican said in a statement.

The financial condition of the bank continues to improve. Another catalyst for this speculative position is the continued improvement in the Cypriot economy which returned to growth in the last quarter. In addition, the recent changes in legislation will allow for the unclogging of non performing loans on the banks books. 

Hourican said the adoption by parliament of controversial foreclosure legislation and insolvency framework is a "significant step" in enabling the bank to tackle bad loans and improve asset quality.

I still think that Bank of Cyprus is an excellent speculation. Things are beginning to turn in the economy and at the bank itself. This stock is hated by most and yet it has the backing of well heeled knowledgeable turnaround experts like Wilbur Ross. I am adding to my position at these levels and based on this recent positive news. 

Sunday, June 7, 2015

How to make money off of California's drought

The image above is from the USDA website and shows the current drought conditions in California. you will note that the almost half the state is classified as being in the D4 range. D4 is classified as extreme drought conditions. The state, which is a historically dry place, is struggling under one of its periodic droughts.People are having to cut back water consumption by up to 25% and the drought is wrecking havoc on the states agricultural industry. 

California’s agricultural economy is contracting.

Facing another severe drought year in 2015, farmers are going to be taking more losses. According to a new study from the UC Davis Center for Watershed Sciences, this year California agriculture is estimated to use 2.5 million acre-feet less in water, employ 18,600 fewer people, and contribute $2.7 billion less to the state’s economy than it would in a normal water year. 


Crop plantings may have to evolve if the drought continues, too.

It’s all the rage to claim that California farmers just need to stop growing water-guzzling almonds, but the global specificity of California’s soil, along with high commodity prices for certain crops, suggests these are decisions that need to be made with the assistance of economic and scientific data, not emotion.

The key word for me in the above snippet is "almonds". This interesting article from the NYT highlights just how much water goes into various agricultural products. 

Which consumes the most water?
A) a 10-minute shower.
B) a handful of 10 almonds.
C) a quarter pound hamburger patty.
D) a washing machine load.
The answer? By far, it’s the hamburger patty. The shower might use 25 gallons. The almonds take up almost a gallon each, or close to 10 gallons for the handful. The washing machine uses about 35 gallons per load. And that beef patty, around 450 gallons.

The article goes on about how unsustainable our current agricultural system is and how this is an opportunity to change the way we do things, at least until it rains again. Anyway, the point I am making is that one persons tragedy is another's opportunity. If one is looking at things on a global scale one would note that although the almond growing areas in California are under extreme pressure, with yields down and farmers actually taking out almond trees by the thousands of acres, the almond growing areas in Australia are thriving.

The company I am investing in is called Select Harvests and trades in Australia under the symbol (SHV) and in the US (SHVTF). The company is the largest vertically integrated nut grower in Australia. The company is a big exporter of almonds to the EU, Asia, and the Middle East. China and the rest of Asia has been steadily increasing its demand for almonds as per capita GDP continues to increase. 

So here is the investment thesis. California is the largest grower of almonds in the world. The state is in the fifth year of a drought. This is causing lower yields and will certainly not lead to further expansion of almond growing. In fact, farmers are beginning to rip out their water guzzling almond trees. As it takes seven years for a almond tree to fully mature this will lead to supply constraints for years even if the drought lifts.The agricultural sector in California is being used as a whipping boy and scapegoat for the failed water policies that go back decades. If the drought continues the farmers in California will come under even more intense pressure to curtail their activities. 

On the demand side the consumption of almonds is growing at 8% per year. Using the rule of 72 this means almond consumption will double in nine years if the rate of consumption growth stays the same. This will not be possible because of the fact that it takes years for the trees to fully mature. Therefore price will rise to ration demand. This is happening just as many of Select Harvests almond trees are reaching prime production age. So we have growing demand, no or low supply growth, higher then historical pricing, and a company that is positioned to take advantage of  the situation. 

Eventually the drought in California will end as these things cycle (see recent weather in Texas). The higher prices will draw in capital and the supply/demand situation in almonds will resolve. In the meantime this is an opportunity to take advantage of a situation that will last for several years. I am adding Select Harvests to the investment portfolio. 

Mongolian Tugrik has appreciated against US dollar for the past 28 days

The Mongolian currency, the Tugrik, has appreciated against the US dollar for the past 28 days. This appreciation in the currency is the direct result of the recent deal between Rio Tinto and GOM on the Oyu Tolgoi copper mine expansion. A currency can be looked at as the stock of a country and as the news in Mongolia gets better and foreign direct investment begins to increase people will have to purchase Tugriks in order to do business in Mongolia. This will lead to more appreciation of the Tugrik. This is good for any investors that hold assets in Mongolia denominated in Tugrik like real estate and stocks. We should continue to see appreciation of the Mongolian currency as the OT phase 2 ramps up. several years ago the MNT rate was less than 1300 MNT to 1 dollar. the current rate is 1877 MNT to 1 dollar.

Saturday, May 23, 2015

Mongolia is again open for business

Or so says the Prime Minister:

Rio Tinto has reached agreement with the government of Mongolia to press ahead with the $5bn (£3.2bn) expansion of the Oyu Tolgoi copper and gold mine.

“Mongolia is back to business. Oyu Tolgoi is a world-class copper-gold asset and its further development is of great economic significance for Mongolia," said Chimediin Saikhanbileg, the Mongolian prime minister.

Rio Tinto has already invested $6bn into the project but the agreement will allow work to begin on the main part of the mine’s development underground. This will entail excavating 200 kilometres of caverns under a vast area of Mongolia on the edge of the Gobi desert.

Regular readers will note that I have written extensively about Mongolia and the potential the country holds. In fact I traveled there myself to check things out and wrote about it on my blog. In summary the country has a population of around 3 million and a annual GDP of around $12 billion. By comparison the GDP of Fargo, ND is about the same size as the entire country of Mongolia. The country is sitting on around $2 trillion in identified mineral resources (there is quite a bit more but it will take time to identify them). The Oyu Tolgoi mine is a large open pit copper mine in the Gobi desert that cost around $5 billion to build. During the construction of the mine the Mongolian economy grew in the 12-17% range for a couple of years. It was deemed as the fastest growing economy in the world and it was nothing but blue skies as far as could be seen. 

The OT open pit mine has been up and running for close to two years and is profitable. However the real value in the mine is in the underground expansion that was to be undertaken by Rio Tinto. This expansion got derailed when the government went batshit crazy a couple of years ago and passed a bunch of nationalistic laws to block the the takeover of a coal mining company by the Chinese Aluminum Company. This coupled with some other poor decisions put the expansion on hiatus and foreign direct investment along with  interest in Mongolia died on the vine as investors moved onto Myanmar and other hot stories. 

Thankfully the government has seemingly learned its lesson as the currency depreciated significantly and the economy has slowed to a crawl. A new Prime Minister made it his mission to get the parties together and get the outstanding issues between the parties resolved. This has apparently now happened as both the GOM and Rio Tinto made announcements that a deal had been reached in the last week. 

I have written before that the disposition of the Oyu Tolgoi situation would be the litmus test for interest in Mongolia returning.I think that the corner has now been turned and it makes sense for prudent speculators to start looking for bargains in Mongolian real estate and stocks. I am still a big fan of Mongolia Growth Group which has continued to execute during the whole downturn and is now poised to reap the benefit of a return of cash to the Mongolia market. Here is an interview that was recently done with the CEO of Mongolia Growth Group, Harris Kupperman regarding the conditions in Mongolia and what the deal on OT will mean for Mongolia going forward. 

I have added to my positions in MGG and the stock has had a nice bounce the last week or so. It is trading well below net asset value and is a real bargain. I would encourage readers to take a look at the recent MGG investor presentation on the company website. 

This whole situation was another example of exercising  patience and knowing that eventually the GOM was going to realize that their prosperous future is tied to cooperating with foreigners who bring capital and expertise. I am sure there will be additional ups and downs as news plays out but I think the worst is over and we will see a gradual improvement in sentiment towards Mongolia. This is excellent time to buy low and catch the next wave of Mongolian development. 

Oil Field services company Weatherford sees opportunity in Argentina


Weatherford Drilling International expects to win contracts in the next two or three months to deploy rigs to Argentina where foreign energy majors are exploring one of the world's largest shale resources, a senior company official said on Thursday.


"There is a fundamental macroeconomic need for Argentina to increase its production, the infrastructure is here, the workforce is here and the ability to explore, find and develop the resource is quicker than in most countries."


State-run energy firm YPF estimates $200 billion is required over the next decade to exploit the barely-tapped Vaca Muerta shale play, which covers an area the size of Belgium. This would help reverse the country's costly energy trade deficit.

I continue to expect Madalena Energy to do well over time as more and more wells are drilled in the Vaca Muerta shale and the volume of news continues to prove up the Argentine shale story. A new more pro-business government should get elected in October and that could be a catalyst for a perception change on all things Argentina. 

Sunday, May 17, 2015

Why you have to invest in frontier and emerging markets


Excellent presentation by Grant Williams detailing the opportunity available in frontier and emerging markets in what he calls the monsoon area of the Indian ocean and southeast Asia. This reaffirms my view and investment thesis that investing long term in these areas as they modernize and urbanize is the way to fantastic wealth creation.

The facts are there for anyone to see;

China recreating the Silk Road

The New Silk Road Initiative will, however, not only result in an enormous surge in growth for China. With "One Belt, One Road," President Xi Jinping is launching one of the largest development projects in history and offers new perspectives to countries such as Uzbekistan and Tajikistan threatened by terrorism. Indeed, he inaugurates the initiative with a visit this week to Pakistan, where China will invest $45 billion in energy and infrastructure projects.

Indian economy to grow 8.1% in 2015-2016

"Growth is forecast to accelerate to 8.1 percent in 2015 and 8.2 percent in 2016, benefiting from the acceleration of infrastructure projects, strong consumer spending due to lower inflation and monetary easing and gradual improvements in market sentiments," said the UN ESCAP report titled, 'Economic and Social Survey of Asia and the Pacific 2015.

Even in Africa things are going in the right direction

The Ethiopian economy grew by over 10 percent annually between 2004 and 2009, slowing to nearly 7 percent since 2012, according to the International Monetary Fund.

Some political commentators have called Ethiopia the “African Lion,” a term similar to the “Asian Tiger,” which described Korea during its period of speedy development.

Most people in the West focus on only their home countries but these various frontier and emerging markets have several things in common. Youthful populations, positive changes in policy that spur economic growth, infrastructure investment, and relatively low debt levels. The most difficult thing investors is to find vehicles that we can use to take advantage of this growth. The other main stumbling block for most people is patience. Even if they have the vision most people do not have the patience to let these trends play out and reap the rewards of their foresight.

However patience is exactly what is required and Mr. Williams presentation shows what can happen when one catches the wave of compounding economic growth. 

Historic oil price recoveries after big declines


Back in March I shared the fact that Americans drove a record 3.05 trillion miles on U.S. highways in January 2015 for the 12-month period, with even more expected this year. Now the International Air Transport Association (IATA) revealed that international passenger traffic in March rose 7 percent from the same time a year ago. Except for Africa, every region around the globe recorded year-over-year increases in air traffic.

Last week, West Texas Intermediate (WTI) crude oil prices reached a 2015 high, rising above $60 before cooling to just below that. It marked the eighth straight week of gains.
Investment banking advisory firm Evercore makes the case that the recent oil recovery is closely following the average trajectory of six previous cycles between 1986 and 2009. Although no one can predict the future with full certainty, this is indeed constructive for prices as well as the industry.

Frank Holmes is the head of US Global Investors and the website for his funds is chalk full of great information and insight. As can be seen by the chart above this most recent decline in oil prices is tracking consistently with the average of previous declines. The dates on the bottom are off by one year and is a mistake. However it appears this time will not be different. Oil is a necessary yet depleting product. The big cuts in capital spending in the oil sector due to the recent temporarily low prices will come back to bite us in the backside over the next year or two. This will also lead to out sized gains for the correctly selected energy stocks.

Saturday, May 16, 2015

A unique and cheap buy from the ruins of Romanian Communism

It is getting more and more and difficult to find undervalued situations with decent upside potential. The continued printing of money by just about every major central bank has led to historical low  rates of return that goes back centuries in some cases. As I have said before one has to become a speculator in this type of environment if one is to get a return on ones money. However, just because we are forced to speculate and go further afield from our home country and comfort zones does not necessarily mean we cannot find decent value and special situations.

One such situation is the recent listing on London Stock Exchange of Fondul Proprietatea. FP is a closed end fund that trades on the Bucharest Stock exchange. The fund was created in 2005 as way to compensate Romanians that lost property during the previous communist regime. Victims were given shares in lieu of compensation and shares began trading on the exchange in 2011. The shares have historically traded at a discount to net asset value. The current discount is 27.61%. The fund manager is Franklin Templeton Group and has been buying back shares over time as a way to narrow the discount to NAV as shown on the most recent fund fact sheet.

The listing of Global Depository Receipts on the London Stock Exchange in late April now gives smaller investors in the US a way to participate as the fund manager continues to seek to buyback shares and lower the discount. 

I like this fund as it gives me a way to play an emerging Eastern European market at only .70 cents on the dollar. Top Hedge Fund manager Paul Singer who runs Elliott Associates has upped his firms stake in FP to 20% and said the following about the fund:

The price of Fondul Proprietatea, a closed-end fund listed on the Romanian stock  exchange, rose during the quarter, accompanied by a narrowing of its discount to net  asset value from 32% to 25%. In early July, the fund completed a significant asset disposal, generating additional cash for deployment toward share buybacks and other  distributions to shareholders. The partial return of the shares’ nominal value to each  shareholder was paid, as expected, in late July. The fund completed its third share  buyback program during the quarter and launched a larger fourth program in late  September. The fund manager also announced that a tender buyback would be considered  in order to accelerate this fourth buyback program. In addition, a resolution proposing a  fifth program was included on the agenda of a shareholders’ meeting to be held in  November.

In other developments, the fund manager recently held discussions with its  local regulator concerning modifications to current regulations necessary to permit the  secondary listing of the fund on the London Stock Exchange, which has already received  shareholder approval. Finally, a new two-year management contract for the fund manager became effective September 30, which formally incorporated a target discount to net  asset value of 15% as proposed by Elliott. 

So basically the largest shareholder has impressed upon the fund manager that they would like to see the discount brought down to the 15% range. I think this is a great 3-5 year hold that will see both increases in NAV and a shrinking of the discount via buybacks. I am placing FP in the investment portfolio. The shares trade on the LSE in US dollars and each GDR represents 50 shares in the fund. I use Interactive Brokers and had no issues getting my limit order fulfilled.