“I cann’t do it Captain (of industry). We got no power."

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

With these words Chief Engineer Montgomery Scott (Scotty) of television’s starship Enterprise would warn Captain Kirk of the ship’s limits and capabilities.  These very same words are being said again but this time in China where the providers of electric power are warning China’s industries to expect massive rolling black outs and power restrictions this summer.  With subsidies in coal (where industrial users pay 1/10^th the price of oil) and oil, Chinese industry burns through the stuff with near hopeless abandon.  The subsidies may end, eventually, but in the interim expect the demands for energy making stuff – like coal, oil, uranium and equipment like windmills, solar cells, generators to increase.  Assuming you don’t work in the oil industry or at General Electric; sadly what is China’s problem is our problem.  Commodities will continue to rise as will the currencies of those who produce the goods and this will be over a number of years.  In the short term look for another spike in energy prices this summer.

 

While this may sound like a broken record, I fear and sense that many industries and governments are not fully preparing for the shocks and have not put in place risk reduction measures.  Some of these will be long term (energy efficient buildings and infrastructure like public transit) and some will be short term (hedging strategies).  The past is past and we are entering a new dynamic environment – has your risk perspectives and handling changed to better suit this new world?

 

For Jeff Rubin’s thoughts on this subject, click on the link:

 

http://tinyurl.com/4348gtm

 

Old McHedgeFund now has some farms

by Michael Arbow, MBA

Partner, RSD Solutions.com

www.RSDsolutions.com

info@RSDsolutions.com

 

Occasionally this blog talks about the rising cost (real and nominal) of the soft commodities (food) and has also pointed out that farmland is becoming an alternative asset in the investment portfolios of billionaires; well it looks like hedge funds are now moving down on the farm.  It is estimated that US farm land will be increasing at a rate of between 5-10% per year in the foreseeable future.  Add onto this the return of the food grown and farmland is looking pretty attractive.  Of course the road will be rough (volatile) but the trend is entrenched as long as the wealth in China and India and numerous other emerging markets increases.

 

Where does that leave the food processors; the candy makers, the bio-fuel creators and the brewers? Well for them, the future will be filled with uncertain prices and shifts in consumer tastes towards alternatives.  Budgeting and price forecasting will become more uncertain as will consumer tastes as demand destruction begins to control the markets.  This world is no longer on the horizon, it is here and the hedge funds know it and are making plans to profit from it.  Meanwhile for commodity users: are they ready, has the risk team and the Board updated themselves with viable alternatives to reduce the worry and volatility, are hedging strategies been re-visited?  According to the attached article, time is running out.

 

For more on this story follow the link to The New York Observer article:

http://tinyurl.com/4yvgend

Paradigm Shift: Value investing comes to commodities

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

 

Value investing as defined by Investopedia is a “strategy of selecting stocks that trade for less than their intrinsic values.”  In my years with brokerage firms in the England and Canada, it was very rare that commodity stocks were ever viewed as value type investments as their prices tended to be asset bubble driven.  But I have argued in the past that while commodity prices may fluctuate in the near term, in the long term the trend is up and at a rate faster than inflation.  Joining the “choir” of this thought is much-admired value investor Jeremy Grantham; chairman of global asset manager GMO LLC a firm that manages more than $100-billion (U.S.).  Mr. Grantham sites the usual reasons like increased world wealth (thanks Ben B.) but what seems to be the tipping point for Mr. Grantham is the fact that it took 100 years for the inflation adjusted price of commodities to fall 70% and only 8 years to wipe out those savings.  Mr. Grantham now sees value in investing in commodities.

 

So what does this mean?  To me it indicates that the natural resource countries, especially those that can produce commodities from below and above the surface are in for solid economic growth and currency appreciation likely for years to come.  For commodity users and end sellers, hedging becomes more important to manage potentially highly variable cash flows.  This trend is a now a reality so has your risk strategy adjusted?

 

 

For more on Mr. Grantham’s views on value investing in the commodity sector click on this Globe and Mail link:

http://tinyurl.com/3rpgnmm

Lamborghini sales exceed forecasts in Saskatchewan and Iowa: WSJ June 2015

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Difficult to believe? This “news” headline maybe more the reality than you think. Followers of this blog know that we have blogged about the new normal of high and volatile agricultural commodity prices consistently since the beginning of this year. Indeed in the first two months of the year some basic commodities have experienced some wide swings, with agriculturals generally rising and industrials generally falling (an economic slowdown warning sign?). However, according to American Jim Rogers of Rogers Holdings in Singapore we are still in the early stages of the bull market in agricultural commodities and have a long way to go to reach inflation adjusted historic peaks. His arguments are sound; increased wealth in the emerging economies, erratic weather patterns and more people. In the longer term Mr. Rogers foresees “farmers driving Lamborghini’s and stock brokers working for them” for wealth will be created down on the farm once again. It is perhaps not surprising that the world's uber rich are buying up agricultural land. 

If you work for a firm that represents commodity end users ask yourself; How has the corporate risk management strategy changed to reflect this new normal of volatility with the added long term uptrend in commodity prices? 

 

For more on commodity prices in perspective from CNN Money follow the link below:

http://tinyurl.com/4m9kexf 

For more from Jim Rogers follow the link below:

http://www.bloomberg.com/video/67100110/

 

If art imitates life; call your risk team. JR is back.

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Last week it was announced that Larry Hagman had agreed to return to Southforks Ranch and reprise his role of JR Ewing. Back in 1979, I was an economic student at the University of Western Ontario, who with my Ivey Business School friends would gather on Friday night before attending any party or social activity to watch the TV soap opera Dallas and cheer for the exploits of JR. During the first 5 years of the show the price of oil reached historic high levels (inflation adjusted) and was 63% higher on average than the previous 5 years, interest rates spiked in Canada up towards 20% and food prices reached historic levels. And now we hear that JR is coming back, ranch and all. 

How interesting that as JR makes his comeback, Brent crude is at triple digits, interest rates are rising (slowly at the moment), inflation is being forecasted and commodity prices are on a tear. JR will surely be having a déjà vu experience, feel right at home and be glad it is not a dream. I wonder if those at Western studying economics and business will be cheering him on this time.  As for your risk team – it might be time to get netflix for their office. 

For more on the Dallas’s rebirth follow the link:

http://tinyurl.com/5wl2x2a