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Dangers Still Abound for Investors Interested in Iran

Sara Nunnally — Wed, 03 Sep 2008 11:42:22 +0000

Iran may be part of President Bush’s “axis of evil,” but Taipan Publishing’s Sara Nunnally says it is also a major player in the global commodities market that is now looking to expand its output.

Ambitious new projects to develop the steel and natural gas sectors will dramatically boost production. China and Russia are rushing in to secure supplies. But sanctions prevent the US from investing in Iran.

Sara says ongoing suspicion over Iran’s nuclear program will keep it off the investment table for much of the Western world…

Over the past several months, the investment world has turned its ever-roving eye on the Middle East and North Africa.

Since July, four new exchange traded funds have hit the market focusing on these regions. They are the WisdomTree Middle East Dividend Fund (NASDAQ:GULF); the Market Vectors Gulf States Index ETF (NYSE:MES); the PowerShares MENA Frontier Countries Portfolio (NASDAQ:PMNA); and the SPDRs S&P Emerging Middle East & Africa ETF (AMEX:GAF).

But the one thing lacking in these investment vehicles is Iran.

Of course, the U.S. has decreed it will not make investments in Iran, who it considers a state-sponsor of terrorism. That’s nothing to fool around with.

While much of the Western world stands firm, other nations, like China and Russia aren’t quite as righteous. Russia has repeatedly stood against strong sanctions in response to Iran’s nuclear program… as has China, but for different reasons. Iran and Russia have a history that goes back to before the Cold War. But China…

Iran is the world’s fourth largest oil exporter, and China, in early December 2007, signed a $2 billion deal with the country to secure oil supplies.

Deals like this have been a welcome balm to Iran’s struggling infrastructure. U.S. and UN sanctions have taken their toll, and foreign investment has been nearly non-exsistent.

But things may be changing in Old Persia… The country just announced that it will increase its annual steel production to 15 million tons, representing a jump of 50% from current levels.

The steel industry hasn’t had a boost this big since March 2005 when a group of European and Iranian banks funded the Hormuzgan Steel project with $800 million. With imported steel accounting for about 40%-50% of demand, and demand across the Middle East rising significantly with the region-wide building boom, rising prices are creating a real problem for infrastructure expansion.

Iran has eight new major steel projects in the works.

It’s also planning on spending $30-billion to expand the South Pars natural gas field. This investment could reap as much as $22.3 billion a year by doubling annual production to 68 million tons.

Without a doubt, Iran is a major player in the Middle East, and will continue to be. It has a $13-billion sovereign wealth fund created from its oil wealth. And some of its major investments have been in financial institutions in the Middle East.

But will Western investors ever get a chance to make money off Iran’s growth, as it they have in Dubai, Egypt and Israel? And should they, for that matter?

It’s a philosophical question that I can’t answer. And it gets even harder when you hear that Iran is sharing its nuclear technology with Nigeria… A technology that the country repeatedly insists is for peaceful power generation while refusing to halt its uranium enrichment and submit to the International Atomic Energy Agency’s full inspections. (Though the IAEA does have Iran’s Natanz facility under video surveillance.)

In late August, Iran announced it had 4,000 centrifuges working on uranium enrichment, and another 3,000 being installed.

The whole situation, for investors and politicians alike, is scary. And while there may be opportunities in playing companies investing in Iran, like Sinopec (NYSE:SNP), the Chinese firm that inked the $2 billion oil deal, and Fortis Bank (Brussels:FORB), who helped finance the Hormuzgan Steel project, danger still abounds.

That will keep Western investors (most, anyway) on the sidelines, and pure Iranian plays off the investment table.

Source: Emerging Iran: Danger or Opportunity?

The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery – And How to Play it for Profit

William Patalon III — Fri, 18 Jul 2008 17:50:20 +0000

A “Lost Decade” doesn’t have to translate into lost profit opportunities.As the global financial crisis continues to escalate, the United States is increasingly facing the prospect of a long malaise that could easily eclipse Japan’s Lost Decade of the 1990s in both duration and depth.

And history shows that such periods can be the worst for investors to navigate – especially when they follow a record stock-market run, such as the all-time-highs that U.S. share prices reached last fall.

In the United States, for instance, Dow Jones Industrial Average hit 381 on Sept. 3, 1929, a record pinnacle achieved in advance of both the Great Crash and the Great Depression that followed – and a level that wouldn’t be eclipsed again until November 1954 – more than 25 years later.

From the Great Crash, fast-forward 60 years, to 1989 Japan. On Dec. 29 of that year, the Nikkei 225 Index topped out at 38,957.44, before closing at 38,915.87. By the following September, stock prices had nearly been halved – and there was still much more bloodletting to go. (Despite several subsequent rallies up over the 20,000 threshold, the Nikkei ultimately bottomed at 7,830 in April 2003. It closed yesterday – Thursday – at 12,887.95, still down 67% from its trading high 19 years ago).

The fallout from Japan’s slow motion, stock-and-real-estate-market meltdowns was incredible. By early 2004, Japanese houses were selling at 1/10th their peak value, and commercial real estate was selling for less than 1/100th of its record highs. All told, an estimated $20 trillion in stock and real estate wealth was vaporized (although one could easily argue that the peak values weren’t real to start with).

That’s scary stuff, especially because many experts fear the U.S. version of the Lost Decade that’s to follow could be much worse. After all, the U.S. financial crisis is much, much bigger, and the resultant malaise is arguably going to take much longer to work through.

Let’s look at some of the some of the profit plays that will allow investors to sidestep a long U.S. slumber – and profit just the same.

1. Miss the Market Meltdown: The Dow closed at an all-time record high of 14,164.53 on Oct. 9 of last year. With yesterday’s 207-point rally, the Dow closed at 11,446.66 – leaving the 30-stock blue-chip index down 19% from the October record, leaving it right on the doorstep of a bear market.

But what if things were to get much worse? For the Dow to match the Nikkei’s wrenching decline of 67%, it would have to drop all the way down to 4,574.29 – an area it hasn’t seen since the first half of the 1990s.

Will the Dow drop that much? Probably not.

But it doesn’t hurt to hedge. That brings me to a key point: There’s a big difference between “diversification,” which most individual investors equate with “protection,” and actual “hedging,” which is part of an investment-protection package that professional traders employ. If we believe a market poised for a real fall, we want to hedge and find an investment that’s going to go up in value while everything else is going down.

For us, that investment is the Rydex Inverse S&P 500 Strategy Fund (RYURX). RYDEX URSA is a so-called “inverse fund” that’s designed to profit as the Standard & Poor’s 500 Index declines in value. In that way, it complements our other holdings by providing some portfolio stability.

As Money Morning Investment Director Keith Fitz-Gerald says, hedging is such a compelling strategy because financial studies demonstrate that “even though broad sections of the markets may decline over time and our portfolios with it, we need only have a small section permanently hedged at any given time. The reason is that, by having a small portion of our assets (5%-10% or less) earning above-average returns, our overall returns are far higher over time.”

2. Gold Isn’t Just for Hedging Anymore: Mention the word “stagflation” to anyone who worked and invested during the 1970s, and I’ll bet you’ll actually see that person physically shudder at the memory. Stagflation – the double-whammy combination of stagnant economic growth and high inflation – was thought to be an impossibility, until it showed up during that decade, leaving ruin in its wake.

But for our purposes, no matter whether we’re looking at stagflation or inflation, one thing is clear – we’re looking at higher prices. And when prices are on the upswing, gold is the one investment you certainly want to own.

Then there’s also the whole “Lost Decade” outlook for the U.S. economy. In a misguided attempt to slowly deflate the asset bubbles it created with a years of overly expansive monetary policies, the U.S. Federal Reserve is now keeping interest rates at artificially low levels – gambling it will still be able to launch a successful counterattack on inflation later on. What’s more, the central bank also has made the ill-fated decision to diversify into the “bailout business” with its intervention in the Bear Stearns Cos. (BSC) and Fannie Mae (FNM) and Freddie Mac (FRE) debacles.

The artificially low interest rates will continue to punish the U.S. greenback, sending it lower and causing inflation to accelerate. And the trillions in debt the U.S. government’s balance sheet will take on from the Fannie and Freddie bailouts certainly won’t help.

In addition to the bleak-sounding inflation-case for gold, there’s also what I like to call the “wealth case” for the “yellow metal.” As the consumer classes in China, India, Latin America and Emerging Europe grow in both breadth and depth, their ability to buy luxury goods will finally intersect with their desire. And gold will be a major beneficiary.

But how best to play it? There are mining companies, bullion, coins and even jewelry. Everybody has his or her preferences for gold investments, including us. We prefer the SPDR Gold Trust Exchange Traded Fund (GLD). There’s no delivery risk, it’s liquid, and you can buy and sell easily through any online brokerage.

Cashing in on Commodities: Life’s Little Luxuries are Costing More than Ever Before

Jennifer Yousfi — Tue, 03 Jun 2008 12:44:56 +0000

This is the fifth installment of a new Money Morning series highlighting investment opportunities in the global bull market in commodities. Soaring prices of grains, dairy and meat have been grabbing global headlines. But other commodities have been on the rise as well.

I’m not talking about the increases in daily staples that make the front page, but those little extras that make daily life just a little bit sweeter – coffee, cocoa and sugar.

We might not need them, but we definitely want them. And inflation is putting upward pressure on the price of these soft commodities just as it is on oil and grains such as wheat and rice.

Coffee is Big Business

It doesn’t take an investment expert to realize Americans love their coffee. It’s no longer a drink just to wake you up in the morning. Starbucks Corp. (SBUX) helped create a cultural coffee phenomenon, introducing consumers to espresso drinks. Now it seems like every city street corner has its own gourmet coffee shop selling specialty coffee beverages, often for upwards of $4 a cup.

But it’s not just the extra foam on top that is making that cup of coffee cost more. The price of coffee beans has more than doubled in the past few years.

According to U.S. Department of Agriculture (USDA) data, the New York spot price for Brazil’s Arabica coffee is up 20% over last year’s annual average of 110.72 cents per pound. Just five years ago in 2003, the annual average was only 50.82 cents per pound.

The USDA said in its recent Tropical Products: World Markets and Trade report that U.S. imports of coffee and coffee products increased 14% in 2007 to $3.8 billion. Meanwhile, exports were at a record $513 million, but that’s still a huge trade imbalance.

But there’s hope for those who are looking for a cheap cup of joe before year-end. Brazil’s 2008 coffee crop is just starting to be harvested and is already forecast to be one of the best ever, producing almost 50 million bags of coffee.

“With Brazil’s larger production this year, world coffee output is expected to reach 133.25 million bags while consumption is seen at 126.0 million. If these figures are realized, it will result in an 8.25 million-bag surplus for the 2008 crop year,” wrote James Cordier & Michael Gross, Optionetics.com. “This is not a record surplus, but it should be enough to knock prices down into a new trading range for the second half of the year.”

If coffee prices head lower this year, then the buyers of the raw beans are going to be the ones to benefit. You might want to consider:

Green Mountain Coffee Roasters Inc. (GMCR): The bulk of U.S. coffee exports are of the roasted variety and this company is getting its share of that export action. It recently announced expected sales growth of 42% to 47% for its fiscal third quarter and reaffirmed its positive outlook for the full-year. Year-to-date, shares are up just a little over 1%, but are up 35% over the past five years. Green Mountain also owns the popular Keurig single-cup brewing system and sells many varieties of coffee to fit it.

Starbucks Corp. (SBUX) and McDonald’s Corp. (MCD): Starbucks will likely benefit from any dip in coffee prices. Meanwhile, McDonald’s has been aggressively entering the specialty coffee arena and is set to give Starbucks a run for its money when it comes to lattes and espressos served on the go.

The Cost of Cocoa

You may have noticed that your candy fix, much like your caffeine fix, has cost you more lately. On average, the cost of high-quality chocolate, which has a higher cocoa content, has increased over 6% in the last year, according to Nielsen data.

That’s because the cost of cocoa has more than doubled since the beginning of 2007. It can be shipped in powder, paste or liquid form and commands $2,600 per metric ton on New York’s Intercontinental Exchange, up from $1,700 at the start of 2007.

And while cocoa is certainly subject to the same conditions that can affect other crops such as poor weather conditions, the huge increase in price, at least for this commodity, doesn’t seem to be a simple function of supply and demand.

For the year ending in September, the International Cocoa Organization only expects a 51,000-metric-ton shortfall, which can be made up with existing stock, The Wall Street Journal reported.

“The fundamentals do not justify this price, and I haven’t heard of any other explanation other than [investment] funds,” said Hagen Streichert, a German government official and the spokesman for cocoa-buying countries on the International Cocoa Council.

Many analysts and management from some of the leading global chocolate manufacturing firms including Cadbury PLC (ADR: CBY) and the Swiss firm Chocoladefabriken Lindt & Spruengli AG are pointing the finger at hedge fund investments. Volatile equity markets and tight global credit markets have led funds to seek out alternative investments in commodities.

“In my lifetime, it’s an entirely new phenomenon,” Stephanie Garner, a cocoa trader for Sucden, a broker owned by Sucres & Denrees SA, on the London International Financial Futures and Options Exchange told The Journal, speaking of the sudden increase in cocoa futures contracts. “It’s to a large extent a fallout of the credit crunch.”

It’s hard for the average investor to find a pure cocoa play. There are some exchange-traded funds that focus on the price movements of cocoa, but they trade in London and aren’t open to most U.S. investors. However, Africa produces most of the world’s cocoa supply, so an ETF focused on that region could be a good choice:

SPDR S&P Emerging Middle East & Africa ETF (GAF): This ETF seeks to replicate the movement of an equity index based on the Middle East and African equity markets. The fund uses a passive management strategy to track the total return of the S&P/Citigroup BMI Middle East & Africa index.

Cashing in on Commodities: Two Ways to Profit From the World’s Newest Markets

Keith Fitz-Gerald — Fri, 30 May 2008 09:51:44 +0000

Many people are in sticker shock thanks to high gas prices and oil that punched through the $135-a-barrel level recently, before sliding back.And many investors are feeling left out because they haven’t been part of the incredible bull run energy companies have enjoyed in the last few years.

But have no fear.

It’s not too late to grab a piece of the pie.

The trick is that you’ll have to look beyond the obvious choices like major oil companies, drillers and other sectors that are hopelessly bid up right now. And you can play various types of funds, as well as stocks, as we’ll demonstrate.

The Four Factors Giving Life to the Commodity Bull

But before we tackle the how, let’s tackle the why:

First, it’s important to understand that high oil prices are simply going to go higher, still. There will be inevitable pullbacks, but as we’ve written so many times in the past, the math is very simple – people are simply using more oil than at any time in history and worldwide demand is accelerating.

Second, it’s also important to note that we haven’t had a major new discovery of any substantial size in the last 30 years. And by substantial, we mean big enough to change the balance of supply and demand and, by implication, to reverse the runaway increase in prices. The lack of any new discoveries, then, also points to higher prices.

Third, absent an immediate, cost-effective and widely available substitute, oil is increasingly nationalistic in nature. This means that oil producers – and particularly the tyrants with spigots – will begin holding back production for their own use. That will reduce the supply available on world markets, further enhancing the upward pricing pressure.

And fourth, while higher prices are finally inducing some drivers in modern industrialized countries to drive less, developing nations don’t give damn about conservation and are guzzling gasoline like there’s no tomorrow – which, for them, is entirely true. For these nations, access to energy and to petroleum is the literal equivalent to survival and they’ll do everything they can to ensure it. So any drop in demand we’re experiencing is almost immediately offset by higher consumption in such markets as China, India and many parts of South America. And that offsetting consumption may well persist for years.

That’s a very painful reality to face. But it does bring us to the fun part of this commentary: The profits.

New Markets = New Profit Opportunities

Any time you have sustained supply-and-demand imbalances, you also the potential for huge profits. And what’s happening now is no different.

Viewed in that light, higher oil prices can actually be a good thing for the stock markets, just as the rising price of such “commodities” as gold, copper, cotton, silk and spices have been for various nations since the dawn of time.

The reason is that excess profits that would ordinarily flow to Caracas, Moscow and Riyadh, are being recycled into the best global stocks on the best first-tier global stock exchanges, including the New York Stock Exchange, the Tokyo and Hong Kong stock exchanges, and the Frankfurt, Euronext and London exchanges.

But that may be coming to a head as trillions of dollars are chasing a diminishing number of high-quality stocks, which over time will propel those shares to excessively high valuation levels.

So what’s an investor to do? Savvy investors will once again have to go with the (global money) flow, ferreting out markets that haven’t yet hit “mainstream” radar screens, but that still are likely to benefit from rising oil prices.

We refer to them as “frontier” markets and they include such mineral- and resource-rich places as Nigeria, Sudan, Egypt and Bangladesh among others. They’re obviously beyond the same old BRIC choices that have become so popular in recent years.

Most of these markets are so small that many investors overlook them altogether – but they’ll soon become very popular because of the tremendous upside they offer.

Even with political upheaval, hyperinflation, open warfare and catastrophic human and natural disasters, frontier markets are piling on stunning returns. Most are benefiting significantly from rising commodity prices that, in turn, produce higher corporate profits.

As a case in point, consider the Standard & Poor’s/IFCG Frontier Markets Composite Index posted a mouth watering 43.3% return last year. And individual markets did even better. Bangladesh turned in 128.3% while Cote d’Ivoire nailed down a 122.7% gain. The index’s worst performer, Estonia, plunged -14.2%.

Clearly with a range like that, so-called frontier markets aren’t for everybody especially since they’ve gotten so expensive as more money has flowed into them. Data shows that many are trading at Price/Earnings (P/E) ratios that range from a high of nearly 100 for Vietnam to a “mere” 35.9 in Slovenia.

Still, even at these valuations, we can make the case that higher commodity prices will allow these markets to grow for years to come – especially given that they are starting from such a small base.

Which makes them a logical choice for adventurous investors who want to get in before they become hot on the country club cocktail circuit.