This from The Rude Awakening:

Demand for food never wavers, even when times are tough. This fact is only one of the reasons to like Viterra (TSE:VT), a Canadian agri-business company. Viterra, an amalgamation of “vital” and “terra,” meaning “life from the land,” is the new name for a very old business new. The old name, Saskatchewan Wheat Pool, better reflects the company’s raison d’etre.

Viterra is in the grain-moving, storing, processing and cleaning business. You would think, based on the recent sell-off, that Viterra was selling the stuff. But Viterra is not a straight-up commodity play in the sense of selling grains. You would do better to imagine a toll road. Volume is the name of the game. Volume and efficiency, not grain prices, dictate the profit profile here.

Its largest business is grain handling, chipping in 65% of sales. Viterra has lots of those tall grain elevators you may have seen in grain country. About two-thirds of Viterra’s grains eventually head west by rail and ultimately wind up in the Asia-Pacific region. In this way, it’s a fine backdoor play on the booming demand in Asia and its peoples’ rapidly evolving diets. The falling Baltic Dry Index, which measures shipping costs, bodes well for Viterra. Cheaper shipping costs make Western Canadian grain cheaper for Asian buyers.

Viterra’s second largest business is as a retailer and distributor of agri-products such as fertilizers, seeds and crop protection products. The company has 276 retail locations across the Canadian prairies. Viterra is the biggest dog on the block, with 45% market share in Western Canada.

In the big-picture sense, Viterra’s profits tie more closely with seeded acreage and the mix of crops so planted. These variables do not vary much from year to year.

And just to juice up the mix a bit, Viterra has a 34% interest in Canadian Fertilizers Ltd. (CFL), a nitrogen fertilizer plant in Medicine Hat, Alberta. Here CFL earns a spread on the difference between fertilizer prices and natural gas. This business is not particularly significant at the moment, but it is an interesting asset, nonetheless.

The recent market crash has been rude to Viterra’s share price, but it is a gift for investors who want to buy more. Just yesterday, the company announced surprisingly strong earnings for the fourth quarter, thanks to robust demand for agricultural products like fertilizer. “Viterra blew the lights out in the fourth quarter,” one Canadian analyst cheered.

For all of 2008, Viterra earned C$1.25 per share. And yet, as I write, the share price is a mere $9.25 per share – or only about seven times earnings. Moreover, book value is nearly $10 per share. The financial position is strong, with net debt less than 8% of capital and loads of cash.

There are rough comparables out there that may help in arriving at a valuation for Viterra, such as Archer Daniels Midland on the grain handling side and Agrium on the retail side. Using a blended valuation of these two companies, I get a value for Viterra around $15 per share. And all of these agricultural companies are trading at somewhat depressed valuations.

Though it has little bearing on the share price, Viterra may be the only publicly traded enterprise run by a former NFL wide receiver. Mayo Schmidt, CEO of Viterra, played wide out for the Miami Dolphins in a brief stint. More importantly, though, Schmidt deserves credit for making many great moves – such as the acquisition of Agricore in 2007 – and proving a savvy chieftain.

There are more moving parts here, so I am simplifying somewhat, for the sake of brevity. The bigger picture is what I want you to focus on. In Viterra, we have a well-financed and well-managed company trading at attractive levels. The company also has big winds in its sails. To repeat; Viterra is like a toll road for grains. And I don’t see any decline in the traffic of that toll road over the next several years.

I expect Viterra will be a good investment over the years. At a minimum, I expect Viterra to exceed its old high of $15, as the grain markets enjoy another push next year.

Source: Investing In Food

Where trade flourishes, business is good. But trade does not always flourish. The linked forces of globalization move in fits and starts.

The authors of Power and Plenty, a new book on trade over the last thousand years, tell us as much. “If anything,” they write, “history suggests that globalization is a fragile and easily reversible process.”

One of the looming threats in 2009 is the reversal in trade flows and increasing barriers to trade.

For the first time since 1982, The World Bank predicts global trade volumes will shrink in 2009. Undoubtedly, global trade enjoyed a boom over the last two decades or so. The global slump, though, is taking a bite out of that happy ride. Already, through November, exports from China, Taiwan, Chile and South Korea plunged by 20% or more.

The falloff in trade is worrisome enough as a globe-trotting investor. In the last several years, companies with operations overseas did much better than those confined to North America. In 2008, though, that wasn’t true. According to Bespoke Investment Group, stocks of companies that booked more than 50% of their revenues abroad fell 46% on average in 2008, versus a drop of 38% for those with no international revenue.

But there are signs that things could get much worse. Because like tea leaves steeping in a pot of hot water, the longer the economic slump persists, the more likely political trouble is to brew. The rise of barriers to trade is a particularly bitter brew of political trouble.

Already, a number of countries have taken actions to close their markets or protect domestic industry. Consider:

- Indonesia – new restrictions on over 500 goods as well as new fees for imports
- Russia – new tariffs on imported cars, poultry and pork
- France – a new state fund to protect French companies from foreign takeovers
- Argentina and Brazil – new tariffs on imported wine, leather goods, peaches and more
- India – a new 20% duty on imported soybean oils.

And then there is the U.S. bailout of the automakers, seen as an unfair subsidy by foreign competitors. This is only a partial list involving some of the bigger economies. However you view these moves politically, there is a good reason we should keep an eye on these things: They will affect how you invest.

For example, Russia is Europe’s largest car market. But now there is a tax on foreign cars of as much as 35%. Moscow wants to protect its automakers. The Russian people are poorer because of it. But as an investor, your favorite automaker, which may have had a nice business selling cars in Russia, may now find it tough going.

Moscow also put high imports on poultry and pork. Russia is the largest market for U.S. poultry. If you own a chicken producer, this is not good news. Your potential profits in a big foreign market are cut, and such tariffs could result in excess poultry staying in the U.S., leading to falling prices and lower profits at home.

All of these kinds of moves tend to happen when economies weaken. They can also bring about nasty trade wars.

In 1930, America passed the Smoot-Hawley Tariff Act. It raised tariffs on a number of imported goods. As the authors of Power and Plenty contend: “It triggered a wave of tariff increases.” By 1931, “average tariffs on foodstuffs had risen 53% in France, 59.5% in Austria, 66% in Italy, 75% in Yugoslavia, more than 80% in Czechoslovakia, Germany, Romania and Spain and to more than 100% in Bulgaria, Finland and Poland.”

These were hard to unwind. It took decades to reverse these anti-trade policies. They certainly didn’t help resolve the Great Depression.

I don’t think it is a coincidence that global trade expanded nearly fourfold since 1990, during a time when the average tariff fell from 26% to 8.8% by 2007.

A reversal of that trend spells bad things for investors. So far, we’re OK. Most of our companies sell goods that other countries can’t get enough of – things like fertilizers, road-building machines and power equipment. In many foreign countries, there is little domestic supply. China, for instance, it is trying to keep fertilizers in, not out. In fact, the Chinese have made it easier to import goods such as potash.

Still, it’s something to watch.

Source: Globalization Halt!

This from Money Morning:

The second phase of emerging markets expansion is well on its way – a period of self-sustaining growth, driven by consumer growth and infrastructure spending.  And Latin America, following China and other Asian economies, is one of the key global pillars of growth that will save the global economy and the U.S. financial system from total collapse. But not all the countries in Latin America will go on to prosper.  There is a wide gulf in the policies that will continue to separate the winners from the losers.

Let me explain.

In a recent article in our affiliated monthly newsletterThe Money Map Report, Money Morning Investment Director Keith Fitz-Gerald made three important points:

• The emerging markets (of which Latin America is the second-most-important leg) will play a growing role in the continued long-term growth of the world economy.
• The U.S. economy will continue to grow long-term, but its relative importance in the world economy will continue to decline.
• In the near term, the emerging markets could well play a determining role in keeping the overall global economy – and the U.S. financial system – from dropping into a depression-like funk that we won’t be free of for years. Emerging economies in Asia and parts of Latin America have huge cash reserves, much of which will be invested in infrastructure projects over the next 20 years.

In the next three years, China, alone will invest as much as $725 billion in infrastructure, while Brazil will invest $225 billion for the same purpose.
This is important to remember, given that the dramatic sell-off the emerging markets have experienced has many investors doubting the ability of these countries to “decouple” from the global economy.  The reality of the situation is that most investors and pundits are failing to differentiate between economic decoupling and market decoupling.

The Gloomy Present

While growth in emerging economies has dropped slightly, the prices of securities and currencies in emerging markets has fallen drastically.   Many investors think that the U.S. economic crash will lead to a dramatic drop in U.S. orders of emerging-market products, which will cause those economies to drop off. That, in turn, would squeeze the profits and market valuations of the companies that operate in these economies.

But that’s a mistaken assumption. And here’s why.

In Brazil, for instance, exports account for a mere 13% of gross domestic product (GDP). In China, exports are just 10% of GDP. So some contraction in U.S. and European orders can easily be counterbalanced by fiscal and monetary stimulus in these countries.

On Oct. 27, in the depths of a rabid, indiscriminate sell-off, I published an extremely bullish piece on Brazil. Since that article was published, Brazil went on to rally as much as 47%. As of Friday’s close – even after some subsequent profit-taking – the exchange traded fund (ETF) that represents the Brazilian market (NYSE:EWZ) is still up 21% (and has risen as much as 42% since my recommendation).

And most emerging markets economies have plenty of fiscal and monetary maneuvering room. Leading the pack is China, which accounted for some 27% of global growth last year, and which has continued to use both fiscal and monetary tools to keep itself on a solid growth path.

It recently slashed interest rates again, down to 6.66% (a lucky number in the Chinese culture, meaning “things (are) going smoothly”).  With record foreign reserves of $1.9 trillion, China also approved a “fast and heavy-handed” $586 billion stimulus, mainly in housing and infrastructure, to be implemented through 2010.  And the Chinese yuan will drop almost 7% vis-a-vis the U.S. dollar to cushion losses in trade.  It has also lowered taxes on investments in capital goods.  And in a key move that’s been almost totally overlooked by the media, China has made huge market-oriented reforms in agriculture.

China has just allowed its 780 million farmers to rent, transfer or utilize as collateral their rights to their lands and eliminated all taxes on agricultural production and to farmers.  This will allow for a massive increase in the scale of production by consolidating companies.  In this way, China will keep its 120 million hectares dedicated to agriculture exclusively, with no possibility of urbanization, while at the same time allowing the millions of small farmers to sell out, and get capital to move to the cities.  This will not only increase the productivity of Chinese farming dramatically by allowing for economies of scale to work and attracting billions in investments, it also will create a huge incentive for these millions of farmers to move to the cities, boosting housing and infrastructure demand.

Brazil’s plans are very similar to those of China. There’s a:

• Strong fiscal stimulus, allowing a drop in the value of the real currency (a decline that’s already been substantial) in order to cushion exports.
• An easing of capital requirements to Brazil’s strong banking system, which will incentivize housing and car loans.
• Export financing.
• And huge local infrastructure projects.

There is another little-understood phenomenon that cushions the blows for emerging economies: Intra-emerging market trade has become increasingly important.  By now everybody understands that iron ore from Brazil and coal and oil from other emerging markets is flowing into China in order to fuel China’s massive infrastructure buildup and growing consumer demand.

The Breakdown on Brazil

Increasingly, a growing proportion of the infrastructure needs of industrial goods being bought by emerging economies are goods produced by other emerging economies.  Trade between Latin America and China has increased by 13 times since 1995, from $8.4 billion to $100 billion.  And China, now the second-most-important commercial partner to the region after the United States, has finally been accepted as a member of the Inter-American Development Bank, committing itself to contribute $350 million to the bank. As an example of this growth in industrial trade, Argentina just bought 279 subway cars from China’s CITIC Group.

However, not all trade with China has been successful, due to China’s notable deficiencies in quality control, especially in health standards.  For example, Latin American imports of medicines manufactured in China had catastrophic results in Panama two years ago, where more than 100 people died and hundreds more became ill from medications containing toxic Chinese glycerine.  Recently, Panama detected toxic chemicals in imported Chinese sweets and crackers and Argentina’s customs recently seized Chinese 20,000 thermos containers for having elevated content of toxic chemicals.

And all of this means that there is a market disconnect between the prices of Brazilian shares and those elsewhere in Latin American equities and the fundamentals of the underlying companies, that we will see played out in the next and subsequent years.  Why?

Just because huge financial losses by banks precipitated a massive de-leveraging cycle, which means they had to sell their holdings, regardless of merit. And that included big sell-offs in preferred investments, including the hugely promising and profitable Petroleo Brasileiro SA (Petrobras) (ADR:PBR), Vale (ADR:RIO), and many others.

Sign up below… and we’ll send you a new investment report for free: “Credit Crisis Report.”

And what is worse, their sales hit the stop losses of major hedge funds, who were also leveraged in such favorite plays as commodities, steel, coal, agro, emerging markets and even defensive stocks such as the U.S.-based Pepsico Inc. (NYSE:PEP).

When you have the proprietary positions of banks and hedge funds all trying to get out of the same door at the same time because of risk management issues, you get the current disconnect between market fundamentals and pricing.

Another impact that we have to understand is that the ongoing dramatic interest rate drops in all major G7 economies and the more than $3 trillion in G7 fiscal programs will have a marked impact on growth next year, containing what would have been a much nastier economic contraction.  But while G7 countries will barely grow between negative 0.5% and a positive 1% in 2009, with the worst contraction front-loaded and recovering in the second half, emerging economies will grow at a minimum of 4%, and in the case of China maybe as high as 10%.

In my October Brazil analysis, I detailed the massive stress that Brazil came under in 1995 because of another exogenous shock: The Mexican devaluation, the so-called “Tequila effect,” which ricocheted around the world, and which caught Brazil in 1995 in a much weaker position than it is in today. Back then, Brazil had a much higher level of debt, much lower reserves, a fiscal sector that needed huge reform, and a much lower capacity for exports.  Brazil dealt with this massive stress effectively and went on to work at each one of its weaknesses in the next 13 years, getting itself into a position of strength today.

While having the temptation and the perfect excuse for a default right at hand, Brazil proved its seriousness back then by taking the hard, but certain road to progress, keeping its international commitments and gradually affecting strong structural reforms.  Since then, it has become a net creditor to the world; it controlled inflation, and avoided an overheating of its economy with tight fiscal and monetary policies during the recent run-up in commodity prices.

This is paying off strongly today.  The policies, run day to day by a sophisticated technocracy led by top economists and international bankers, many of which held top positions in leading international banks, has allowed Brazil to move forward and to anticipate GDP growth of 4% to 5% for the New Year.
Hence, Brazil is by far my favorite Latin American play for 2009.

Checking Out Chile

Following closely behind, and hindered only by its small size, is the poster child of fiscal and monetary prudence: Chile.

Chile, which came out of its 1970s default by eliminating its foreign debt and successfully restructuring its banking system, has made every effort to maintain very prudent fiscal and monetary policies and to diversify its exports away from copper, which, being the largest exporter of the metal in the world, still accounted for 38% of its GDP.

Today, Chile exports many diversified products, including agricultural products, wine, fertilizers and industrial wares.  And because it’s situated on the Pacific Coast, it is geographically well positioned to trade with the fastest-growing markets in the world – China and the other emerging Asian tigers.

But Chile, in order to minimize the cyclical nature of its economy due to the wide fluctuation in the price of copper, decided years ago to start a “rainy-day” fund, which would accumulate wealth in the good years and be used to soften the blow in the bad ones.  Now, Chile boasts a $28 billion sovereign wealth fund, accumulated almost completely from its copper profits.  That’s almost equal to a staggering 14% of the country’s GDP in cash savings!  This will enable Chile to implement counter-cyclical policies to keep growing at 3.5% to 4% next year – or about the current rate of growth, even with the worldwide meltdown.

Chile already has started to deploy this capital, having passed a $1.15 billion government plan on top of last month’s $850 million to stimulate housing and small-business lending, injecting that capital into a government bank that will make available loans for small businesses.

Avoid Argentina

Chile’s fiscal prudence is in direct contrast to Argentina’s lack of discipline.  Argentina’s Peronist government, which squandered the agricultural commodities bonanza in fiscal spending, is now is trying to use its majority in both houses in Congress to pass the nationalization of the privatized pension funds under the excuse of “protecting them from market volatility.”

These funds, which now have successfully grown to more than $30 billion in size, or 73% of the government’s budget and have returned an average of more than 13% a year since inception will allow the government to cover its fiscal gap and debt maturities next year and to financed public works and consumption projects.  The government, at the same time, is suffering from an important loss of confidence, as evidenced by its need to resort to police controls in order to prevent the illegal purchase of U.S. Dollars.  Argentina might end 2009 with growth of negative 2% and unemployment of 10%.  Stay away.

A “Maybe” for Mexico

Mexico, given its strong links to the United States, is receiving a heavy dose of external shocks on many economic and financial fronts – especially where the United States is concerned: It’s being hit by a drop in exports (the United States is the main component), the drop in oil prices, lower tourism (its largest proportion of travelers is from the United States), falling U.S. investments in Mexico, and reduced remittances from Mexicans working in the United States back to their Mexican relatives.

In addition, many companies suffered strong losses in their derivatives hedges, banks have had to reduce lending due to reduced liquidity and the Mexican peso has lost some 22% of its value against the U.S. dollar.  Mexico’s growth in the New Year may fall to about 1% from 2008’s 2.4% pace, and the country is on its way to approving the first budget with a fiscal deficit in four years.  The government’s target will be negative 1.8% of GDP, in order to stimulate the economy.  Mexico, seeing its oil production declining, is seen moving soon towards opening some oil areas for exploration and development, which some estimate could add another 1% to GDP.

Once the U.S. markets have stabilized, Mexico’s stocks will be an incredible buy once more, since they discount a very bad scenario at these prices.

A Case Against Colombia

Colombia, another country that has merited a lot of attention, given its staunch support of U.S. anti-drug and anti-money-laundering efforts, has seen its free trade agreement with the United States inexplicably delayed.

The country foresees a tightening of credit conditions, so it is moving up its peso-based borrowing to this year.  Next year it will issue only $1 billion in foreign bonds and tap $1.4 billion from multi-lateral lenders.  So the refinancing risk for Colombia is muted, given the small amounts involved, and the country’s economy should expand a minimum of 1% in the New Year, even in the worst economic scenario. However, Colombia could grow as much as 4% under a moderate scenario.

That would represent a big drop from the 8% growth recorded this year.

The story in Colombia has been the curbing of inflation, and how far behind the curve the central bank has been, at least as recently as July, when it boosted rates up to 10% and then kept them there.

These ultra-high interest rates, combined with the global slowdown, have blunted demand for consumer products in Colombia. Since the passage of the trade pact is a situation in flux, I want to wait and see right now.

I will not go into the economies of Venezuela, Bolivia and Ecuador, which, with massive intervention by their governments and advances against property rights, are experiencing severe economic and political stress, and which do not offer the guarantees needed for foreign investment.

Source: Some Latin American Markets Show Profit Potential in the New Year, While Others Pose Risk

[Editor's Note: This is the eighth installment of our “Outlook 2009” series, which looks at the global investing outlook for the New Year.]

This from Today’s Financial News:

What impact will rising taxes, stronger labor unions and increased regulations have on the country’s publicly traded corporations? Well, if today’s trading activity is any indication of what the future holds, we are in for a long road to recovery.

Some investors are taking this as an opportunity to look overseas.

India and the fairly limited impact the global economic crisis has played on the country has been a safe haven for some savvy investors. Even Australia is getting plenty of American investment dollars now that many of its mining stocks are dirt cheap.

While all of these investing notions are solid, international investors can do better. One region you should keep your eye on is Eastern Europe. There is a lot of political activity heating up in the area and smart investors will be able to take advantage of the action.

The fighting never stops

We all know Russia and Georgia are far from good friends right now. They are battling over many issues, but one undeniable fighting point is energy. Russia’s financial stability depends on selling oil and natural gas to its western neighbors at a premium.

But just like you and I do not like paying absurd amounts for our fuel, neither do countries like Georgia. That is why they are hurriedly trying to build out their own supplies. Countries like Turkey, Hungary, Georgia, and Kazakhstan are quickly realizing they are sitting on some very valuable energy reserves.

This does not make Russia happy.

But as investors, we need to look at this situation, not as a political mess, but as a great investing opportunity. Tiny, government-backed companies are about to be sitting on huge windfalls. The kind our new administration would love to tax… but can’t.

America may be getting a new administration that is not too happy with Wall Street, but that does not mean our days of successful investing our over. In fact, I believe there are more profit opportunities today than there were yesterday. You just have to know where to look.

My colleagues and I are currently researching and examining the situation in Eastern Europe. Look for our conclusions very soon.

Source: Obama Presidency: Investors flee overseas

This will see small companies, whether on the main market or AIM, offered the chance to pay £10,000 for a year’s worth of independent research prepared by one of three firms, Argus Research from New York, Chicago’s Pipal Research and our very own International Investment Research Plc.

Naturally I am pleased to see the LSE at least acknowledge that the share prices of small companies often bear no relation to the performance of the business itself, and that this is a real concern not only for investors but also for the many small companies that want to be able to issue new shares at a fair price.

But will this new measure really offer ‘huge value’? After all independent research is not new.

Filling the gap

In the old days a company’s stockbroker was responsible for writing research notes, partly to inform the market and partly to drum up some business for itself. Finding that the illiquidity of small companies defeated this latter purpose, many stockbrokers have simply abrogated this responsibility to the disgust, I might add, of many of their clients.

Into this gap have stepped a number of independent research houses such as Edison and Hardman that will write research notes to order, for a fee of something in the region of the £10,000 that the LSE is charging for its new service.

Nobody, of course, really believes that this research is truly independent. The researcher will be briefed by the company, and the research note will be vetted before it is published. If an ‘independent’ research firm has ever thanked a client for the commission by publishing a sell recommendation, I haven’t seen it.

The new venture sounds slightly different. The research note will be written by one of the three appointed firms ‘on a pre-determined allocation basis’ which I assume means that the company itself does not get to choose which of these three it will be. And ‘the research will consist of comprehensive factual information and analysis’ and ‘will not be investment advice and will not make recommendations.’

This immediately raises one question. Will companies be prepared to pay £10,000 for a research note over which they apparently have no control, and which does not conclude with a recommendation for the shares? A second question concerns the contents of these notes.

Apart from ‘comprehensive factual information’ we are promised that ‘the research providers have agreed to share common methodologies and produce reports that follow a uniform presentation format, in order to facilitate cross-company and cross sector comparisons by investors.’

Some bright spots

I like the sound of a common methodology, although I wait to see how this will enable us to compare the merits of, for example, an oil explorer and a software provider. But how much new information will these notes bring to investors?

The basis of the LSE’s initiative is that there is a lack of information about small companies; that more information will mean that more opinions are formed; that more opinions will lead to more trading in the shares; and that the result will be a more accurate pricing of small company shares.

However, there has been a massive increase in the amount of information that is available to investors in the last few years – but it seems to have done very little for the pricing of small company shares.

Whereas two or three years ago it could be quite hard to get hold of information about small companies, today just about each one has a very comprehensive web-site, featuring a description of its activities, past copies of annual and interim reports, biographies of the directors, and sometimes broker research notes. Indeed, my very own articles from Red Hot Penny Shares have been known to appear on company websites.

So companies have made a big effort to inform the market and if it has had no effect it can only be for one of three reasons. Either very few people are actually reading it – as I am sure is the case. Or the huge increase in the number of small companies trading on the LSE has simply overwhelmed the market’s capacity to absorb all that it should know about them – which I also think is the case.

Or people have been reading this information, but simply don’t believe that it tells the full story.

It is of course inevitable that companies do not publish negative information about themselves, either via a corporate website or via a note written by an ‘independent research house.’

What intelligent investors really want to see is an informed assessment about a company’s product written perhaps by an industry specialist, and a suitably cautious and sober assessment of its position vis-a-vis competitors.

If these newly appointed research houses can provide these perspectives they could make a useful contribution. But the old problem remains – will small companies be prepared to pay £10,000 for a note that draws attention to their weaknesses? And if not, is it worth having these ‘independent’ notes written in the first place?
Regards,

Tom Bulford
for The Penny Sleuth

Source: The London Stock Exchange Listens to the Sleuth