GSG: Emerging Markets Keep Energy and Agriculture Booming

Don Dion submits:

The advent of $4-per-gallon fill-ups generated a lot of headlines during the last few months, but gasoline wasn’t the only commodity with a soaring price. Corn recently hit $8 per bushel for the first time in history, gold surged to $950 per ounce following a sharp drop in April, natural gas futures hit a 29-month high, soybeans topped $16 per bushel for the first time ever, and the price of a barrel of oil rose 38% to hit all-time highs beyond $140. iShares S&P GSCI Commodity-Indexed Trust (GSG), which invests in all those commodities, gained almost 29% for the quarter, even as broad market indices suffered losses.

GSG invests in futures contracts of 24 commodities: six energy products, five industrial metals, eight agricultural items, three livestock products and two precious metals. Like the index it tracks, the S&P GSCI, GSG’s portfolio is world-production weighted. In other words, the amount of a particular commodity in which GSG invests is determined by the amount of that commodity that flowed through the global economy during the last five years. Standard & Poor’s uses a complex methodology to estimate these production values, which shift constantly due to economic conditions. When growth in emerging markets is strong, for instance, agricultural and petroleum-based commodities tend to play a larger role in the global economy. Conversely, when global economic growth is mostly driven by industrialized countries, industrial metals are typically weighted heavier on the index.

Alesco Financial: REIT Selling For Less Than Cash On Hand

Brian King submits:

Alesco Financial (AFN) is among the Specialty REITs that have been significantly affected by the disruption in the credit markets. The company was formed as a result of the merger between Alesco Inc. and Sunset Resources in late 2006, and evolved in 2007 as an investment vehicle for CDO pioneer Cohen & Company to invest in a hybrid type of debt instrument called a Trust Preferred (TruPS) issued primarily to medium size banks and insurance companies. The company also has a business that provides commercial loans to mid market companies in 34 industries and a business that generates income from a $1B residential portfolio of 740+ FICO borrowers.

Alesco was among the first of the Specialty REITs to set a 2Q 2008 earnings release date (Tuesday, August 5^th ) and recently reported that it had $115M unrestricted cash as of May 15th. Moreover, the company recently declared a 25 cent dividend (see June 10^th announcement). This begs the obvious question: Why is a stock which just declared a 25 cent dividend trading for a $1+ and for less than the cash it has on hand.

Oil, Gold and the Holy Dow

Stockerati submits:

There’s something about the trinity of Oil, Gold and Stocks that catches the fascination of modern investors. I spent sometime last night looking at the correlation between these. Though, I have data on the prices of the three for the past 62 years (since WW II), in order to make this exercise relevant to modern times, I chose to do it from 1970 onwards. It was right after man landed on moon and the era of scientific, engineering and industrial evolution leap-frogged to levels only dreamt about before. From an analysis perspective, I chose to study the correlation between the 3 around the following data points:

A. Oil crisis of 1973

NVR, Inc.: A Housing Stock? Now?

Ted Allrich submits:

NVR, Inc. (NVR) operates as a homebuilder in the United States. It engages in the construction and sale of single-family detached homes, town homes, and condominiums. The company sells homes under the Ryan Homes, NVHomes, Fox Ridge Homes, and Rymarc Homes trade names primarily to first-time homeowners and first-time move-up buyers.

It markets its products in Maryland, Virginia, West Virginia, Pennsylvania, New York, North Carolina, South Carolina, Ohio, New Jersey, Delaware, and Kentucky. The company also offers mortgage banking services to its homebuilding customers, including broker title insurance; and performs title searches in connection with mortgage loan closings. The company was founded in 1979. It was formerly known as NVHomes, Inc. and changed its name to NVR, Inc.

VMware: Is the Dream Over?

Robin Bloor submits:

The valuation the stock market put on VMware (VMW) never made a great deal of sense. I wrote about this in November (The EMC Paradox) when the irrational exuberance of the market had driven VMware shares to over $120 and it’s value was approaching that of EMC (EMC), which owned and still owns 86% of the company. Since then EMC’s share price movements have reflected those of VMware, demonstrating the market belief that VMware constituted the dominant portion of the value of EMC. In terms of stock value, it surely did, but  in terms of business value I’m not sure that’s the case.

VMware is now, in my opinion, approaching a realistic valuation. The stock price tanked when Microsoft (MSFT) announced that it would be releasing a hypervisor of its own, Hyper-V, bundling it in with server versions of Windows. Anyone who believed that VMware wasn’t going to face hypervisor competition from Microsoft  was living in la-la land. Virtualization revolutionizes the OS market. (If you’re not sure what OS visualization is click here.) Microsoft was never going to stay out of this market.

An Open Letter to the Plunge Protection Team

Mark McHugh submits:

First of all, there is no such thing as the Plunge Protection Team.  It’s the super-hero nickname for the Working Group on Financial Markets.  In case you haven’t noticed, they haven’t exactly been living up their moniker lately.  All jokes aside, I truly love this country, as I’m sure those in charge do.  What follows is what I think might be a win-win solution (although I hate that phrase).

You’ve Got Problems…

What started out as a seemingly contained problem with sub-prime mortgages has metastasized into a full blown financial meltdown. There is now a very real crisis of confidence in Capitalism in general and America’ future.  You can’t blame anyone who doesn’t want to deploy new capital.  We see record amounts of money in money markets and shorting stocks.  I hate to be the one to tell you this, but we don’t trust you. 

China: Chickens Coming Home to Roost?

Cam Hui submits:

I previously pointed out that the Bank Credit Analyst, or BCA, wrote that “emerging markets will be key to timing a slowdown in oil [and other commodity] demand”. Today, we see signs of slowdown in many emerging markets. Vietnam is a disaster. India is slowing down and problems are becoming more evident (see comments here and here).

China slowing?
Risks are also increasing in China. BCA also summarized the risks the China well here and the Economist wrote about China’s macro risks here. Recently Stratfor summarized the risks to the Chinese economy well in the following commentary (emphasis mine):

Oil Price: $100 Before $150 - But $200 Before $50

Cam Hui submits:

Emerging market slowdown is commodity bearish
Some commodity prices are starting to show the strain and may be starting an intermediate term correction. Demand destruction is already being seen in oil and petroleum products.

Be prepared for volatility
Is it all over for the commodity bulls? I was asked that question recently and my answer was “expect $100 oil before $150 oil, but expect oil to hit $200 before $50.”

Sectors Tell an Important Story

IndexUniverse submits:

By Matthew Hougan

Just look at the changes Jim Wiandt outlined between the sector weights in the S&P 500 from 2005 to June 30, 2008.  Here's the table:

Q2 2008 Market Review

John D. Frankola submits:

The S&P 500 Index—the broadest U.S. benchmark—lost 2.7% in the second quarter of 2008.   It was the third consecutive quarter of negative performance for the S&P 500.  After attempting to stage a recovery in April and May, the S&P 500 fell 8.6% in June.  This put year-to-date performance at negative 11.9% and reflected an 18.2% decline from its peak on October 9, 2007.  As the following table indicates, all major market indices have suffered a significant correction for both year-to-date and trailing one-year periods.

click to enlarge images

Just Think Positive!

Tim Iacono submits:

Even the most casual observer can plainly see where the roots of many of today's economic problems lie simply by examining two stories appearing amidst a torrent of news yesterday morning at Bloomberg.