As we all know, we live in turbulent times. This global depression, which is a combination of structural weakness within the western financial system and massive demand for materials and soft commodities in China and India is truly changing the world we live in.
In a previous blog, I quoted Thomas Malthus's theory that agriculture grows arithmatically (1,2,3,4 etc) and population geometrically (2,4,8,16). He believed that to control population in order to feed the people, we needed pestilence and war. Malthus could not have foreseen the advances in medical science and the influence of the UN on the world.
Please click on the Casey Chart above right for an illustration of this.
In 1979, China introduced it's "one child" law to curb rampant population growth. Whilst draconian and invariably cruel, this policy (albeit unknowingly)has probably done more to stabilise worldwide food prices than any single piece of legislation from any government anywhere, ever.
Despite this, we still have a major food crisis to deal with. The combination of high oil prices and massive hikes in food inflation will have a major toll on our everyday lives.
Below is a short video from Fox News with Bud Conrad which goes straight to the heart of this matter.
Click here for the video
So where to invest? As Bud Conrad mentions, the major US food corporations such as Sarah Lee, Kellogg and General Mills are looking to increase prices by up to 20% by years end. This indicates that the Futures Markets will continue to be strong.
The Powershares DB Agriculture ETF (DBA) is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities – corn, wheat, soy beans and sugar. The index is intended to reflect the performance of the agricultural sector. The fund is nondiversified.
The Market Vectors Agribusiness ETF (MOO) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal Agribusiness index. The fund normally invests at least 80% of total assets in equity securities of U.S. and foreign companies primarily engaged in the business of agriculture, which derive at least 50% of their total revenues from agribusiness. Such companies may include small- and medium-capitalization companies.
I think that this combination of futures and straight equity is very powerful. However, I would advise waiting for a month, as August is looking uncertain for equities generally. Additionally agricultural futures have tended to soften during the summer.
Click here for the Chart
It is not often that I recommend a particular individual stock but Cash America International looks like a no brainer. Along with Ezcorp, Cash America is a leading provider of credit services to individuals who do not have cash resources or access to credit to meet their short-term cash needs. Where do low income people go, now that sub prime loans are no longer available?
Cash America and Ezcorp provide a real alternative but with a much more structured loan criteria and security. If the western economies stay illiquid, people will need short term cash. These two corporations have the means to capture this empty corporate real estate.
Below is an article about Cash America from SeekingAlpha.com,accompanied by a chart of both companies.
Cash America: Up 16% on Higher Guidance
by: Brian Bober posted on: July 08, 2008
Yesterday, Cash America (CSH), the leading pawn retailer and one of the leading cash advance merchants, dramatically raised its Q2 2008 guidance sending the stock up 16%.
Cash America expects second quarter 2008 earnings per share to be between 51 cents and 54 cents. The Company’s updated expectation for the second quarter of 2008 is now between 62 cents and 64 cents per share, up over 44% from 43 cents per share earned in the second quarter of 2007. Cash America will release complete second quarter results on July 24, 2008 before the market opens.
This is the second quarter in a row that during the quarter CSH has increased its guidance. On March 24, 2008 CSH raised its EPS guidance to $.80 - 82 from $.70 – 75 then exceeded that updated guidance on April 24 with actual EPS of $.86. Cash America’s business is really running on almost all cylinders.
Revenue from pawn loans and increased gross profit dollars on the sale of merchandise exceeded expectations… [while the] online cash advance product offering experienced strong revenue growth and lower than expected loan losses.
Regulatory Risk
The only cylinder potentially misfiring is due to regulation risks of its cash advance business. This caused the company to reduce full year 2008 EPS guidance by 15 cents and consider closing 139 stores. The regulatory risks warrant caution however several prominent 3rd parties, including the New York Fed and Yale, have released major studies demonstrating the positive effects of CSH’s type of short term lending.
Online Short-Term Financing Platform
Cash America has a strong, growing online cash advance platform. This platform offers short-term cash advances over the Internet to customers in 32 states and in the UK. The online platform, which was acquired in September 2006, has spent years getting various regulatory approvals and tweaking its proprietary lending models. Recently the president of the Internet Services division purchased 57,400 shares of CSH.
Crossover of Retail Customers
The current consumer lead recession has driven many sub-prime lenders from the market. This has caused many new marginal borrowers to seek financing from Cash America. In addition, many traditional retail customers are crossing over from traditional retail to pre-owned merchandise. Cash America offers a smooth transition for many customers with its strongly branded safe, clean stores easing the migration of new customers. The pre-owned merchandise offered by CSH allows consumers to stretch their limited dollars. For example, it is common for jewelry to be priced 35-40% below traditional retail outlets.
Solid Management & Growth
CSH’s seasoned management has a history of being conservative and open with shareholders. The company’s growth is high quality coming from its brick and mortar stores’ organic growth (not by opening new stores) and through the company’s online platform. Even after yesterday’s run-up Cash America has a P/E around 12 based on its current 2008 full year guidance which now appears extremely conservative.
Click here for the Chart
Again, I believe that if August is as weak for equities as predicted by analysts at RBOS and Morgan Stanley, then it is worth keeping our powder dry for September.
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