Commodities, Rent, Safety, and Insurers
I have disappeared from the world of CAPS blogging, and even from Seeking Alpha over the past few months. It's been due more to lack of time than anything. So I thought I'd do a quick summary on some of the interesting things I've been observing recently and some of the trends I think we'll see over the next 12 months.
(1) Commodities bust. I've been predicting this for a bit, but I think it's finally starting to gain some momentum. Commodities have been setting record highs based on loose Chinese monetary policy, coupled with massive numbers of speculators entering the markets. Yet, there's no fundamental economic reason why this is sustainable long-term. Many of the speculators are buying based on a poor understanding of monetary policy. There has been virtually no inflation in the US for the past four years and the inflation that does exist only exists because of the two aforementioned currents (loose Chinese monetary policy and speculators).
Silver was the most inflated of the precious metals for awhile, but it's retreated a bit. It still might have further to go. I'd be afraid of holding palladium, platinum, copper, rare earth elements, and many agricultural commodities, as well. The rare earth elements, in particular, are out of this world right now.
Margin hikes and increased regulatory scrutiny are likely to accelerate the commodities bust. Also, I wouldn't completely dismiss the idea that the Chinese economy is starting to slow down.
(2) Rental supply shortage. Speaking of inflation, there's really only one area of the economy where there is legitimate inflation issues: rental prices. As very little real estate has been constructed since 2008, we are starting to see a rental supply shortage in many urban and inner suburban areas. Here in the City of Atlanta, we've seen rental rates climb from about 8% - 15% in the past year in prime areas.
This is a bad thing if you're a renter (like me) and a good thing if you own homebuilding stocks (like me). So, it's a mixed bag for me personally. But I think rising rental prices, coupled with falling housing prices, will eventually meet up and create a bottom for the housing market. At some point, it's simply going to be more economical to buy rather than rent. I think we might actually be at that point in some submarkets, but we're not that far away on a broader level.
While we can talk about "shadow inventories" all we want, once buying becomes more economically desirable than renting, we will start to see a pick-up in building activity. I'd also take a guess that much of the "shadow inventories" are in areas where the market will never recover; as opposed to the higher-growth markets (multi-family, urban, infill). So the "shadow inventories" might not be as huge of a deal as people believe.
(3) Flight to Safety. With the Eurozone issues, falling housing prices in the US, sovereign debt issues, austerity, and a potential slowdown in China, I think the markets are starting to look a lot riskier, especially considering the run-up in prices over the past few years. So I've started increasing my cash position and increasing my commodity-related puts. Perhaps more importantly. I've started shifting towards stocks that pay very large dividends. I part like a few mortgage REITs and some commercial REITs that I believe are undervalued and have good upside potential (FUR, ROIC, OLP).
(4) Insurers. This isn't so much a "market current", so much as a sector I like right now that I haven't mentioned. I think many of the insurers are very attractive right now. I particularly like the Hartford (HIG). Once we see earnings recover to more normalized levels, I think we'll see a lot of appreciation in some of the insurance stocks.
So my portfolio can be thought of as a collection of homebuilders, insurers, dividend-paying stocks, coupled with some commodity puts and an increased cash position. I've begun scaling back on my bank holdings, focusing more exclusively on banks with very high capital ratios in the Northeast and the West Coast. I've pulled out of Southern banks almost completely.
So that's what I've been up to investing wise. What are your throughts right now?
Disclosure: I am long stocks in sectors I've commented on favorably in this article (including FUR, ROIC, HIG, PHM, and OLP) and own long-dated puts on certain commodity related securities.