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How to Invest in a Bacon Bull Market

A bacon shortage?  Say it ain’t so.

Unfortunately for American bacon lovers—though no doubt fortunately for their health—a porcine virus is ravaging the U.S. pig population and will probably cause the biggest decline in pork production in more than 30 years.  Meanwhile, demand for pork—and bacon in particular—continues to rise; U.S. bacon sales increased last year by 10% to a whopping $4 billion.

The resulting supply squeeze has caused pork prices to already rise by about 10%. Bacon prices have been particularly affected—up about 13% year-over-year.

I’ve been known to eat my share of bacon. Were I ever a condemned man, I would request a large plate of bacon as my last meal, washed down by a decent single-malt scotch.  (Hey, let’s keep it a little classy here.)

It seems like bacon is everywhere these days.  It’s jumped off the breakfast menu at IHOP and into places and products that are surprising even a confirmed bacon lover like myself.  Bacon jam to put on your toast in the morning?  It exists.  There is an all-bacon restaurant in New York—Bar Bacon— and a Bacon of the Month Club (I am not a member…yet), and a poll by Smithfield Foods found that 65% of Americans were supportive of making bacon America’s “national food.”  Taking it to levels that only an addict could appreciate, Olympic gold medalist Sage Kotsenburg tweeted that he wished his medal was made of bacon. And the ultimate?  You can buy bacon condoms.  I couldn’t make this up if I wanted to.

A bacon shortage would be devastating to millions of grease-loving unhealthy American slobs like myself. But all joking aside, there are real economic consequences.

I’ll start with pork product stocks.    While there is no true substitute for bacon—absolutely none, and I consider turkey bacon an unholy abomination—the fact is that consumers will shift to other meats if they become significantly cheaper on a relative basis.  This means that pork processors cannot fully pass on the price hikes to consumers—and that their margins should be crimped as a result.  This isn’t particularly good news for Hormel (HRL) and Tyson Foods (TSN).

But the biggest impact of rising pork prices goes far beyond U.S. shores.  China is the world’s largest consumer of pork, eating six times as much pork as the United States.  Despite China’s vastly lower per capita income, Chinese diners eat considerably more pork per person than Americans.  Among large-population countries, only Germany, Italy, and Spain consumer more pork per capita than China—and China is close to surpassing Italy. Three fourths of all meat consumed in China is pork, and the Chinese government considers pork critical enough to have created a strategic pork reserve.  Yes, that’s a real thing.

US-china-pork-consumption

So, a global shortage of pork—were the U.S. porcine virus to spread—would potentially wreak havoc on China’s major pork producers, such as Tianli Agritech (OINK) and WH Group—the Chinese company that bought Smithfield Foods last year. WH Group is planning an IPO in Hong Kong this year.

Rising pork prices also present the Chinese government with an unappealing set of choices.  Do they exhaust their strategic reserve and possibly start an expensive pork subsidy to keep their middle and working classes happy?  Or do they wait it out and hope that any price spikes are temporary? Food-price inflation could threaten China’s plan to reorganize its economy away from exports and investment and towards domestic consumption.

Chances are good that the price spike will be temporary and that, once the virus is contained, pork production will return to normal levels.  In the meantime, keep your eyes open for the WH Group IPO.  If you believe, as I do, that the rise of the Chinese middle class consumer is a durable and investable trend, then investing in the world’s largest pork producer is a fine way to play that trend.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Outlook for Gold in 2014

Gold had a rough 2013. With a loss of 28% on the year, the spot price of gold was down by nearly the same percentage that the S&P 500 was up.  And I don’t expect gold to regain its shimmer in 2014.

Let’s take a look at the macro environment as we enter the new year:

  • The inflation that gold enthusiasts have feared since the onset of the 2008 crisis is dead on arrival.  The latest CPI figures show an inflation rate of just 1.2%, and energy prices are actually falling.
  • The quantitative easing that fueled the inflation fears of the past few years is already being tapered, from $85 billion in bond purchases per month to $75 billion per month…with more tapering to come.
  • The Federal budget deficit, though still far too high, continues to fall and is expected to be just 3.3% of GDP in fiscal year 2014.
  • Gold miners are contemplating hedging their risk by selling their production forward,  which will effectively cap the price of gold (and sends a very negative signal to the market).
  • Hedge funds and other large institutional buyers—the driving force behind much of the rise in the spot price of gold in the past decade—appear to be abandoning gold if the outflows from gold ETFs are any indication.  Gold ETF holdings are now at their lowest levels since 2008.
  •  Gold now has competition in the anti-establishment crowd from Bitcoin and other “virtual” currencies.  (I think Bitcoin is a joke, mind you, but that doesn’t mean that it won’t continue to steal gold’s thunder for a while longer.)

And on top of all of this, we should remember that gold had a monster secular bull market run that lasted twelve years.  When the last bull market in gold broke, in 1980, it took two decades for it to finally find a bottom.

I try not to spend much time on specific price targets, as I see these as being something of a distraction but I expect the spot price of gold to finish in the range of $1,000 to $1,100.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.

This article first appeared on InvestorPlace.

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Mea Culpa: Shorting Japanese Bonds

You don’t get every trade right, unfortunately.  Sometimes, even the best-thought-out investment thesis turns out to be flat-out wrong.

My biggest blunder of 2013?  Shorting Japanese bonds.

In the June issue of Macro Trend Investor (formerly the Sizemore Investment Letter) I recommended readers buy shares of the PowerShares DB 3X Inverse Japan Government Bond ETN (JGBD), a leveraged ETN that bets against Japanese government bonds. I ended up selling about six weeks later at a modest 2.6% loss, but it’s not the portfolio loss that made this my mea culpa for 2013 but rather the opportunity cost.  I could have made a fortune in Japan by playing my cards differently.

Let’s flash back to May.  Abenomics has been in effect for about five months, and Japan is starting to see its first flashes of inflation in years.  The Fed’s initial tapering comments have turned world debt markets upside down, and Japan’s 10-year bond yield has soared from 0.6% to 1.0% in just weeks. JGBD

The moment I had been waiting for appeared to have finally arrived.  The bond vigilantes had awoken from their long slumber and had at last come to rout the Japanese bond market. It certainly took them long enough. Japan’s sovereign debts, at 250% of GDP, are the highest in the world, dwarfing those of the U.S. and Europe. And with annual budget deficits at close to 10% of GDP, Japan has been adding to that debt load at a speed that should be alarming to anyone who cared to look.

As I wrote in February, “debt service now accounts for 43% of Japanese government revenues and quarter of all spending. Furthermore, more than half of all Japanese government spending is financed by new borrowing…  It’s a debtor’s nightmare.”

The house of cards was kept up by Japan’s high domestic savings rate.  But as Japan’s population has aged and a much larger percentage of Japanese citizens are now retired, the savings rate has plummeted.  At less than 2%, the Japanese savings rate is now lower than that of “spendthrift” Americans. 

With Japanese investors no longer in a position to soak up their government’s new bond issues, it left two potential buyers—the international bond market and the Bank of Japan.  And at the time, the Bank of Japan already bought 70% of the new bonds issued by the Japanese government. As I wrote in the June issue of Macro Trend Investor, “The way I see it, there are two possibilities here.  Either the 10-year sinks back into its long trading range and the day of reckoning is postponed for a while…or things get really choppy really fast.”

Well, as it would turn out, the day of reckoning was indeed postponed.  Calm returned to the Japanese bond market, and yields sank back to 0.6%. If I had it to do over again, I would have simply jumped on the macro bandwagon of going long Japanese equities and short the yen.  An ETF that essentially follows this strategy– WisdomTree Japan Hedged Equity (DXJ)—is up 52% over the past 12 months.

Live and learn…

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.

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3 Trends to Watch in 2014

Last December, few people would have expected market returns of 30% in 2013. I entered 2013 modestly bullish and have consistently recommended staying invested throughout the year. But this time last year, I was steadfast in my belief that dividend-paying stocks would outperform in 2013 and that “the best values in the world” were in Europe.

Well, so much for that. U.S. stocks have trounced all their peers, and non-dividend-paying stocks have beaten the pants off of their dividend-paying brethren. As they say, “It’s hard to make predictions, especially about the future.”

So, all forecasts should be taken with a grain of salt. Markets are fickle and emotional, and they rarely do what they are “supposed to” within a given time frame. A good investment strategy is one that doesn’t require a precisely-timed forecast … and one that can be adjusted as market conditions change.

With that said, I’m going to offer three predictions for 2014:

Tapering Will Cause Bond Yields to Fall

I realize that this is a highly counterintuitive statement. The Fed, through its quantitative easing programs, has been absorbing a shocking amount of Treasury and agency debt at $85 billion per month. At various points in late 2012 and early 2013, the Fed bought in excess of 90% of new bonds being issued.

Still, we have to remember a few things. “Taper” does not mean quit. It means slowly reduce over a period of months or years, and that is exactly what the Fed announced following its December meeting. Rather than buy $85 billion per month, the Fed will be buying $75 billion, with further reductions dependent on the economy continuing to improve. And Bernanke and Yellen have made it very clear that tapering is not irreversible. If the economy starts to backslide, they can ramp up quantitative easing again at any time.

The bond market, not sure of what to expect, has priced in the worst. When the reality of tapering sets in, I expect a large rally in bonds and “bond-like” investments such as mortgage REITs.

And the Fed is not the only story here. Foreign investors — led by Japanese institutional investors — are aggressively buying U.S. Treasuries. Japanese purchases last quarter were the second-highest on record since at least the year 2000.

So, overall bond demand is likely to remain high even while the growth in new supply continues to shrink. The U.S. budget deficit, while still too high, has been shrinking for more than a year.

Bottom line, if you are in or near retirement and looking for quality income investments, this is a great opportunity to grab them at a bargain.

The U.S. Market Will Continue to Rise

Yes, the U.S. stock averages are up big this year. But this doesn’t indicate that there is a lean year ahead. In looking at the S&P 500’s returns since 1970, strong years in the market are generally followed by additional gains in the year that follows. There have been 9 years since 1970 in which the S&P generated price returns of 25% or more. In all but two cases, the S&P 500 went on to generate positive returns in the following year, and the average return the following year was 10.8%.

10.8% is a far cry from 30%, of course. But my point stands. Market history does not suggest that strong years are followed by weak ones.

Europe and Emerging Markets Will Outperform the United States

While I like the prospects for U.S. stocks in 2014, I see better opportunities abroad. Of course, I made a similar call this time last year, and I was wrong. “Cheap” European and emerging market stocks got cheaper, at least relative to their American peers.

As I wrote recently, many of the largest emerging markets are priced to deliver annual returns of 10%-20% or even more in the years ahead, whereas the U.S. market is priced to deliver returns that are barely positive.

Meanwhile, the Eurozone has emerged from recession — even if shakily — and China’s slowing appears to have run its course for now.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.

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