Joel Bowman, reporting from Manhattan, New York City…
The tide is rising…and American homeowners are strapped into their concrete boots.
According to a new report by Deutsche Bank half of U.S. mortgage- holders will be “underwater” or “upside down” on their loans by 2011 – that is, they will owe more on their loan than their property will be worth. And it’s not just those risky subprime borrowers who will feel the pressure of the rising debt waters (although the report suggests up to 69% of home “owners” in that category will be submerged).
As it turns out, prime conforming loans, those ordinarily considered to be the safest bets, will sink the quickest. The report suggests that 41% of these relatively “safe” home loans will be underwater by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009. Furthermore, forty-six percent of prime jumbo loans (those greater than $417,000) will be larger than their properties’ value, up from 29% over the same period.
Partly, this equity to debt inversion will be due to continued fall in home prices. Covering 100 U.S. metropolitan areas, the bank predicts home prices will tumble another 14% through the first quarter of 2011, for a total drop of 41.7%. The problem is exacerbated when people simply give up on their loans, knowing full well that, without jobs or a rise in the value of their home anywhere on the horizon, they might just be better abandoning the whole situation and starting from scratch (with a demolished credit rating, of course).
It goes without saying that your editors have no idea what home prices will do tomorrow. Maybe the government will bulldoze excess inventory to stimulate prices on the supply side. (That sounds just dumb enough for them to undertake, come to think of it.) Or maybe they will fall another 14%, as Deutsche Bank forecasts. Either way, the days of the ARM ATM seem to be over. And, without a job to supplement that home equity “income,” consumers might find the going tough for some time.
This dour news, however, has nothing to do with the column below in which Rude favorite, Chris Mayer, offers some unusually uplifting news for commodity investors. Please enjoy…
Oil and Water Do Mix
By Chris Mayer
The oil price is stubborn, like a two-year-old who refuses to eat his mashed peas. Despite all evidence that the market is well supplied, oil is over $70 a barrel again as I write. Taking the view out to the horizon, though, I think it will go higher and will drag the price of most commodities higher in its wake.
Part of the reason for the rise is weakness in the dollar. People often say that oil is denominated in dollars. But maybe it is the other way around; dollars are denominated in oil. A dollar is worth how much oil it can buy. Part of oil’s rise is simply marking down the value of the dollar. Weak dollar means higher oil prices.
People will blame the higher oil price on speculators, but something interesting is happening in the markets for minor metals like molybdenum. Prices are rising, too. The silvery metal, used to strengthen steel, is now $15 a pound — nearly double the $8 and change it fetched in April. This is significant, because there is no futures exchange for “moly.” It trades on a physical spot market. Speculators play a very small role here. The buyers of the metal use the metal.
So there is a demand story shaping up here, too, mostly focusing on a fragile recovery of some sort and mostly centered on China and the emerging markets. The market is looking ahead.
For instance, over the weekend, South Korea reported numbers that show signs of a recovery in that country. Industrial output fell less than expected, and trade volume surged to $60 billion. That was its best showing since last October. Also, South Korean companies have been reporting better-than-expected results.
The biggest buyer of South Korean goods is China. Still, it’s a confusing time because of all the stimulus money that governments around the world have been spending. So it’s hard to say what’s real and what’s just an illusion created by a temporary spending binge.
Another piece of the puzzle from last week: Spot iron prices in China (meaning iron ore for immediate delivery) topped $100 per ton. That’s the highest level since October 2008. The other breakthrough in iron ore last week came when BHP Billiton, the world’s largest miner, announced that a third of its customers were moving to prices linked to the spot market.
This is big news for the industry. The old way was to have annual contracts with a negotiated price. This was bad for iron ore companies because the contracted price lagged the increase in iron ore prices. And when iron ore prices fell, steelmakers just reneged on their contracts. As the iron companies found out, having contracts was a great way for iron ore producers to cap their upside and leave them with all the downside. Not so good.
The industry now looks like it is moving toward more spot pricing, which is a good thing for the producers. Iron ore prices have rallied too, along with crude oil and moly.
Every rally, like every bottle of beer, has a finite life span. There will be lots of bumps along the way, but the prices of many commodities — such as oil, iron ore and moly — will tack higher, in my view.
The price of water is also rising — at least in China. I’ve long watched for this, as it affects companies like Hyflux (HYFXF:pink sheets) – a stock I recommended to the subscribers of my investment service, Mayer’s Special Situations. Water rates in China are well below average. One cubic meter of water in China costs about one tenth of what it does in Germany, for example.
Yet as we’ve covered here, China has a serious water crisis. Mother Nature did not smile on China when it came to water. The amount of water available per capita is only a third of the global average. Low prices only make that worse. Raise the price and people will get smarter about how they use water.
So finally, many cities are raising the price of water. The WSJ points out several places where water prices could rise 25-48%. Shanghai, for instance, raised water rates 25% in June and plans another 22% increase next year.
This is all good for Hyflux, which is in great position to capture those increases. The fact that those water prices are now rising partly explains why the stock is up 80% from its lows.
The stock was too cheap before, anyway. As I pointed out in an e- mail alert on March 16, Hyflux had gotten about as cheap as it has ever been on an earnings basis when it hit $1 per share. I continue to believe that Hyflux has a great future and enormous growth potential ahead of it.
One other note on the news this week: Japan is shifting its focus to investing in agricultural commodities. Japan is the largest importer of food in the world, with an annual bill of more than $40 billion. Now Japan’s big trading houses are looking to invest in assets that produce soybeans, wheat, corn and more. They are eyeing grain elevators and export terminals and grain processors. Some of them are investing in their own farmland.
Mitsui, for example, has nearly 250,000 acres of farmland in Brazil. Itochu, Japan’s fourth largest trading company, aims to double the amount of grain it handles. (All of this from the Financial Times piece this weekend titled, “Japan Thinks Global to Fix Food Shortage” by Javier Blas).
Years of underinvestment in food production around the world is now catching up with us. So I continue to believe that some of the best performing stocks over the next few years will come from the ranks of commodity companies that keep the world supplied with water, food and energy.
I like to say that now is a good time to invest in those things that keep civilization a going concern. The budding economic recovery may prove to be a mirage, but dwindling water and food and energy resources certainly will not.
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