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· The Dow levels out…Bear market rally of bottom fishing time?
· Three reasons why investing in timberland makes sense,
· One investment strategy that time has befriended and plenty more…

Joel Bowman, reporting from Luxor, Egypt…

Bear market rally or bottom fishing time? No doubt that was the question on most investors’ lips as some of the blood returned to their knuckles during Monday’s giant rally.

We wonder, however, if the jovial stampede was a little overdone. Could it be that, after suffering through a harrowing few months, investors are wiling to cling on to anything that splashes a little green on the screen?

“There is every reason to doubt that nationalisation of the banking sector will work,” writes Dan Denning in yesterday’s Australian Daily Reckoning. “It does nothing to arrest falling global residential real estate problems, the core of the rot in the system.

“It is, in effect, a giant bet by the backers of fiat money that investors prefer inflation to insolvency. Because let’s face it, unlimited liquidity does nothing to improve the solvency of troubled financial firms. Liquidity is not wealth. Not even money is wealth.”

Before we don our rally caps, we would want to be able to tick a few boxes first. One, has the market fully priced in the recession as it has spilled over into other sectors of the economy? The transport sector and general production capacity of the US has been dramatically effected, for instance. Has that been fully considered? We would also like to see a solid bottom in the asset prices that underpin the securities that dragged down all those Wall Street giants. The housing market is still in a slump, we see. Is that about to change? And what about the solvency issues lending facilities face. Will a flood of “unlimited dollars” solve their woes?

Just to be clear, we enjoy a good rally party as much as the next fellow. It’s only that we hate being the first to show at the shindig, only to see it canceled because the birthday boy is tragically ill. During market rebounds, it’s often better to be a little fashionably late than to be tragically early.

With all the kerfuffle in the markets, it’s difficult to know what is cheap for a reason and what has been unfairly treated. Your rude editors don’t pretend to know how long irrationality can last. We know only that one underestimates the longevity of such delusional mob behavior to his peril.

As such, it helps to take a step back and try to understand the investments that have been tried and tested in both good markets and bad ones. We’re looking for investments have stood the test of time, in other words. In the column below, Chris Mayer goes one better and finds an investment strategy for which time is actually a key profitable ingredient.
Details below…

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Got Wood?
By Chris Mayer

Timberland is like a cassoulet – that French wonder of a slow-cooked stew brimming with pork, pork sausages, duck, beans and much more – that gets better after a long simmering on the stove. So, too, is time the friend of the timberland investor.

Timberland, besides its perennial appeal (stemming from its long-running track record of happy returns), is timely now, too. It’s a crisis-proof investment, because the growth of the trees does not move in step with economic cycles. You don’t have to harvest when demand is soft. You let them grow and the trees will become more valuable anyway. Bigger trees equal more dollars.

Timberland as a timely and crisis-friendly investment might seem odd, given its ties to the housing market. In fact, demand for timber as a building material is weak right now, at least in the U.S.

As the housing market reaches depths not seen in a long time, the end of the deflating housing bubble seems a way off. Housing inventory in the U.S. at the end of June was 4.9 million homes, or about 12 months of supply – a glut we have not seen since 1981. New housing starts are near 17-year lows. And perhaps most surprisingly, even though housing prices have fallen quite a bit already, there is probably plenty of room to go, based on at least one good historical indicator: price to income.

The price of a single-family home to median income is 3.4 times, a historically high number – even after housing prices have come off their peaks. The long-term average is close to 2.9 times, which means housing prices need to fall 17% just to reach trend line. This assumes too that incomes stay where they are. Given a recessionary environment, that may be a poor assumption. Of course, markets usually don’t stop at trend lines, anyway. They blow through them on the upside and downside. All this means bad things for housing yet.

So despite weak housing markets and no sign of an imminent turnaround, timberland values have continued to climb. Why?

There are three reasons for this, all making timberland a good investment today. They are scarcity, global demand and institutional interest. Let’s take a look at each of them. Growing scarcity of quality of timberlands. The mountain pine beetle infestation had a very real effect on supply. North America will lose about 20% of its spruce, pine and fir lumber over the next five-eight years. In addition, much of Canada’s boreal forests are not economical, thanks to high costs and Canadian taxes, unless lumber prices rise significantly. Many of these businesses have already shut down. Also, the U.S. government continues to set aside timberland for conservation – about 1.4 million acres per year. Add up all three and you have a good case for tight supply.

The other big issue outside of North America is the reduction in Russian logs.
Traditionally, Russia has been the low-cost provider of timber, but log export taxes have taken much of its timber off the global market. So as Russian logs withdrew, prices skyrocketed in markets in which Russia was a key supplier.

In the frosty Baltic states, for example, lumber prices recently hit 18-year highs. Softwood prices were 57% higher than a year ago.

Global demand should increase. China is a giant here. It is the world’s largest importer of logs. Its appetite has increased 16-fold in the last 12 years alone! As the Chinese build more homes, they’ll need plenty of lumber.

In addition to China, the demand for biofuels has an impact on timberland. The use of wood pellets and cellulosic ethanol for fuel, for example, provides a source of growing demand for wood products. Wood is environmentally friendly, which could become more important as we get into reducing carbon emissions.

Growing institutional interest in timberland. There is a big slug of money in institutional vaults – like pension funds – slated for investment in timberland. By some estimates, there is at least $10 billion in funds seeking timberland investments. All the usual appeal about timberland – steady inflation-beating returns – has caught the interest of these whales. This provides a floor of demand for timberland.

These three factors keep timberland prices strong, even as housing markets stay weak.

There is one other interesting point. Lumber has not yet really joined in the commodity cycle. Its pricing lags that of many other commodities. Lumber pricing lags even competing building materials. The gap among lumber prices and concrete and steel, for example, is as wide as it’s been in 20 years. So timberland – a growing scarce resource – ought to participate sooner or later.

[Joel's Note: Sorting the trash from the treasure in these markets can be difficult, to say the least. Some stocks are cheap for a reason, and will likely become much cheaper. Others have been unfairly oversold. But how to tell one from the other?

Right now, Chris is offering readers of his Capital & Crisis newsletter the chance to sort the wheat from the chaff with what he calls his “Paycheck Portfolio” program. In short, it’s a way you can unleash a steady flow of work-free income by investing in just a handful of companies. If you’re interested, here’s a link to the free report Chris sent over to us. You can qualify for two “paychecks” per day on at least 24 of the days listed. For more information, read on here

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[Rude Endnote: “No one seems to be addressing the root cause of the home mortgage disaster,” observes one reader, writing from a financial services firm in Chicago.

“When the Community Reinvestment Act was passed it mandated that a certain % of all mortgages made by lenders had to be to subprime borrowers. if lenders violated the % guidelines they are subject to heavy fines.

“Today the CRA is still in effect. Lenders then would have to continue lending to many borrowers who fail to meet minimum lending requirements and are no more than defaults waiting to happen.

“Lenders will not make those loans in this climate. Thus they have every incentive to not lend to anyone rather than lend and incur certain defaults or incur penalties for lending only to those who will probably not default.

“Nothing in any of the rescue packages being promulgated address this. Until it is addressed the home mortgage market will remain frozen and the country cannot recover.

“Given this it is difficult to project that we have hit a ‘bottom’.”

Thanks to all who responded to the “bear market raly or bottom fishing time?” question.
To have your say, flick us an email at the address below.

Until tomorrow…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com