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(Article from Jordan Wirsz)
Weekly Summary Report
March 11, 2016
By Jordan Wirsz
This week’s wild ride was exactly indicative of the volatility I predicted for 2016. Last week in my podcast, I talked about getting ready to get short the stock market, but I didn’t pull the trigger and I’m glad I didn’t since we’ve seen not only volatility, but some to the upside as well. I’m glad I didn’t have to ride that one out. Since I play in futures that would have been a painful roll. I got asked this week why I didn’t pull the trigger – and the simple answer is that after watching the markets for almost two decades, I’ve developed a little “sixth sense” that sometimes gives me pause. Last week was an example of that sixth sense giving me pause in entering the short. I’m not always right, and I’m far from psychic, but there are times when your experience and better judgment tell your gut something, and when it does, you better listen. My gut told me to hold off on my short…and I was right to do so.
I’m attaching my June 16’ S&P E-mini futures chart showing two lines…one is a potential resistance point up near 2025, and the other assumes the spike yesterday was an interim top. If we close above yesterday’s spike today, which it looks like we will, then 2025 is probably a top boundary. Stochastics are also overbought and they have turned negative. My buddy Jim Willis with Beacon Bay Asset Management thinks we could rally to the 2025 level before taking the elevator down. Looks like he is right to me. The environment of bulls and bears has a unique taste about it at present time…and I’m not willing to try and make that precise of a “trading” call, because I tend to be a good “investor” and a poor “trader.” Its good to know your own limits! I’ll wait until we get a little more overbought and hit that top resistance line before I sell short…
The fear in the market is still prevalent. Gold is one indication of that, remaining in the upper end of the $1200’s this week with momentum and accumulation indicators remaining quite high. Gold got to $1045 – I called $965. Close enough to be right? Maybe not – and it looks like gold could stay in this $1150-$1350 range for a while. The main factors remain interest rates, the stock market, recession fears, and China. OK, enough about gold.
One of the biggest value-investments in the coming decade is going to be farmland. I’ve talked a lot about farmland in the past, and the agriculture sector in general. The agricultural markets have been through one heck of a boom, and now it’s busting. I had a conversation this week with one of our commercial real estate investors who happens to be a banker in the agricultural market. His comment to me was that essentially farmers have lost more this year and last year, than they made in the three previous years. This is due to crashed grain prices and softening cattle prices…the commodity boom has been officially over since about 2014, but topped in 2012-2013. Now, many farmers are struggling to make ends meet between land payments or rents, low commodity prices, a tougher banking environment, and high input prices. Given China’s massive slowdown, the export demand for U.S. commodities has slowed considerably, and these low commodity prices could be here to stay for a while. This could take agriculture land down 40-60% off the highs. Although farmers are losing lots of sleep at night over the state of the commodity markets and land prices, the August 2015 USDA land price survey shows prices holding steady in many areas. Take a look at these maps:
This information is, quite literally, as good as any other government originated data. i.e. its WORTHLESS. The real story is that farmland values are 10-20% off their highs. Last year, some data was published by the Center for Agricultural and Rural Development regarding Iowa farmland values declining from 2013 to 2014…Keep in mind, Iowa ground is some of the most desirable farmland in the country, and carries with it some of the highest prices. But look at what the 13’/14’ difference was in most of these values:
So…How is it that in 13’-14’ values dropped but in 2015 when commodity prices are even lower, the USDA is saying property values are rising? Suspicious at minimum.
The fear in the agriculture market is palpable. Some very astute and wise farmers began trading their high priced ag land in for commercial real estate with us, and as a result, have saved millions of dollars of “would be” losses while also making gobs of money in commercial real estate. The right time, for the right investment. It is all driven by market cycles.
If commodity prices stay low for a prolonged period of time, say for the next couple years, there will be (unfortunately) a lot of blood in the water. Agricultural banks are already tightening their lending criteria and preparing for borrower defaults. This is an inevitability of the combination of low commodity prices, high land prices, high input prices, and high debt loads including operating lines of credit, equipment loans, and land loans. In the recent years of the commodity and farmland boom, farmers were buying land at 1%, 2% and 3% unleveraged returns. In effect, they were buying jobs and taking on millions of dollars of risk to make a couple percent. It made no sense, but that’s what happened.
Internally, our parent company Savant Investment Partners is preparing to buy farmland as another real estate investment class within our portfolio. Although it is sad that many farmers are likely to lose their land, we do want to be positioned to pick up good deals when they arise. The asset bubble in agriculture fit the mold almost perfectly:
Now look at what Iowa farmland did:
Pretty clear bubble, isn’t it? And to think, I argued fiercely with agriculture experts over the bubble theory…and now it looks like I was right.
If you were lucky enough to have invested $1,000 in Iowa farmland in 1960, it would have been worth almost $300,000 in 2012. Fortunes, absolute incredible wealth has been made in agriculture, especially in recent decades…In fact, far outpacing $1,000 invested in the S&P as seen above.
A recent MarketWatch.com article does a great job detailing the commodity price dynamics and the market exuberance that led to the farmland bubble that many are now staring in the face. The full article can be found at: http://www.marketwatch.com/story/spiking-farmland-prices-can-offer-a-lesson-for-stock-investors-2015-06-17
One stock I have been watching to short is a REIT that trades as FPI, Farmland Partners Inc., which is on the NYSE. Although it is thinly traded, it is worth looking at a long-term short position for a variety of reasons…. Not the least of which is their continued buying spree of high priced farmland, including the recently closed $197 million acquisition of farmland in IL. http://www.bizjournals.com/denver/news/2015/11/10/farmland-partners-buying-22-300-illinois-acres-for.html
Although the safer, and probably bigger bet is to buy farmland when the prices are low, than try to find a way to short farmland prices through the FPI REIT. Leverage is definitely our friend in the real estate business, especially at the right time in the cycle.
While the ag-market cycle is definitely bearish, the overall real estate cycle in the U.S. remains very bullish. Although the chance of recession in 2016/2017 remains, there cycle hasn’t topped. A recent commercial real estate survey of investors showed a good bit of bullishness for 2016, tempering my hope for good deals this year and next…Take a look at the survey below asking if their purchases are going to outpace their sales…Its 2:1!
The return expectations of commercial real estate investors in 2016 also brings a pretty bullish picture to the forefront:
Investors continue to want value-add deals. The problem is, there are few of them available. As a highly successful value-add investor, I can attest to the fact that true value-add deals are few and far between. Good quality real estate is not selling at “value add” prices anymore. But as you can see from the survey below, MOST commercial real estate investors are chasing the fewer deals available:
It’s a good time to be in the commercial real estate business… And we have to “make hay while the sun shines.” Far too many investors are sitting on the sidelines and investing in the wrong asset classes. We hope that you take the other side of that coin, and invest like a Savant.
Stay tuned for more next week.