Research watch

This is a sampling of the week's best research notes. In a world of too much information, we hope our selection helps you spot the market's key signals.
As global equity markets continue their tumble and some Western investors see property looking just as grim, new forms of creative investing – and hedging – are taking form. As oil prices rise, drill rigs are sprouting up for gas exploration, and as food becomes more expensive, backyards are being turned to pasture. Yet are financial safe-havens becoming new bubbles and are bears the new bulls? As contrarians become trend-setters and doomsayers become financial gurus, you know that you have to dig a little deeper for truly different ideas. Here are a few '¦

Rural land may be a bubble '¦ “Rural land has long been seen as a good inflation hedge. But now may not be the most opportune time for investors to swap their wingtips for wellies. After more than two decades in the mire, the value of farmland has soared over the past few years on the back of strong prices for agricultural commodities, low interest rates and urban sprawl. It has become so fashionable that some wonder if it is a bubble waiting to burst '¦ To some, farmland values have now reached scary levels. The average price of an acre in America has almost doubled since 2004. In Britain, the value went up by 25% in 2007 and by a staggering 47% year-on-year in the first half of 2008. Many poor countries have seen similarly dizzying increases '¦ Tobias Levkovich, an equity strategist with Citigroup, thinks investors have been seduced by the bulls’ “everyone’s got to eat” mantra and are ignoring the warning signs, just as they did with the housing market in 2005-06. In an uncomfortable echo of that boom-turned-bust, land prices in America have deviated dramatically from their long-term growth rate. In relation to farm cash flows, they are now much higher even that they were in the late 1970s, the last golden age for ploughmen.” (The Economist, August 24)

Though recession fears lead to a cow market '¦ “Rising supermarket prices are persuading hundreds of families to turn their back gardens into mini-ranches, stocked with miniature cattle. Registrations of the most popular breed, the Dexter, have doubled since the millennium and websites are sprouting up offering 'the world’s most efficient, cutest and tastiest cows. For between £200 and £2000, people can buy a cow that stands no taller than a large German Shepherd dog, gives 16 pints of milk a day that can be drunk unpasteurised, keeps the grass 'mown’ and will be a family pet for years before ending up in the freezer '¦ A desire for organic food, fuelled by health concerns over factory farming and soaring food prices, means that many people now see growing their own food as a viable alternative. As many as 2% of households are now estimated to have their own fresh supply of eggs. In the last year food prices have increased by a record 13.7%. The cost of meat has risen 16.3%, while milk, cheese and eggs rose by 19%, according to figures released by the Office for National Statistics last month.” (The Times, London, August 17)

Another bull market for bears hits new peaks '¦ Gold-market bulls couldn’t buy publicity much better than this: the US Mint says it has run out of one-ounce American Eagle gold coins amid rocketing demand '¦ The government has sold 60,000 one-ounce gold coins this month, up from 47,500 in all of July and just 13,000 in June. Sales of US silver Eagle coins, meanwhile, have been hot all year, which has led to rationing of those coins by the Mint '¦ some coin dealers confirm that they’ve been swamped with orders over the past month as gold dived from $977.70 an ounce on July 15 to $786 last Friday, the lowest since December '¦ Gold’s fans say the metal – which has risen every year since 2001 – is shining again as a haven amid the financial system’s ongoing turmoil, surging inflation and concerns about increasingly rocky US relations with Russia. The Mint, however, obviously wasn’t planning on a spike in demand. Now it’s losing gold coin sales to other countries, including Canada, which makes the one-ounce Maple Leaf.” (Los Angeles Times, August 22)

India meanwhile appears to be avoiding the credit crunch '¦ “The global credit turmoil may have singed Goldman Sachs and Merrill Lynch, but the two leading investment banks are betting big on India '¦ Goldman will have an operational credit desk in India by the year end and Merrill is in the process of increasing the headcount for its credit debt/mezzanine transactions in India '¦ Goldman, which parted ways with the Kotak Mahindra group in 2006, had announced ambitious India plans in March this year. The focus of the India team will be on institutional sales, which means that Goldman will sell risks to the large lending institutions in India '¦ Merrill will also be looking at developing a team in Singapore specifically for the Indian transactions.” (Business Standard, India, August 26)

Though more news suggests otherwise for China '¦ “China Construction Bank Corp, the country's largest mortgage lender, expects profit in the second half and next year will slow considerably, well below the 71% gain in the first half. The state-owned lender, which is also the country's second-largest commercial bank by assets, said increasing economic uncertainty suggested the banking sector's stellar run in the past two years was over '¦ In a recent research report, JP Morgan noted: 'We acknowledge that from a medium-term outlook, Chinese banks have yet to be tested by an economic down-cycle. This potentially means the best period is over as earnings growth is unlikely to match the level banks have enjoyed in the past three to four years.’ (South China Morning Post and ChinaStakes.com, August 25, 26)

Should have taken the money '¦ “Stock options are currently underwater at nearly 40% of Fortune 500 companies, compared with about one-third that had worthless options during the first quarter, according to data compiled for Financial Week by compensation consultants Steven Hall & Partners. And many of those options are well into the abyss: One in every 10 companies now has options that are more than 50% underwater. Compensation consultants say an increasing number of companies are considering dealing with their now-worthless options, either by repricing them or exchanging them for newly issued restricted stock '¦ Not surprisingly, the corporations whose options are the most deeply underwater – which occurs when a company's stock price dips below the exercise price of an option – are largely financial firms, although automakers, retailers and tech companies also account for a significant portion.” (Financial Week, August 25)

Peak oil? Not for gas '¦ “American natural gas production is rising at a clip not seen in half a century, pushing down prices of the fuel and reversing conventional wisdom that domestic gas fields were in irreversible decline. The new drilling boom uses advanced technology to release gas trapped in huge shale beds found throughout North America – gas long believed to be out of reach. Natural gas is the cleanest fossil fuel, releasing less of the emissions that cause global warming than coal or oil '¦ Many people in the natural-gas industry believe a new era is at hand, and a rising chorus of Wall Street analysts and Congressional lawmakers supports that notion. Competition among companies for rights to the new gas has set off a frenzy of leasing and drilling '¦ Domestic gas production was up 8.8% in the first five months of this year compared with the period a year earlier, a rate of increase last seen in 1959, during the great drilling boom that followed World War II.” (New York Times, August 24)

Finally, mega-rich Russian watch '¦ “ As more Russians move into the top tier of the world's rich, they are beginning to dive from one sea to another. Leaving their traditional stomping grounds of the Mediterranean, rich Russians are slowly making their way to the islands of the Caribbean '¦ Although super rich Russians have owned houses in exotic locales for more than a decade, the growing number of millionaires – 136,000 at last count, according to Merrill Lynch and CapGemini – means that more Russians than ever are investing in second, third and fourth homes abroad '¦ Group Metro's Costa Blanca, to be completed by 2010 on 121 hectares of land on the south coast of the Dominican Republic, will include 10 condominium towers, 52 villas, a marina village with retail and commercial space, slips for 150 boats ranging up to 40 metres, a tennis village, clubhouses for both tennis and golf, a private beach, a signature Greg Norman PGA golf course and a Founder's Club 'made up of 52 elite individuals’ '¦ [And] the Eclipse will become the world's longest yacht owned by a private citizen when it is delivered to none other than Roman Abramovich this December. It will overshadow the unconventionally designed "A”, Alexey Melnichenko's superyacht, which grabbed headlines last month. This trend shows that despite the global credit crunch, rich Russians are still prepared to splash on the ultimate luxury accessory. It isn't just superyachts that are being bought; somewhat 'poorer' Russians are also purchasing smaller, less extravagant yachts '¦ There are already lots of yacht clubs, and last year a new one opened in landlocked Moscow, interestingly called the Royal Yacht Club.” (Daily Telegraph, Moscow News Weekly, The Moscow Times, August 26, 20)