January 6, 2011

Outlook 2011, Alternative Investments: Rhodium, Rice, Florida Timberland

These offbeat bets may have some good upside for the year

“Fair is foul and foul is fair.” So say the three witches in Act 1, Scene 1 of Shakespeare’s Macbeth, and so could be said of Act 1, Scene 1 of a new investment year.

Wall Street, like the three witches, is full of contradictions. The trend is your friend, but then the herd suddenly rotates into something once thought foul. Therein lies the attraction, or perhaps the hope, of alternative investments: getting to some unnoticed investment before it becomes mainstream.

Herewith, a witch’s brew of alternative investing ideas:

An Unappreciated Metal

It’s hard to recall now, but there was a time when investors concerned themselves primarily with stocks and bonds, before commodities became all the rage. While 2010 was a boon for virtually every asset, there was magic most of all in metals. Gold had its 10th consecutive up year, silver was up 84%, palladium up 97%; platinum, copper, tin — they all soared.

The prize for most creative alternative investment idea may go to South African investment advisor Prieur du Plessis, who seems to have married the powerful “trend is your friend” conceit — after all, owning real assets is still indicated in these wobbly economic times— with a metal that seems to have escaped the herd, to whit: rhodium.

In his Invesment Postcards blog, du Plessis comments on“how severe the plunge of rhodium in 2008 was and how ‘tame’ the subsequent recovery has been, at least when compared with other precious metals.” Du Plessis says the crash occurred as a result of plunging car sales, since rhodium’s main industrial use is in catalytic converters for automobiles. As the rarest of precious metals, rhodium would seem to be subject to a steep price hike if economic recovery takes hold and the automotive trend in Asia continues apace.

Best of all, what makes this the most alternative of alternative investments is the near impossibility of investing in it — unless you’re adept at buying Royal Bank of Scotland perpetual options listed on German’s Scoach or Euwax exchanges.

Have any friends in Frankfurt who can walk you through this?

There are all kinds of mining companies that extract rhodium along with palladium, silver, platinum and gold. And, because these other metals have gone gangbusters, those mining companies are far from undiscovered; they’re mostly close to 52-year highs. In short, until someone figures out how to safely extract rhodium from used nuclear fuel — another potential source for the metal — there are no available pure plays that are convenient to buy. Unless, that is, you desire a hunk of the stuff. The Cohen Mint in Brooklyn, N.Y., sells rhodium bullion coins and bars. The commission would be well worth it if rhodium (current spot price: $2,580) were ever to get even close to its peak 2008 price of around $10,000.

Some Rice Would Be Nice

Even as metals were shining, another commodities theme — agriculture — has been growing. Over the past six months, baskets of agricultural commodities have gone straight up — between 30% and 60%, depending on which index you’re looking at.

Let’s assume that 2011 is not going to be a year where throwing a dart at a commodity list will automatically produce great results; this assumption could be incorrect, but I prefer to be conservative. So, which grain will bring gain? According to commodities bull Jim Rogers, some rice would be nice. A few months ago, the famous “investment biker” and hedge fund manager predicted silver and rice are headed up. This week, Rogers reiterated his optimistic view in an interview with the Economic Times of India. “If rice goes down, I will buy more rice. So both the silver and rice have a great future for the next few years,” said Rogers, a bull in a China shop if ever there were one.

This investment idea marries both the powerful uptrend in agricultural commodities (based on a growing world population, diversion of crops to biofuel usage, and droughts, floods and other wacky weather cutting into production) with the ongoing dramatic rise of Chindia, whose increasingly affluent people are consuming more calories than they used to.

Commodities traders can buy rice futures on the CBOT. Investors who shy away from the fury of pit trading once again have no pure plays available. But until the first rice ETF comes out (and I predict 2011 will be the year!), there are some broad basket agricultural ETFs in which rice is a constituent part: Rogers’ branded commodities index can be accessed through ELEMENTS Rogers International Commodity fund (RJA); the iPath DJ AIG Agriculture Fund (JJA) and the PowerShares DB Agriculture ETF (DBA) are two other exchange-traded products.

If Rogers is right, you may be ushering in a celebratory 2012, and maybe 2013 too, with some hot sake.

Clash of Investing Titans Over Florida Land

Metals and grains are almost conventional, however hard it is to obtain rhodium and rice pure plays. Timberlands and master planned communities are classic alternative investments wherein a pure play is readily at hand. I refer to the Jacksonville, Fla.-based St. Joe Company (JOE).

What makes this stock a unique alternative — in addition to its assets — is its unique role at the center of a battle between two of today’s investment giants, Bruce Berkowitz and David Einhorn.

Berkowitz is a legend in his time. The Fairholme Fund manager, along with co-manager Charles Fernandez, already holds the distinction of Morningstar Manager of the Decade and Manager of the Year for 2009. Morningstar said of Berkowitz’s performance in 2010 that he “has knocked the ball out of the park again,” having made big bets on very unloved financial stocks such as AIG. Berkowitz has described his M.O. as not looking for potential catalysts to stock performance, but looking for what can go wrong. Only when he feels a stock can’t blow up does it make his buy list.

Given that philosophy and his fund’s performance, you might think his big investment in JOE — one of his top 10 portfolio holdings — is a no brainer. Enter David Einhorn, a hedge fund manager who is noted above all for seeing and calling out the emperors wearing no clothes. The Greenlight Capital manager publicly exposed Lehman Brothers’ financial house of cards months before its collapse and also brought down Allied Capital, an effort detailed in a book he authored.

The Market Folly blog quotes Einhorn speaking at The Value Investing Congress, describing JOE as another naked emperor:

“[T]here’s no ongoing business. They have this many acres. Ten years ago they had twice as many acres. All they do is sell acres. They take in cash for selling the acres. Most of it goes to the operating expense of the company so there’s not a lot of profits left for shareholders. And so basically, this isn’t an ongoing business, it’s basically a run-down of the assets. And my feeling is that if they continue on their current course, it’s going to take them a few decades, but, by the end of the day, there just won’t be anything left."

In contrast, Berkowitz and Fernandez are joining St. Joe’s board, the better to fight for shareholders. JOE is much closer to its 52-week low than its high, in contrast to high-flying AIG. If you want to want the pride of owning timber and resort communities, St. Joe board member and Morningstar Manager of the Decade has got some land in Florida he’d like to sell you. Time will tell if famous Fairholme turns foul.

See AdvisorOne's Outlook 2011 calendarto find the publishing dates for, and links to, other categories in the Outlook series.

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