A Day That Will Go Down in History

The Daily Reckoning PRESENTS: Two days ago, India opened its $300 billion retail sector up – for the first time ever- to a foreign mega-retailer. While this may cause howls of indignation from mom and pop store owners and politicians, James Boric explains that they need to get over it – because this is how investors make a lot of money…

A DAY THAT WILL GO DOWN IN HISTORY

Mark this day down on your calendar: November 27, 2006. It is a day investors will look back to in 10 or 15 years and wish they would have realized its importance.

Unfortunately, most won’t realize this until it’s too late. But I don’t want you won’t fall into that trap. Let me explain…

For the first time since the British pulled out of India in 1947, the world’s largest democratic nation opened its virgin $300 billion retail sector up to a foreign mega-retailer. Namely: Wal-Mart.

Yesterday, Wal-Mart announced it formed an alliance with Bharti Enterprises Ltd. (a leading Indian telecommunications company) to open hundreds of stores in India over the next several years. According to an article on investor.com, “Under the deal, Wal-Mart and Bharti Enterprises will set up a joint venture to manage procurement, inventories and logistics, while stores will be set up under a franchise agreement, said Sunil Bharti Mittal, the chief executive of the Indian company.”

This is a massive story – although it didn’t make the headline of any mainstream news source that I saw. (It was buried under about 10 stories that came out that day). This sole event will lead to billions and billions in profits for investors – especially for those involved in small-caps.

For the last 49 years, the Wal-Marts, Targets and Sam’s Clubs of the world were not granted access to India’s blossoming consumer class. The country’s leftist leaders wanted to protect the millions of small-time shopkeepers that dominate the retail sector. After all, the politicians need votes come election time. And this has been the major item on the Communist ticket for years now.

To be a true super power you cannot close yourself off competition – whether foreign or domestic. By doing so, you sacrifice your own people’s long-term prosperity for short-term mediocrity. By allowing major retail outfits like Wal-Mart into India, you encourage billions of dollars to be spent on access roads, parking lots, water purification, infrastructure development, banking development, insurance writing and real-estate development. And on top of that, you encourage billions in foreign direct investment – money India can use to improve its living standard.

As a guy who has been to India twice in the last three years (and seen the problems with my own eyes), believe me: India has a lot of room for improvement.

Of course, there will be some negatives that follow Wal-Mart and other massive retail outfits into India. Thousands of mom and pop shop owners will go out of business – just like they have here in the United State when Wal-Mart set up shop. Politicians (who are on the hook come election time) will scream bloody murder – just like they do here in the United States. And thousands of folks without a job will tell Wal-Mart and its supporters that they are the devil incarnate – just like they do here in the United States.

BOO-HOO. Get over it. All great economic nations are founded on a principle of competition – both domestic and from abroad. That’s how progress is made. That’s how improvements are encouraged. And that’s how ingenuity is promoted.

It’s also how investors make a lot of money.

The last time a major Asian country opened its retail sector to foreign direct investment was China in 1992. It opened its then $75 billion cash cow to foreign investment for the first time ever. And what followed in China was a wildly lucrative series of events…

·            The Hang Seng Stock Exchange rose as much as 314%

·            The Shanghai Stock Exchange’s market value soared 44 times over

·            And the Chinese retail market grew from $75 billion to $480 billion. That’s a 15.3% annual growth rate for 13 years.

Looking forward, there are going to be a lot of investment ideas that pop up in India. Many of them will be small-cap in nature. But it is going to take time to find the really good ones.

Right now, I am working with Kif Hancock – editor of The Bull Hunter – to find an Indian play that will directly benefit from India’s emerging retail sector. Kif is still in the due diligence stages right now. But as soon as he has something figured out, I’ll let you know.

For now, please know this…

India’s retail market is not headline news at this time. No one is talking about it. No one is thinking about how to make money when it opens up. But it will open up (it is just starting to now). And investors who follow this story early on could make a mint. As investor.com reported yesterday…

“India’s retail industry is estimated at about $300 billion, and is forecast to grow to $427 billion in 2010 and $637 billion in 2015, according to consultancy Technopak Advisors.”

If you are interested in getting some of the billions in profits, stay tuned to this space.

Best regards,

James Boric
November 30, 2006

P.S. The last time we reported on India, our winning plays quickly shot through projected profit targets and yielded a combined average gain of 70%.

Check out my latest report for Small Cap Insider…in it, I detail a market leader that could rise at least 74% in the next 12 months – and three more companies whose insiders – from a VP paid a little over $100,000 a year to a chairman of the board and the CEO – are forking over huge portions of their hard-earned salaries to scoop up their own company shares at bargain prices.

Editor’s Note: James Boric is Small-Cap Strategy Report’s editor in chief. Throughout his career, he has focused on fundamentally sound small-cap companies with market capitalizations of $1.5 billion or less.

Thanks to his renowned insights into the small-cap market, Boric has been featured in John Mauldin’s best-selling book Bull’s Eye Investing. He’s also been published on dozens of well-known investment sites, including The Daily Reckoning, Rude Awakening, www.Gold-Eagle.com, www.financialsense.com and Tradersedge.com.

Today, Boric travels the world searching for the finest investment opportunities for his readers and writes about them in Small-Cap Strategy Report, Sleuth and Small-Cap Insider.

We are resolutely ignorant of the future. So we keep our eyes wide open, dear reader.

It is easy to stand taller today, all you need is to step onto one of the world’s prestigious hedge funds – say Medallion or Lone Pine. Your neighbors will look up to you. Even your wife might think better of you; you are not only rich, but also smart and well connected.

Pity the man, on the other hand, who has to tell his family and friends that he is invested in a pig farm, a cotton plantation, or a down-market retailer; he almost shrinks. “He must not have very much money,” say his friends. “He must not have very good friends,” says his money.

But what you gain in stature today may be lost in both inches and dollars tomorrow, for there is likely to come a time when you will have to do some explaining.

When the grandchildren ask, “What happened to the family fortune, grand-dad,” you will want do have a ready answer.

“It disappeared in the great crash of ’07,” you might be able to say – as if referring to some obscure form of magic.

“A hedge fund manager leveraged it…and put it into leveraged derivatives,” perhaps you could say, dazzling the little suckers, while putting the blame squarely onto someone else.

“When the housing market collapsed, we lost everything,” might be a good way of describing it; your cute tykes couldn’t expect you to beat that one.

We claim no ability to look into the future. Still, the future is very much in our thoughts, and with a little luck, we will one day live in it, whether we like it or not. And we want to be ready.

So we ask ourselves, “Which investments are most likely to hold up in an uncertain future?”

“Deep value.”

When we hear our friend Rick Rule say these words, we think of gold buried under a mile of hard rock somewhere in South Africa. Rick is a geologist. He probably thinks of layers of rock by their proper names and calculates the cost of digging through them.

But when Rick spoke of ‘deep value’ in New Orleans recently, he was referring to something else – businesses that you can buy for half what they’re really worth. The depth of value he described was the measure by which an investor could protect himself today from having to answer awkward questions tomorrow.

Rick described the type of businesses he looks for:

“Typically, these are businesses owned by families – not public stock holders. And they are beset by boredom. They rarely give interviews. They don’t hold press conferences to release their quarterly numbers. You’re lucky if they will return your phone call.”

One example: Boswell.

Boswell is a large, boring company owned primarily by the Boswell family, with a few shares available to the public. It is primarily in the business of cotton farming, from which it grosses about $700 million and earns about $70 million.

This alone would make Boswell a value stock, says Rick; it is in a solid business, with $120 million in cash, and the shares trade hands (however rarely) at only about 8 times earnings. But the real story of Boswell is deep in the ground, not in the news. It happens to own some of the biggest tracks of the most valuable open land in Southern California. Thousands of acres are carried on the firm’s books at the price of acquisition – which took place decades ago. And underneath all this land is the biggest, most rapidly replenishing aquifer in Southern California. The value of the water alone is worth about $4 billion at today’s prices.

“So what is a company with thousands of acres of prime land in Southern California…with plenty of water underneath it…going to do,” Rick asked his audience. “That’s right, Boswell is going into the real estate development business.”

How much Boswell will eventually be worth, we don’t know. Eventually is far in the future…far ahead of our nose. But we have a feeling Rick is right; compared to the many fortunes that will be lost in hedge funds and derivatives, there will be very few lost in deep value stocks such as Boswell.

Tomorrow…another deep value idea: pig farming.

More news:

————–

Justice Litle, reporting from Reno, Nevada…

“…I believe that in the past 50 years, and perhaps the past century, there has hardly been a better chance to amass a great fortune…”

For the rest of this story, see the latest issue of Whiskey & Gunpowder

————–

And more thoughts:

*** What’s the latest with the housing market?

There cometh news that houses fell by 3.5% from year to year, in October. That’s the biggest decrease on record, according to the National Association of Realtors. Also, inventories rose to $3.85 million, the second highest number of unsold houses ever.

We recall that only a few weeks ago, Alan Greenspan – you remember him, dear reader…Mr. Bubbles, himself – stood before an audience and told them that the worst was over for real estate. At that time, property prices were said to be down 2% in September.

Two percent…now 3.5%…how far down will they go? Gary Shilling says 25%. We will wait to find out.

*** In an article in The Christian Science Monitor, Michael Darda said, “‘We’ve got capital coming into the [United States] because the [United States] has been growing faster than our trading partners. Why is that bad?'”

According to Darda, “The imbalances in global trade can be dealt with…as export-centered nations develop stronger economies with more growth in consumer spending.”

He’s right…but the solution he imagines for the export-centered economies is an even greater problem for the import-centered ones, such as the United States. Currently, the imbalance in the world economy can be summed up as follows: they make – we take. As they become wealthier, they will take more – thus solving the imbalance problem.

But where does that leave the takers of yesterday? Us. What will we do when the taking is over? Then, we will neither make nor take. What’s worse, we will then have to compete with the people who both take and make, for everything we get. Prices for primary materials – oil, copper, wheat – will go up. So will finished product prices.

The present trade imbalance is sustained, too, by an imbalance of capital flows. Exporters earn money that it recycled back to the importer – primarily the United States – thereby allowing its ravenous consumers to continue taking without making the money to pay for the stuff. We imagine that this imbalance will be corrected too, but in a painful way for the importing nations. Exporters will lighten up on their dollar holdings. The dollar itself will fall and with it American standards of living will come down too.

*** Another old friend, Doug Casey, writes about uranium:

“Ever since I got onto the uranium story back in 1998, I have remained a steadfast believer that yellowcake was headed north of $100. The rationale for that projection is as clear to me today as it was back then. Simply, nuclear power is the cleanest, safest, cheapest and most abundant source of mass energy on the planet. Yet, thanks to environmental alarmists – almost universally ignorant of science and technology – and egged on by an arm-waving priest class, both new uranium mines and nuclear reactors can take upwards of 20 years to bring on-line. As a result, uranium has been in a worsening supply deficit since 1989.

“So far, so good on my original call, with prices now topping $60 a pound, up 700% from the low of $7.10 a pound in 2001. Those gains in the underlying commodity have translated, literally, into fortunes for some of our subscribers, those who bought into the uranium stocks we brought to their attention while they were still selling at bargain prices.

“But just when I thought the picture for uranium couldn’t improve, the news broke that Cameco’s much anticipated Cigar Lake mine had flooded.”

*** “The uranium industry is reeling,” adds Dave Forrest. “On October 23, Cameco, the world’s largest yellowcake producer, announced that its Cigar Lake mine had sprung a leak. Early attempts to seal the affected area failed, and the underground workings are now completely flooded.

“This is a pivotal development. Cigar Lake is the world’s largest undeveloped uranium deposit, holding 232 million pounds U3O8 at a grade of 19%. Production from the mine was supposed to begin in early 2008; at peak, it was thought that the mine would have provided 17% of world uranium supply.

“At the risk of hyperbole, the loss of Cigar could kick off a spectacular run for uranium stocks. Although share prices for uranium exploration companies have had stellar gains over the last three years (greater than 1,000% in a number of cases) a $5 or $10 jump in the uranium spot price over the coming months could touch off buying of even greater proportions. A frenzy reminiscent of tech stocks in the late 1990s is brewing.”

*** “I think that the original invasion of Iraq, and all of its consequences, yes, were a blunder,” former U.S. President Jimmy Carter said. “It’s going to prove, I believe, to be one of the greatest blunders that American presidents have ever made.”