Investing is often focused on the minute details of a company like the balance sheet, income statement, and cash flow statement. But investors shouldn't forget that macro forces are just as important in our investing decisions. The world is changing every day, and the world we invest in a decade from now will be different than the one we invest in today.
Below I've highlighted three of the most important trends in the world and a few ways investors can take advantage of them.
The world's population is growing
Not only is the world's population still growing, more people are expecting a higher standard of living as countries like China, India, and Brazil grow the middle class. This means the world will require more food from less land and fewer workers. The recent explosion of corn prices highlights just how important farming will become, even as few people go into the field in the U.S.
Investing in companies that make agriculture more productive with less land will take advantage of this macro trend. Monsanto is in the business of engineering seeds that deliver more yield to farmers. The company invests heavily in developing and protecting its product, which often rubs people the wrong way -- but it's been good for business.
Monsanto's seeds won't grow without food, which is where Potash (NYSE: POT ) and Mosaic come in, providing fertilizer to farmers.
Deere & Company is another leg of the agriculture food chain and one of the most important to productivity. Deere's products will be key to not only U.S. agriculture productivity, but also productivity around the world. Trading below 10 times trailing earnings and paying a 2.4% dividend yield are nice treats for investors as well.
It's also worth noting that if macro predictions of climate change come true, these companies will become even more vital to farmers. Predictions are that weather events will become stronger and more frequent (not necessarily just warmer), and a hot dry summer and a hurricane touching land this week may be a sign of things to come.
Energy is becoming harder to come by
In Texas 111 years ago, oil drillers struck black gold at Spindletop, shooting oil 150 feet in the air. The well eventually produced 100,000 barrels of oil per day and started an oil drilling boom in Texas.
Today, there's a similar renaissance in energy because of fracking, a technology that has unlocked both oil and natural gas in the U.S. But as successful as fracking has been, there has yet to be a fracked well (to my knowledge) that has produced 100,000 barrels per day. Fracking expands the amount of oil we can produce, but it does it at a higher cost than traditional wells.
Offshore drilling has run into a similar conundrum. There's lots of oil offshore, there's no doubt about that. But wells are being drilled in ultra-deepwater and hazardous environments, not the shallow water that once dominated the industry. SeaDrill (NYSE: SDRL ) , Transocean, and Noble have been building rigs as fast as they can, betting that the deepwater boom continues. But at Hercules Offshore an expanded bet on shallow water is leaving the company with massive losses. Even though oil isn't reaching record highs, the dayrates explorers are willing to pay for an ultra-deepwater rig are reaching new records, showing the demand that exists in the industry.
The simple fact is that oil and natural gas are harder to come by than they were 100 years ago, a fact that's true around the world. So how can investors profit?
Companies that make or own equipment that makes complex drilling possible are where investors should focus. Halliburton (NYSE: HAL ) developed much of the technology behind fracking, SeaDrill is a bet on continued ultra-deepwater drilling, and National Oilwell Varco (NYSE: NOV ) provides a plethora of on- and offshore services to drillers.
For those looking for an alternative to oil drilling, solar is already the fastest growing area in energy in the U.S. and will continue to grow. First Solar (Nasdaq: FSLR ) and SunPower are two of the major players worldwide and their financial fortunes are starting to see an uptick. The solar industry has been battered for the past few years but this will be a major area of growth in the next decade and beyond.
Debt can only get more expensive... probably
The Fed has worked tirelessly to keep interest rates low in the U.S. and even countries abroad have extremely low interest rates, but it can't last forever. Well, we've been saying that for years but eventually this prediction must come true.
One way to bet on rising interest rates is to buy ProShares Short 20+ Year Treasury ETF. This ETF holds U.S. Treasury securities that have maturities over 20 years and have more than $250 million outstanding. There are currently 19 constituents with a weighted average maturity of 27.85 years and a yield to maturity of 2.68%. So, how will this profit if rates go up?
A short ETF sells Treasuries and pays the coupon while it holds it and then sells the bond when it reaches 20 years' maturity. A 30-year Treasury bond recently sold for $989.68 on a $1,000 par and pays a $2.75 coupon (paid biannually). The ETF would have to pay the coupon while it is short the bond and hope to make up the difference by buying it back for a lower price when the bond reached 20 years. In this case, the implied yield would have to be about 5% annually in 10 years, still a low rate in historical terms. If inflation runs rampant this would be a big winner in the end.
Investors should also watch the leverage in companies they own and how much is tied to floating rates or debt that will need to be rolled over in the future. Companies like Caesars Entertainment and MGM Resorts use floating rates to pay for casino development and acquisitions, but if rates rise they could be in real trouble.
Foolish bottom line
Growing population, more difficult energy extraction, and rising interest rates are three macro trends investors should keep an eye on. Having exposure to the right side of these trends can help put the odds on your side.