Introduction

Since May 2009, I have recommended investments in emerging market countries. In part, I did this to bet against the dollar. But also, emerging market countries’ growth rates were high – they had middle classes whose growing demands would get them out of the global recession far more rapidly than the “mature” Western countries. In addition, their debt/deficit rates were low relative to the US, Europe, and Japan.

What has happened? My recommendations were hardly impressive. As Table 1 indicates, the S&P 500 did slightly better than the simple average of the emerging market ETFs and mutual funds that I recommended.

Table 1. – Investment Results

Source: Yahoo Finance

 What Went Wrong?

There was nothing wrong with the growth projections: emerging market countries have grown rapidly while Western nations continue to have high unemployment and growing debt. And on top of this, European banks are near collapse and the US government economic policy making has become dysfunctional.

There were three reasons my recommendations were mediocre:

•  Stock market investing is a “random walk”;
• Western traders and “thin” stock markets in emerging nations;
• Panic.

Random Walks

Paul Samuelson is credited with developing the mathematical theorem showing that “properly anticipated futures prices fluctuate randomly”. That means all new information is immediately reflected in stock market prices. How immediately? With the large amount of computer-driven trading that goes on today and professionals following every company day and night, any new information will be reflected in stock prices before I get it. Picking stocks is a losing game for individuals. But many of us continue to look for an “edge”. If the random walk theory is correct, all stocks have an equal probability of going up or down. So it is not too much of a surprise to see emerging market stocks performing about the same as the S&P 500.

Western traders and “Thin” Stock Markets in Emerging Nations

Table 2 provides data on the capitalization of selected stock markets, by country. In every country, the holdings of residents far outweigh the holdings of foreigners. However, the determinants of prices are trades, and investors from the developed world are the dominant equity traders globally. Take a look at the trade ratios in Table 2, the total value of trades divided by the stock market(s)’ capitalization. Note how low they are in many emerging market countries. This means very little trading. But trades are what determine prices. So what happened in emerging markets? The Westerners bought in 2009 and sold more recently. And even relatively small trades by their standards had a tremendous impact on equity prices. Some of this trading was value driven, but as with other commodities, there has also been considerable speculative trading. Speculative trading has occurred in advanced equity markets as well, but the speculators will normally have less of an impact their because of higher capitalizations and higher trade ratios.  

Table 2. – Stock Market Capitalizations, End-2010 (in bil. US$)

Source: World Federation of Exchanges

Panic

Since 2008, there have been numerous instances of global financial panic. What happens in such times? Foreigners liquidate their holdings of overseas assets. If they hold any foreign assets in panic times, they will hold US dollars.

Not Just Correlations – Look at the Betas

A number of pundits have recently remarked that stock markets are increasingly correlated: when the S&P 500 goes up/down, so does the Tokyo market. But there is another factor of equal or greater importance to investors: how much the Tokyo market rises or falls relative to the S&P 500. The Beta coefficient captures this: it gives the average percent increase/decrease other markets for any percent increase/decrease in the S&P 500. These differences are reflected in the Beta coefficients of my recommendations. Table 3 gives the Betas for my investment recommendations for the May 2009 to the end of 2011 period.

 Table 3. – Betas vs. S&P 500

Data Source: Yahoo Finance

 Note the high coefficients for South Africa (EZA), Brazil (EWZ), Emerging markets (EPP), Pacific, excluding Japan (EPP), South Korea (EWY), and Latin America (PRLAX). For a 1% increase/decrease in the S&P 500, they go up/down on average 30% more/less. The coefficients for China (MCHFX) and India (MINDX) are much lower, probably reflecting the high capitalizations of their markets and heavy trading (at least in China).

What Does This Tell US for 2012?

If global fear and panic continues, the market whiplashes will continue. A lot remains worrisome. As I have written, things will get worse in Europe before they get better. The US pull-out of out Iraq has left a completely unstable nation, threatening oil supplies and worse. However, the US is showing some signs of recovery. So let’s at least consider what should be done if panic subsides a bit.  

Weaker Dollar

Panic is propping up the dollar. I believe even more strongly than I did 3 years ago that the dollar will weaken in future years. Despite panic and other problems that tend to strengthen the dollar, it has weakened somewhat against major currencies since May 2009. With the deficits, debt, and dysfunctional government in the US, the dollar should weaken much more. So I continue believe in betting against the dollar, and that means getting your money into other currencies/commodities.

Table 4. – Dollar Losses vs. Major Currencies

Source: Oanda

But how? Jim O’Neill and his partners at Goldman have come up with a new list of countries to consider. But since I only like 2 of his 4 BRIC suggestions, I go back to square one by looking at countries:

•  with 15 million people or more;
• that have sizeable equity markets;
• that are projected to grow by 3% or more in 2011.

Table 5. – Country Growth Projections

Source: IMF: World Economic Outlook

What countries on this list bother me? Right now, the Middle East is too risky for investments. Russia is also problematic: a country that is accustomed to being run by a dictator with no history of allowing markets to work. And while there is corruption in all countries, Transparency International reports there are only 7 countries in the world more corrupt than Russia -  Tajikistan, D.R. Congo, Guinea, Kyrgyzstan, Venezuela, Angola, Equatorial Guinea, and Burundi.

 I have looked at Mexico relative to other Latin American countries, and it has real problems. It is running out of oil, a major export. It depends too much on the US for markets, and it has a real drug trafficking problem.

 So now let’s look in a bit more detail at the remaining countries. Table 6 combines growth prospects of countries with their unemployment and inflationary pressures.

Table 6. – Economic Conditions In Selected Countries

Source: IMF: World Economic Outlook

Argentina’s inflation looks dangerous enough to exclude from further consideration.  

Now let’s look at the debt and deficit problems of these countries. Both India and Sri Lanka are running large government and current account deficits. A couple of years ago, I was positive on India. No longer. Unlike China, it has not invested in needed infrastructure. Perhaps its government is too democratic to rule effectively at this time of rapid growth.

 Table 7. – Debt and Deficit Problems in Selected Countries

Source: IMF: World Economic Outlook

These considerations leave us with the following 13 countries for further consideration: Brazil, Chile, China, Colombia, Indonesia, Korea, Malaysia, Peru, Philippines, South Africa, Taiwan, Thailand and Turkey. But are their markets overpriced? Table 8 provides price earnings ratios for selected country and region ETFs and mutual funds. In light of discrepancies that turned up, I  have given ratios from both Yahoo Finance and CNN Money

 Table 8. – Price Earnings Ratios

Putting It Altogether – What To Do?

Go back to the Betas: they are important. They mean that if financial panic subsides, emerging markets should way outperform the markets of developed nations. This will happen in large part because “big finance” from developed nations will buy them again. One other thing will happen if panic subsides: people will sell dollars. The dollar will weaken. Betting against the dollar will pay off.

When panic subsides, I will start by looking at selections in Table 8 with price-earnings ratios of 11 or less.

My Investment Position

I generally agree with the argument that trying to time investments is futile. But with what has been happening these last two years, I have pulled most of my money out of emerging markets equities, concluding that a return of 4-6% is preferable to the equity roller coaster. I own Vanguard’s Emerging Market Income Fund (TGEIX) yielding more than 6%, the less risky Wisdom Tree Emerging Market Local Debt ETF yielding 5%, and the Fidelity Real Estate Income Fund (FRIFX) yielding 5%+. For reasons discussed in an earlier article, I sometimes prefer mutual funds to ETFs.

So when is time to go back into emerging market equities? We know Washington will remain dysfunctional indefinitely. Let’s wait and see what happens in Europe and the Middle East over the next couple of months.

]]> http://www.morssglobalfinance.com/investing-in-2012-%e2%80%93-what-we-have-learned-from-panic-times/feed/ 0 http://www.morssglobalfinance.com/sovereign-ratings-an-assessment-of-the-sp-rating-for-the-us/ http://www.morssglobalfinance.com/sovereign-ratings-an-assessment-of-the-sp-rating-for-the-us/#comments Mon, 08 Aug 2011 15:40:54 +0000 Elliott Morss http://www.morssglobalfinance.com/?p=922 by Elliott R. Morss

Introduction

I never had much use for financial ratings. I view them as second best reference points for lazy financial sector workers and people who are unable to research investment possibilities on their own. And as we learned in the recent banking collapse, the raters have no idea what is going on. So what do we draw from the S&P rating change for the US? Well, at least the ratings change does focus attention on the US financial condition.

US fundamentals have not suddenly changed. The country is still in a recession. Sound fiscal policy calls for another stimulus package that would increase its government debt. How does the US compare with other countries on ratings and real economic conditions? Read on.

Country Comparisons – Financial Indicators

Three key indicators of financial problems for any country are its government deficit, government debt, and a current account deficit. Government deficits increase government debt, and debt can get become unsustainable, e.g., Greece. However, if countries run large current account surpluses, e.g., Japan, they can continue with large deficits and debt. Foreign investors know that if either becomes too onerous, the government can pay them off with foreign exchange reserves. However, current account deficits must be financed by capital inflows, and the need for continuing large capital inflows can become problematic. Greece is again the prime case: foreigners are not interested in either loaning or investing in Greece, and hence its capital inflows do not offset its current account balances, and hence – crisis.

These indicators are presented for 23 countries in Table 1. To make comparisons possible, they are expressed as a percentage of their GDPs.

Table 1. – Government Deficits, Debt, and Current Account Balances, 2011 (as percent GDP)

Source: IMF WEO Database

Let’s now look at how the governments of these countries are rated for foreign investors by Standard and Poors. In Table 2, I present the S&P ratings. In the third column, I convert the ratings to a quantitative index. In my index, the best rating (AAA) gets a 10 while S&P’s worst (D) would get a 1 (AAA=10, AA=9, etc.). In my table, “+” adds .4 to a rating and a “-” subtracts .4 from a rating.

Table 2. – S&P Credit Ratings and Morss Index

Now, let’s see how the economic conditions compare with the ratings. For this, I have taken the average ranking of 23 countries on the three economic conditions indicators, and compared it with my numerical indicators for the S&P rating. The results appear in Table 3.

Table 3. – Economic Conditions and S&P Ratings Compared

I have listed countries in the Table by their economic condition rating. Note that the US ranks just above Greece and lower than Ireland, Portugal, and Spain. And yet, S+P gives it a 9.4 (AA+) ranking for foreign investors. Hmm. Well, of course, the S&P ratings include political risk. Political risk??? Wait, with what is going on in DC, the US is a safe political risk????

Well, I have never thought much of rating companies, and my view has not changed. Incidentally, the R² (measuring the correlation between the two indicators) is only .19. 

For more than two years, I have advised investors to get their money out of Europe, the US, and Japan. Even though the emerging stock markets get hit whenever a new crisis appears in the West, my view has not changed.

 by Elliott R. Morss, Ph.D.

Introduction

The world became pre-occupied with economic recovery, but then we had a coal mining disaster and a massive oil spill, reminders that our energy problems have not gone away. The global recession caused energy use to fall in 2009 for the first time since 1981, but the International Energy Agency (IEA) projects energy demand to grow by 41% between 2007 and 2030[1] unless major policy changes occur.

Table 1. – Energy Projections, Current Policies

Source: IEA

* Million tons of oil equivalent (MTOE), is a standardizing measure for energy;

one million tons of oil equivalent is the energy generated

by burning 1,000,000 metric tons of crude oil.

To meet this growth in demand, fossil fuels (oil, coal, and gas) are expected to grow most rapidly. Coal use is projected to grow by 52%, with its share increasing from 26.5% to 28.8%, unless major policy changes occur. Under this scenario, the number of railroad cars loaded with coal leaving mines every day would increase from 225,687 to 343,044.

IEA Projections: How Realistic?

These projections are disturbing: if nothing changes, forget about efforts to curb global warming. And sadly, there are a couple of reasons to think they are quite realistic.

• Momentum/existing infrastructure: 343,044 coal cars leaving the mines daily – a reminder that the world has invested a tremendous amount in its “energy infrastructure delivery system”, and any major change will be costly.
• Oil companies control oil and gas supplies: and they want to protect their markets for these products; and while they don’t work entirely in consort, they will work to keep prices low enough to keep alternative energies from being profitable in the foreseeable future. 

 Consider now coal and nuclear energy. Both industries are profitable at existing oil prices. What can we expect in these two industries?

 Coal

The World Coal Institute likes to remind us that there is enough coal to last us over 130 years at current rates of production. In contrast, proven oil and gas reserves are equivalent to around 42 and 60 years at current production levels.

But there are problems. Coal travels well in trains, but ocean transport is very expensive. So while Russia and the US are sitting pretty with more than 100 years of coal left at current production rates, coal will never be a leading export.

And then there is the China situation to consider. In my last energy piece, I noted that 72% of China’s energy comes from coal. China is using 2.4% of its proven reserves of coal annually, suggesting it has coal supplies left for 42 years at current use rates. Of course, more reserves will be discovered, but China is growing rapidly, and that growth will increase coal demand.

Suppose coal demand grows at the same rate as GDP. Table 2 indicates what this means: a growth rate of 8% implies that China has only 32 years of coal left. To put this in context, the World Bank estimates that China’s GDP will grow at 9.5%, 8.5%, and 8.2%, in 2010, 2011, and 2012, respectively.

 Table 2. – China Coal Use at

Different GDP Growth Rates

 Of course, China is not sitting on its hands: it is scouring the world for oil and gas contracts. The China government could be thinking of trying to buy control of BP as its stock price falls.

But its actions in the nuclear sector are most interesting.

 Nuclear

As Table 3 indicates, estimated for installed nuclear capacity in future years continue to rise. The second column is the IEA’s estimate for 2030 mentioned above. Column 3 is a second projection done by the IEA is major policy changes to reduce global warming occur. The OECD is now estimating as much as 680 GWe capacity in 2030, and The International Atomic Energy Agency (IAEA) now anticipates at least 73 GWe in net new capacity by 2020, and then 511 to 807 GWe in place in 2030.

 Table 3. – Installed Nuclear Capacity Estimates (GWe)

 Feasibility – Costs

 The World

Is this feasible? What will it cost? A joint study by the Nuclear Energy Agency of the OECD and the International Energy Agency estimated that is would cost $3.974 trillion (in 2008 constant US$) to increase global nuclear capacity from 370GWe in 2007 to 1,200GWe in 2050.That works out to US$4.8 billion per GWe. That figure is consistent with other numbers that range from US$5.0 billion per GWe in the US to US$1.5 billion per GWe in China.

A jump from 328 GWe to 680 GWe installed capacity would cost US$1.7 trillion at US$4.8 billion per GWe. Let’s come at this from another direction.

 Table 4 provides data on how electricity is generated worldwide. Suppose we want to replace half of the electricity generated by coal to nuclear. 1 GWe can generate 8,760 GWh in a year. That means you would need 470 GWe of installed capacity to produce  4,113,975 GWh annually. At US$4.8 billion per GWh, that would require an investment of US$2.3 trillion.

Table 4. – World Electricity, by Fuel, 2007

Source: IEA

Is such an investment feasible? With global GDP of US$60 trillion and investment normally running at 22%, or $13.2 trillion, finding US$2.3 trillion over a couple of decades should not be a problem.

 China

Let’s look at China. The World Nuclear Association (WNA) reports that China, with eleven operating reactors on the mainland, has 22 reactors under construction. China aims at least to quadruple its nuclear capacity from that operating and under construction by 2020. It hopes to have 250 GWe capacity by 2030.

Table 5 provides data on electricity generation in China. Note the extremely heavy dependence on coal.

Table 5. – China Electricity, by Fuel, 2007

Quadrupling its nuclear capacity would mean being able to produce 248,520 GWh per year. That increase, 186,390 GWh, would require increasing its capacity by 21GWe. Using US$2 billion as the GWe cost (some estimates for 1 GWe in China are as low as US$1.5 billion), this will cost only US$42 billion. This should be no problem for China.

But let’s consider something somewhat more ambitious: could China replace half its electricity generated by coal with nuclear? That would mean increasing nuclear production by 1,328,217 GWh annually. That would take an additional 151 GWe of capacity. At US$2 billion per GWe, that would cost US$302 billion. With a GDP of US$5 trillion annually, this investment would also seem feasible over a couple of decades.     

 Feasibility – Technical

There are exciting new technical developments taking place in the nuclear industry:

• Breeder reactors are under development;
• More advanced reactors such as Bill Gates’ Traveling Wave Reactor are in the planning stage;
• Work is on-going to use Thorium in reactors; Thorium is 4 times as abundant as Uranium;
• Efforts to obtain uranium from the sea continue.

 But a word of caution: In our new information age, we tend to assume that all technical problems can be resolved. But things can and will go wrong. The nuclear energy system is complex. And although it is better understood than it was 20 years ago, there will be more unanticipated problems.  

Feasibility – Other

The joint study referenced earlier by the Nuclear Energy Agency of the OECD and the International Energy Agency gave the impression that most of the concerns with nuclear are manageable. But there are extraordinarily complex logistical and regulatory problems that still must be faced. China is in a much better position to deal with these problems than is a democracy.

Investment Opportunities in Nuclear

Who develops and produces nuclear power generating plants? Westinghouse, originally an American company, is now part of Toshiba. Toshiba is too large for any growth in its nuclear business to have a significant impact on its profit. AREVA (CEI.PA) is the major European nuclear group: the French government holds a majority of its stock. General Electric, Toshiba, and Hitachi are also big players in nuclear. But again, their other operations are too large to make them a nuclear pick. The Russian and Canadian governments are also important nuclear players.

 How about uranium as a commodity? Very tricky. The speculators are already in. There are a lot of uranium reserves that can be tapped. The one thing we do know: nuclear power will grow rapidly over the next decade, and the demand for uranium will grow along with it.

I am sure there are some great nuclear investments: every industry has someone making “widgets” that turn out to be very profitable.

by Elliott R. Morss, Ph.D.

Introduction

Several points about equity markets:

•  They are growing globally.
• An increasing number of equity trades are computer driven.
• A primary activity of private equity firms is to take publicly traded companies private.
• In the US, the Sarbanes-Oxley Act passed in 2002 made it more costly and burdensome for public companies to satisfy SEC regulations.

 How these factors affect equity trading, now and in the future, is discussed below.

 Global Equity Markets

 Table 1 provides data on stock market values worldwide.

 Table 1.  – Stock Market Capitalization (% share)

n.a. – not available

Source: World Federation of Exchanges

 Note that the lead markets in all regions (US, Japan, and the UK) are losing their dominance to other markets in their respective regions. Japan’s decline is most pronounced. China’s markets (Shanghai and Shenzhen) are now slightly larger than Japan’s, while India now ranks fourth in Asia, just behind Hong Kong. Although the US exchanges share has fallen, they still dominate all others by a wide margin.

 Table 2 provides global data on the number of listed companies.

 Table 2. – Companies Listed on Stock Exchanges

n.a. – not available

Source: World Federation of Exchanges

It is notable that unlike the dominant countries in the other regions, the number of listed companies in the US has fallen by 36% since 1995. Perhaps some of this decline in recent years is attributable to more burdensome regulatory requirements and the activities of private equity and merger/acquisition companies.

Computer Driven Trades   

A recent Bloomberg Businessweek article “The Machines That Ate the Market” made a number of interesting points about computer-driven trading:

1.   History

• “Historically, the NYSE and Nasdaq were nonprofits seen as utilities that served the public interest…. Beginning in the 1970s, Nasdaq, and, later, additional electronic rivals, gradually eroded the NYSE’s dominance…. Newer profit-making exchanges started explicitly to benefit the firms that ran and patronized them.”
• “Directives from Washington have encouraged the dispersal of trading. Some 50 exchanges and other electronic venues across the country now compete for securities business. The volume of equity traffic controlled by the NYSE fell from 80 percent in 2005 to 50 percent in 2007 and then to less than 25 percent this year…. Wall Street’s extreme makeover has achieved its main goals: greater efficiency and much lower commissions for the pension and mutual funds, insurance companies, and endowment managers that invest in equities.”
• “…the market is now dominated by quick-draw traders who have no intrinsic interest in the fate of companies or industries…. High-frequency traders (HFTs) now account for as much as 60 percent of daily volume….The most prolific HFT outfits, such as Getco in Chicago, Tradebot Systems in Kansas City, Mo., or RGM Advisors in Austin, Tex., can individually generate as much as 5 percent or 10 percent of all the stocks traded in the U.S. on a given day.”
• “HFT shops move enormous quantities of stock in fractions of a second.” They locate their computers near the mainframes of wholly automated trading venues “because the distances that their orders travel, measured in feet, can determine profit or loss.”
•  “On its Web site, Wolverine in Chicago says its servers receive direct data feeds from more than 15 exchanges and execute more than 1.5 million orders a day.”

2.     Today

Amazing! What does it all mean for individual investors?

Analysis

The article documents things have changed dramatically.

The HFTs)…argue that all that extra buying and selling provide the liquidity that makes the market more efficient.

1. There is no question that some of what the HFTs are doing keeps markets worldwide accurately reflecting value – classic arbitrage, e.g., “The quants use a range of strategies. One is simultaneously posting bids and offers for ever-changing amounts of a single stock. Prices tend to vary by minuscule amounts on different electronic exchanges, so a stock can be bought at a lower price on one, then sold instantly at a higher price on another…. They direct their mainframes to sift the information flows for minute discrepancies, such as when futures contracts fall out of sync with related underlying stocks.”
2. But there are other computer programs the HFTs use that do just the opposite. Remember, the HFTs primary aim is to make money “with no intrinsic interest….” Suppose the HFTs are betting lots of money on markets to fall. They have carefully studied every facet of momentum quantitatively, and they know how to generate momentum, i.e., if stock prices start down, they know what sorts of trades will accelerate the downturn. 
3. Perhaps one trader does not have the clout to cause a major market disruption. But it is reasonable to assume that most of the large computer driven traders have their own momentum generating programs. What if they all try to generate momentum downward at the same time? It can be quite disruptive.
4. The quants have also studied how market movements are correlated. They know that bad economic news in the US will cause its markets to fall. They also know a fall in US markets will have a ripple effect globally. They can get into other markets before anyone else and short them, thereby accelerating the ripple effect.  
5. Consider what has happened on global markets in the last year. Asia and Latin America are out of the recession, but their markets move up and down with Western country markets. Why?

Before answering that question, let me document my statement with numbers. The so-called coefficient of determination (R²) measures the extent to which the movement in one variable can explain/predict the movement in another. An R² of 1 would mean the movement in one variable can completely explain the move in another; an R² of 0 means there is no correlation between the two variables. Consider first how stock indices, funds, and ETFs from different regions have performed since 2007. In Table 3, the R²s for these variables is provided against movements in the S&P 500. In other words, how much of the day-to-day fluctuations in these other variables can be explained by movements in the S&P 500?

Table 3. – R² of Markets vs. S&P 500

(1/31/2007 – 6/4/2010)

Source: Yahoo Finance

To me, these figures represent markets where values are being pretty accurately represented. The banking collapse and resulting global recession was the result of problems in the US, Europe, and Japan. Note that the R²s for Asia and Latin America are much lower than for Europe and Japan.

But now look at what happened since worries about the four weak sisters of Europe started affecting the markets. As I have been writing for some time, Europe, Japan and the US are still mired in the recession and debt. In contrast, Asia and Latin America are fundamentally debt-free and emerging from the recession. In light of this, one would expect Asian and Latin American markets to be performing much better than Western markets.

As Table 4 indicates, this is not what has happened. Movements in the FTSE 100 are more highly correlated with market movements in Asia and Latin America than the US or Japan.

Table 4. – R² of Markets vs. FTSE 100

(4/23/2010 – 6/4/2010)

Source: Yahoo Finance

Table 5 provides data on what has happened to stock markets since the European worries started. Asian and Latin American markets have fallen more than Western markets.

 Table 5. – Stock Market Performance

(4/23/2010 – 6/4/2010)

Source: Yahoo Finance

Why is this? Does it have anything to do with the HFTs, or is it just the result of the relatively small markets of Asia and Latin America being more affected by Western liquidations than the underlying strength of their economies?

 Conclusions

 What can we expect? The only thing I can say with certainty: the emergence of HFTs as dominant global players will mean more stock market volatility.

 by Elliott R. Morss, Ph.D.

 Introduction

I recently interviewed George Ball, the Chairman of Burpee Gardening, about the economics of the mail order/nursery plant/seed business (I will post that interview shortly). He said the vegetable seed business is growing rapidly, partly because in tough times, people want to take advantage of the cost savings resulting from growing vegetables from seed.

 That got me thinking: at 10 cents a tomato seed, there is definitely a cost savings if you can just rough up the soil, drop in a seed, and get a healthy tomato plant to grow. But living in New England, it is not quite that simple. In what follows, I will take you through what I do and what it costs.

Seed Costs

 Certainly seed costs are low enough to warrant growing from scratch, if that were all there was to it. The following seed prices are taken from my recent article comparing gardening catalogues.

 Vegetable Seed Prices

If we could only live on lettuce, basil, and beans! 

Starting Seeds Indoors

 Living in New England requires that I start growing seeds indoors if I want vegetables before fall. What do I grow the seeds in? In essence, there are two possibilities: buy an all-in-one seed-growing package, or buy separate pieces and put them together. A good example of the former is the APS system that has been offered by Gardener’s Supply for many years. In essence, you get a water-holding tray, a capillary mat, soil holders and a plastic cover at a cost of $19.95 for one that holds 24 plants. You can get 2 with soil for $49.94. A. M. Leonard’s Gardeners Edge offers essentially the same product. Burpee offers something similar – its “ultimate growing system” has a reservoir, a mat, soil and 72 soil holders (the holders are smaller than the other two) for $19.95. The attraction of these systems? In addition to being all-in-one packages, they are self-watering: you can go away for a few days without losing your seedlings. The systems can be reused but new soil will be needed (more on soil costs below).

 All-In-One Sytems

 I turn now to the separate pieces. “Pot-Makers” allow you to make your own holders. In essence, you wind newspaper around the pot-maker to make a soil holder. Pinetree charges $14.95 for one, Burpee charges $19.95.

 Johnny’s offers “hand-held soil block makers”. You press down using a block maker and you get a block of soil that stands on its own. One that presses out 2 square inch soil blocks 4 at a time costs $29.95.

 And then there are the pellets – held together by a biodegradable netting ( that I do not find all that biodegradable the next spring):

• The Jiffy-7 peat pellets;
• Coir pellets.

So how do all of these products compare? To answer this question, we need comparable soil prices. Most catalogues offer seed growing soil, quoted either in quarts or cubic feet. So I asked, how many 2-inch square blocks (8 cubic inches) of soil can one get from each seller’s soil? You need to know there are 1728 cubic inches in each cubic foot and 67.2 cubic inches in each quart to make the conversion from bags of soil quoted in cubic feet or quarts in the catalogues to square inches. And that, coupled with the catalogue prices, allows me to the price per square two-inch (8 cubic inch) block shown in the following table.

Price per 2- Inch Block of Seed Starting Soil

 According to this Table, Jiffy’s seed starting mix (not pellets) sold by Harris is the lowest priced soil. And Harris’ shipping fees are based on shipping value, not weight. How do these soil prices compare with the price of the Jiffy pellets (a peat growing medium held together by a biodegradable netting)? I use the “extra-depth” Jiffy-7. I pay Harris $56.95 for 500 pellets, or 11 cents per pellet. Park offers 200 coir pellets for $19.95 or 10 cents a disk). Clearly, the Jiffy soil is cheaper than the Jiffy pellets. But pellets don’t need a holder. If you buy the soil, you will need to use a pot-maker, a soil block press, or just buy trays with built-in cells.

 Lighting

 To grow a significant number of seeds indoors, you need lighting. I use a 3-level fluorescent stand with 12 growing trays of 10’ x 21.5” for a total growing area of 2,580 square inches. I have been using the extra-deep Jiffy-7 pellets. I can fit 40 pellets comfortably in each tray, or 480 seeds in all. I don’t transplant.

 This lighting apparatus in available from A.M. Leonard’s “Gardeners Edge” for $600 or from Harris for $720. I believe this lighting system bought from Leonard will be as good or better in price per square inch of growing area than any other lighting system on the market.

 My tomato plants get special treatment. I use a now discontinued Gardener’s Supply APS system where each cell is 4” inches square. When the plants get too large for the fluorescent stand, I stake them and take them to the basement where I have a halide light hanging from a beam. They don’t go outside until the Memorial Day weekend.

Heating mats are simply too expensive for me, and my vegetables grow without them.

 Outdoors

 There is really no limit on what you can spend once it is time to move your plants outdoors.

 I believe the following table constitutes pretty close to the bare minimum of what is needed. You really need a small seed dispenser, but maybe you could do without the soil-testing machine. The catalogues convince us we need fertilizer and fertilizer sprayer. But how about the need for the bean innoculant and tomato blossom set spray? I don’t know, but I get them.

 Every year, I buy a few bags of manure/compost. I don’t buy red mulch any more for my tomatoes. They do fine without it. I do need tomato, bean, and cucumber supports (I use the metal cages. Soil is tough on skin and nails, so gloves are needed. A weeding instrument for gardeners is like a good knife for a chef – they come in many different forms but are essential. Rabbits ate all my green peppers and beans last year and it will not happen again. I will start with sprays (Liquid Fence). If that does not work, I will have to buy fencing.

 There are many different ways to water your garden. But whatever method you use, you will at least need a hose with a nozzle. I use a combination of sprinklers and soaker hoses on a timer. You really don’t need a mechanical tiller, but you do need clippers and to be politically correct, a composter.  

On all of these products, I recommend that you first check with Pinetree and Gardeners Edge on price. Gardeners Edge seems to be mimicking Gardener’s Supply but with lower prices.

But I should say: I will always have an allegiance to Gardener’s Supply – so many original great ideas! What does that mean? I will always buy their new ideas from them – but I will not buy upside down plants from them or anyone.

 I have left out a lot. For example, water and electricity costs. And I have to get my trees trimmed back every other summer at a cost of $1,500 a trim.

 I now want to return to George Ball’s claim that there are great savings in growing vegetables from seed. In the following table, I have two columns for costs: the middle one is for annual costs and the right one is for investment costs. I arbitrarily assume the investments will last six years.

Growing Vegetables from Seed: Summary Cost Table

 This assumption is reflected in line 27 where I take the total investment cost ($1,431) and divide it by 6. In line 28, I get the costs per seed planted. For the annual costs, I divide the total ($199.80) by 300 seeds. For the investment costs, I divide $238.50 by 300. That results in a total cost per seed of $1.46.

 What does it all mean? George Ball was right: at $1.46 for a vegetable plant, you are doing a lot better growing than buying your vegetables in the market.