POSITIVES
The industry is divided into commodity chemicals (45%) and specialty chemicals (55%). The commodity segment tends to be more concentrated. In the commodity segment, cost reductions, improving yield from better technology and economies of scale are important. In the specialty segment, margins are higher due to better pricing and more efficient operations. Demand for fertilizers is driven by crop plantings and crop prices, both of which are favorable. Economies of scale are important to keeping costs low.
Prices are improving by 7-8% in this industry. Pricing power is a function of three variables: inflation, capacity utilization and raw material price changes. Inflation is low (but likely to increase with aggressive monetary policy), capacity utilization levels are improving but still in the low 80s, and oil prices are elevated, but falling.
NEGATIVES
The chemical industry is a large consumer of oil, natural gas and energy. Raw material costs have been at historically high levels, which is a very serious challenge for the chemical industry. However, oil and gas prices are falling.
Demand growth is near 0% currently. Demand for chemicals tracks global industrial production and global GDP very closely. Housing and auto markets could continue to weaken. Nearly 10% of chemical demand is directly tied to the housing sector, and an additional 10% is tied to the auto sector.
BUY/SELL RATINGS
Agrium Inc. (NYSE: AGU - News) -- BUY; CF Industries Holdings, Inc. (NYSE: CF - News) -- BUY; Georgia Gulf Corporation (NYSE: GGC - News) -- SELL...zacks.com
Tuesday, November 25, 2008
Tuesday, November 18, 2008
Agriculture Opportunity Worth Cultivating
As investors survey the landscape of beaten-down ETFs, different methods come into play. Some are looking for value. Some seek sectors with rebound potential. Others look for news-driven potential.
When we examine ETF charts and our model output, we see the results of this analysis. We see factors like Trends and Cycles and try to Anticipate the best opportunities. It is an interpretation of how the market is reacting to fundamental considerations. Each week we choose a sector for a more detailed focus. (For new readers, there is a more complete description of our methods at the end of the article.)
Spotlight on Agriculture
We follow the Ag sector via the Market Vectors Agribusiness ETF (MOO). The security is based upon the DAXglobal® Agribusiness Index. MOO is down about 36% YTD. The current P/E ratio is about 17 with a price-to-book ratio of about 2. The top five holdings constitute over 40% of the fund. It is a mixture of agriculture and fertilizer companies with about 40% in chemicals, 30% in operations, and 20% in chemicals. About half of the group is US based.
Tom Lydon picked up this connection right after the election. Citing Aaron Task who interviewed James Altucher, Lydon points out the Obama support for ethanol and infrastructure spending.
Jordan Kahn, a colleague at TheStreet.com's Real Money site, noted the post-election bounce in MOO, and is adding to positions.
We expect to see other analysts picking up this theme.
Rising in the Ratings
We note with interest the rapid rise in our ratings of the Market Vectors Gold Index, (GDX). This sector moved from #53 to #7 in the rankings (click on chart to enlarge).
Weekly TCA-ETF Rankings
Performance in the S&P 500 last week was very poor, down over 6%. Our portfolio was a little worse, more in line with the Q's, down almost 8%.
It remains a time of great opportunity, but the market activity also shows great risk. We missed much of the downside by getting out of the market in September, and we are sticking with our signal to act in sectors where prices are much lower.
We are looking for a better way to tabulate and report results. This includes an updated report on the weekly trading program focusing on the top six ETFs in our rankings. Accredited investors are eligible for our daily trading model, which also includes some discretionary choices. We are reporting the exact days of trading signals in our weekly updates. Those interested can see how this would have played out in a weekly trading program covering the entire period where we have revealed the ratings, as well as earlier extensive testing.
Based upon the current ratings, we have continued our recent bullish vote in the Ticker Sense Blogger Sentiment poll. Last week was the first time that we have had a bullish stance since August 18th.
We are very happy with the model signals, and especially the long period of safety during a slow-moving market crash. For readers interested in our program, we have a long-only method and one that embraces more market timing.
Note for New Readers
Our weekly ETF Update is designed to assist both investors and traders interested in ETFs and Sector Rotation. Before turning to the current rankings, let us undertake a review for readers new to this series.
Our Method. In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike. While we urge readers to check out the entire article, the key point is that ETFs pose challenges and opportunities different from investment in individual stocks. The fundamentals may be more difficult to assess. Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETFs. This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves. Here is an article on that point.
The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF. While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box." The basic elements are used by many, and widely reported. We even discuss the need for human analysis as opposed to black box trading.
We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model. We monitor and trade this daily, and offer a free report (request via the 'Contact Jeff' button on the left of the page) for those interested in our weekly trading program
When we examine ETF charts and our model output, we see the results of this analysis. We see factors like Trends and Cycles and try to Anticipate the best opportunities. It is an interpretation of how the market is reacting to fundamental considerations. Each week we choose a sector for a more detailed focus. (For new readers, there is a more complete description of our methods at the end of the article.)
Spotlight on Agriculture
We follow the Ag sector via the Market Vectors Agribusiness ETF (MOO). The security is based upon the DAXglobal® Agribusiness Index. MOO is down about 36% YTD. The current P/E ratio is about 17 with a price-to-book ratio of about 2. The top five holdings constitute over 40% of the fund. It is a mixture of agriculture and fertilizer companies with about 40% in chemicals, 30% in operations, and 20% in chemicals. About half of the group is US based.
Tom Lydon picked up this connection right after the election. Citing Aaron Task who interviewed James Altucher, Lydon points out the Obama support for ethanol and infrastructure spending.
Jordan Kahn, a colleague at TheStreet.com's Real Money site, noted the post-election bounce in MOO, and is adding to positions.
We expect to see other analysts picking up this theme.
Rising in the Ratings
We note with interest the rapid rise in our ratings of the Market Vectors Gold Index, (GDX). This sector moved from #53 to #7 in the rankings (click on chart to enlarge).
Weekly TCA-ETF Rankings
Performance in the S&P 500 last week was very poor, down over 6%. Our portfolio was a little worse, more in line with the Q's, down almost 8%.
It remains a time of great opportunity, but the market activity also shows great risk. We missed much of the downside by getting out of the market in September, and we are sticking with our signal to act in sectors where prices are much lower.
We are looking for a better way to tabulate and report results. This includes an updated report on the weekly trading program focusing on the top six ETFs in our rankings. Accredited investors are eligible for our daily trading model, which also includes some discretionary choices. We are reporting the exact days of trading signals in our weekly updates. Those interested can see how this would have played out in a weekly trading program covering the entire period where we have revealed the ratings, as well as earlier extensive testing.
Based upon the current ratings, we have continued our recent bullish vote in the Ticker Sense Blogger Sentiment poll. Last week was the first time that we have had a bullish stance since August 18th.
We are very happy with the model signals, and especially the long period of safety during a slow-moving market crash. For readers interested in our program, we have a long-only method and one that embraces more market timing.
Note for New Readers
Our weekly ETF Update is designed to assist both investors and traders interested in ETFs and Sector Rotation. Before turning to the current rankings, let us undertake a review for readers new to this series.
Our Method. In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike. While we urge readers to check out the entire article, the key point is that ETFs pose challenges and opportunities different from investment in individual stocks. The fundamentals may be more difficult to assess. Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETFs. This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves. Here is an article on that point.
The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF. While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box." The basic elements are used by many, and widely reported. We even discuss the need for human analysis as opposed to black box trading.
We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model. We monitor and trade this daily, and offer a free report (request via the 'Contact Jeff' button on the left of the page) for those interested in our weekly trading program
Wednesday, November 12, 2008
Agrium outlook brightens for fourth quarter
TORONTO, Nov 12 (Reuters) - Agrium Inc (AGU.TO: Quote, Profile, Research, Stock Buzz) (AGU.N: Quote, Profile, Research, Stock Buzz) said on Wednesday it could have another round of record results in the fourth quarter as crop supply fundamentals remain strong, the company's CFO told Reuters on Wednesday.
The outlook marks a shift in the company's guidance from earlier this month when it signaled that the end of the year could be slow if farmers defer fertilizer applications until early in 2009.
"We have had some tail-offs in pricing for some of our products, but we just announced a record third quarter and we're going to have a very good fourth quarter," CFO Bruce Waterman said on the sidelines of a conference in Toronto. "Our guidance would indicate it could be another record quarter."
The world's third-largest nitrogen producer and the top U.S. retailer of crop supplies reported Nov. 5 a higher third-quarter profit that topped analyst expectations, but it had warned of the possibility of a slower fourth quarter.
"We're obviously watching the commodity prices but the fundamentals are very strong for our business," Waterman said on Wednesday.
Commodity prices have fallen sharply from record peaks since summer on deepening worries about the health of the global economy, undermining the outlooks and stock prices of big agricultural companies.
Waterman said Agrium was well-placed to weather the global financial crisis and added that the company remained on the lookout for potential acquisitions.
"We look at things all the time and as I said we're going to be very prudent," he said. "There are opportunities and hopefully we'll have a chance to take advantage of those opportunities."
Waterman said Agrium was well-buffered against the financial crisis because it expanded its credit lines and trimmed its debt "before things got tight." (Reporting by John McCrank; Writing by Richard Valdmanis; Editing by Frank McGurty)
The outlook marks a shift in the company's guidance from earlier this month when it signaled that the end of the year could be slow if farmers defer fertilizer applications until early in 2009.
"We have had some tail-offs in pricing for some of our products, but we just announced a record third quarter and we're going to have a very good fourth quarter," CFO Bruce Waterman said on the sidelines of a conference in Toronto. "Our guidance would indicate it could be another record quarter."
The world's third-largest nitrogen producer and the top U.S. retailer of crop supplies reported Nov. 5 a higher third-quarter profit that topped analyst expectations, but it had warned of the possibility of a slower fourth quarter.
"We're obviously watching the commodity prices but the fundamentals are very strong for our business," Waterman said on Wednesday.
Commodity prices have fallen sharply from record peaks since summer on deepening worries about the health of the global economy, undermining the outlooks and stock prices of big agricultural companies.
Waterman said Agrium was well-placed to weather the global financial crisis and added that the company remained on the lookout for potential acquisitions.
"We look at things all the time and as I said we're going to be very prudent," he said. "There are opportunities and hopefully we'll have a chance to take advantage of those opportunities."
Waterman said Agrium was well-buffered against the financial crisis because it expanded its credit lines and trimmed its debt "before things got tight." (Reporting by John McCrank; Writing by Richard Valdmanis; Editing by Frank McGurty)
Intrepid 3Q profit surges on fertilizer demand
Intrepid 3rd-quarter profit surges as fertilizer demand sends revenue, pricing higher
DENVER (AP) -- Fertilizer maker Intrepid Potash Inc. said Wednesday its third-quarter profit soared on growing demand for fertilizer products.
Intrepid posted a profit of $49.7 million, or 66 cents per share, for the quarter ended Sept. 30, up ninefold from $5.4 million, or 7 cents per share, in the same quarter last year. Revenue nearly tripled to $146.3 million from $52.9 million.
The results fell short of Wall Street estimates, however. Analysts polled by Thomson Reuters expected 73 cents per share $143.3 million in revenue.
The company said it was helped by rising potash prices during the quarter. Average net sales price increased to $623 from $193 per short ton during the quarter, although production declined slightly.
"Our realized potash price further widened relative to our North American competitors as we focused on our regional markets and on paying close attention to the opportunities in the spot market for potash," Chief Executive Bob Jornayvaz said in a statement.
Shares of Intrepid Potash closed Tuesday at $19.46. The stock has declined 61 percent since its initial public offering price of $50.40 in April.
DENVER (AP) -- Fertilizer maker Intrepid Potash Inc. said Wednesday its third-quarter profit soared on growing demand for fertilizer products.
Intrepid posted a profit of $49.7 million, or 66 cents per share, for the quarter ended Sept. 30, up ninefold from $5.4 million, or 7 cents per share, in the same quarter last year. Revenue nearly tripled to $146.3 million from $52.9 million.
The results fell short of Wall Street estimates, however. Analysts polled by Thomson Reuters expected 73 cents per share $143.3 million in revenue.
The company said it was helped by rising potash prices during the quarter. Average net sales price increased to $623 from $193 per short ton during the quarter, although production declined slightly.
"Our realized potash price further widened relative to our North American competitors as we focused on our regional markets and on paying close attention to the opportunities in the spot market for potash," Chief Executive Bob Jornayvaz said in a statement.
Shares of Intrepid Potash closed Tuesday at $19.46. The stock has declined 61 percent since its initial public offering price of $50.40 in April.
Monday, November 10, 2008
No Bull: Fertilizers Staying Strong
When we sat down recently with Zacks senior equities analyst Paul Raman, CFA, we were interested in finding out how the chemicals & fertilizer industry is doing. Is it fostering growth, or something to be wary of stepping in?
How are you viewing the chemicals & fertilizer industry at the present time?
Our outlook for the industry is positive. The industry is divided into commodity chemicals (45%) and specialty chemicals (55%). The commodity segment tends to be more concentrated.
In the commodity segment, cost reductions, improving yield from better technology and economies of scale are important. In the specialty segment, margins are higher due to better pricing and more efficient operations. Demand for fertilizers is driven by crop plantings and crop prices, both of which are favorable. Economies of scale are important to keeping costs low.
What's a good rule-of-thumb for investors who may be looking to increase exposure to this group?
Investors should neutral-weight chemical stocks now. The group is likely to track the S&P in the next six months. The chemical industry is a large consumer of oil, natural gas and energy. Raw material costs have been at historically high levels, which is a very serious challenge for the industry.
However, oil and gas prices will fall. Demand growth is near 0% currently. Demand for chemicals tracks global industrial production and global GDP very closely. Nearly 10% of chemical demand is directly tied to the housing sector, and housing and auto markets could continue to weaken. An additional 10% of demand is tied to the auto sector.
Prices are improving by 7-8% in this industry. Pricing power is a function of three variables: inflation, capacity utilization and raw material price changes. Inflation is low (but likely to increase with aggressive monetary policy), capacity utilization levels are improving but still in the low 80s, and oil prices are elevated, but falling.
Which companies under coverage are your top Buy recommendations at this time?
With this backdrop, two companies we recommend are Agrium (NYSE: AGU - News) and CF Industries (NYSE: CF - News). Demand for fertilizers is driven by population growth, and demand has been exceptionally strong in China and India.
Any caveats and/or Sell ratings for investors to take note of?
Capacity growth is minimal in this segment. Fertilizers are needed to improve the yield of crops. These companies are highly leveraged to rising global prices for nitrogen, potash and phosphate due to strong demand from China and India. Operating rates of 90-100% should hold until 2010/2011.
One company to avoid is Georgia Gulf (NYSE: GGC - News), as we expect them to file for bankruptcy. This is due to excessive housing market exposure along with high financial leverage.
Paul Raman, CFA is a senior analyst covering the chemicals & fertilizer industry for Zacks Equity Research.
How are you viewing the chemicals & fertilizer industry at the present time?
Our outlook for the industry is positive. The industry is divided into commodity chemicals (45%) and specialty chemicals (55%). The commodity segment tends to be more concentrated.
In the commodity segment, cost reductions, improving yield from better technology and economies of scale are important. In the specialty segment, margins are higher due to better pricing and more efficient operations. Demand for fertilizers is driven by crop plantings and crop prices, both of which are favorable. Economies of scale are important to keeping costs low.
What's a good rule-of-thumb for investors who may be looking to increase exposure to this group?
Investors should neutral-weight chemical stocks now. The group is likely to track the S&P in the next six months. The chemical industry is a large consumer of oil, natural gas and energy. Raw material costs have been at historically high levels, which is a very serious challenge for the industry.
However, oil and gas prices will fall. Demand growth is near 0% currently. Demand for chemicals tracks global industrial production and global GDP very closely. Nearly 10% of chemical demand is directly tied to the housing sector, and housing and auto markets could continue to weaken. An additional 10% of demand is tied to the auto sector.
Prices are improving by 7-8% in this industry. Pricing power is a function of three variables: inflation, capacity utilization and raw material price changes. Inflation is low (but likely to increase with aggressive monetary policy), capacity utilization levels are improving but still in the low 80s, and oil prices are elevated, but falling.
Which companies under coverage are your top Buy recommendations at this time?
With this backdrop, two companies we recommend are Agrium (NYSE: AGU - News) and CF Industries (NYSE: CF - News). Demand for fertilizers is driven by population growth, and demand has been exceptionally strong in China and India.
Any caveats and/or Sell ratings for investors to take note of?
Capacity growth is minimal in this segment. Fertilizers are needed to improve the yield of crops. These companies are highly leveraged to rising global prices for nitrogen, potash and phosphate due to strong demand from China and India. Operating rates of 90-100% should hold until 2010/2011.
One company to avoid is Georgia Gulf (NYSE: GGC - News), as we expect them to file for bankruptcy. This is due to excessive housing market exposure along with high financial leverage.
Paul Raman, CFA is a senior analyst covering the chemicals & fertilizer industry for Zacks Equity Research.
Agrium a Play on Agri-Business
Agrium Inc. (NYSE: AGU - News) is growing through acquisition and organic expansion. The acquisition of United Agri-Products (UAP) is driving revenues and profits supported by an expanded product line in the major business segment.
Agrium announced record results for third quarter earnings, with net earnings for the third quarter of 2008 of $367-million ($2.31 diluted earnings per share) more than four times the previous third quarter record achieved in 2004 and more than seven times above the $51-million ($0.38 diluted earnings per share) in the third quarter of 2007.
The third quarter results include non-qualifying natural gas and power hedge losses of $171-million ($0.73 diluted earnings per share) and a recovery in stock-based compensation of $99-million ($0.42 diluted earnings per share). Retail results are not directly comparable to the same period last year due to the inclusion of UAP which was acquired in May of 2008.
Rising global prices for nitrogen, potash and phosphate leveraged by strong demand augur well for AGU. The company also has a significant free cash flow. Therefore, we rate the shares a Buy with a target of $40.
Agrium announced record results for third quarter earnings, with net earnings for the third quarter of 2008 of $367-million ($2.31 diluted earnings per share) more than four times the previous third quarter record achieved in 2004 and more than seven times above the $51-million ($0.38 diluted earnings per share) in the third quarter of 2007.
The third quarter results include non-qualifying natural gas and power hedge losses of $171-million ($0.73 diluted earnings per share) and a recovery in stock-based compensation of $99-million ($0.42 diluted earnings per share). Retail results are not directly comparable to the same period last year due to the inclusion of UAP which was acquired in May of 2008.
Rising global prices for nitrogen, potash and phosphate leveraged by strong demand augur well for AGU. The company also has a significant free cash flow. Therefore, we rate the shares a Buy with a target of $40.
Monday, November 3, 2008
Fertilizer Stocks Should Rise Again
Stocks like Mosaic and Potash were among the worst performers in recent months but now possess both good value and technical merit.
AS SEASONED INVESTORS KNOW, the leaders of the last bull market are typically not going to be the leaders of the next one. But that doesn't mean they can never do so and fertilizer stocks are presenting a rather attractive risk/reward scenario once again.
Before looking more closely at this sector, I must say upfront that we are far from being in a bull market. However, as the market heals and transitions from bear to something more positive, there are going to be tradable rallies -- and declines -- along the way.
If last week's positive action marked the start of one of those rallies then the goal for chart watchers is to identify emerging leadership areas. And it turns out that one of the superstar groups of the last bull market - fertilizer stocks - happens to be among them.
As a sector, fertilizer stocks have gotten absolutely crushed during this year's market debacle. And while the broad market peaked just over one year ago, these stocks continued to move significantly higher until peaking in June. But as the saying goes, the bigger they come, the harder they fall and these once high-flying stocks fell very hard, indeed.
Potash Corp of Saskatchewan (POT) is an example of just how far they fell (see Chart 1). From its closing high of 240 on June 17 to its lowest close under 64 last week, this stock was pummeled for a 73% loss. Contrast that to the Standard & Poor's 500 and its top to bottom loss of 46%.
Of course, just because something is so far down in price does not mean it is cheap. But Potash has been showing several areas of improvement from a change in momentum to a change in its supply/demand picture.
For example, as it was setting lower lows over the past two months, such momentum indicators as the relative strength index (RSI) were setting higher lows. When price action and momentum readings diverge like this it is often a sign that the decline has run out of power. That sets the stage for a rebound.
Volume readings have also shown quite a change in recent weeks with average volume doubling from roughly 10 million to 20 million shares traded daily. Such a surge is often a precursor to a change in trend, as well.
To be sure, the major trend here remains down so conservative investors have no real impetus to jump back in here. However, its fundamental story remains sound (see Weekday Trader, "A Wilted Fertilizer Stock Can Sprout Again," October 28) and its technical underpinnings are greatly improved to make this a top candidate to run in whatever short-term rally the market gives us.
We can substitute almost any peer stocks for Potash, including CF Industries Holdings (CF), Mosaic (MOS), Sygenta (SYT) and several others as all have very similar charts.
Another fertilizer stock that looks interesting is Scotts Miracle Gro (SMG), although this company does not operate in the same circles as the others. Scotts makes lawn and garden fertilizer and care products so its story is not the same as Potash and the agribusiness group. Regardless, the stock has several characteristics that make it a good leadership candidate.
The most important feature on the chart is the fact that the stock did not set a lower low in October when the market cracked (see Chart 2). This is an important point as we can say that investors did not dump shares in a panic as they were selling almost everything else last month.
A higher low is the first step in changing the trend from down to up. A move above the longterm declining trendline drawn from the February 2007 alltime high would be the second. Currently, that trendline is near 28, where not so coincidently sits it's widely watched 200-day moving average.
Scotts is well on its way towards recovery, but as with any stock in the current environment general market turmoil can kill a fledgling rally. But if the market does indeed embark on a multiweek rally, Scotts looks as if it can be among the leaders.
AS SEASONED INVESTORS KNOW, the leaders of the last bull market are typically not going to be the leaders of the next one. But that doesn't mean they can never do so and fertilizer stocks are presenting a rather attractive risk/reward scenario once again.
Before looking more closely at this sector, I must say upfront that we are far from being in a bull market. However, as the market heals and transitions from bear to something more positive, there are going to be tradable rallies -- and declines -- along the way.
If last week's positive action marked the start of one of those rallies then the goal for chart watchers is to identify emerging leadership areas. And it turns out that one of the superstar groups of the last bull market - fertilizer stocks - happens to be among them.
As a sector, fertilizer stocks have gotten absolutely crushed during this year's market debacle. And while the broad market peaked just over one year ago, these stocks continued to move significantly higher until peaking in June. But as the saying goes, the bigger they come, the harder they fall and these once high-flying stocks fell very hard, indeed.
Potash Corp of Saskatchewan (POT) is an example of just how far they fell (see Chart 1). From its closing high of 240 on June 17 to its lowest close under 64 last week, this stock was pummeled for a 73% loss. Contrast that to the Standard & Poor's 500 and its top to bottom loss of 46%.
Of course, just because something is so far down in price does not mean it is cheap. But Potash has been showing several areas of improvement from a change in momentum to a change in its supply/demand picture.
For example, as it was setting lower lows over the past two months, such momentum indicators as the relative strength index (RSI) were setting higher lows. When price action and momentum readings diverge like this it is often a sign that the decline has run out of power. That sets the stage for a rebound.
Volume readings have also shown quite a change in recent weeks with average volume doubling from roughly 10 million to 20 million shares traded daily. Such a surge is often a precursor to a change in trend, as well.
To be sure, the major trend here remains down so conservative investors have no real impetus to jump back in here. However, its fundamental story remains sound (see Weekday Trader, "A Wilted Fertilizer Stock Can Sprout Again," October 28) and its technical underpinnings are greatly improved to make this a top candidate to run in whatever short-term rally the market gives us.
We can substitute almost any peer stocks for Potash, including CF Industries Holdings (CF), Mosaic (MOS), Sygenta (SYT) and several others as all have very similar charts.
Another fertilizer stock that looks interesting is Scotts Miracle Gro (SMG), although this company does not operate in the same circles as the others. Scotts makes lawn and garden fertilizer and care products so its story is not the same as Potash and the agribusiness group. Regardless, the stock has several characteristics that make it a good leadership candidate.
The most important feature on the chart is the fact that the stock did not set a lower low in October when the market cracked (see Chart 2). This is an important point as we can say that investors did not dump shares in a panic as they were selling almost everything else last month.
A higher low is the first step in changing the trend from down to up. A move above the longterm declining trendline drawn from the February 2007 alltime high would be the second. Currently, that trendline is near 28, where not so coincidently sits it's widely watched 200-day moving average.
Scotts is well on its way towards recovery, but as with any stock in the current environment general market turmoil can kill a fledgling rally. But if the market does indeed embark on a multiweek rally, Scotts looks as if it can be among the leaders.
CF Industries Brings About Growth
CF Industries Holdings Inc. (NYSE: CF - News) has leading market shares in many key fertilizers. Strong domestic and international grain markets have produced an exceptionally high global demand for fertilizer, translating into substantially higher selling prices for all the products.
The company is optimistic about its phosphate business where the market is expected to remain tight near term due to healthy offshore demand growth in India and Brazil as well as higher application rates in the U.S. This is likely to lead to higher prices and cash margins for various fertilizers.
In addition, the company is likely to benefit from the proposed nitrogen facility in Peru, which will address the nitrogen demand on the west coast of Central and South America as well as Mexico, which does not have any nitrogen facility. As a result, we rate the shares a Buy with a target of $60.00.
The company is optimistic about its phosphate business where the market is expected to remain tight near term due to healthy offshore demand growth in India and Brazil as well as higher application rates in the U.S. This is likely to lead to higher prices and cash margins for various fertilizers.
In addition, the company is likely to benefit from the proposed nitrogen facility in Peru, which will address the nitrogen demand on the west coast of Central and South America as well as Mexico, which does not have any nitrogen facility. As a result, we rate the shares a Buy with a target of $60.00.
Corn and Its Industry: The Next Tobacco
Summary
Corn-based ethanol, which always was a mistake, is finally out of favor, and the crop price has fallen to $4/bu.
This is just the beginning of a long-term secular decline in corn’s fortunes. First, the US fiscal wreckage will put pressure on its subsidy payments.
Far more important, the cost of US health care will turn the debate to the causes of poor health itself, and the fact of our underlying poor diet.
The corn-driven American diet is acting like a slow poison on us. With a lot of education, this will become better known, producing a profound change in habits, similar to the smoking cessation phenomenon.
The resulting drop in demand for corn will mean a big retrenchment in the corn-related industries, negatively affecting:
Stocks
Potash Corp (POT) ($68.52), Fertilizers
Mosaic Co. (MOS) ($27.78), Fertilizers
Archer Daniels Midland (ADM) ($17.53 ), Corn refining
Corn Products International (CPO) ($22.99), Corn refining
E.I. duPont (DD) ($29.33), Corn seed, crop protection
Monsanto Co. (MON) ($71.95), Corn seed, crop protection
Syngenta (SYT) ($29.28), Corn seed, crop protection
Deere & Co. (DE) ($30.36), Farm machinery
CNH Global (CNH) ($12.22), Farm machinery
Our thesis is long term by nature, and will take years to prove out. In the short run, both corn itself and the industry participants (e.g., Deere) may have been oversold, caught up in the forced hedge fund liquidations. So, our present recommendation would be to watch for a recovery, and see it as a selling opportunity in what will become a troubled situation down the road.
Research Perspective
On October 1, this analyst wrote of the dubious merits of the bailout:--
Nothing actually changes, except that financials are bailed out and the national debt goes up. We are at the end of a huge credit upcycle. The bailout plan is a very expensive and futile effort to extend it.........a wealth transfer from the public to financials, with no assurance of new lending as a result.
Naturally, the plan was passed. Almost immediately afterward, its central strategy was abandoned, the one on which the government had staked so much of its credibility, and replaced with a completely different one. Neither the previous one nor the current one involves any commitment by the recipients to lend, so there will be no impact other than the wealth transfer we expected. Our institutions and processes are now almost out of control, and the crisis of confidence in them is finally upon us.
For years, America listened to, and went along with, big, forceful assertions about war, deficits, low interest rates, trickle down, deregulation, low savings rates, executive compensation, job creation, incentives, and now bailout plans. We must by now realize that none of it was true, and have started to pay the price. We are now living through Act I, Scene 1 of the payback phase.
If there is any good news in all this, it must be that by now it should be possible to say something not patently false, and not be shouted down. From crisis comes the possibility of reform, maybe even the necessity for it. Six months ago, this analyst wrote up an eight-point economic plan. We said then that no aspect of it would happen. Now, the chances have improved. In particular, our fourth point:--
Cut health care costs in half by getting the massive amounts of corn out of the American food supply. Corn is junk, whose only dietary uses are in fattening up livestock or in milling into junk food or processing into corn fructose. As such, its contributions, uniquely American, are heart disease, obesity, and diabetes.
The corn growers and refiners, and their whole support group infrastructure, have had a stranglehold on US government policy that rivals the military establishment. Their grip may be weakening. The first chink may be corn for fuel, the many bizarre aspects of which were obvious all along. But that is just the start. Corn itself, not just corn-based ethanol, will come under increasing scrutiny and pressure.
The Economy, Heath Care, and Public Policy
Pressure for change in national priorities will come from two directions, accelerated by a progressively weaker economy. First, government spending generally will get refocused on necessary programs, and away from those that are simply corrupt. Second, the cost of health care, not just how to pay for it, will get more attention.
Grower subsidies have been a sore point for years. The Farm Bill is a transfer payment to growers, an entitlement. It typically does not even go to the operators, the ones riding in tractor cabs, but to people living in New York and Beverly Hills. As the legislation makes its way through Congress, it picks up more and more unrelated amendments to buy off critics, some of which are actually good (food stamps, school lunch), making it more and more expensive. Meanwhile, the commodity title survives, with no caps or even a pretense of being downside protection, even when crop prices and farm income are through the roof.
These transfer payments have had a profound effect on industry practices. The subsidies have made corn in particular a huge phenomenon it would not otherwise be. Federal payments made corn so universal by stimulating production and letting the grain be bought, until very recently, for less than the cost of growing it.
Pre-fuel ethanol, corn was made artificially cheap by taxpayer support. This economic distortion in turn drove down the prices of foods that could incorporate it, thus substituting processed food for unprocessed.
Subsidized grain also meant animals being fed corn at feedlots that could buy it cheaply, below grower cost, so beef cattle, poultry, swine, and dairy cows could all be fattened at animal feedlots, instead of on range and pasture grasses. This factory feeding produced animals diseased by fecal bacteria, and deprived of all manner of nutrition, but these problems were addressed by a big animal antibiotic and vitamin industry.
Corn growing itself is not the only subsidy beneficiary -- there is also corn refining. Sugar import tariffs into the US have for decades supported an otherwise uneconomic market for high fructose corn syrup. HFCS is in pastries and baked goods, ketchup, jams and jellies, syrup, and candy, but most of all sodas. When it comes to effective lobbying, the pharmaceutical companies, oil companies, et al -- Archer Daniels Midland taught them everything they know.
Even in a weak economy, all this nonsense would probably be sustained, if it were not for the pressure coming from a second direction -- health care cost and the imperative need to reduce it.
The US ratio of health care cost to health is high. America spends one-sixth of its national income on health care, and yet enjoys no special benefit from all this spending, compared to other developed nations. The reason for this is not bad doctors, hospitals, or care. The reason is the uniquely high prevalence of chronic, preventable disease, especially heart disease, diabetes, obesity, etc. One-third of US adults are seriously overweight or obese. The Center for Disease Control says that an alarming one in three American children born in 2000 will become diabetic.
It is this analyst’s opinion that the whole tragedy is diet-driven, and that the main problem is corn, which is discussed in detail below. Sweet corn, the kind people eat, is not a particularly good food. It is high-starch, glycemic, empty calories, compared to green vegetables. Milled corn becomes junk food and corn fructose, leading causes of diabetes and obesity. About 10% of American calorie intake comes from corn fructose alone.
Feed grain corn is used to fatten up US beef, swine, and poultry, making American meat a uniquely high-risk food, promoting heart disease and cancers compared to grass-fed. (See detail below.) A corn-based animal diet, vs. grass-fed, elevates saturated fats and triglycerides, and lowers antioxidants.
One reading of the literature leads to the conclusion that, post-smoking, corn is the single worst offender when it comes to boosting health care cost. Therefore, an enlightened health care proposal will not only address issues of who pays how much and by what means. It will also address corn, which imposes huge, unnecessary costs on the nation.
It appears to this analyst that corn is why our health is so poor, relative to what we spend on health care. If this is the case, and it becomes better known, corn will be pressured from two directions. First, if only for reasons of fiscal necessity, the Farm Bill’s grower subsidies will be cut. It will become broadly understood that these payments only lower the cost of low-quality calories of fat, sweetener, and feedlot-fed meat, thereby encouraging chronic diseases.
Second, health care proposals may address corn and identify it as the new tobacco, and the corn lobby go the way of the tobacco lobby. If so, over the next several years, an important investment theme will come along and track policy developments, namely, the decline of corn and the whole corn-driven industry.
Our thesis is long term: It will take a matter of many quarters, even years, to prove out, although we have confidence that it will. In the meantime, we are not making a call on the short-term direction of either the industry or corn itself. In fact, the commodity, on a near-term basis, may be oversold below $4/bu., a consequence of forced hedge fund liquidations.
As shown below, the corn carryover going into the 2009 planting could be only one billion bushels or a touch more, compared to 2 billion bushels going into the 2005 and 2006 plantings, a record low. In 2009, either a harvest below 12 billion bushels, or a recovery in demand ex-ethanol, which dropped by 900 mm bu this year, could produce visible tightness, even if ethanol demand plateaus.
Corn-based ethanol, which always was a mistake, is finally out of favor, and the crop price has fallen to $4/bu.
This is just the beginning of a long-term secular decline in corn’s fortunes. First, the US fiscal wreckage will put pressure on its subsidy payments.
Far more important, the cost of US health care will turn the debate to the causes of poor health itself, and the fact of our underlying poor diet.
The corn-driven American diet is acting like a slow poison on us. With a lot of education, this will become better known, producing a profound change in habits, similar to the smoking cessation phenomenon.
The resulting drop in demand for corn will mean a big retrenchment in the corn-related industries, negatively affecting:
Stocks
Potash Corp (POT) ($68.52), Fertilizers
Mosaic Co. (MOS) ($27.78), Fertilizers
Archer Daniels Midland (ADM) ($17.53 ), Corn refining
Corn Products International (CPO) ($22.99), Corn refining
E.I. duPont (DD) ($29.33), Corn seed, crop protection
Monsanto Co. (MON) ($71.95), Corn seed, crop protection
Syngenta (SYT) ($29.28), Corn seed, crop protection
Deere & Co. (DE) ($30.36), Farm machinery
CNH Global (CNH) ($12.22), Farm machinery
Our thesis is long term by nature, and will take years to prove out. In the short run, both corn itself and the industry participants (e.g., Deere) may have been oversold, caught up in the forced hedge fund liquidations. So, our present recommendation would be to watch for a recovery, and see it as a selling opportunity in what will become a troubled situation down the road.
Research Perspective
On October 1, this analyst wrote of the dubious merits of the bailout:--
Nothing actually changes, except that financials are bailed out and the national debt goes up. We are at the end of a huge credit upcycle. The bailout plan is a very expensive and futile effort to extend it.........a wealth transfer from the public to financials, with no assurance of new lending as a result.
Naturally, the plan was passed. Almost immediately afterward, its central strategy was abandoned, the one on which the government had staked so much of its credibility, and replaced with a completely different one. Neither the previous one nor the current one involves any commitment by the recipients to lend, so there will be no impact other than the wealth transfer we expected. Our institutions and processes are now almost out of control, and the crisis of confidence in them is finally upon us.
For years, America listened to, and went along with, big, forceful assertions about war, deficits, low interest rates, trickle down, deregulation, low savings rates, executive compensation, job creation, incentives, and now bailout plans. We must by now realize that none of it was true, and have started to pay the price. We are now living through Act I, Scene 1 of the payback phase.
If there is any good news in all this, it must be that by now it should be possible to say something not patently false, and not be shouted down. From crisis comes the possibility of reform, maybe even the necessity for it. Six months ago, this analyst wrote up an eight-point economic plan. We said then that no aspect of it would happen. Now, the chances have improved. In particular, our fourth point:--
Cut health care costs in half by getting the massive amounts of corn out of the American food supply. Corn is junk, whose only dietary uses are in fattening up livestock or in milling into junk food or processing into corn fructose. As such, its contributions, uniquely American, are heart disease, obesity, and diabetes.
The corn growers and refiners, and their whole support group infrastructure, have had a stranglehold on US government policy that rivals the military establishment. Their grip may be weakening. The first chink may be corn for fuel, the many bizarre aspects of which were obvious all along. But that is just the start. Corn itself, not just corn-based ethanol, will come under increasing scrutiny and pressure.
The Economy, Heath Care, and Public Policy
Pressure for change in national priorities will come from two directions, accelerated by a progressively weaker economy. First, government spending generally will get refocused on necessary programs, and away from those that are simply corrupt. Second, the cost of health care, not just how to pay for it, will get more attention.
Grower subsidies have been a sore point for years. The Farm Bill is a transfer payment to growers, an entitlement. It typically does not even go to the operators, the ones riding in tractor cabs, but to people living in New York and Beverly Hills. As the legislation makes its way through Congress, it picks up more and more unrelated amendments to buy off critics, some of which are actually good (food stamps, school lunch), making it more and more expensive. Meanwhile, the commodity title survives, with no caps or even a pretense of being downside protection, even when crop prices and farm income are through the roof.
These transfer payments have had a profound effect on industry practices. The subsidies have made corn in particular a huge phenomenon it would not otherwise be. Federal payments made corn so universal by stimulating production and letting the grain be bought, until very recently, for less than the cost of growing it.
Pre-fuel ethanol, corn was made artificially cheap by taxpayer support. This economic distortion in turn drove down the prices of foods that could incorporate it, thus substituting processed food for unprocessed.
Subsidized grain also meant animals being fed corn at feedlots that could buy it cheaply, below grower cost, so beef cattle, poultry, swine, and dairy cows could all be fattened at animal feedlots, instead of on range and pasture grasses. This factory feeding produced animals diseased by fecal bacteria, and deprived of all manner of nutrition, but these problems were addressed by a big animal antibiotic and vitamin industry.
Corn growing itself is not the only subsidy beneficiary -- there is also corn refining. Sugar import tariffs into the US have for decades supported an otherwise uneconomic market for high fructose corn syrup. HFCS is in pastries and baked goods, ketchup, jams and jellies, syrup, and candy, but most of all sodas. When it comes to effective lobbying, the pharmaceutical companies, oil companies, et al -- Archer Daniels Midland taught them everything they know.
Even in a weak economy, all this nonsense would probably be sustained, if it were not for the pressure coming from a second direction -- health care cost and the imperative need to reduce it.
The US ratio of health care cost to health is high. America spends one-sixth of its national income on health care, and yet enjoys no special benefit from all this spending, compared to other developed nations. The reason for this is not bad doctors, hospitals, or care. The reason is the uniquely high prevalence of chronic, preventable disease, especially heart disease, diabetes, obesity, etc. One-third of US adults are seriously overweight or obese. The Center for Disease Control says that an alarming one in three American children born in 2000 will become diabetic.
It is this analyst’s opinion that the whole tragedy is diet-driven, and that the main problem is corn, which is discussed in detail below. Sweet corn, the kind people eat, is not a particularly good food. It is high-starch, glycemic, empty calories, compared to green vegetables. Milled corn becomes junk food and corn fructose, leading causes of diabetes and obesity. About 10% of American calorie intake comes from corn fructose alone.
Feed grain corn is used to fatten up US beef, swine, and poultry, making American meat a uniquely high-risk food, promoting heart disease and cancers compared to grass-fed. (See detail below.) A corn-based animal diet, vs. grass-fed, elevates saturated fats and triglycerides, and lowers antioxidants.
One reading of the literature leads to the conclusion that, post-smoking, corn is the single worst offender when it comes to boosting health care cost. Therefore, an enlightened health care proposal will not only address issues of who pays how much and by what means. It will also address corn, which imposes huge, unnecessary costs on the nation.
It appears to this analyst that corn is why our health is so poor, relative to what we spend on health care. If this is the case, and it becomes better known, corn will be pressured from two directions. First, if only for reasons of fiscal necessity, the Farm Bill’s grower subsidies will be cut. It will become broadly understood that these payments only lower the cost of low-quality calories of fat, sweetener, and feedlot-fed meat, thereby encouraging chronic diseases.
Second, health care proposals may address corn and identify it as the new tobacco, and the corn lobby go the way of the tobacco lobby. If so, over the next several years, an important investment theme will come along and track policy developments, namely, the decline of corn and the whole corn-driven industry.
Our thesis is long term: It will take a matter of many quarters, even years, to prove out, although we have confidence that it will. In the meantime, we are not making a call on the short-term direction of either the industry or corn itself. In fact, the commodity, on a near-term basis, may be oversold below $4/bu., a consequence of forced hedge fund liquidations.
As shown below, the corn carryover going into the 2009 planting could be only one billion bushels or a touch more, compared to 2 billion bushels going into the 2005 and 2006 plantings, a record low. In 2009, either a harvest below 12 billion bushels, or a recovery in demand ex-ethanol, which dropped by 900 mm bu this year, could produce visible tightness, even if ethanol demand plateaus.
Agrochemical Sector a Bright Spot in Slowing
Agrochemical companies are expected to hold up better than the overall chemicals industry in the current global economic slowdown, with credit ratings remaining stable through the end of 2008 and 2009, according to Standard and Poor’s Ratings Services.
Thanks to continuing world population growth, improving standards of living, energy diversification into biofuels, and a cap on the amount of arable land available, the outlook for agrochemicals companies..remains favorable.
Record U.S. farm income is forecast for 2008, which should boost farmers’ purchasing power of fertilizer, as well as the latest state-of-the-art seed varieties. In addition, fertilizer prices should remain high because of tight supplies and strong demand globally, S and P said.
As a result, companies such as Monsanto Co. (MON) and Potash Corp. (POT) have seen their credit ratings upgraded in 2008, with the entire sector seeing S and P ratings improvements over the past 18 months
Thanks to continuing world population growth, improving standards of living, energy diversification into biofuels, and a cap on the amount of arable land available, the outlook for agrochemicals companies..remains favorable.
Record U.S. farm income is forecast for 2008, which should boost farmers’ purchasing power of fertilizer, as well as the latest state-of-the-art seed varieties. In addition, fertilizer prices should remain high because of tight supplies and strong demand globally, S and P said.
As a result, companies such as Monsanto Co. (MON) and Potash Corp. (POT) have seen their credit ratings upgraded in 2008, with the entire sector seeing S and P ratings improvements over the past 18 months
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