Here's the answer every hedge fund knows: It will not let you raise numbers in the out years.
Right now there is a tremendous struggle going on about near-term and far-term earnings growth and what we can expect to see. Everyone knows when Mosaic and Potash report next week that the numbers will be beaten and the estimates raised.
But so what? If you scrap the ethanol mandate or if people even think that it will be scrapped, you will see grains collapse just as quickly as oil collapsed when we found a level we didn't need it -- remember, we don't "need" ethanol, but it is mandated.
Wednesday saw the stock market register another data point of ignominious distinction: the S & P 500 entered bear market territory -- a drop of more than 20% from its October 2007 peak.
One would like to make a case for a rebound for the S&P 500 and the DJIA, but current economic fundamentals (unfortunately) make a stronger case for the opposite: sky high gasoline and oil prices, declining disposable income in several income groups, rising inflation, the worst housing market in more than 15 years, the probability of additional, substantial mortgage-backed asset write-offs, more than 400,000 jobs lost in the first six months of 2008. The prognosis: tough times ahead for the Dow. Let's hope it holds psychological support at 11,000 or technical support at 10,750.
If the Dow doesn't hold the above support levels ... well, let's not go there. Instead, let's focus on the positive. Are there any decent plays in these difficult times for the market and economy?
There are, for investors who can tolerate moderate risk or high risk, and who are not interested in a short-term trade of six months or less. These are longer-term investments where the goal is a double-digit, average, annual, total return on equity over 3-5 years. Investors should also be capable of tolerating a 20-25% pull-back.
So much for "geopolitical risk" not being a factor in the markets, and for that matter so much for the bulls. Today was a psychological blow for traders as the DJIA crossed under the 12,000 level today. Israel's conducting of a training exercise to bomb Iranian nuclear facilities was the excuse needed for the bears to assume full control. Oil prices rose over $2.00 per barrel to $134.77 today, even ahead of the weekend meeting to explore ways to boost Middle East refinery production. Throw in the excuse of a Quadruple Witching Day on top of it and that's all she wrote. These are the unofficial closing levels for major US index levels:
DJIA 11,842.69 (-1.8%) S&P500 1,317.93 (-1.9%) NASDAQ 2,406.09 (-2.3%) 10 YR T-Note 4.137% (-0.06%) 52-WEEK LOWS TOP 10 ANALYST CALLS
Cincinnati Financial Corp. (NASDAQ: CINF) managed to buck much of the downward trend today despite the company's poor guidance comments after losing money on investments and its insurance exposure to the massive Midwest Flooding. Shares were up 0.6% at $28.78 in the final minutes of trading today.
When natural disasters happen, there are always some companies that can turn the circumstances in their favor. Recent downpours in the Midwest provided such an opportunity as they came not only with high damages for people in the area, but also with floods for crop production, causing even higher agricultural commodity prices. The rise in corn and soybeans prices could easily lead to an increased demand for seeds, agricultural equipment, and fertilizers. BusinessWeeksuggests some big names to invest in that could offer us the advantages we are looking for.
One such company is Archer Daniels Midland (NYSE: ADM), which could also benefit from higher ethanol prices, after purchasing seven businesses in 2007. Bunge Limited (NYSE: BG) is also amid possible winners, having forecast better-than-expected fertilizer earnings. Shell eggs producer Cal-Maine Foods (NASDAQ: CALM) is also on the selected list; the company saw its shares climb 15% year to date, and has just revealed a new dividend payout policy.
Another important name is Mosaic Co. (NYSE: MOS), whose stock prices have surged 70% so far this year. BusinessWeek cites Mosaic as being able to benefit from higher prices for fertilizer and potash. Following the same logic, the article points out potash provider Potash Corp. of Saskatchewan (NYSE: POT) and fertilizer distributor CF Industries Holdings (NYSE: CF), which should be able to take advantage of the weak dollar and higher sales prices.
Mosaic (NYSE: MOS) shares are trading higher today after the company announced it intends to sell its Saskferco Products Inc. unit, which makes nitrogen fertilizer and is based in Belle Plaine, Saskatchewan. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on MOS.
After hitting a one-year low of $32.50 in August, the stock hit a one-year high of $163.25 on Wednesday. MOS opened this morning at $151.67. So far today the stock has hit a low of $147.46 and a high of $155.60. As of 12:20, MOS is trading at $153.25, up $2.00 (1.3%). The chart for MOS looks bullish and steady.
For a bullish hedged play on this stock, I would consider a September bull-put credit spread below the $90 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in just three months as long as MOS is above $90 at October expiration. Mosaic would have to fall by more than 41% before we would start to lose money.
MOS hasn't been below $90 since January and has shown support around $115 recently. This trade could be risky if the company's earnings (due out 7/29) disappoint, but even if that happens, this position could be protected by the support the stock might find at its 200 day moving average, which is currently around $95 and rising.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in MOS.
With crude oil prices soaring, shares in coal and fertilizer companies have also been climbing for the past year. Barron's offers a survey of the momentum plays, pointing out some opportunities and risks when investing in coal and fertilizer stocks.
Talking about risks, Barron's underlines the fact that it can be difficult for investors to put their hard earned money into a stock that is already trading near its highs. But as they say, the trend is up unless proven otherwise, and we might take this into account when picking our trades. For example, back in April, it looked like Mosaic Co. (NYSE: MOS) was facing technical weakness, but this did not last long and the company was able to rebound.
Now let's take a took at the coal sector. Data shows that the Dow Jones U.S. coal index gas gained more than 50% for the past year. While James River Coal Co. (NASDAQ: JRCC) has quadrupled this year, Peabody Energy Corp. (NYSE: BTU) has been seeing some weakness, and this might be a sign that the sector could face tough times ahead. The first concern tied to supply and demand appeared for Peabody when we began to notice that volume on rally days slipped, while volume on declining days has increased.
And yet my best indicator, the Standard & Poor's oscillator, which you can order from their Web site, is saying you cannot be short here and should be doing some buying. The oscillator, when it has been at minus 5, has called a bottom almost every time in the last decade, plus or minus a day or two, and a percent or even two, and I have long since learned not to see through it.
MOST NOTEWORTHY: Webster Financial, Eaton and Macrovision were today's noteworthy upgrades:
Keefe Bruyette upgraded shares of Webster Financial (NYSE: WBS) to Outperform from Market Perform on valuation as they feel the company is adequately capitalized and in a position to withstand the weakening credit markets.
JP Morgan upgraded Eaton (NYSE: ETN) to Overweight from Neutral citing bullish management comments at its conference last week.
Piper upgraded Macrovision (NASDAQ: MVSN) to Buy from Neutral citing the closure of the Gemstar deal.
OTHER UPGRADES:
Lehman upgraded U.S. stocks to Overweight from Underweight.
Goldman added Hess Corp (NYSE: HES) and Mosaic (NYSE: MOS) to its Conviction Buy List.
Novo Nordisk (NYSE: NVO) was raised at HSBC to Neutral from Underweight.
In a challenging market amid an uncertain U.S. economic landscape, identifying long-term, promising investment opportunities becomes a difficult task. Further, to make the investment equation even more challenging, there's election risk, as well, with the 2008 U.S. Presidential election five months away.
Still, risk-adjusted investment opportunities exist. Accordingly, here's a 'Fab Five' that should rank with the best the equity markets have to offer, 3-5 years out.
(Note: Don't buy these stocks if you're interested in a short-term trade of six months or less. These are longer-term investments where the goal is a double-digit, average, annual, total return on equity over 3-5 years.)
Potash (NYSE: POT). Current Price: $212, p/e 47. Revised Stop Loss: $170. Potash remains the best of a very good fertilizer bunch, due to its 20% global market share in the namesake fertilizer. Consider buying POT on a pull-back to $202-203, but keep in mind Potash may not retreat to that level.
Mosaic (NYSE: MOS). Current Price: $132, p/e 40. Revised Stop Loss: $97. Mosaic also is well-positioned in phosphate and crop nutrients. Further, the fact that 66% of its revenue is internationally based is especially appealing, given the U.S. economic slowdown.
Transocean (NYSE: RIG). Current Price: $144, p/e 10. Revised Stop Loss: $110. RIG offers deepwater oil drilling services in all regions of the world, and it's an oil-thirsty world.
Freeport-McMoRan (NYSE: FCX). Current Price: $114, p/e 14. Revised Stop Loss: $69. Copper / gold / molybdenum miner Freeport is one of a handful of companies that have the economies of scale to compete in the global mining sector of the early 21st century, and it boasts impressive clients, to boot. Consider buying FCX on a pull-back to $111-113, but keep in mind Freeport may not retreat to that level.
CSX Corp. (NYSE: CSX). Current Price: $66, p/e 23. Revised Stop Loss: $48. Ride the railroad resurgence with this superior trade / commodity / freight transport company. The rails are in the transportation sweet spot: truck transport costs are rising with fuel costs, and the U.S. highway system is inadequate, with increased congestion likely, pending future investment.
Top Pick: Potash.
Safest Pick: CSX Corp.
Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.
Mosaic (NYSE: MOS) shares are falling with other fertilizer-makers after an article in The Wall Street Journal this morning detailed skyrocketing fertilizer prices that are squeezing small farmers. The article said that Sen. Byron L. Dorgan (D-ND) will ask the Federal Trade Commission to scrutinize the industry's business practices. It also quoted the president of the North Dakota Farmers Union accusing fertilizer producers of price-gouging. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on MOS.
After hitting a one-year low of $32.23 last May, the stock hit a one-year high of $143.32 in April. This morning, MOS opened at $118.96. So far today the stock has hit a low of $113.64 and a high of $119.79. As of 12:00, MOS is trading at $113.74, down $6.12 (-5.1%). The chart for MOS looks bullish and deteriorating slightly.
For a bearish hedged play on this stock, I would consider a July bear-call credit spread above the $150 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in eight weeks as long as MOS is below $150 at July expiration. Mosaic would have to rise by more than 31% before we would start to lose money. Learn more about this type of trade here.
Farmers are paying more for supplies to grow their crops and they're passing those rising costs onto consumers. The Wall Street Journal reports that farmers paid 65% more for fertilizer in April 2008. Fuel, the second-fastest rising cost, is up 43%. And seed prices have risen 30%. But you can hedge your rising food costs by investing in companies that profit from rising fertilizer prices.
Farmers say too much market power is concentrated in the hands of a small group of companies in the U.S., Canada and Russia that dominate global production of potash and phosphate. Phosphate is up 174% from $365 last year to $1,000 a ton. The price of a ton of potash is up 204% from $230 to $700. Thanks to a rise in natural gas prices, the price of Urea, a nitrogen fertilizer, has doubled to $600 a ton.
Should you hedge your rising food prices by buying stock in Potash and seed suppliers? Potash Corp. (NYSE: POT) and Mosaic Corp. (NYSE: MOS) have benefited from the rising price of Potash. And Monsanto Co. (NYSE: MON) is the biggest seed company out there. They have benefited in the past year -- with stock prices up 202%, 279%, and 103% respectively. But will they keep rising?
TheStreet.com's Jim Cramer says lots of companies now thrive with crude up here.
Oil's not a tax on everything -- it's a tax on the consumer. That's what I come down to when I see the charts this weekend and ponder what's happening in so much of industrial America.
Company after company that I examine -- the new techs, as I call them -- actually benefit from higher oil prices. Or they can pass them on with ease, because of the worldwide demand being so strong.
Take all of the companies involved with making a Boeing (NYSE: BA) (Cramer's Take): Boeing itself, Alcoa (NYSE: AA) (Cramer's Take), Honeywell (NYSE: HON) (Cramer's Take) and Precision Castparts (NYSE: PCP) (Cramer's Take) being good examples. Each of these is necessary because the new Dreamliner burns lots less fuel, and with fuel the biggest airline cost, it stands to reason that higher energy prices make the plane more desirable even at a higher price point.
Readers of this space know that the preferred tack is to look for well-capitalized companies with competitive advantages in sectors with secular, long-term growth trends. One select sector has been oil/oil services, and another right near the top has been fertilizer producers, primarily Potash, Mosaic, and Agrium, first reviewed in December 2007-January 2008.
To be sure, the sector has been bid-up, as a wider community discovers the value of fertilizer and companion products amid the likely substantial increase in global food demand in the decade ahead.
Too late to get in on a fertilizer play? Hardly. P/Es are higher, so entry point is key, but with the above in mind, here's a revised review of the fertilizer producers, with the updated Sell/Stop Loss levels. They're ranked by risk, with the top stock, POT, being the lowest risk.
TheStreet.com's Jim Cramer says the bull story here has more causes than just a weak greenback.
Better seeds and more fertilizer. That's it. Those are the technology weapons in the war against food shortages caused in the short term by a worldwide obsession with biofuels (we are the worst offender, of course) and in the long term by the increased affluence in China and India, which leads to more nutritious, protein-filled diets.
Both forces, when combined with worldwide droughts and failed harvests, not augmented by the U.S. -- we are late to start with our corn season -- are driving prices up to ridiculous levels. I have no doubt that if tomorrow the president of the United States said he was suspending the biofuel mandates for ethanol that we would see a collapse in food pricing. But I also have no doubt that this inept administration could never figure that out.
So, the solution comes to all of the stocks that were crushed yesterday: Monsanto (NYSE: MON) (Cramer's Take), Potash (NYSE: POT) (Cramer's Take), Mosaic (NYSE: MOS) (Cramer's Take) and Agrium (NYSE: AGU) (Cramer's Take). Without better seeds that produce higher yields, without more fertilizer that increases yields, we are going to be facing a long-term continuation of these price increases and the attendant inflation and food riots. Inflation, by the way, that has nothing to do with the Fed, unless the Fed is also a big granary hoarding wheat and corn.
This market is tough. Pros and novices alike are having a tough time. Particularly in a down market, a market commentators like to call a ""stock picker's market," I find it illustrative to dig deeper into the holdings of those special professional money managers that have found a way to make a go of it.
Take the CGM Focus (CGMFX) fund. This fund consistently shows up at the top of 1-year, 3-year, and multi-year best performers. CGM Focus has returned on average 37% per year for the past five years. While this is absolutely no guarantee that it will continue to perform like this, fund manager Chuck Heebner seems to have the special sauce -- at least for now.
So, what has been so successful for the fund?
Commodity picks like fertilizer plays Potash (NYSE: POT) and Mosaic (NYSE: MOS) have been big positions and have been big winners. Steel plays like US Steel (NYSE: X) have performed very nicely for CGM as well.
Looking at what worked is somewhat like looking into a rear-view mirror. These gains were in the past. What's Heebner and team buying now?
TheStreet.com's Jim Cramer says the writing's on the wall, so position yourself accordingly. 
The U.S. stock market's summer doldrums continue. 
So much for "geopolitical risk" not being a factor in the markets, and for that matter so much for the bulls. Today was a psychological blow for traders as the DJIA crossed under the 12,000 level today. Israel's conducting of a training exercise to bomb Iranian nuclear facilities was the excuse needed for the bears to assume full control. Oil prices rose over $2.00 per barrel to $134.77 today, even ahead of the weekend meeting to explore ways to boost Middle East refinery production. Throw in the excuse of a Quadruple Witching Day on top of it and that's all she wrote. These are the unofficial closing levels for major US index levels:
When natural disasters happen, there are always some companies that can turn the circumstances in their favor. Recent downpours in the Midwest provided such an opportunity as they came not only with high damages for people in the area, but also with floods for crop production, causing even higher agricultural commodity prices. The rise in corn and soybeans prices could easily lead to an increased demand for seeds, agricultural equipment, and fertilizers. BusinessWeek 
With crude oil prices soaring, shares in coal and fertilizer companies have also been climbing for the past year. Barron's offers a .gif){kind=logo}
Farmers are paying more for supplies to grow their crops and they're passing those rising costs onto consumers. The 
Is Ford running on empty?
Cramer on BloggingStocks: How to play the end of the ethanol mandate
Before the bell: AMZN, F, DOW, DAI, QCOM, MMM, LLY, COST ...
