What they wouldn't let me say on CNBC about the Dow and energy stocks
By Adam Lass
Taipan Group's Dynamic Market Alert
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What they wouldn’t let me say on CNBC about the Dow and energy stocks
By Adam Lass, Editor, WaveStrength Options Weekly
Who says the gods have no sense of humor? After years of sniping about vapid talking heads mouthing meaningless sound bites, I have suddenly become one.
Anyone who has read my material in any of TFN’s many outlets knows I am not known for brevity. I believe that as economic and business journalists, we are exploring the quantifiable leading edge of history, and that this topic deserves more than taglines and mottos.
So when I was informed that the big kahuna of national biz TV, CNBC itself, wanted myself and a CME floor trader to go at the Gordian knot of energy prices and the market for a whole 30 minutes, I was pleasantly surprised and pleased enough at the opportunity to overlook the 6:00 a.m. broadcast time.
I spent a fair portion of the night before nervously marshalling my facts and figures, and was more than a little bleary-eyed when the alarm went off at four in the morning. But I somehow managed to squeeze my (admittedly overweight) frame into my best suit and tie, and scoot downtown through empty Baltimore streets to CNBC’s remote studio.
Then I sat there on camera for 25 minutes with production and use numbers dancing through my head, while the two NYC hosts quizzed their reporter in Beijing as to the color of Boone Pickens’ suit. (He doesn’t go by T. Boone anymore, another priceless gem I learned while stuck in that chair.)
In the end, they had just enough time before going to the break to ask me for… a sound bite. My wife tells me that I sounded just like all the other guys they had on that day. She was very pleased.
Here is what I would have said, given the opportunity to get a word in edgewise: Dow 14,000 (give or take a few points) is now on the books as the blue-chip benchmark all-time high. Is this a reason to buy more blue-chip calls? For good or ill, probably yes… for a while, anyway.
But it is also certainly not a reason to abandon common sense, as that old “energy-stimulated inflation overhang” still dangles over the market like some great rusty Damoclesian dagger.
In point of fact, much of this market’s pricing power is coming directly from big energy. Note that while the Dow Industrials have gained some 30% over the past 12 months, Dow component Exxon Mobil (XOM: NYSE) is definitely the engine here, gaining almost 40% over the same stretch.
Reduce your time scale a bit and look at, say, just 200. You’ll see the energy stocks of the S&P Energy Select SPDR (XLE: AMEX) have outstripped the Dow 2-to-1. Simply put: Out of the whole market, energy has been the best ride, but is damned expensive to buy right about now. So, once again, we look to a back door into the energy lists, and that back door is ethanol.
Here are two ways to step through that door: One is a turnaround story and the other a pure e-ticket ride. Let’s start with Archer Daniels Midland Co (ADM: NYSE). Traditionally thought of a food processor, it has used its relationships and production and supply line expertise to move heavily into ethanol production. In fact, it just might envision itself as the next Exxon Mobil some 10 years out.
So what’s stopping it? Until recently, it was the phenomenal cost of to produce corn-based fuel. If you’ve paid any attention at all to this story, than you’ve heard the nay-sayers rant as to how “it costs more in diesel for the tractor than it produces in the end… blah, blah, blah,” to which the white lightning crowd respond that it’s all a question of scaling up.
Well, one of those key economy-of-scale items has been the amount of available corn for brewing. And word out Washington has it that U.S. farmers, drunk on high demand and high prices, have planted 19% more corn this year than 2006. Corn futures had been trading in the vicinity of their 10-year highs since the ethanol rush began in July of 2006.
Now, the U.S. Department of Agriculture is looking at 90.5 million planted acres -- the most corn since the 1940s. Now we see that ramp in corn futures reversing. So what does this mean for ADM? It means that its chief cost -- not only for ethanol but for many of the food products it sells -- has suddenly become manageable again. This kick in the pants has already added a quick buck to ADM shares, I figure that there are at least $9 more coming by late fall.
As for that rocket ride, heck, if you believe in corn at all then you have to love Monsanto Company (MON: NYSE). MON is on top of the world right now, hitting new high after new high via a mixture of startling innovative science and simply beautiful basic book issues.
Monsanto’s Seeds and Genomics segment supplies the guys with the tractors with darn near-invulnerable and super productive soybean, corn, canola, cotton, vegetable and fruit seeds, using biotechnology traits that control insects and weeds. The Agricultural Productivity side of the house gins up herbicides and mega fertilizers both for the animal feed biz and the residential market. (They make Round Up, folks: what more does any Saturday morning lawn tractor jockey really need to know?).
Now none of this good news is much of secret for anyone who had the smarts (and patience) to dig through the farm reports. Back on June 28, MON reported fiscal third-quarter earnings of $1.02 per share, up from 61 cents in the prior-year quarter and two cents above expectations. Revenues rose 23.4% to $2.84 billion.
You already know about surging U.S. and European demand for Monsanto’s genetically modified corn and other seeds (yeah that’s right: the Euro-tree huggers may shudder and whine at the thought of “frankencorn,” but in reality, “bio-food” has thoroughly interpenetrated their food chain). Beyond that, Monsanto’s cotton trait technologies are breaking huge in India, where planting’s are up some 66% year over year.
Looking toward the next few seasons, Monsanto tells us to expect an 18%-40% increase in corn borer insect-protection product (some 60 million to 70 million acres this go round, up from previous estimates of 50 million to 60 million acres).
Also, forecasts for glyphosate-tolerant corn (that is to say, corn that blows off stuff like Round-Up) are up about 33% over previous estimates (roughly 80 million acres, up from prior of 60 million acres for those of you who really, really need to know).
Full year guidance for MON per-share profits reflects these gains at $1.75-$1.80, up from previous forecasts of $1.60 to $1.65. And I see no reason to think that they will miss next quarter, seeing as how they have surpassed estimates for the past three consecutive quarters.
I am looking for MON shares to add another $10 as well.
Forgive me if this was long, or detailed, or useful. As I said earlier, I am not much good with soundbites.
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TAIPAN TIDINGS
Adam Lass’s WaveStrength Options Weekly is up 240%… for June!
I don’t know about you but when I see a 240% gain in a month I tend to think it’s a fluke -- a one-off -- just dumb luck… but not so. Adam is up 1,746% year-to-date. His next trade is geared up for Tuesday night. You can buy the next Exxon Mobil for pennies on the dollar. Don’t miss it.
From the track record:
JNJ July 65 puts (JNJ SM) 03/14/07 89%
TWX July 20 puts (TWX SD) 03/28/07 30%
TYC July 30 calls (TYC GF) 05/24/07 67%
AXP July 57.5 puts (AXP SY) 04/05/07 3%
CSCO July 25 calls (CYQ GE) 05/08/07 51%
Key Statistics:
June’s Average Gain: 48%
June’s Cumulative Gain: 240%
YTD Average Gain: 53%
YTD Cumulative Gain: 1,647%
Earnings Announcements
Boston Scientific Inc, Citigroup Inc, Journal Register Company, Schlumberger Limited, Wachovia Corporation, and Whirlpool Corporation are releasing earnings.
Unlock Dates for July 2007
7/23/07 - Aeroenvironment Inc is unlocking 6.7 million shares.
7/24/07 - Oculus Innovative Sciences Inc is unlocking 3.025 million shares.
7/30/07 - Employers Holdings Inc is unlocking 26.75 million shares.
7/31/07 - Information Services Group Inc is unlocking 28.12 million shares.
7/31/07 - XTENT Inc is unlocking 4.7 million shares.
Upgrades and Downgrades
CSX Corporation upgraded by Calyon Securities from Reduce to Neutral.
Satyam Computer upgraded by Susquehanna Financial from Neutral to Positive.
JP Morgan Chase upgraded by CIBC World Markets from Sector Perform to Sector Outperform.
Juniper Networks upgraded by Robert W. Baird from Neutral to Outperform.
Valero Energy downgraded by Bernstein from Market Perform to Underperform.
Brought to you by Taipan Financial News
http://www.taipanfinancialnews.com
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