Phil’s Favorites

Courtesy of Daniel Jones of OptionsNotions

Boston Scientific Corporation engages in the development, manufacture, and marketing of medical devices that are used in various interventional medical specialties worldwide. The company offers its products in three groups: Cardiovascular, Endosurgery, and Neuromodulation. The Cardiovascular group consists of drug-eluting and bare-metal stents, coronary revascularization products, Intraluminal ultrasound imaging catheters and systems, Embolic protection system, peripheral and neurovascular interventions, electrophysiology devices, and cardiac rhythm management devices.

The Endosurgery group includes esophageal, gastric, and duodenal intervention products; colorectal, pancreatico-biliary, and pulmonary intervention devices; and products for urinary tract intervention and bladder disease, prostate intervention, pelvic floor reconstruction and urinary incontinence, gynecology, and oncology.

The Neuromodulation group comprises Precision Spinal Cord Stimulation system for the treatment of chronic pain of the lower back and legs, and HiResolution 90K Cochlear Implant system to restore hearing to the profoundly deaf. Boston Scientific Corporation markets its products through direct sales force, and a network of distributors and dealers. The company was founded in 1979 and is headquartered in Natick, Massachusetts.

Financial Results: Boston Scientific has been digesting an acquisition of epic proportions from over a year ago. Many may recall BSX’s successful cash and stock bid for Guidant in 2007, as they came in and scooped the company away from a rival medical equipment maker. The resulting acquisition was one of the largest in financial history, topping $20 billion, and basically leaving BSX’s balance sheet with a significant multi-billion dollar “goodwill” asset, a huge float of 1.5 billion shares, and a healthy dose of acquisition-related debt. Current debt levels for the combined company are just over $8 billion in long-term debt, roughly equivalent to their annual revenues.

As this acquisition is digested, we believe BSX has the opportunity for balance sheet improvement as well as an avenue to build important margin improvements to their currently anemic bottom line. Current estimates are for the company to earn between 50 and 60 cents per share next year, and a similar amount into 2009. We see marginal opportunity for improvement of their cost to carry the $8 billion in debt they’ve built up, given current low interest rates. The capital markets may provide some cost savings if the debt were to be renegotiated or rolled over, however we believe those improvements might be minor in the scheme of earnings.

Bigger opportunity for BSX likely resides in its new “Liberte” stent, which received a preliminary approval letter in mid-March from the FDA. BSX Management expects a more formal approval of this stent system in the near future. BSX already offers two platforms of drug eluting stents, including the TAXUS stent and the Promus product, known as the “XIENCE” from Abbott Labs. Promus is a private-labeled stent system manufactured by Abbott Labs (ABT) and distributed by Boston Scientific, which is coated with a different drug than the TAXUS system. BSX is the only company with two separate stent platforms in the market.

Trading near their current book value of $10 per share, we see some value in BSX shares, which we would like to buy now and hold for a long-term appreciation. Over the course of the holding period, we would look to write covered calls against these shares to extract a few dollars in premium income. Currently BSX pays no dividend.

Investment Recommendation: We recommend that investors accumulate Boston Scientific shares at or below $12.80 per share, and write the August $15 calls for at least $0.60. This gives a target exit price of $15 per share, reflecting a $2.20 per share, or 17% increase. The call premium of $0.60 over the $12.80 “buy” price of BSX gives you a static return of 4.7%. Combined, (if you’re called away at $15 on the shares) you would have a return of 21.7%, which is not a bad return for 138 days until August’s options expiration.

On the downside, if BSX declines past $12.20, you would begin to experience unrealized losses on the position. You would get to keep the $0.60 option premium when those options expire, but a holder of BSX shares would lose $0.60 or more on the shares once the price declined below $12.20 (not including commissions), so that is the break-even level, and those are your known risk / return parameters. You may want to have a sell stop in place at $11.00 to $11.20 to limit your losses to about 10%.

Please note: Options trades all involve a high degree of risk and the potential to lose some or all of your investment. These recommendations are general in nature, and you should consult your own financial professional who is familiar with your situation as to the appropriateness of these trade ideas.

Update in the NY Times on Merck and Schering-Plough’s cholesterol lowering drugs.

Doubt Cast on 2 Drugs Used to Lower Cholesterol

By ALEX BERENSON

Excerpts plus comment (in red)

“CHICAGO — Two widely prescribed cholesterol-lowering drugs, Vytorin and Zetia, may not work and should be used only as a last resort, a panel of four cardiologists told an audience of more than 5,000 people at a major cardiology conference on Sunday.

Instead, physicians and patients should rely more heavily on older cholesterol-lowering drugs called statins, which have proven benefits and can be cheaper, the panel said.

“The strongest recommendation we can make on this panel is to go back to statins,” said Dr. Harlan M. Krumholz, a cardiologist at Yale. “They work.”…

Statins include drugs like Lipitor and simvastatin, the generic version of Zocor. But other, lesser-known drugs like niacin should also be tried before Vytorin and Zetia, the panel said.

Vytorin and Zetia are among the top-selling drugs in the world, with combined sales of $5 billion last year. About five million people worldwide, including four million Americans, take the medicines, which have been heavily advertised to consumers in the United States.

The New England Journal of Medicine made a similar recommendation about the drugs in an editorial published on Sunday.”…

“The stakes of the debate are high both medically and financially. The drugs produce about 70 percent of Schering-Plough’s profit, according to analysts.

Unlike statins, which block the liver from making cholesterol, Zetia works by blocking the intestine from absorbing cholesterol in food. Vytorin is a single pill that combines Zetia with simvastatin, or Zocor.

LDL cholesterol, the harmful kind, is known as a risk factor for heart disease, and so doctors have generally assumed that lowering LDL cholesterol would reduce the risk of heart attacks and strokes.”

Doctors have assumed, it’s not been proven, that lowering LDL cholesterol would reduce the risk of heart attacks and strokes. Recall previously blogged article, Medication Under a Microscope which discusses the problems with surrogate endpoints and assumptions.)

“But proving that a drug actually cuts those risks requires an expensive, multiyear clinical trial involving 10,000 or more patients. Those studies, called outcomes trials, have been conducted for statins, and they have proved that patients taking those drugs do have a reduced risk of heart disease. No such outcomes trials exist for Vytorin and Zetia.

“We’ve got a drug that has no clinical outcome trials,” Dr. Nissen said. “I advise my colleagues essentially to use this drug only as a last resort.”

The recommendations released Sunday will probably have an immediate impact on clinical practice, said Dr. Douglas Weaver, the incoming president of the American College of Cardiology, which was host of the conference. Nearly half of the 30,000 cardiologists in the United States attend the conference, and many of those doctors heard the panel’s recommendations firsthand.”

And here’s another perspective, by Michael Mandel, posted at Business Week.

Here’s another article on the topic of the proposed regulatory changes, from Business Week.

Administration pushes regulatory changes

Excerpts:  “The Bush administration is trying to confront the credit crisis that has rattled nerves from Wall Street to Main Street by proposing wholesale changes in how Washington oversees the financial system.

A plan set for release Monday would give new powers to the Federal Reserve so that the central bank serves as the system’s overarching protector of stability.

The proposal would abolish agencies such as the Office of Thrift Supervision and the Commodity Futures Trading Commission, shifting their responsibilities to other federal institutions.

When Treasury Secretary Henry Paulson outlines the ideas in a speech, the changes will represent the most sweeping overhaul of financial regulation since the Great Depression of the 1930s.”

“The Paulson plan would:

–designate the Fed as the primary regulator for market stability, greatly expanding its ability to examine any financial institution deemed to pose a risk to the stability of the system.

–shift the functions of the Office of Thrift Supervision to the Office of the Comptroller of the Currency, although ultimately the plan envisions just one banking regulator.

–merge the Securities and Exchange Commission with the Commodity Futures Trading Commission.

–create a national regulator for insurance companies, which now are largely regulated by the states.

–establish a commission to address the abuses exposed in the current tidal wave of mortgage defaults.”

Another very timely article by Mish Shedlock. (Had a feeling Mish would have written an extensive commentary on the matter before I finished waking up this morning. Yeah, I know it’s 2 pm.)

The Fed And The Henhouse

The GlobeInvestor is reporting Even on Wall Street, capitalism takes a hit.

Socialist-style Fed or financial saviour?

The cover of the latest issue of BusinessWeek shows Ben Bernanke in profile against a bright red and orange backdrop, pensively stroking his grey beard and looking remarkably like Vladimir Ilyich Lenin.

The imagery is intentional and pointed.

“Comrade Ben is determined that there will be no financial meltdown and no depression while he is in command,” economist Ed Yardeni wrote to clients. “Given the initial reaction [on Wall Street], I suppose this means we are all financial socialists now.”

Guaranteeing Bear Stearns’ portfolio of troubled investments sets a bad precedent by transferring potential losses from the market to taxpayers, complained Allan Meltzer, a professor of political economy at Pittsburgh’s Carnegie Mellon University.

“I do not believe the current system can remain if the bankers make the profits and the taxpayers share the losses.”

Fed Calls Regulatory Overhaul “Timely”

Reuters is reporting Treasury regulatory overhaul plan “timely”.

Upcoming Treasury Department proposals to make the Federal Reserve the chief regulator of U.S. financial markets and give it sweeping new powers won praise on Saturday from the central bank and the head of the Securities and Exchange Commission.

“The Treasury’s report presents a timely and thoughtful analysis and is an important first step in the complex task of modernizing our financial and regulatory architecture. We look forward to working with the Congress and others to help develop a policy framework that will enhance financial and economic stability,” a Federal Reserve spokeswoman said.

Let’s Take a Look at “Timely”

• Housing is imploding.
• There are $500 Trillion in derivatives that no one can possibly understand the financial risks on.
• A huge portion of those derivatives are with JP Morgan (JPM).
• Bear Stearns stock went from $170 to $10 in a year in Shotgun Wedding between Bear Stearns and JP Morgan arranged by the Fed
• Questions Linger Over Lehman’s Balance Sheet as Lehman Brothers (LEH) is leveraged 31.7 times.
• Citigroup (C) had to be bailed out by Abu Dhabi Deal Raises Questions About Citigroup’s Health
• Merrill Lynch needed $6.6 Billion Bailout From Kuwait, Mizuho.
• Cost of Capital “Ratchets Up” at Citigroup and Merrill
• Morgan Stanley (MS) sold 9.9% of the firm to China after handing out huge bonuses.
• People are walking away from homes
• Businesses Are Advised To Walk Away from agreed upon deals.
• There is an open public debate on Moral Obligations Of Walking Away
• 1 in 10 of the entire state of Ohio is on food stamps.
• Florida, Ohio, and Michigan are in an economic depression.
• There is No market for Asset Backed Commercial Paper (ABCP)
• German Banks Fears Global Meltdown caused by US subprime debt
• There is a $1.1 Trillion HELOC Problem
• Unemployment is poised to soar.
• Commercial real estate is massively overbuilt and poised to plunge.
• Goldman Sachs (GS) is calling for another $460 billion in writedowns.
• The SEC Openly Invites Corporations To Lie.

Gee, that sure looks “timely” to me.

Who is to blame for the mess we are in?

And who is to blame? The Fed course, with help of Congress, and the SEC.

Congress passed legislation to create GSEs to foster affordable housing. Now the definition of “affordable” is over $700,000, and calls to reduce the role of the Fannie Mae are now calls to increase the role of Fannie Mae in the wake of the housing crisis. There were 300 some programs to create affordable housing and every program made the situation worse. All those programs really amounted to was handouts to the building industry and banks.

And if Congress would stop wasting money on needless programs the dollar would stop sinking. Of course the government is wasting trillions of dollars trying to be the world’s policeman, a role we can no longer afford.

The SEC in its infinitely poor wisdom, decided to give government sponsorship to Moody’s, Fitch, and the S&P and this led to extremely risky garbage being rated AAA. I talked about this problem in Time To Break Up The Credit Rating Cartel.

But the Fed deserves the brunt of the blame for micro-managing interest rates like some central planners from the Soviet Union. The Fed does not know the proper price for money (interest rate) any more than it knows how to set the price for orange juice. Only the free market can do that.

Unfortunately, every problem Greenspan faced was an excuse to cut interest rates. Even non-problems like the silly Y2K (year 2000) scare was an excuse to cut rates.

When the dotcom bubble collapsed, the Fed slashed interest rates to 1% to get the economy moving again. The housing bubble was the result. Greenspan added more fuel to the fire along the way by openly praising ARMs and derivatives.

Greenspan May 5th 2005: “Perhaps the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth.“

I compared Greenspan to Buffett in Who’s Holding The Bag?

Buffett in stark contrast to Greenspan called the explosive use of derivatives an “investment time bomb”.

It’s perfectly clear now who was right. For those who have not pieced the story together properly, it was fear of a dominoes style chain reaction collapse of Credit Default Swaps starting with Bear Stearns that caused Bernanke to force a shotgun wedding between Bear Stearns and JP Morgan.

So what does the Treasury Department propose? The Orwellian answer of course is to give the Fed still more power to wreak havoc.

The Fed And The Henhouse

The New York Times is reporting In Treasury Plan, a Reluctant Eye Over Wall Street.

The Bush administration is proposing the broadest overhaul of Wall Street regulation since the Great Depression. But the plan, to be unveiled on Monday, has its genesis in a yearlong effort to limit Washington’s role in the market.

The regulatory umbrella created in the 1930s would grow wider, with power concentrated in fewer agencies. But that authority would be limited, doing virtually nothing to regulate the many new financial products whose unwise use has been a culprit in the current financial crisis.

The plan hands vast new authority to the Federal Reserve, essentially formalizing what has been an improvised process over the last three weeks. But some fear that the central bank’s role in creating the current mess will undercut its ability to clean it up.

“The Fed oversaw this meltdown,” said Michael Greenberger, a law professor at the University of Maryland who was a senior official of the Commodity Futures Trading Commission during the Clinton administration. “This is the equivalent of the builders of the Maginot line giving lessons on defense.”

The Fed’s former chairman, Alan Greenspan, for years praised the growth in the derivatives market as a boon for market stability, and resisted calls to use the Fed’s power to increase regulation of the mortgage market.

Inquiring minds can read through a 15 page Summary of Treasury’s Regulatory Proposal should they so desire. But here is the sad state of affairs:

The biggest, most reckless credit experiment in history has started to implode. It’s far too late to stop a complete systemic collapse now. Granting new powers to the agency most responsible for the mess simply does not make any sense.

In the long run, the only solution is to abolish the Fed, end government sponsorship of the ratings agencies, and return to sound monetary policies in Congress with a currency backed by hard assets instead of promises.

Instead, the proposal is to give Fed increased authority to watch over additional henhouses. And if there’s one thing worse than the fox watching the henhouse, it’s the Fed watching the henhouse. A quick look at history should be enough to convince anyone of that.

Mike “Mish” Shedlock

Playing Lehman’s Liquidity

By Steven M. Sears. The full article can be found at Barron’s.

“IF YOU WANT TO GAUGE Wall Street’s crisis of confidence in itself look no further than options and stock trading in Lehman Brothers Holdings.

The big investment bank has managed to thus far avoid the worst of the credit crisis and yet it is still hounded by bearish trading patterns as seen in the days before Bear Stearns fell into J.P. Morgan Chase’s bailiwick.

The “takedown trade” that first emerged with Bear Stearns, and now swirls around Lehman, involves shorting stock and buying puts that increase in value when the stock price declines. The trading cycle is fueled by spreading rumors through the international capital markets about an imminent negative announcement.

Thus far, Lehman has not recorded massive write-downs in the value of illiquid structured products. Lehman even recently reported good earnings results last week. On the earnings call, the chief financial officer lifted the corporate kimono to give investors a very candid view of the firm’s financials and a liquid capital position.

‘We are suspicious that the rumors are being promulgated by short sellers of our stock that have an economic self interest,’ a Lehman spokeswoman said.”

Oh, and I should add another excerpt, “No matter your trade, it is important to use the money saved by establishing an options position in Lehman versus straight stock to buy good Armagnac or bourbon. Buy enough booze to last at least until the options expire.”

Click here for full article.

These excerpts are from Barron’s Getting into the Swing

Whiplashed? That’s a Bullish Sign Now Is the Time to Buy, Not Sell

By RICHARD W. ARMS

“UP 400! DOWN 300! UP 260! TO many stock-market observers, especially those accustomed to the minimal price volatility of recent years, such dizzying swings in the Dow Jones Industrial Average might suggest stocks have lost their moorings and are headed sharply lower. History says otherwise, however, as huge volatility is associated with market bottoms, not tops. When volatility spikes to the levels seen recently — levels that have prompted even the nightly news anchors to wag their heads in disbelief — it is usually time to buy, not sell.

The peaks and troughs in all my charts tell an interesting story: Huge volatility isn’t unique to today’s market, and often occurs just ahead of a substantial rally…

Why is greater volatility a sign of brighter days? When stocks rise or have risen, investors usually get complacent. But when prices are falling, each down day amplifies fears, leading to violent price swings. Maximum panic occurs at the bottom.

Today’s high volatility suggests we’re in a bear market. Something important happened at the end of July to bring about the change. Yet a good rally wouldn’t mean stocks are entering a new bull market. We’d need to see declining volatility, and the return of complacency, to say the down move that began last summer is over.

Astute traders should take advantage of extremes by going against the crowd.”

Very interesting article, with obvious stock idea implications (but what’s with wfr??).

All Energy Roads Lead to the Sun

By Andrew C. Revkin

“It’s the sun, stupid,” is probably how James Carville would summarize the message of Daniel G. Nocera, a chemist and professor of energy at the Massachusetts Institute of Technology, when he addressed a meeting on environmental issues that began in Aspen Wednesday night.

The event is the first Aspen Environmental Forum, a conclave of scientists, policy experts, industry executives, environmental campaigners and communicators (I probably left out a category or two) organized by the Aspen Institute and National Geographic Magazine.

A prime focus of Dr. Nocera’s lab is unraveling photosynthesis to find ways to turn sunlight efficiently into chemical fuels (hydrogen, for example).

“All scientists ultimately believe solar has to be the answer,” he said. On Thursday, he laid out his “big idea” as a formula: “If you take sunlight plus water, that equals oil plus coal plus methane.”

The night before, he described what he said was an achievable energy future — if the world engages seriously in pursuing scientific, technological and policy advances that are needed to make sunlight into usable energy cheaply.

“With the right investments in science and the right policy you’ll have a house with shingles generating your electricity during the day when the sun’s out,” he said…

Finding other options is a huge challenge, he added. To illustrate, he provided one hypothetical (and impossible) menu for getting those 18 additional terawatts without emissions from coal and oil:

- Cut down every plant on Earth and make it into a fuel. You get 7 terawatts, but you need 30. And you don’t eat.
- Build nuclear plants. Around 8 terawatts could be gotten from nuclear power if you built a new billion-watt plant every 1.6 days until 2050.
- Take all the wind energy available close to Earth’s surface and you get 2 terawatts.
- You get 1 more terawatt if you dam every other river on the planet and reach 30.

As he summed up, “So no more eating, nuclear power plants all over, dead birds everywhere, and I dam every other river and I just eke out what you’ll need in 40 years.”

Read more …

Discussion of commodity price inflation, courtesy of Mish Shedlock.  Seems we’re learning the hard way “it’s quite a leap of arrogance to believe ‘investment in the red metal can’t lose’. With enough leverage, anything can lose, even in mostly favorable conditions.”

Eye on Commodity Prices

There was an interesting “buzz” on Minyanville on Thursday about commodity prices. Here goes from Minyan Peter:

Three things that caught my eye this morning:

• The WSJ reporting that Valero (VLO) is cutting back refining output because of a surplus of supply.
• Oil trading flat/down despite the announcement of a terrorist bombing of a major Iraqi pipeline.
• The CME announced an increase in commodity trading margin requirements.

While discrete events, all again raise the question of peaking consumer
commodity prices. Two things to keep in mind:

First, commodity price inflation has been cited repeatedly by the Fed as a concern. And given the view of many that the most recent price rises are a function of rampant speculation (versus fundamental demand) I would not underestimate

a) the pressure placed on the CME to increase margin requirements by banking regulators to curtail speculation

b) how stability in commodity prices (let alone price declines) opens up the Fed’s ability to drop short term rates further without pummeling the dollar.

Second, while everyone will likely cheer commodity price declines as the savior of the US consumer, asset deflation, whether in housing, commodities or anything else is like Kryptonite to the banking industry. And don’t forget, too, how much lending (particularly M&A related) has been done in the past five years in support of commodity related companies - particularly in Asia.

At least to me, commodity price deflation eliminates any notion of decoupling.

Death Spiral Becomes Born-Again Experience

Bloomberg is writing about a Born-Again Experience at Red Kite.

Rising prices for industrial metals and other commodities have pulled thousands of new investors into what were once illiquid markets. Money invested in commodity hedge funds surged 83 percent to about $55 billion in 2007 from $14 billion in 2005, according to estimates by Chicago-based Cole Partners Asset Management. Mutual funds tracking commodity indexes held $125 billion at the end of 2007, compared with $25 billion in 2003, according to Barclays Capital.

“The world is going through the biggest industrial revolution it has ever seen, and it’s affecting the largest part of the human population ever,” they [Michael Farmer, co-founder of hedge fund Red Kite Metals and his partner, David Lilley] wrote in an e-mail. “This is bringing a combination of millions of new consumers and cheap manufacturing capacity. The implications for raw materials are dramatic, and the world has to learn to value them more highly.”

Not everyone agrees that commodity prices will keep rising, especially at a time when economists are predicting a U.S. recession and global slowdown.

“I think where we’re really at in the commodity business - - and I’ve been at this since the 1970s — is we’re overvalued in a number of areas,” says Don Roose, president of West Des Moines, Iowa-based brokerage U.S. Commodities Inc. “We’re nearing a commodity bubble that is very similar to the dot-com bubble.”

Donald Selkin, director of equity research at Joseph Stevens & Co. in New York, says the commodities boom has little to do with supply and demand.

“Massively Misguided”

“The near-record prices that we are seeing come from speculators — it’s massively misguided bullishness,” he says. “All economic data we have seen — durable goods data, economic growth — are quite negative. It will backfire one day, though I don’t expect a market collapse in copper.”

Though it also trades aluminum, nickel and tin, Red Kite Metal’s main business is copper. It buys the metal from producers in North and South America and sells it to companies that turn the metal into wires and pipes for home and office builders and carmakers. The fund trades copper futures on the LME and buys the physical metal, holding it in warehouses around the world until Farmer and Lilley are ready to sell.

Red Kite moves markets via the huge trades it executes. According to a prospectus sent to potential investors in 2006, Red Kite Metals at that time was borrowing an average of six times its investment pool, which an investor estimated at about $1 billion.

At the March 20 price, that would buy about 750,000 metric tons of copper, or almost four times the combined total metal stockpiles currently held at warehouses registered with the Comex division of the New York Mercantile Exchange, the Shanghai Futures Exchange and the LME.

“If you buy a million tons of copper, that’s guaranteed to get the market up,” says David Threlkeld, president of metals trading firm Resolved Inc. in Scottsdale, Arizona. Threlkeld was the man who blew the whistle on Tokyo-based Sumitomo Corp.’s illegal effort to corner the copper market in the 1990s.

“RK holds physical stocks of metal as part of its investment strategy,” Farmer and Lilley said in a February e-mail. “As a matter of policy, we don’t comment on specific positions.”

The kings of copper continue to believe that as long as China and India keep building, an investment in the red metal can’t lose.

Commodity Speculation

When one points to commodity inventories being at record lows, those inventories do not take into account all the speculative inventories. Red Kite admits being leveraged 6 times. And Red Kite is just one such company. How many more hedge funds are stockpiling metals and/or leveraging futures? In what amounts?

Regardless of what China and India are doing, in light of a slowing economy combined with pressure on the CME to do something about speculation, it’s quite a leap of arrogance to believe “investment in the red metal can’t lose”. With enough leverage, anything can lose, even in mostly favorable conditions.

Mike “Mish” Shedlock

This article’s written by Ryan Krueger of Minyanville, contemplating fertilizer, I think.

I want to share my opinion in answer to a few questions I’ve received about the increased margin requirements imposed by the Chicago Mercantile Exchange (CME) for crops of agriculture futures.

This is one of a few tremendous clues in March alone to solve the mystery of whether or not our long positions in a worldwide food fight are in jeopardy. You don’t get a much better test than removing certain speculators from bidding (increased margin requirements) combined with relentless efforts to control prices (crippling export taxes for farming countries).

There is true confusion in many markets right now. According to anybody I heard explain it, the announcement should have caused a violent sell-off of agricultural futures. And the Dow Jones-AIG Commodity Index is actually up on the week as I type this.

Make no mistake, the reduction in credit lines will affect all markets - levered longs in agricultural included. I’ve said since January I believe when this period ultimately gets written about, the stories of over-margined “smart money” will trump that of any group of over-mortgaged homeowners.

Looking Through a Different Lens

For some much needed perspective, two pictures can speak loudly on the topic of just how high we went, and now how far we’ve fallen. Historically, in a 40+year inflation adjusted chart of Soybeans (to name one of many examples that look just like this) the bubble gets harder to find.

Click to enlarge image

As for the much needed and severe correction in the price of most commodities this month, below is the “historic reversal” in that Bean. In this case all the way back to levels unseen since - January 31, 2008.

Click to enlarge image

Commodity prices have additional pressure from a growing roster of farming countries. Argentina, for example, imposed major export taxes in an effort to keep supplies at home to combat soaring food costs. Naturally, a crop growing even faster — capitalists — rioted because they want to sell at the highest price available. We’ll stand by our ridiculous — at the time — prediction of four years ago that now seems unfortunately safe: we’ll see more domestic fights over food than oil.

In the U.S., food costs rising a few percentage points in a year is a big deal. In some countries, spikes are far higher and are a life or death deal. Fertilizing those crops is costing a few percentage points more every couple of weeks. We’re seeing new contracts being signed that add 50-60% — or more — to prices from just one year ago. I remain long this “food for the food.”

CF Industries (CF), Mosaic (MOS), Agrium (AGU), Potash (POT), and Terra Industries (TRA) are the candidates to consider. I’ve written about these ever since Minyanville added this funny looking farmer to its roster. For those able to trade in foreign markets, it becomes even more interesting when you can locate a fertilizer plant right next to substantially cheaper natural gas - which is the primary input cost to manufacture this stuff.

If commodities are now a busted bubble then it will be breaking 250 years of history. If this bull dies now, it would be less than half way toward average CRB price moves and one-third the duration of the prior six major bull markets. That data excludes the fact that in none of those periods did I find a few billion new capitalists to feed.

Yes, some agricultural commodities and stocks have every reason in the world to sell off - and they did. But the action afterwards has thus far been even more striking. I’ve been in the minority in believing that at least in the agricultural space, this is not a rally based on dollar weakness or speculation. Although those factors have certainly played a role, the view through most of my lenses indicate that strength is based on demand and one other factor hardly ever discussed next to explanations of the rally - supply.

Perhaps still a misunderstood piece of this puzzle is acreage, so I thought I’d share some terribly simple perspective. The swelling demand for beans and wheat, just to name two, is matched up against a supply from U.S. farms that was planted on about 10 million fewer acres than just ten years ago. Now that’s some food for thought.

Here’s a report by Michael Zhuang president of MZ Capital.

Investor sentiment and stock market return

Investor sentiment is at its lowest since 1990 and second lowest since the American Association of Individual Investors (AAII) sentiment indicator began in 1987. On 2/7/08, the 8-week moving average bull/bear spread reached the low of -25% and has since hovered below -20%. What does it mean for investors that the bull/bear spread stands at -25%? And what is the bull/bear spread?

Are you bullish, bearish, or neutral?

That’s the question asked by the AAII who has been conducting weekly market-outlook surveys of its members since 1987.

The bull/bear spread is the bullish percentage of the answers minus the bearish percentage of the answers. For instance, if 30% are bullish, but 50% are bearish, then the bull/bear spread would be 30%-50%=-20%. Since investor sentiment is very votalile, the 8-week moving averaging is used to smooth out the kinks. The AAII has 20 years of data with which we can study the relationship between investor sentiment and stock market return.

Current low investor sentiment is significant because there were only six instances (excluding this one) when it was below -15%. And only two instances when it was below -20%.

Click here for full article.

Chasing Liberty

By Todd Harrision, courtesy of Minyanville.

We’ve now entered the most dangerous juncture in the age of financial engineering, that of desperation. Imbalances continue to cumulatively compress, gaining intensity in terms of magnitude and consequence. It is truly remarkable what we’re witnessing with each passing day.

I respect the potential for further strength, particularly given the ease in which the bears have operated and the fact that our first technical test won’t arrive until S&P 1405 and DJIA 12,800. And I’m quite conscious that, through the lens of the dollar, most Americans have yet to arrive at the point of recognition.

With that in mind and stepping away from the flickering ticks, I will again offer that the Depression was an era rather than an event. Just as many folks recently realized their portfolios were in pain, a similarly daunting dynamic may manifest in coming years. (MV: )

Students of history will tell you that the stock market crash didn’t cause the Great Depression—the Great Depression caused the stock market to crash. It was all about social mood and risk appetites, two issues that continue to percolate in the current environment.

By the time Hollywood finished portraying that period, we were left with bread lines and hungry children. While those unfortunate elements surely littered the landscape, it’s important to remember 75% of the country continued to work and the stock market enjoyed several spirited sprints.

Students went to colleges. Businesses were built. Families were formed. Fortunes were made as opportunities emerged from obstacles.

I believe we’re in for a similar stretch, one that will last much longer than most people think. It’s incumbent upon us to maintain perspective and keep our emotions in check as we find our way.

An eternal optimist tends to look for lights at the end of the tunnel rather than the train to which they’re affixed. Understanding they could arrive in tandem will help us properly prepare for the fate that awaits.

Of Smoke and Mirrors

While the financials have cycled through their first phase of pain, the biggest fly in the recovery try remains the other side of zero-percent financing.

Despite the central bank spigot, one that is expected to open globally should the need arise, banks remain hungry for capital and will continue to hoard cash and tighten lending standards. The consumer, 70% of the GDP and dependent on fresh debt to finance existing obligations, faces leaner times still with upwards of $400 billion in mortgages due to reset this year.

The battle lines have been drawn, with hyperinflation on one side and watershed deflation on the other. We’ve been monitoring this situation carefully at Minyanville and need to respect both sides of that wary war.

How long we’ll rally—or how far the dollar will be allowed to fall—remains an open question that I’m not smart enough to answer. I will simply offer that the mechanics of the swing are as important as the results of the at-bat.

Now, more than ever, discipline and lucid decisions will serve us in good stead. Emotions are running rampant all over the world but we would be wise to leave them for weddings and funerals.

One Foot in Front of the Other

Someone once told me that trading, in its simplest form, is the process of capturing the disconnect between perception and reality. As more and more investors subscribe to the notion we’ve effectively turned the corner, the higher the likelihood becomes they’ll eventually be disappointed.

There are few opportunities in our lives to literally watch history tick before our eyes. These are the times our grandchildren will study, like we study the Great Depression, puzzling over the bizarre circumstances that came together to form this perfect storm.

What is most misunderstood is that this not only a financial crossroads, but a societal one as well. The repercussions of government policy and our individual actions will echo loudly throughout future generations.

We have a choice to make. We can face our mistakes with bravery, accepting consequences as they come, confident we can meet the challenge while rebuilding a more sustainable structure; or we can continue to let fear and greed drag us along the road to ruin.

The former, while more challenging, is the path of perseverance. It is the only noble road, one that accepts responsibility for our actions and paves the way to better days.

They say admitting you have a problem is the first step towards solving it. It’s about time that we, the people, practice what we preach.

The Future Of Oracle

Courtesy of Minyanville, by Sean Udall.

The headline after Oracle’s (ORCL) earnings report reads: “Oracle Shares Plunge on 3Q Sales Miss, Disappointing Forecast, Despite 30 Percent Profit Rise”

I’m not a huge bull on ORCL, but I think investors may need a dose of perspective here.

Here are my bullish and bearish take-aways:

Bullish

1. Note the headline, 30% Profit Rise. While forecasted profits didn’t crush analyst expectations, they’re still very good. In the current environment, many companies would kill for the quarter ORCL just had. Where ORCL really shines, however, is on a relative basis compared to mature companies in other sectors. We’re seeing massive earnings declines (and in guidance) in housing, retail, finance, auto, but ORCL is still expanding.

2. ORCL’s valuation is becoming more compelling on this pullback. ORCL isn’t dirt cheap but is far from expensive. At today’s level the Price/Earnings to Growth, or PEG, is right around one. Not many American companies this size are guiding for 14-18% revenue growth.

3. ORCL has for some time pursued a roll-up strategy. After the tech bubble, the firm realized it could buy competitors selling at huge discounts. This strategy allowed them to grow quickly, but in a cost effective manner. I think ORCL has executed this strategy quite well. This type of acquisition will typically create a higher growth trajectory on the bottom line than the top line. This is precisely what has occurred in ORCL’s case.

4. See above, expect more of the same with the eventual merger with BEA Systems (BEAS).

5. ORCL is well diversified and has built its business across geography and product categories.

6. ORCL has significant financial clout, which will allow the firm to continue its buyout strategy. It should benefit from the macro-driven weakness and low stock prices.

Bearish

1. ORCL isn’t known for its organic growth. However, this is a known fact and companies that pursue a roll-up strategy tend to forgo growing revenues from within to focus on growth of cash flow and earnings.

2. The macro environment will affect ORCL more than niche software providers. The deeper the slowdown the more negative for ORCL, as well as other companies heavily dependent on the U.S. economy.

3. At some point ORCL may face similar headwinds as has Microsoft (MSFT). It could run into Department of Justice issues and be forced to pursue mergers in areas where it has less expertise.

4. Competition is stiff in ORCL’s space and many other players are also best of breed names. Missteps are magnified. IBM’s (IBM) acquisition of Cognos comes to mind and MSFT is not sitting idly by in their data base initiatives either. There are a host of smaller, but strong players that could always come up with “the next big thing.”

Many investors will wrestle with what the next quarter is going to look like. I tend to focus a little farther out.

Oracle’s chief financial officer, Safra Catz, said some customers “got a little more cautious” about their spending during the third quarter, on which he partly blamed the company’s cautious fourth-quarter guidance. “Deals are getting done, although they took a little longer than anticipated later in the quarter,” he said.

These comments seem to point to more of a deferral issue than lost business. Time will tell as we’ve seen this type of behavior before. The company expects net income of 43 cents or 44 cents per share in the fourth quarter, excluding one-time charges, and expects sales to increase 15 percent to 19 percent. These numbers don’t point to an imminent cliff jump for enterprise software purchases.

There could be “quite a bit of upside, but we want to be cautious,” Catz said.

This short statement sums it up well. Near term caution, while focusing on longer term growth. This quarter from ORCL seems a lot like Cisco’s (CSCO) last quarter. We’ve collectively hit the air pocket. Lots of business leaders got “spooked” - to put it mildly. We’re now coming to grips with what sectors will experience longer term declines in business and which ones are going to rebound and experience — or sustain — higher levels of growth.
Bottom Line:

I’m not a buyer on today’s drop but another point or two of weakness and shares could offer compelling risk-reward. Call it three or maybe even four-to-one upside versus downside from the mid-$18’s.

Positive Comments on Boeing, from Ockham Research, in

Boeing Cleared for Take-Off

The Boeing Company (BA) has been making headlines for the wrong reasons lately. First, came word of unspecified delays in rollout of the new-generation 787 “Dreamliner”. BA has notified two early 787 customers–British Airways and Virgin Atlantic–that the preliminary delivery date of early 2009 looks unlikely, as the manufacturer must redesign the area where the wing meets the fuselage. Furthermore, Boeing was stunned to lose its bid to replace the U.S. Air Force’s (USAF) in-flight tanker fleet to its European rival.

The $35 billion contract for the USAF tankers–which many considered an almost certainty for Boeing to win–was also highly politicized. Boeing management raised national security questions about the USAF awarding large contracts to a foreign company, particularly during a domestic economic slowdown. “Our team has taken a very close look at the tanker decision and found serious flaws in the process that we believe warrant appeal,” said Jim McNerney, Boeing’s Chairman, CEO and President. “This (appeal) is an extraordinary step rarely taken by our company, and one we take very seriously.”

Clearly the $35 billion dollar project would have been a nice addition to Boeing’s sales, but even without that deal the fundamentals underlying BA look fairly attractive. Consensus analyst estimates still predict 12.5% sales growth in 2009. Estimates also show a rise in EPS in the neighborhood of 20% to $7.14 per share from $5.97, which continues the strong earnings growth that Boeing has enjoyed since 2003. Boeing has increased its dividend each of the last five years as well, which is a good sign of management’s confidence in the company’s financial strength. Perhaps the most telling aspect of the recent success of the company’s management is its ability to consistently grow Return on Equity (ROE). ROE was a bit below average 5 years ago at just 9% but has steadily grown and to 44% last year.

So, combine a few negative news stories about BA with a generally weak market so far in 2008 and it is easy to understand how the stock is off more than 12%. Were it not for the underlying strength of Boeing, the stock’s swoon could have been much worse. There are stocks that are more undervalued than BA in the market, but it is a purchase candidate for investors with a 3-5 year time frame, when Ockham’s valuation methodology has a rational price target for Boeing in the range of $90-$93 a share.

This brief report is from Bespoke Investment Group:

S&P 500 Short Interest Rises Again

Excerpt: “Recently released short interest figures from both the NYSE and Nasdaq show that short interest as a percentage of float is currently at record levels. On the NYSE, the mid-month short interest report hit a level of 4.15%, which is a record high. On the S&P 500, short interest is even higher. As of mid-March, 5.4% of the float of S&P 500 listed companies were sold short. This represents an increase of 53% over the last year!”

A longer version of Bespoke’s article which highlights individual stocks in the Russell 1,000 with highest and lowest short interests can be found at Seeking Alpha. CROX is reported to have the second highest short interest (after NTRI), of 44%.

Interesting perspective, to read in more detail after market closes.

Remember the Last Time Globalization Collapsed?

Courtesy of Eben Esterhuizen, contributor to The Panelist.

“Remember Friday, March, 14 2008: it was the day the dream of global free-market capitalism died,” says the Financial Times’ Martin Wolf. “For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the U.S., chief protagonist of free-market capitalism, declared this era over.”

Mr. Wolf argues that market deregulation has reached its limits, echoing Joseph Ackermann, chief executive of Deutsche Bank, who said that he “no longer believes in the market’s self-healing power”. Mr Wolf adds: “If the U.S. itself has passed the high water mark of financial deregulation, this will have wide global implications. Until recently, it was possible to tell the Chinese, the Indians or those who suffered significant financial crises in the past two decades that there existed a financial system both free and robust. That is the case no longer. It will be hard, indeed, to persuade such countries that the market failures revealed in the U.S. and other high-income countries are not a dire warning. If the U.S., with its vast experience and resources, was unable to avoid these traps, why, they will ask, should we expect to do better?”

If Mr. Wolf is correct, emerging economies will question the value of free-market capitalism. Market liberalization and integration of emerging economies will inevitably take a back seat, and globalization may sink. This sounds like a ridiculous argument, but history shows us that this scenario cannot be ignored.

“The last age of globalization resembled the current one in numerous ways,” says Niall Ferguson, an award winning Scottish historian, writing in the March/April 2005 issue of Foreign Affairs magazine. “It was characterized by relatively free trade, limited restrictions on migration, and hardly any regulation of capital flows. Inflation was low. A wave of technological innovation was revolutionizing the communications and energy sectors; the world first discovered the joys of the telephone, the radio, the internal combustion engine, and paved roads. The U.S. economy was the biggest in the world, and the development of its massive internal market had become the principal source of business innovation. China was opening up, raising all kinds of expectations in the West, and Russia was growing rapidly.”

“World War I wrecked all of this,” Ferguson argues. “Global markets were disrupted and disconnected, first by economic warfare, then by postwar protectionism. Prices went haywire: a number of major economies (Germany’s among them) suffered from both hyperinflation and steep deflation in the space of a decade. The technological advances of the 1900s petered out: innovation hit a plateau, and stagnating consumption discouraged the development of even existing technologies such as the automobile. After faltering during the war, overheating in the 1920s, and languishing throughout the 1930s in the doldrums of depression, the U.S. economy ceased to be the most dynamic in the world. China succumbed to civil war and foreign invasion, defaulting on its debts and disappointing optimists in the West. Russia suffered revolution, civil war, tyranny, and foreign invasion.”

World War I was the catalyst for globalization’s collapse at the start of the 20th century. Will the fallout from the current market crisis, i.e. the end of market deregulation, lead to the collapse of the current age of globalization?

Yes, that sounds absurd and sensationalistic. I don’t really buy the argument, but there are economic parallels that can’t be dismissed.

“With the benefit of hindsight, however, five factors can be seen to have precipitated the global explosion of 1914-18,” explains Ferguson. “The first cause was imperial overstretch. By 1914, the British Empire was showing signs of being a “weary Titan,” in the words of the poet Matthew Arnold. It lacked the will to build up an army capable of deterring Germany from staging a rival bid for European hegemony (if not world power). As the world’s policeman, distracted by old and new commitments in Asia and Africa, the United Kingdom’s beat had simply become too big.”

“Great-power rivalry was another principal cause of the catastrophe. The problem was not so much Anglo-German rivalry at sea as it was Russo-German rivalry on land. Fear of a Russian arms buildup convinced the German general staff to fight in 1914 rather than risk waiting any longer.”

“The third fatal factor was an unstable alliance system. Alliances existed in abundance, but they were shaky.”

“The presence of a rogue regime sponsoring terror was a fourth source of instability. The chain of events leading to war, as every schoolchild used to know, began with the assassination of the Austrian Archduke Franz Ferdinand in Sarajevo by a Bosnian Serb, Gavrilo Princip. There were shady links between the assassin’s organization and the Serbian government, which had itself come to power not long before in a bloody palace coup.”

And finally: “The rise of a revolutionary terrorist organization hostile to capitalism turned an international crisis into a backlash against the global free market. The Bolsheviks, who emerged from the 1903 split in the Russian Social Democratic Party, had already established their credentials as a fanatical organization committed to using violence to bring about world revolution. By straining the tsarist system to the breaking point, the war gave Lenin and his confederates their opportunity.”

As the economic parallels with 1914 suggest, we can’t dismiss the possibility that we are about to enter an age of de-globalization. And while we are on the topic of historical parallels, let’s not forget a quote from Vladimir Lenin, founder of the Russian Communist Party, who said “the best way to destroy the capitalist system is to debauch the currency.”

Disclosure: None

Note about The Panelist:  “We, at The Panelist, understand that social consciousness and the bottom line are not mutually exclusive ideals, but rather a necessary union, the merger of which makes each aspiration more feasible. People managing their investments tend to be polarized into two camps: those that care about the world and those that care about maximizing returns for shareholders, retirement, college tuition or an endowment. But we know that the best way to profit is to do so responsibly and that the most effective way to make a difference is gainfully.”

Google (NASDAQ:GOOG): Buy Google here (for a bounce)

Banc of America is about the only firm defending Google (NASDAQ:GOOG) here following yesterday’s comScore data. Firm notes comScore’s paid click report indicates GOOG’s US paid clicks (core google.com site) grew 3% Y/Y, from roughly flat and 25% Y/Y growth in Jan ‘08 and Q4, respectively. While GOOG’s Feb paid click data does little to calm investor fears of a slowdown in GOOG’s core business, they believe most of the deceleration is due to the continuing quality initiatives by the company itself, which should drive significant upside longer-term. Moreover, they caution investors against reading too much into comScore numbers as they have historically been a bit noisy (but directional nonetheless).

Paid clicks are a function of the number of searches, coverage (% of searches with an ad) and click-through rates (paid clicks per search with an ad). In Feb, GOOG witnessed healthy query growth of 30% Y/Y (vs. 39% in Jan).

While GOOG’s ad coverage initiatives are painful in the near term, BofA believes they are necessary to drive sustained revenue growth over the long term.

Reits Buy and $700 tgt.

Notablecalls: BofA’s Brian Pitz is right - GOOG’s a buy. Guys, comScore data didn’t bring any surprises. We had several firms (Piper, RBC - both influential analysts on GOOG) come out ahead of yday’d data saying it’s likely going to be bad. Yet, we have the stock down almost 20pts pre mkt bc Mr. Amazon-to-$800 Blodget said the stock should be down.

The fact is the stock’s already in bottoming process, down 40% from the highs. comScore data is partly worse than expected bc of GOOG’s own doing.

Buy GOOG here. Buy it for the bounce.

Yep, it sure does. Here’s an excerpt from Shlomi Cohen’s SanDisk is down but not out.

SanDisk is down but not out

“One of the most frustrating stocks this year is SanDisk Corporation (SNDK), which last week slumped 7%, and was down 38% since the beginning of 2008, and by 56% since the acquisition of m-systems. One person who is taking massive losses, albeit on paper for the time being, is m-systems founder Dov Moran, who came away with $100 million worth of SanDisk shares after he sold m-systems to it in 2006 at a value of $1.6 billion. These shares are now worth a mere $44 million.

Moran’s SanDisk shares are locked up until November this year, and I came away from a recent meeting with him with the impression that this loss has not put a damper on his elation with the launch of Modu, the innovative handset he has developed, and certainly not the massive funding he is currently in the process of raising for the company producing it. Moran sees a potential billion dollar market for Modu and he seemed pretty calm to me about SanDisk, possibly because he knows that its flash technologies, both the current and the newer ones, some of which remain under wraps, will be an integral part of the potentially gargantuan market for mobile devices and handsets in the coming years.

SanDisk digs itself into a new hole almost daily, as the NAND flash chip market continues to suffer from oversupply and falling prices. After Intel Corporation (INTC) warned two weeks back of a 2% loss in gross margins on its entire first quarter sales because of the NAND sector, Toshiba (TOSBF.PK), followed suit last week with a warning of its own. Toshiba, as is known, is SanDisk’s partner in its fabs in Japan. These two warnings, coupled with another warning last week from handset manufacturer Sony Ericsson (SNE), a major SanDisk customer, broke JP Morgan analyst Paul Coster who downgraded SanDisk to “Neutral” from “Overweight” causing the weekly drop in the share…”

Here’s a highly interesting article by Brett Steenbarger on our Brains and risk control. I’ve selected a few excerpts, but it’s worth reading the whole thing.

Control Your Brain by Controlling Your Risk

“I received an eloquent email from an excellent trader who marveled that he trades very well when he trades moderate (but still significant) size, but then trades quite poorly when he trades his maximum size. His level of risk-taking, he finds, affects his emotional experience in trading.”

“Research suggests that different areas of the brain process risk and reward. Moreover, brain activation in the face of reward tends to be more rapid than in the face of risk. Other research shows that individual differences in our patterns of brain activity are closely correlated to our risk tolerance and risk aversion. This research finds that “reward centers” in the brain become more or less active depending upon how much money can be won or lost. Significantly, these reward centers are “some of the same areas of the brain that are activated when people take cocaine, eat chocolate or look at a beautiful face.”

“It appears that the thrill of risk and prospect of reward “hijack” the reward centers of the brain, particularly the dopamine system. This research emphasizes that gambling affects the portions of the brain associated with “planning and forming strategies”. Is it any wonder that traders report “losing discipline” as a common psychological concern?”

“There is a very important lesson to be learned from the trader who wrote to me: By controlling our exposure to risk and reward, we control the degree to which our brains get hijacked. Trading 100% of our risk turns planned trading into gambling; cutting risk back moderates the reactivity of our dopamine systems.”

“There is also another sobering conclusion: failing to moderate our risk–day after day, week after week–can make permanent changes in the brain.”

“You can’t succeed if you don’t have control, and you don’t have control if the reward circuitry of your brain is hijacked by the risks and rewards you’re pursuing.”

This Day in Agriculture

By Trader Mark.

A few items today (1) raised guidance from Monsanto (MON) on the heels of yesterday’s analyst upgrade (2) impact of central plains flooding on the corn crop (3) more stories of world shortages of food. Now if the hedge funds are done with their speculative locust behavior I’d be happy to raise my stakes in agriculture much higher…. again, the fundamentals are quite clearly those of a massive secular bull. Why fertilizer stocks sell off when wheat drops is beyond me, but that’s the lame logic we have in these “high level analysis” of Wall Street. Instead they run into “early cycle” retailers because that’s what the “playbook” says to do. Even in a US consumer recession. That’s the herd at it’s best.

Once again, one benefit of an investor of agriculture is problematic weather - bad weather = higher prices = better for investor. Not so good for worldwide consumer of said food. But since I am a heartless American socialist… err I mean free market capitalist because that’s what we are in the USA, I can only focus on making money and have to ignore the plight of hundreds of millions/billions…

Monsanto substantial increase in guidance

• Agricultural products company Monsanto Co. on Tuesday raised its 2008 earnings per share guidance and predicted its second-quarter profit will rise above Wall Street analysts.
• The company said it now expects second-quarter earnings per share of $1.98, including a gain of 23 cents per share for a settlement of claims related to a subsidiary’s emergence from bankruptcy. Excluding that gain, the company expects earnings of $1.75 per share.
• Analysts polled by Thomson Financial expect earnings per share of $1.34.
• The company said its seeds and traits business will contribute more than expected to profit due to brand share growth and increased volume in the soybean business.
• Monsanto added its Roundup and other herbicide businesses have also performed well in the quarter with demand exceeding supply.
• For the year, Monsanto now expects earnings per share between $3.38 and $3.48, including the gain of 23 cents per share. Excluding that gain, the company expects earnings between $3.15 and $3.25.
• The company previously expected earnings in the range of $2.70 to $2.80 per share. Analysts anticipate earnings of $2.87 per share.

I have previously held off on holding Monsanto in the fund due to valuation but with such large increases in future guidance it suddenly gets much cheaper. Will have to rethink. The fear with Monsanto is its dependence on corn but we see they have some benefit from soybeans as well… also, as for corn we might be headed for a shortage this year - my thesis (I’m not a farmer but thinking like an economist) is the huge year in wheat will drive a lot of acreage to shift from corn to wheat this spring leading to…. shortages of corn NEXT year… despite the ethanol boondoggle…. and the weather is not helping.

Wheat, Corn, Soybeans Advance on Supply Risk (mind you this supply risk did not suddently disappear last week and then reappear - it simply speculation moving these commodities and stocks up/down 20% for no good fundamental reason - gold I can understand - but not these agricultural products but again to Wall Street corn = oil = wheat = coffee = gold = copper = soybeans = iron ore = all just a fun plaything for hedge funds levered 30:1)

• Wheat, corn and soybeans rose for a second day on speculation demand for grains in food and fuel will outstrip supply as poor weather cuts U.S. crop yields. Corn and soybeans may keep rising because output is lagging behind demand, said Morgan Stanley, the second-largest U.S. securities firm.
• “U.S. production in the near term is inadequate to meet growing ethanol and export demand,” Morgan Stanley analysts led by New York-based Hussein Allidina, said in a report e-mailed today. The fundamentals are “very constructive,” he said.
• The price decline last week resulted from a strengthening dollar and reduced inflation expectations, “rather than a change in the underlying supply and demand fundamentals,” said Morgan Stanley’s Allidina.
• Rising prices of food commodities have fueled inflation from the U.S. to China and India. China has increased imports of raw materials and boosted stockpiles to cool prices. South Korea and India announced the removal or reduction of tariffs on some food commodities in the past week to keep inflation in check.
• Wheat jumped the most in more than a week yesterday on speculation dry weather in the western U.S. Great Plains will reduce yields. Soybeans climbed the most in almost nine months, and corn rose, on speculation flooding and rain in U.S. growing areas may delay planting, eroding potential yields.

Will La Nina further penalize the US growing season? (already off to a shaky start, but these guys cannot forecast a week out so I take any long term assessments with many grains of salt)

• U.S. farmers in the Midwest and Plains risk drought this summer while those in much of the eastern half of the U.S. could face flooding similar to what has battered the nation this week, government forecasters said on Thursday.
• There is an “enhanced risk” of drought going into spring and even summer for the Corn Belt, largely because of a fading La Nina, said Doug Lecomte, a meteorologist for the National Oceanic and Atmospheric Administration’s Climate Prediction Center.
• But he added: “The first thing is to worry about getting rid of the wetness” that is “is unprecedented for this time of year.”
• Forecasters said a major concern this spring is the threat of flooding across much of the country as a result of record rainfall and melting snow packs, which are causing rivers and streams to overflow.

It’s easy to talk about this stuff academically from NYC or heck Michigan, but what is it like from a local perspective?

• As flooding continues to torment southern Missouri, weather watchers in Kansas City are not just worried about what is happening today. They are worried about what could happen tomorrow. Here.
• “The next couple of months,” said meteorologist Mark O’Malley of the National Weather Service in Pleasant Hill, “could really be problematic.” Why?
• Soils, even here, are saturated. Ponds are full. Streams are running strong, sometimes too strong. Add it all up, and even average rainfall totals for the next several months could spell disaster.
• “We’re on the edge of what could become a major problem,” said Gary Lezak, meteorologist at KSHB. “No doubt about it, there’s a very, very high likelihood of above-average precipitation. “We got wet in October, and it hasn’t stopped yet.”
• “With our heavy clay soils, if we get in there and work them when they’re wet, they just become clods,” he said. “They ball up. That destroys the structure of the soil, and it can present problems for the rest of the growing season. “Whether you’re doing 300 acres of corn or six tomato plants in your backyard, it’s the same thing. You destroy that structure, and the roots don’t go deep into the soil. If you don’t get a good root system, you don’t get a good plant.”

Or maybe here [in Arkansas]

• Flooding has some Arkansas farmers worried that they may have no wheat to harvest later this spring. Some are concerned about having enough time to plant their other crops, after the waters recede and the fields dry out.
• Stephen Wyatt, who farms near Rosie in Independence County, said all 800 acres of the soft red winter wheat he planted in the fall are underwater from the White River overflow. Some of the 6- to 8-inch tall plants are submerged in more than 10 feet of water, Wyatt said.
• “The million-dollar question is: How long can wheat survive underwater ?” The answer depends on several factors, he said. Cooler water and running water are probably less damaging, and the smaller the plants are, the more likely they are to survive, Kelley said. The longer the water is on the wheat, the more likely damage is, he said. Some plants may be able to live for as long as three to seven days.
• Arkansas farmers have planted an estimated 870, 000 acres of winter wheat, according to the U. S. Department of Agriculture. That would be 6 percent more than the 820, 000 acres planted in 2006.
• “I’ve heard that people haven’t seen it this bad in 80 years,” Vangilder said.
• Soybean agronomist Jeremy Ross said flooding and heavy rains are hampering farmers who want to get out in their fields and prepare them for planting. “If they’re behind on getting their corn planted, it’s going to push the soybeans back, too. It’s kind of a domino effect,” Ross said.

Last, in our weekly review of the coming global food crisis that no one pays attention to in the US. The social unrest will grow as foodstuffs continue to increase by the week/month/quarter. Trust me, this is China’s greatest fear…

• If you’re seeing your grocery bill go up, you’re not alone. From subsistence farmers eating rice in Ecuador to gourmets feasting on escargot in France, consumers worldwide face rising food prices in what analysts call a perfect storm of conditions. Freak weather is a factor. But so are dramatic changes in the global economy, including higher oil prices, lower food reserves and growing consumer demand in China and India.
• The world’s poorest nations still harbor the greatest hunger risk. Clashes over bread in Egypt killed at least two people last week, and similar food riots broke