Santa Claus Rally?
Was that Santa darting across the sky this early morning? It sure appears global markets have begun to flirt with a better late than never "Santa Claus Rally." We've seen reasonably strong gains across almost the entire world. In fact, trading in the last 24 hours shows the first global embrace of risk and return to equities since the disappointing Fed rate cut announcement and continued conflicting statements by Federal Reserve Board governors. Previously, one region would rally while another spent the follow-up session digesting the latest toxic paper write-off. Odds are, we'll have some carry through for a few days. That should be a refreshing change. Hey, hedge fund managers need to tweak their performance records. It's bonus time.
Global growth in 2008 is an open question. We are in the camp that believes the US will experience a modest recession, and that in fact it probably has already started - certainly the case if one accurately accounts for inflation, unlike the US government. Nevertheless, there are industries that should perform well no matter the 2008 global economic backdrop. Agriculture ranks high on the list, and the closer one gets to the farm as either a producer, input provider or efficiency enhancer the better.
Portfolio Update: Farm Equipment, Fertilizer & Deep Sea Drilling
On the open, we will add the following positions:
- Agrium Inc. (AGU: NYSE): 100 shares, market price
- Hanfeng Evergreen Inc. (HF: Toronto): 300 shares, market price
- AGCO Corp. (AG: NYSE): 100 shares, market price
- Transocean Inc. (RIG: NYSE): 100 shares, market price
Agrium is a large diversified North American fertilizer company. Its shares reflect a lower relative valuation to industry peers, in part due to its diversified operations and the fact that the company has a lower profile as a Canadian-based company. The stock is attractive at the current quote. Going forward, we expect the shares to close the valuation gap with peers.
Hanfeng Evergreen is one of the largest producers and distributors of fertilizer in China. It has the opportunity to increase market share and sales will likely maintain a compound annual growth rate well in excess of 30% over the next five years. The shares trade at about 21 times 2008 earnings, reflecting a healthy discount for the highly competitive market it serves and favorable taxes. The stock is undervalued and less well known among US institutional investors. It would not be surprising to see the stock turn in at least 50% upside over the course of 2008.
AGCO Corp. is a leading US-based farm equipment manufacturer. Deer & Co. recently reported stellar earnings and we believe AGCO's next earnings report will leave analyst estimates in the dust. AGCO has yet to see the type of multiple expansion investors afford Deer. Simply put, the shares are far from pricing in a multi-year bull market in agriculture. The next earnings report should accelerate the stock's advance.
Transocean Inc. is the world leader in deep ocean drilling. In the years ahead, a greater percentage of global oil production will be sourced from deep sea fields. Transocean trades at about ten times 2008 earnings. To be perfectly blunt, this is an absurd valuation. Institutional investors are terrified the global deep sea drilling market will go soft in 2009 or 2010. Given global decline rates of existing super giant fields and limited ability to increase capacity by conventional means, the world simply has no choice but to make extensive efforts to develop more difficult to obtain oil resources. The phenomena commonly referred to as "Peak Oil" is not a theory. It's a scientific fact, with the only real debate focused on the timing and nature of peak. Deep sea drilling will continue to play a critical role in procuring global energy supply and we believe it's not likely drill ship capacity will become an issue until well after 2012.
We will provide further updates and fundamental analysis on agriculture and the energy sector in the days and weeks ahead.
Portfolio Accounting Note: Pediment Position Doubled
Our order to buy an additional 2000 shares of Pediment Exploration executed this week. All of the above positions will be formally entered into the portfolio table within the next blog posting.
