Are Insiders Picking a 2011 Commodities Top?
By Justin Rohrlich, Minyanville,
A call came in this morning from Shawn Hackett, founder and CEO of Hackett Financial Advisors, a Boynton Beach, Florida money management firm with a specific focus on agricultural commodities.
“Why is Cargill selling Mosaic (MOS)?” Hackett asked. “They know more about ag than anyone else in the world — why would they be cashing out of the fertilizer business when everyone else is falling all over themselves to get in, with people talking about food shortages and riots going on?”
Cargill, which is the largest privately held company in the United States and competes directly alongside agribusiness behemoth Archer Daniels Midland (ADM), is unloading its $20 billion-plus stake in Mosaic — the world’s leading producer and marketer of concentrated phosphate and potash — to reportedly free up money for the family-owned business’ charitable trusts without raising cash through an IPO and going public.
But why would Cargill, which according to its website, has “75 businesses organized around five major segments: Agriculture Services, Food Ingredients and Applications, Origination and Processing, Risk Management and Financial, and Industrial,” choose Mosaic as the one asset to shed?
“I don’t know exactly what’s going on inside other peoples’ heads, but this is certainly an interesting ‘tell,'” Hackett says. “There are so many other things they could be selling, so are they making a call that we’re at the top of the fertilizer cycle? The market is so bullish. Cargill’s not. Why would they give up all these ‘billions and billions of dollars in future value?’ It pays to pay attention to the kinds of companies who are really profitable again and again.”
Others agree.
“Cargill is smart money,” Malcolm Polley, president of Stewart Capital Advisors LLC, told Bloomberg news. “If they are getting out of Mosaic, maybe it’s a good time to hedge your bets probably in the whole sector.”
Further, Mosaic CEO James Prokopanko and CFO Lawrence Stranghoener may sell what they described in a Tuesday regulatory filing as a “modest” number of MOS shares. What makes this noteworthy? Neither Prokopanko or Stranghoener have sold any of their Mosaic shares since the company was formed in 2004.
Delving deeper, Hackett points out that Goldman Sachs (GS) has pared down their risk exposure to commodities to levels not seen since 2004.
“Q4 2010, Goldman had the lowest risk exposure to the overall commodity market they’ve had since Q1 2004,” he says. “What are they seeing that no one else seems to be? When you have two entities like Cargill and Goldman taking risk off the table, it may be a pretty telling macro call that there may be some trouble ahead.”
Matt McCormick, a banking analyst at Bahl & Gaynor, gave Reuters a similar perspective.
“I think Goldman is consciously making smaller bets on commodities,” he said. “Any time you go back to a low of 2004, you are clearly making a substantial call.”
Equally substantial is the fact that Morgan Stanley (MS) and JPMorgan (JPM) have made similar moves that bear a closer look.
Morgan Stanley’s commodities “Value at Risk” in Q4 2010 was down roughly 20% for the quarter and JPMorgan’s VaR was flat — but, as Reuters reports, “down more than two-thirds from its 2008 peak.”
“These numbers came despite a 28.7% jump in commodity prices over the two last quarters combined, as measured by the Reuters-Jefferies CRB index,” the news service reported. “The last time the CRB rose as much for two consecutive quarters was when it climbed 29% in 2008 and 34.5% 1973.”
While these questions are nothing more than questions at the moment, the prudent investor may well be served by filing them away for further thought.
“It doesn’t mean that it’s all over for commodities tomorrow,” Hackett says. “However, we may find out three or six months from now that we really should have been listening to this.”
Categories: Commodities, Investment Wisdom