Curried Wealth Building
Finding an Edge

If you want help with your finances, give me a call at 703-791-3243.
April 4, 2009
Issue 40  -  Two Trades to Consider
 
 
This week I’d like to change it up a little and talk about something different. Instead of railing against the government excess and spending I thought it would be a good time to discuss two trades I am looking to make.

The first of these is in, of all things, food. There is growing evidence that we are going to have a food price shock sometime later this year. This idea comes from many different sources. First off, world food stockpiles are at decades long lows. This is a result of several things including the global population growth, non-optimum weather, and increased consumption per capita throughout the world.

These factors point to higher prices. Then why are the price of most foods way down from 2008 peaks? The prices were probably too far ahead of the supply demand issues and I believe there was some government intervention to try and stop the inflation train that was pulling away from the station. There were reports that the world governments, including the United States were buying up food stubs in increasing quantities. This even led to an ABC reporter suggesting that something was going to happen and the authorities were preparing. This may have been propaganda to spike food prices before they pulled the rug out.

The prices of most agriculture commodities are down tremendously. Corn down 50%, wheat down 80%, sugar down 80%, soy beans down 50%, and this is the case for all crops. Now these are off the lows so we aren’t trying to pick a bottom. I think we are just getting started and that by the end of the year we will back over the old highs. It just isn’t possible to keep the prices of these items down artificially because of the life consequences. People can live with out silver or oil, but not food. This is a theme that I think will play out over the next two years, if not longer.

Food is going to rise in price and I just don’t see any way around it. The rise will come over a short period of time as the futures price of commodities is a real time gauge. The other key reason I believe that foods, especially grains will rise is, believe it or not, the credit crisis. Due to the heightened tightness in the credit markets, farmers are finding it harder and harder to get loans for seed. This does not bode well for this Fall’s crop. To make matters worse, the depressed prices of the crops are discouraging farmers from planting. Corn is fetching about $3.00 a bushel, yet costs of production are closer to $5.00 a bushel. Would you plant?

So it’s hard to get loans for seed and farmers are looking at producing at a loss. I don’t think that will lead to a bumper crop. Food stockpiles at record lows will not allow the government to release food to help ease prices. In fact, the government may actually want higher prices for less than virtuous reasons.

So how do I "play" food as an investment? Buying a stock like Archer Daniels is not very good because the increased profits won’t flow through to the bottom line for a quarter or two. I want to have a real time play on this. Futures, however, are not my cup tea as I would need to open a new account and that just doesn’t interest me. What’s left? Luckily, there has been a virtual explosion of ETFs. This stand for electronically traded funds. They are basically like mutual funds but instead of pricing at the end of the day, they trade live all day. This is exactly what I want. I have identified an ETF that is involved in the agriculture sector. It’s price is meant to mimic the price moves of four commodities. Corn, wheat, sugar and soybeans make up it’s portfolio. The funds are divided evenly between these four items.

The symbol is DBA. It sold as high as 48 last year and was down as low as 17. It is back up to nearly 25 and looks to be building some steam. Now if these commodities were to get back to their old highs then this would be trading at a price of maybe 60 or so. This would indeed be a nice gain but I have a more aggressive plan I’m contemplating. This ETF trades in excess of a million shares a day which is very liquid. This has led to the rise of options for the ETF. Options are basically rights to buy stock at certain levels for a defined period of time. There are options which expire in January of 2010 which I am look at. They are priced at $3.60 a share. Doing some quick math shows that a doubling of the price would lead the options to at least quadruple. Were the food to really spike in price, and drive the ETF to say $100, the options would appreciate 1500%. Now that’s some gain. Hardly a guarantee, but maybe worth a chance. I am strongly looking at this option.

 
 
 
 
 
 
 
The second trade I’m looking at is the Canadian mining stocks. They have been utterly devastated in price. To make matters worse the exchange rate between Canadian and U.S. dollars is up near a high with the Canadian dollar only fetching 81 cents U.S. This is waaaaay down from not too long ago when the Canadian dollar was worth more than the U.S. dollar. I believe this is also near a tipping point as the U.S. dollar is ready to reverse trend and head back down. If you’ve never bought Canadian stocks before then I must explain that as you order them, the price is converted to Canadian dollars. Depending on the exchange rate, you might get more or less shares of the stock. Right now, it is very advantageous to buy Canadian stocks as you get much more bang for the buck.
 
So which stocks am I looking at? I have invested in the past in a number of them including Rainy River, Tyhee, Esperanza and others. Currently I believe that silver stocks will be the big winners so I am looking at getting a silver stock. One I am currently looking at is Great Panther. It is a current silver producer and trades at .48. It was as low as .19 so it way off it’s lows. It has been well over a dollar. I am still looking at these and will let it be known here if I make a trade.  I want to repeat that this is NOT investment advice, only what I am considering and to give you some things to research further.

My move into the general stock market has so far been successful and I expect the rally to last into the Summer, probably July. I may get out before then as top picking is a fool’s game. Shoot for the middle 50% and you will make a lot of money.  Talk to you next week.