LOOKING BACK:  One major day-trading tenet is to look back at each trade & learn from both your successes & mistakes. This rule should apply to investing, speculating, everything.  So let me do so today.

THE SOFT AGRICULTURAL THEME.  Yesterday I cleaned out my files and found when I first began writing about “AG” stocks.  It was exactly two years ago now, in May 2006.  Below are some excerpts:

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Written May 17^th, 2006

THE CASE FOR OVERWEIGHTING AGRICULTURE AND FOOD STOCKS

I would posit that the commodity bull may now start being led by the agricultural commodities like wheat, corn, sugar, soybeans and other agricultural related commodities. 

My Rationale.  The rationale here is that as the world gets a little richer, err, let me change that to read as the world develops a larger middle class, in China, India, Brazil, Eastern Europe, Russia and more, this new middle class buys food.  I heard a commodity analyst on CNBC say that when a person moves into the middle class (when food and shelter becomes standard fare), when a person makes $10 a day versus $1 a day, the first thing he does is to increase the quality and quantity of his food intake.  Makes sense to me.  With the global middle class truly expanding greatly and rapidly during this growth spurt (by the limited definition of middle class) because of globalization, demand should rise for agricultural commodities like corn, wheat, barley, etc.  And it would fit well with Morgan Stanley’s Steven Roach’s recent writings as well.  In the same article whereby economist Roach argues that the run up in industrial metals is way overdone, a bubble as I mention above, he quotes China’s latest five year plan which decreases its focus on commodity-intensive exports and encourages its focus on consumer-led growth.  I would say that means billions of Chinese will be buying more and better food soon, wouldn’t you?  And elsewhere the same.

Written May 18, 2006:

MORE ON MY NEW AGRICULTURAL COMMODITY THESIS

I began this new thesis on Monday when I first suggested overweighting agricultural related stocks, or “AG” stocks as I think they are called in the business.  Then yesterday I offered up the basic rationale behind this new overweight allocation recommendation.  Let me repeat and expand upon my reasoning again this morning because the investment rationale is the bedrock principle.  If this economic principle is economically sound and correct in its timing, we should make money overall.  If not, well, then not!

Commodity Bull Market:  Phase 2.  On the other hand China’s new plan is to encourage a different growth strategy which encourages consumer-led growth.  That means more consumer spending to me.  And that means the new Chinese middle class will first start spending more on food, expanding their diets.  Remember any country that is (1) growing wealthier and (2) has billions of people has to spend its new found wealth on something.  And China says they are going to encouraging more consumer spending.

And its not just China which has gotten wealthier by the world economy expanding and coming closer to together because of more free trade.  (In spite of the war on terror.)  Latin America has really been helped out as well.  Remember Brazilian banks are now finding its profitable to make consumer loans to their citizens!  (I wrote about that.)  That’s another indication of a new middle class forming.  (Again don’t think of developing country’s middle class as the same thing as in America.  Middle class meaning people have the means to finally not worry about a roof to sleep under and where the next meal is coming from.)

And its not just China and Brazil growing wealthier and thus developing a new middle class.  .  Think India, Eastern Europe, Russia, and more.

Schwartz Conclusion.  My sense thus is there is a wind at the back, a tide coming in, if you will for foodstuffs and thus anything agricultural related.  Farms, grain companies, companies producing or shipping agricultural commodities, fertilizer companies, commodity traders, etc., etc. etc. and on and on.

Written May 19, 2006:

Continuing on with my new theme I proposed on Monday, that agricultural commodities are going to take the lead from industrial commodities (the base metals) in phase 2 of this long commodity bull market, let me make a couple more comments and then start offering up the “shopping list” I promised you.

Brazil makes ethanol out of sugar, the US makes ethanol out of corn, biodiesel is made out of byproducts.  Analysts are saying when people make $10 a day instead of $1 the first thing they buy is better food.  But the extrapolation from ethanol to agricultural commodities in general is not mainstream quite yet, thus we have a “first mover” advantage.  And by looking at the charts of corn and wheat and other foodstuffs I can confirm we’re early on into the ag commodities bull market.  Corn just started perking up last December, wheat in early May, cocoa is still trading sideways.

Thus we’re in a way earlier stage in foodstuffs than industrial metals but still it’s the same commodity bull market.  Over time we’ll probably see more new ETFs, this time in agricultural commodities, come into play but we mustn’t wait around for that.  Look what happened to silver just now when that ETF came out!  ETFs usually come out just in time to suck the public in at some type of top, someone’s got to buy when holders want to take profits, right?  Bottom line I believe the next big thing is going to be anything to do with agricultural stocks.  So I’ve begun a shopping list below.  But please remember, don’t just jump in without checking where each stock stands!  As an example, the stocks having anything to do with ethanol, yes they are in the ag group, have just ran way up and may hurt you badly unless you’re very careful. 

AGRICULTURAL COMMODITY SHOPPING LIST:  The very beginning!

                                                                Price      Price      %

                                                                5/18/06  5/14/08  Gains

ADM      Archer-Daniels-Midland     39.80       43.07       +8%      Processes agricultural commodities

MON      Monsanto Company           83.25       122.63     +195%  Tech-based agricultural products

POT        Potash Corp.                         93.20       198.80     +539%  Produces potash, phosphate and nitrogen

MOS       The Mosaic Company         16.40       125.16     +663%  Produces crop nutrients to ag communities

AGU       Agrium Inc.                           25.91       86.68       +234%  Produces fertilizers and related products

UAP       UAP Holdings                      20.35       ????        ????        Distributes crop protection, seeds, etc.

CF           CF Industries                        16.97       136.27     +716%  Manufacturers, distributes fertilizers

TNH       Terra Nitrogen                      19.45       142.77     +634%  Produces nitrogen, fertilizer, seeds

Schwartz Update:  I filled in yesterday’s closing prices above and the % gains.  Note:  Some stocks have had stocks splits and or spin offs so the numbers may not seem right.

Written May 24th, 2006:

THE INVESTMENT CONCEPT:  INFLATION FINDS ITS WAY INTO FOOD NEXT. 

Remember my new investment concept or thesis here is that commodity inflation is going to find its way over into the agriculture and foods sector next.  The speculation and demand for industrial metals, while still probably robust going forward depending on economic growth, has blown its top.  Thus after this first, big commodity bull market correction is over, and it could run some time, in a 25-year bull market a correction could last from three months to three years says Jimmy Rodgers, famed investor who first called this commodity bull market, I expect commodity leadership to come from, to shift over to, the soft commodities, namely the food and agricultural stocks and almost any related ag stocks like farm equipment companies, etc. 

Schwartz Lesson & a New SCHWARTZ RULE:                                                                        

“When you find a solid, working theme, stay with it!”

This is a rule put forth in both of Jack Schwager’s books if I recall correctly, in both The Market Wizards and The New Market Wizards.  One wizard trader in particular was an expert on staying with a trend, like a “dog with a bone.”  And I must say I’ve seen first hand staying with trends work very well over the last few years.  Maybe after writing today’s piece and seeing for myself the incredible results out of my fertilizer recommendations, I’ll learn to not be so flighty and thus stay with multiyear trends much longer in the future, like the REITs trend I identified early on in its big multiyear move up which ran from the beginning of 2000 to the beginning of 2007, like today’s ongoing commodities bull market and the still running and hot alternative, clean green, wind, solar trend.  Yep, when we unearth a new trend with strong underlying economic fundamentals (macro economic trends which don’t change for years) we gotta milk it for all its worth.  “Are you listening Schwartz?”  You better be!