Thursday, April 14, 2011

3 Cases for POT

Potashcorp (POT), the largest fertilizer company in the world with dominant presence in potash fertilizer, is a winner riding the agriculture boom for years to come. There are at least half a dozen of reasons why it is a good play but three should suffice to make a case:

1. A surge in more protein-oriented diet in developing countries

This notion is not new. With substantial increase in income and wealth, meat consumption in China has increased by 600% in the last 30 years and there is no end to this growth in sight. According to a study from Purdue University, Chinese pork demand is projected to be 68 million metric tons in 2015. This is a large increase from 2003, when pork consumption was 45 million metric tons, and a 32% increase from 2010 levels.

The demand for a more protein-oriented diet and to a lesser extent, ethanol fuel has been and will be the driving force of a secular growth in agricultural industry. To increase the yield per acre, fertilizers are essential.

2. Barriers to entry means high margins

Other than nitrogen, soil nutrients such as phosphate and potash are scarce resources especially the latter. Only 12 countries have potash mine and about 50% of the world capacity is in the hands of three major players, namely Potashcorp (POT), Mosaic (MOS) and Belaruskali. New capacity takes years and billions of dollar to come in place, giving existing players plenty room to enjoy huge profit margins leveraging the economies of scale in face of heightened demand for the materials.

3. Hot money is favorable to commodity

With the US government printing money and tightening unlikely to be soon and severe, plenty of liquidity is left pursuing riskier assets especially commodity that is mostly denominated in US dollar. That includes agricultural products and thus providing incentives for farmers to apply fertilizers. Materials that go in these fertilizers are just as likely to enjoy the commodity fever. Currently, potash, phosphate fertilizers are priced at roughly half of its peak in 2008 when the crisis brought down everything. It is foreseeable for these commodities to go up by at least another 50% in the next 12 months.

In sum, POT with its overriding presence in fertilizers is set to ride the multi-year agriculture boom and the stock price is likely to go along with 50-100% upside (It is currently at $56). That said, these are not without risks. One of the near-term risks include hard landing in the US or China, drying up excess liquidity quickly once again. As I am writing, stock and commodity markets are going through a technical pull-back that may take a few more sessions to settle. For friends who shy volatility may want to wait till the dust is settled.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own  positions in POT in her personal account as of  April 14, 2011

Foreign Currency Reserves and Inflation Soared in China

From Reuters,
China's foreign exchange reserves soared to a record of more than $3 trillion by end-March, while its money supply growth blew past forecasts, threatening to aggravate the nation's inflation woes and trigger more policy tightening.

Chinese banks extended 679.4 billion yuan ($104 billion) in new local currency loans in March, while the broad M2 measure of money supply rose 16.6 percent from a year earlier, both above market expectations.

Tapping the brakes on money and lending growth has been a crucial part of Beijing's campaign to rein in inflation, which probably hit a 32-month high of 5.4 percent in the year to March, according to local media reports.

After making progress at the start of the year in mopping up excess cash, the People's Bank of China appeared to lose some ground in March.

"The latest numbers show that it is still too early for China to ease monetary tightening. China still needs to keep tightening policy at the current pace in coming months," said Qu Hongbin, chief China economist with HSBC...................................................
China has raised benchmark interest rates four times since last October and has required the country's big banks to lock up a record high of 20.0 percent of their deposits as reserves.

Economists polled by Reuters last week said that China was heading for a pause in its half-year cycle of monetary tightening, forecasting that it would raise interest rates just once more this year.

Wednesday, April 13, 2011

Las Vegas is still out of game

From Bloomberg
"Las Vegas Strip gambling revenue fell 9.6 percent in February, the fourth straight monthly decline as the city faces an uneven recovery after a record slump in the casino industry.
Revenue declined to $513.7 million from $568 million a year earlier, Nevada’s Gaming Control Board said in an e-mail today. Betting fell 6.3 percent in the first two months of 2011 from a year earlier.

Las Vegas is struggling to recover from record declines in gambling and convention revenue. Strip betting proceeds increased 4.1 percent last year, after dropping more than 9 percent in 2008 and 2009. MGM Resorts International (MGM), Las Vegas Sands Corp. (LVS), Wynn Resorts Ltd. (WYNN), and Caesars Entertainment Corp., the four biggest Las Vegas-based casino owners, have said the worst has passed.

Revenue for all Nevada casinos fell 6.8 percent to $881.8 million in February, the board said. Monthly proceeds for Clark County, which includes downtown Las Vegas as well as the Strip, dropped 7 percent to $769.5 million. "
While Las Vegas is struggling, elsewhere in Asia has had gamers rolling in. Gaming Inspection and Coordination Bureau of Macao announced yet another significant year-over-year rise in gaming revenue. Gaming revenue in Macao rose 33%, 47.7% and 48% in January, February, March 2011 respectively.