Agora Financial’s Rude Awakening

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Laguna Beach, California

· One Canadian agri-business company to consider for your portfolio,
· The beauty of market asymmetry…and how not to get crushed by it,
· The two-play playbook for 2009, unexpected turns in an edited Game of Life and more…

Eric Fry, reporting from Laguna Beach, California…

A couple of days ago, your editor’s 10-year old son, Ethan, huddled together with a friend of his to create a new board game, modeled loosely on the old Parker Bros. “Game of Life.” Ethan’s updated version would feature a slightly more sinister series of adversities than the original “Life,” consistent with Ethan’s slightly more cynical worldview.

The game would be called, “Life’s Not Fair…Deal With It.”

In Ethan’s board game, players could potentially lose limbs in traffic accidents (and retreat 10 spaces), contract fatal diseases (and move to the Hospital, hoping to draw a “miracle cure” card), get caught dealing drugs (and miss five turns) or lose all of their savings in the stock market (and go back to the start).

The possibilities are not all bad, of course. A fortunate player might be able to advance quickly on the game board by recording a hit rap song, inheriting a mansion from a rich uncle or wining American Idol. But on Ethan’s game board, adversity if far more likely than success.

The real world is probably not so different from Ethan’s game. Life is not fair…at least not intuitively so. Good people sometimes walk the earth half-naked and starving, while bad people sometimes drive Astin Martin’s to 5-star restaurants. Good people sometimes lose lots of money by trusting despicable individuals to behave honorably, while bad people sometimes lose billions of dollars of their shareholder’s wealth, then retire with multi-million pay packages. Life is not fair.

And yet, most investors – at least the modern-day American variety – seem to assume a fairness and symmetry that is not in evidence. This assumption is woefully misguided.

The financial markets are neither fair nor symmetrical. They are Darwinian. Bad things happen, often, especially to the weak and the lame. There is no innate balance in the financial markets; no majestic yin and yang. Sometimes there’s just yin. Sometimes there’s tragic-comedy, without the comedy.

And even if life on earth might appear balanced and symmetrical from an elevation of, say, 40,000 feet…or from the moon, it is not. Billions of minute imbalances and asymmetries, operating concurrently with one another, create images of balance and symmetry. These images are a lie…or at least a deception.

The gazelle that fails to outrun a hungry lion might represent part of nature’s symmetry, but the gazelle’s experience is distinctly asymmetrical. It is dead. Many investors suffer similarly asymmetrical fates. These investors succumb to the Darwinian forces of finance. They buy when they should be selling, sell when they should be buying, and “invest for the long-term” when they should be hiding their cash in a mattress.

Yes, it is true that markets go up and down. It is also true that booms yields to busts, and that busts prepare the way for a new boom. If you don’t allow the busts to occur, classic economic theory asserts, you cannot have a new boom. The busts must eradicate the economic imbalances, the “mal-investments,” the excess leverage and the boom-era hubris in order to clear the way for a new era of prosperity. In this way, economic busts are very much like a wildfire.

No one disputes that wildfires perform a valuable ecologic function. But even so, no one advocates standing in the middle of a wildfire while it is performing this valuable function…no one except a Wall Street strategist.

The wildfire is part of nature’s symmetry, but it is also fatal for an individual. Bear markets are no different. They perform a necessary function. But they do not need to perform that function with your money. They can do it with someone else’s.

Why be a part of the stock market’s symmetry, if you can avoid it? Why not be a part of its asymmetry – the part that consists of buying low and selling high? In other words, fend for yourself. Ignore what has been. Throw out the old Wall Street “Buy and Hold” playbook of the 1990s. That playbook won’t do you any good in 2009.

Instead, grab a copy of the new playbook. The one that has only two plays:

1) Buy rock-solid, bullet-proof value…or don’t buy anything at all;
2) Never stop asking yourself, “What’s next? Where do we go from here?”

We have crossed the threshold of conventional investing into a financial marketplace that is fraught with peril. This is a time for vigilance. It is a time to monitor the factors that might cause a temporary deflation, or re-awaken hyper-inflation, or cause the dollar to go into a free fall. And it is a time to prepare for potentially extreme and uncomfortable outcomes.

Unfortunately, some of the potential outcomes require diametrically opposed preparations. If deflation, then “X” is the course of action. If inflation, then “Y.”

Your editors cannot say whether investors ought to prepare for deflation or inflation. But they have a nagging hunch that inflation poses the most durable threat… and, therefore, that investors should err on the side of defending themselves against that outcome. Even so, we prefer the sorts of defenses that won’t kill us if we’re wrong. That’s why we find the agriculture sector so compelling.

Even in a deflation, food maintains premium pricing. So investing in the food supply chain should produce a decent outcome, no matter what economic winds may blow. That’s why we are intrigued by Chris Mayer’s suggestion that investors buy Canadian farmland. (Tuesday’s Rude: Saskatchewan! Wednesday’s Rude: Get Rich Slow)

Not all of us can afford to buy farmland, however. So Chris returns once more today to suggest a different sort of agriculture-related investment…

— When Fear = Profit: A Special Volatility Report —

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Investing in Food
By Chris Mayer

Demand for food never wavers, even when times are tough. This fact is only one of the reasons to like Viterra (VT:tsx), a Canadian agri-business company. Viterra, an amalgamation of “vital” and “terra,” meaning “life from the land,” is the new name for a very old business new. The old name, Saskatchewan Wheat Pool, better reflects the company’s raison d’etre.

Viterra is in the grain-moving, storing, processing and cleaning business. You would think, based on the recent sell-off, that Viterra was selling the stuff. But Viterra is not a straight-up commodity play in the sense of selling grains. You would do better to imagine a toll road. Volume is the name of the game. Volume and efficiency, not grain prices, dictate the profit profile here.

Its largest business is grain handling, chipping in 65% of sales. Viterra has lots of those tall grain elevators you may have seen in grain country. About two-thirds of Viterra’s grains eventually head west by rail and ultimately wind up in the Asia-Pacific region. In this way, it’s a fine backdoor play on the booming demand in Asia and its peoples’ rapidly evolving diets. The falling Baltic Dry Index, which measures shipping costs, bodes well for Viterra. Cheaper shipping costs make Western Canadian grain cheaper for Asian buyers.

Viterra’s second largest business is as a retailer and distributor of agri-products such as fertilizers, seeds and crop protection products. The company has 276 retail locations across the Canadian prairies. Viterra is the biggest dog on the block, with 45% market share in Western Canada.

In the big-picture sense, Viterra’s profits tie more closely with seeded acreage and the mix of crops so planted. These variables do not vary much from year to year.

And just to juice up the mix a bit, Viterra has a 34% interest in Canadian Fertilizers Ltd. (CFL), a nitrogen fertilizer plant in Medicine Hat, Alberta. Here CFL earns a spread on the difference between fertilizer prices and natural gas. This business is not particularly significant at the moment, but it is an interesting asset, nonetheless.

The recent market crash has been rude to Viterra’s share price, but it is a gift for investors who want to buy more. Just yesterday, the company announced surprisingly strong earnings for the fourth quarter, thanks to robust demand for agricultural products like fertilizer. “Viterra blew the lights out in the fourth quarter,” one Canadian analyst cheered.

For all of 2008, Viterra earned C$1.25 per share. And yet, as I write, the share price is a mere $9.25 per share – or only about seven times earnings. Moreover, book value is nearly $10 per share. The financial position is strong, with net debt less than 8% of capital and loads of cash.

There are rough comparables out there that may help in arriving at a valuation for Viterra, such as Archer Daniels Midland on the grain handling side and Agrium on the retail side. Using a blended valuation of these two companies, I get a value for Viterra around $15 per share. And all of these agricultural companies are trading at somewhat depressed valuations.

Though it has little bearing on the share price, Viterra may be the only publicly traded enterprise run by a former NFL wide receiver. Mayo Schmidt, CEO of Viterra, played wide out for the Miami Dolphins in a brief stint. More importantly, though, Schmidt deserves credit for making many great moves – such as the acquisition of Agricore in 2007 – and proving a savvy chieftain.

There are more moving parts here, so I am simplifying somewhat, for the sake of brevity. The bigger picture is what I want you to focus on. In Viterra, we have a well-financed and well-managed company trading at attractive levels. The company also has big winds in its sails. To repeat; Viterra is like a toll road for grains. And I don’t see any decline in the traffic of that toll road over the next several years.

I expect Viterra will be a good investment over the years. At a minimum, I expect Viterra to exceed its old high of $15, as the grain markets enjoy another push next year.

[Joel’s Note: Unfortunately, we can’t publish ALL of Chris’ ideas in these here pages (although we would sure like to) as subscribers to his Mayer’s Special Situations service get first dibs. However, if you’d like to join his service, and benefit from his most timely research, you can do so at the end of this Special Resource Investing Report he prepared for us.

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[Rude Endnote: It seems that right around the time your editor was dragging himself to physical recovery yesterday, the market also rebounded somewhat.

After the worst inaugural day selloff in history, the Dow Jones Industrial Average clawed back a commendable 278 points.

Oil stacked on another few bucks and trades at around $44 per barrel as we write. Gold inched slightly higher too and changes hands for about $849 this morning.

Revived, renewed and free of unwanted food poisoning, we’ll be back tomorrow with more thoughts about this Rude world.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

P.S. Thanks Jacques and Lynn, we did ingest a warm Coca-Cola…and it worked wonders. And thanks for all the other get well suggestions, too. With another three weeks in Thailand, Cambodia and Vietnam, we’re sure there’ll be plenty of opportunities to try them all.