Sunday, June 8, 2008

TSO, ADM, and RMIX updates

I last wrote about non-integrated oil refiners as being attractive as margins would widen when either the price of oil decreases or the rate of change slows. I felt brilliant until Thursday and Friday when I gave most of my profit back as oil surged. The good news is that TSO is still attractive on a cashflow basis and their margins, pre Friday have been steadily rising. If TSO falls further I intend to buy more as I still like their earning power as some of the froth comes out of crude oil.

That froth is going to come out. No, oil isn’t going to fall like a rock, but it is going to retreat. It may climb to $150 before the retreat starts but retreat it will. Demand has grown, but nowhere near the percentage price increases we’ve seen in crude. The catalyst for a lowering of the barrel price will be commodity market reporting and classification changes that will limit positions. The investment bank swaps exemption will be curtailed also.These changes will dampen unlimited buying opportunities that currently discourage short selling.

Additionally, the Fed is likely to attempt to talk up the dollar as the dollar decline has been a major player in the assent of commodity prices and resultant inflation. If the Fed doesn’t get its arms around oil and commodity prices soon it will have a huge inflation fight on its hands. I think the boat has already sailed and we will start to see increased rhetoric from the CFTC, the Fed, and the treasury all aimed at a stronger dollar and lower commodity pricing. While the ECB surely didn’t help matters Friday with the comment about maybe raising rates, and thereby srengthening the Euro vs the dollar, it would not surprise me to see some coordination between central banks to tackle commodity induced inflation as both continents will pay the price if inflation surges out of control. So far it is only raging on inputs, payrolls will soon follow if progress isn’t made.

Therefore I continue to think crude oil will start coming down after the jawboning/rule changing starts and I think refiners will drag their heels on the price of fuels and margins will expand. Along with the expanding margins will be the price of their stock.

The market has pounded ADM lately and another of my profitable positions has eroded. The company has done very well financially so the decrease is due to the dissatisfaction with ethanol producers , a projected smaller crush spread for soybeans, and a planned equity offering. I like the minor initial dilution of the equity offering as it gives them flexibility in bad times, think the ethanol concerns will lessen, and analysts are not great predictors of crop yields and pricing. But if the world is short of food, ADM is going to participate and I plan to add more shares.

RMIX, the little concrete company that I originally bought as a hedge against my MLM puts but fell in love with, has risen to the point that I’m gone. The shares moved up from the 2’s to 6 and I was happy to capture the gain. I was ready to go to the darkside again on MLM at about $118 but I procrastinated and never got around to it. It has since fallen and I’ll watch the price action.

My fingers are tired so adios amigos.

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