The S&A Digest: Ethanol's Effect on the Corn Market

Meet the advisory board... Jim Rogers on commodities... Maybe the pictures aren't such a good idea... A better brisket?... Which should you buy, corn or oil?

Editor's note: Porter's off to the family compound in Scotts County, Tennessee, for the holiday. In the meantime, Sean Goldsmith will be stepping in.

 At long last, the advisory board is here. We read through thousands of applications, and these are the chosen seven. Thanks to all of you for your interest in the position. While there were many qualified for the position, we chose these seven based on their perceived value to us as researchers. To those of you who were not chosen, please reapply next year. Now, we would like to introduce the Stansberry & Associates Advisory Board:

F. B. "Ted" Bywater has been in the real estate sales and development business for almost 40 years. A 1961 Georgia Tech graduate with a degree in industrial engineering, Ted is president of The Bywater Company, which has focused on commercial real estate in Central Florida for 30 years now. As president, Ted has participated in more then 2,000 real estate transactions involving hundreds of millions of dollars. He's organized and led multiple investment partnerships for the acquisition and long-term ownership of investment-grade real estate. And he has developed and owned multiple properties, including warehouses, apartments, office buildings, and retail entities.

Mark Tobino graduated from Wilkes University in Pennsylvania in 1987 and has spent the last 20 years in specialty retail. After short stints with Limited, G&G, and Susie's Casuals, Mark joined New York and Company in 1992. He is now the director of merchandise for the billion-dollar women's retailer and handles ordering logistics for 575 stores. Mark came on as one of Stansberry & Associates' first subscribers and has helped several of our editors with his retail expertise.

Charles E. "Cactus" Schroeder III is a professional petroleum geologist who is recognized by the State of Texas Board of Professional Geoscientists. Cactus founded Chisholm Exploration Inc. in 1981 and Chisholm Operating in 2000, and has been personally responsible for the discovery of 4 million barrels of oil and 10 billion cubic feet of gas. A member of the American Association of Petroleum Geologists and the Texas Alliance of Energy Producers, he was recently featured in the London Times as a successful Texas prospector. As our "man in the fields," Cactus has consulted on several oil recommendations in the past.

Peter Lacey worked his way through Rutgers University doing modeling and commercials. After graduating in 1983, he took a job at Lehman Brothers as a "do boy" for the brokers. Peter left Lehman to become an independent broker on the New York Stock Exchange working for Larry Helfant Inc. During his five-year tenure, he carried out trades for investing greats including Joel Greenblatt and Peter Schoenfeld. In 1991, Peter joined Bank of America as a specialist, and retired in 2004 as co-head of trading and risk management, overseeing the trading of 84 specialists.

A fraternity president at Washington and Lee, Larry Honig later earned a master's in journalism from the University of Texas and an MBA from Harvard. After a seven-year stint as a consultant for McKinsey & Company, traveling the globe and advising clients, Larry became COO and CIO for May Department Stores – operator of Macy's and Bloomingdale's. Larry stayed in clothing retail until 2001, when he joined eHatchery, an Atlanta-based tech business incubator. In 2002, private-equity powerhouse Blackstone and General Electric recruited Larry to run Centerplate, where he oversaw the catering and concessions for 130 major American sports facilities. He retired in 2005, but still serves on several boards, including IBM and Abercrombie and Fitch... where he informed us he must wear torn jeans and flip flops to board meetings.                          

Leonard Wood knows timber. A University of Florida trained forester, he spent eight years researching forests and managing 90,000 acres of timberland for a multibillion-dollar company. In 1990, Leonard started Jowett & Wood, his own forestry-consulting firm. He is a certified forester, a licensed real estate appraiser and salesperson, and member of the Association of Consulting Foresters of America.

After graduating from Pennsylvania State University in 1985, Dr. Eric Whitman interned at the Milton S. Hershey Medical Center. In addition to his 30 published papers, Eric literally wrote the book on radioguided surgery in 1999. He is currently the medical director for the cancer center at Mountainside Hospital in Montclair, New Jersey, and in 2005 was named one of America's best surgeons. He also serves on numerous committees and lectures on melanomas around the world.

Welcome to the board. We look forward to seeing you all in Playa del Carmen for the Alliance conference.

 Famed investor and commodities bull Jim Rogers was interviewed by Bloomberg News this weekend. While his message was no surprise, it's still smart to listen to one of the world's greatest investors...

To start, Jim thinks commodities are the best place to be for the next 20 years. He's particularly bullish on water but says you shouldn't own water directly. Buy water-services companies instead.

Right now, he's worried that there are too many speculators and bulls in the gold market. He suggests waiting for a correction to shake them out before getting back in. Likewise, he's sold out of nearly all emerging markets, griping that there are too many MBAs exploiting them. Again, he hopes to buy back in after a correction. The only emerging market Jim didn't sell is China. He said he'd rather never sell, but will if the price rises to bubble proportions. After the pop, he'll buy back in.

Finally, Jim believes there is money to be made in regard to the shortage of women in Asia. He doesn't know how to play it yet, but joked that divorce lawyers might be a good bet.

 Signs of a market top... Social networking site and MySpace competitor Facebook launched a Fantasy Stock Exchange program allowing members to compete against one another in stock picking.

 Signs of a real estate top in London... RBS, owner of the London headquarters of 12% Letter pick Citigroup (C), today sold the building for around $2 billion to two investors. The sale of the 1.2 million square feet of office space in Canary Wharf marks the second-largest real estate transaction in Britain. This follows HSBC and Swiss Reinsurance Co. selling their headquarters in the same neighborhood earlier this year for $2.18 billion and $1.18 billion, respectively.

 Medical Investor pick Novartis (NVS) will pay $364 million to license more than 10 projects in preclinical and early-stage development from Austrian biotech company Intercell. The Swiss pharmaceutical maker will take responsibility for Phase III development, manufacturing, and commercialization of any project.

 S&A Oil Report subscribers: Don't freak out when you see your shares of Petrobras (PBR) lose half of their value. The company carried out a two-for-one split before the market opened today.

 I'm sure Porter would love to respond personally to a couple of these e-mails. Maybe he will when he returns. Until then, I'll take a crack. Give us your worst: feedback@stansberryresearch.com.

 "In spite of a substantial loss in PXRE, I forgive you. I cannot believe that you are always right. I subscribed to Extreme Value and several of your other newsletters and I finally realized that I would be better off becoming an Alliance member. While I do not usually follow the advice in all of your publications, I have made a small fortune in those that I have invested in. Keep up the excellent work." – Paid-up subscriber Gerald Friedman

 "Your implication that the only people benefiting from IPOs are the previous owners isn't correct. As a practicing CPA, financial planner and having assisted companies with raising capital, I can tell you that although the prior owners usually benefit (sometimes greatly!), so do investors in IPOs. The 'trick' is knowing which ones to invest in. Although I don't believe that your group has a newsletter that focuses on this area, there are newsletters out there that do and are very successful in pointing their subscribers in the right direction. (See the Hot IPO Trader offered by the Oxford Club, for example!) There are also business reasons for IPOs. Many companies require access to additional capital to fund their continued success and future expansion. So don't go knocking IPOs because you don't like them. Personally, I have never seen a client – and I've had hundreds of them over the years – who has ever made money in the long-term through 'day trading' or trading options. I believe that you have an options newsletter service. Why don't you update us with the long-term truth in these area?" – Paid-up subscriber Richard G.

Goldsmith comment: What possible need could hedge funds and private-equity groups have for going public? Generally, it is easier to make good returns with less money, and that would obviously be best for the investors, but that didn't stop Fortress from going public. Blackstone had something like $20 billion in cash when it went public. That's enough cash to buy pretty much anything you want. By the way, how did the Blackstone IPO go for investors?

As for the options matter, Jeff Clark, editor of the S&A Short Report, has recommended five triple-digit trades so far this year.

 "If subscriber Ed thinks majority popular support denotes a democracy, he needs to review the history of Hitler's rise to power, and the Third Reich. Like Lenin, Mao, Castro, and Sadam, Chavez – as [with] all those other thugs who murdered and rigged polls on their way to power – is already showing his true nature, as a despot." – Paid-up subscriber Stan Kurzet

 "I'm not a big fan of brisket... but down here in Texas, you can't be acclaimed as a cook if you don't occasionally serve brisket. So I started with your recipe. It was delicious but I made a couple of changes... Before putting on your rub, use molasses to coat the brisket. It makes the rub adhere and makes a tasty crust as it cooks. Add a tbs of cinnamon (or cinnamon sugar) to the rub. Add a tbs of liquid smoke and a tbs of Kitchen Bouquet and one cup of maple syrup to the mop sauce. We fed a bunch, and they all liked it. Thanks for the recipe... and the advice." – Paid-up subscriber Jim Taylor

Goldsmith comment: Can you really mess with perfection?

 "Porter, I'm from North Carolina, and am constantly amazed at the foul-mouthed, adverse comments you receive. I personally think you and your associates do a fine job with your picks. In addition to your Investment Advisory, I also get Steve's True Wealth, Matt's Oil Report, Dan's Penny Letter, Sean's Dividend Grabber, and where it all started the Oxford Club Communique. I hold, very profitably, some positions from all of these publications. I am very happy with all the publications, and if I were not, I would cancel my subscription without putting the bad mouth on you or any of your associates." – Paid-up subscriber Ed Davis

 "Yeah, I'd think twice about a picture. There are a lot of armed nuts out there who get mad when they lose money. I was at the shooting range a few weeks ago, and this guy had a magazine picture of Jim Cramer taped to the center of his target and was filling old Jimbo up with 9mm lead (in fact, I couldn't be exactly sure it was Cramer but it sure looked like him and the letters... 'MER' was still visible at the bottom). I yelled over, 'Bad stock buy?' He gave me a smile/grimace and emptied his clip. I did not ask him which stock." – Paid-up subscriber John Lemon

 "I am fully subscribing to George's complaint. While I believe your company isn't allowing 'front running,' that doesn't mean it cannot happen. I've been a happy subscriber to a couple of your letters for about a year now but this really bothers me especially when trading options. I've seen it more than once: The price of the stock hadn't moved much for the day, the price of recommended options crept up before we received the recommendation in our mailbox, and really shoots up afterward. The hypothetical front-runners can safely make 20%-30% on those options in one day. More than once I took the chance and slightly exceeded the maximum recommended price. Got burned a couple of times, made good profits most of the time. Regarding the Penny Letter, you keep complaining you cannot sell it, but the maximum entry price of each new recommendation gets exceeded every single time right after you send it out. The entry prices you are listing are pure fantasy. Most of the ensuing rallies are short lived, but not always... Other than that, keep up the good work. Your letters are by far the most profitable I ever subscribed to." – Paid-up subscriber Nick S.

 "You can tell Bernie Krantz that he's right about corn – vast acreage in Texas is in corn that has not been planted to corn in a generation. It wasn't planted in corn because Texas is on the edge of 'corn country' due to rainfall and heat. But this spring was cool and very wet – so the corn crop is going to be enormous. On the other hand many of those fields would have been wheat – and the wet spring has devastated the wheat harvest where it was planted. Finally, he may have seen oilfield pumps in Grand Junction, but they weren't pumping from Green River Basin heavy oil fields. Grand Junction is in the Piceance Basin, which doesn't bear on the research reports regarding heavy oil production. Which by the way don't reference the critical element to producing that oil – WATER." – Paid-up subscriber Gene Colgan

 "I just want to say that I subscribe to several of your letters and have learned so much about the way the economy works and how big business has so much control over the governments today. Steve's recommendations over the past two years have made me money and the Money Book is invaluable. My husband was putting me down to our CPA and he said, 'She must be doing something right because she has made a profit.' I hope my penny stocks will do as well... Mr. Stansberry, I enjoy you and all of your associates and one day will be able to get the whole kit and caboodle of advice from your services." – Paid-up subscriber Sandra Shakespeare

 "I was going through this week's S&A Digests, when I read your comment to Mike Doyle... I, too, am a Mac devotee, shareholder and everything else Mike Doyle said about Apple, Inc. I too might get an iPhone, eventually, but not now. I also find your continued denigration of Apple and Steve Jobs perplexing, because I think both have shown good performances... As a matter of fact, I bought several shares of Apple, after Steve was rehired by Apple, at $15.161 per share and, as Mr. Doyle said, it now sells at $121.89+ per share, a very nice gain. As for your statement that Steve Jobs is a crook, he's a darn cheap one. His salary is one dollar a year. This has earned him a listing in Guinness World Records as the 'Lowest Paid Chief Executive Officer.' How many other CEO's do you know of who would work for a salary anywhere near his?..." – Paid-up subscriber Roy B

Goldsmith comment: You don't need to pay yourself a large salary when you can just backdate all of your options.

Regards,

Sean Goldsmith

Baltimore, Maryland

Ethanol's Effect on the Corn Market

By Ian Davis

Nowadays, the price of corn is acting more like a fuel than a food source.

The government's support of renewable fuels through legislation such as the Energy Policy Act of 2005, has led to competition between using corn as food (or animal feed) and as a fuel.

The Energy Policy Act, among other things, tripled the amount of biofuels – such as ethanol – that must be mixed with gasoline when sold in the United States. That has driven up the price of corn by more than 60%. 

Prior to 2005, ethanol production consumed less than 12% of the U.S. corn crop. This year, the Agriculture Department estimates that ethanol production will use 27% of the corn crop... more than double the amount used just two years ago.

The following chart shows the price of corn versus the price of oil in terms of BTU. (BTU stands for British thermal unit, a standard unit of energy. One BTU will raise the temperature of one pound of water one degree Fahrenheit.)

As you can see, corn prices shot up after the U.S. enacted the Energy Policy Act in August 2005. Today, it costs roughly the same to produce a BTU from corn as it does from crude oil.

As long as corn exists as a substitute for oil, the price of corn will be largely influenced by the whims of the energy market.

Corn Now Tracking the Price of Oil  

Percent of U.S. Corn Supply Used to Make Fuel Alcohol  

CONCLUSION

Since the price of corn will be correlated to the price of oil for the foreseeable future, it may be profitable to invest in whichever energy source happens to be cheaper.

In the past couple of months, the price of corn has fallen while the price of oil has risen. Now may be the right time to jump into a corn trade.

Good investing,

Ian Davis

July 2, 2007

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