Plantation play - Earning Bubble

European banks announced a lot of bad news: multibillions write-down and losses due to mispricing(nice cover up word for greed??) in bonds. How can all these smart people made mistakes like that? Anyway, leave it to others to comment.

The fever of soft commodities play is on! Crude Palm Oil closed at another new record of RM 3,630.

Plantation stocks in KLSE and SGX were pleasantly green. Sime Darby, IOI Corp, KLK up 2.52%, 1.9% and 1.6%. Wilmar and Golden Agri closed even more impressively, up 4.6% and 5.4%.

I definitely feel the bullishness of the sector. CIMB recommended underweight IOI Corp with price target of $ 6.90 on 14 February but changed their mind, revised the target to $ 9.40 on 15 February, in less than 24 hours apart! The justification was fantastic, increase forward PE from 20X to 24X. (Why don’t you just increase it to 50X!!!!) Justifications for that? Strong earning prospect(as if they have a good crystal ball for two to three years ahead); and potential MA activities. Share buy back has removed share overhang.

Wilmar sell down was due to concerns of the Chinese government price hike control hurt earnings. But that fear seems to disappear and buying appetite is back! Crowds say CPO earnings will exceed margin deterioration of cooking oil. I remembered I read an article in Wall Street Journal on the plane, many analysts tagged this stock to S $ 7.

Commodity play is all about demand and supply. I have been having a hard time trying to figure out what causes price rally since late of 2007. Some blamed it on Ben flushed the market with too much liquidity - his rates cut-lah!. Some argued that turning soft commodities into alternative fuels is the culprit, you need a lot of acres to give you energy. The result was fight of acre between grains and oilseeds because supply will take a long time to come. Jim Rogers said world food production in the last 30s has been on the declining, the world will have to pay for it now!

The most important variable in plantation stocks earning equation(short and medium terms) is CPO price. It is very difficult to judge fair value of crude palm oil, it is all depend on what others willing to pay for it. It can goes up to RM 5,000 tomorrow, sky is the limit. The earning bubble is developing.

I don't know enough how long the up cycle will last, thus difficult to set exit price. Shall I get out from the sector if price drops more than 10% or 20% after peak? How much should I allocate, if I ever decided to play. How to set margin of safety, Professor Ben Graham? Should I walk away or play? Still undecided why the party is still on? No wonder you call yourself turtle.