commodity

GENERAL MILLS INC. $64 (New York symbol GIS; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 334.1 million; Market cap: $21.4 billion; WSSF Rating: Above average) is the second-largest cereal maker in the United States after Kellogg. Leading brands include Cheerios, Total and Wheaties. The company also makes a variety of other foods, including baking mixes (Betty Crocker), dinner mixes (Hamburger Helper), canned and frozen vegetables (Green Giant), and yogurt (Yoplait). Wal-Mart accounts for about 20% of its total sales. Rising prices for raw materials such as grains, corn and milk have dampened General Mills’ recent earnings growth along with those of other food stocks.

Hedges help food stocks control commodity costs

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THE BOEING CO. $52.42, New York symbol BA, has agreed to a new contract with its striking machinists union. The strike began in early September, and probably cost Boeing $100 million a day in lost revenue. The company hopes this new agreement will help it secure a new contract with its engineers and technical workers, whose current contract expires on December 1, 2008. Meanwhile, Boeing’s third-quarter earnings fell 34.3%, to $0.94 a share from $1.43 a year earlier. The decline was mostly due to the strike. Revenue fell just 7.4%, to $15.3 billion from $16.5 billion, as strong growth at its military products division helped offset lower sales of commercial planes. Boeing’s order backlog now stands at a record $349.4 billion, which is equal to over five times its annual revenue. The slowing economy could prompt some airlines to delay or cancel their orders. However, about 90% of the backlog for commercial jets comes from overseas airlines, many of which receive financial subsidies from their governments. Demand for new fuel-efficient planes, such as the 787 Dreamliner, also remains strong....

I still feel that government efforts now underway are likely to solve today’s financial crisis. However, these steps come at a price. My best guess is that we’ll see much higher inflation as a result of all this newly supplied liquidity, probably in the early part of the next decade. My view is that you should keep this inflationary potential in mind, but it’s too early to try to profit from it. That’s partly due to the drawbacks of Resources stocks. They do provide a handy hedge against inflation, and even many of the most pessimistic observers now feel that resource prices are bound to rise in the next few years, as millions of Indian and Chinese workers pole-vault into the middle class. But many pessimists felt the same way following the last great resource and commodity boom, in the 1970s and 1980s. After that boom ended, the sector went into a slump that lasted 15 years or more....

I still feel that government efforts now underway are likely to solve today’s financial crisis. However, these steps come at a price. My best guess is that we’ll see much higher inflation as a result of all this newly supplied liquidity, probably in the early part of the next decade. My view is that you should keep this inflationary potential in mind, but it’s too early to try to profit from it. That’s partly due to the drawbacks of Resources stocks. They do provide a handy hedge against inflation, and even many of the most pessimistic observers now feel that resource prices are bound to rise in the next few years, as millions of Indian and Chinese workers pole-vault into the middle class. But many pessimists felt the same way following the last great resource and commodity boom, in the 1970s and 1980s. After that boom ended, the sector went into a slump that lasted 15 years or more....

The Dow’s 11.1% gain on Monday was the fifth-biggest percentage gain on record. The 9.8% gain on Toronto the next day was the biggest ever. Markets remain volatile and have moved down since, but my view is that governments around the world are now taking the kind of steps that will contain the crisis and eventually restore liquidity in the banking system. You can only spot market reversals in hindsight, so it’s too early to declare if we are near a bottom. But even if we are, markets are apt to remain volatile and some stocks are bound to go to lower lows....

Today’s rebound in the market is reassuring, but I expect stocks to remain highly volatile for a month or more. After that, we could see a six-month rebound in prices. The U.S. bailout of major financial institutions raises inflation risk over the next few years, but it heads off panic. Nobody can predict market bottoms, but I suspect we are much closer to the bottom than the top. BANK OF AMERICA CORP. $37.48, New York symbol BAC, has agreed to acquire troubled brokerage firm Merrill Lynch & Co., Inc. (New York symbol MER). Based on current prices, Bank of America will pay about $49 billion in stock. That’s equal to 29% of its market cap of $170.9 billion. The addition of Merrill will greatly expand Bank of America’s retail brokerage and wealth management operations. Including Merrill’s 16,000 brokers, the merged company will be the world’s largest brokerage firm, with 20,000 brokers and $2.5 trillion in assets under management. Bank of America will probably keep the Merrill Lynch brand, and operate it as a separate division....

H&R BLOCK INC. $24.24, New York symbol HRB, has agreed to acquire the operator of its franchises in Texas, Oklahoma and Arkansas for approximately $278 million. Under the original franchise agreement in 1957, these offices pay just 6% of their revenues to H&R Block instead of the usual 30% that newer franchisees pay. This purchase gives H&R Block the opportunity to re-franchise these properties at the higher rate. H&R Block lost $129.4 million or $0.40 a share in its first fiscal quarter ended July 31, 2008. However, the company typically loses money in the quarter after the April 15 tax filing deadline. The latest results also included a $20.4 million increase in loss reserves and asset writedowns at its banking division. In the year-earlier quarter, it lost $109.8 million or $0.34 a share. Revenue fell 10.9%, to $339.6 million from $381.2 million. Lower revenues at its accounting and consumer finance operations offset a 7.7% gain at its tax services division. H&R Block is a buy....

CHILE FUND $17.05 (New York symbol CH) (CWA Rating: Aggressive) invests primarily in Chilean stocks. It’s managed by Credit Suisse Asset Management, a division of Credit Suisse, Switzerland’s second-largest bank. Prices for copper, a key commodity for Chile, are down from the all-time highs they reached in June, 2008, but still remain strong. Chile is a major exporter of copper, particularly to Asia. It’s the world’s biggest supplier of copper. Other important non-mineral exports are forestry and wood products, food and wine. Top holdings are: Compania de Petroleos de Chile SA (Oil & gas), 20.6%; Empresa Nacional de Electricidad (power), 16.1%; Empresas CMPC (pulp & paper), 11.3%; Enersis SA (power), 5.7%; Compania De Aceros del Pacifico SA (Mining), 5.7%; Cencosud (retailing), 5.7%; Banco Santander Chile (banking), 4.5%; Sociedad Quimiday Minera de Chile (Mining), 4.3%; SACI Falabella (retailing), 4.0%; and AES Gener SA (Electric power), 3.3%....

HECLA MINING COMPANY $8.71 (New York symbol HL; SI Rating: Extra risk) (208-769-4100; www.hecla-mining.com; Shares outstanding: 127.4 million; Market cap: $1.1 billion) explores for, mines and processes silver and gold in the U.S. and Mexico. The Idaho-based company has been in business for 117 years. Hecla produced 5.6 million ounces of silver in 2007, mostly from its 29.7%-owned Greens Creek mine in Alaska (2.6 million ounces) and its 100%- owned Lucky Friday mine in Idaho (3 million ounces). The company recently paid Rio Tinto plc $750 million for the 70.3% interest in the Greens Creek Mine that it didn’t already own. Greens Creek is the fifth-largest silver mine in the world. Hecla now expects its silver output to rise to 11 million ounces per year by 2009....

Earnings at these two leading commodity producers have lagged recently. However, recent sales of less-profitable businesses put them in a good position to increase long-term profitability. ALCOA INC. $37 (New York symbol AA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 815.1 million; Market cap: $30.2 billion; WSSF Rating: Above average) is one of the world’s leading producers of aluminum. In February 2008, Alcoa sold its packaging and consumer businesses for $2.5 billion. These operations accounted for 11% of its total sales....