One way consistently profitable stock market investor’s create wealth is by identifying and exploiting recurring patterns.
These patterns can be price based such as used in technical analysis. They can also be built upon recurring fundamental or cyclical happenings in the economy.
One cyclical pattern that many stock market investors don’t pay attention to is the weather. The weather is one of the most reliable patterns on earth and it has a huge effect on certain sectors of the stock market. Those investors who understand these recurring weather patterns are set to earn substantial profits by utilizing their knowledge.
Exploitable weather patterns can be as simple as the changing of the seasons. Commodity traders have long taken advantage of the changing of the seasons in the natural gas and heating oil markets. Cold winters and hot summers increase demand for these commodities and clever commodity players try to profit from the changing seasons.
There is a critical extreme weather pattern that is far more complex and profitable than simple seasonal patterns brewing.
In fact, this recurring pattern is forecasted to be the most severe on record. This extreme weather will create huge profits for those investors prepared to profit from it. At the same time, unprepared investors may see their portfolios crushed by the extreme weather!
I am talking about the weather phenomenon called El Nino.
Just What is El Niño?
According to Vox.com, El Niño is a complex weather phenomenon that occurs irregularly in the eastern tropical Pacific Ocean every two to seven years.
When the trade winds that typically blow from east to west in this region weaken, sea surface temperatures in the east and central tropical Pacific start rising.
Some El Niño events are strong, some are mild — and they can last anywhere from seven months to two years. But El Niño events typically push up global surface temperatures and bring heavy rain to South America, drought to countries in the western Pacific, and warmer winters to the United States.
A strong El Niño, in combination with global warming, can push global surface temperatures to new highs. It can bring heavier rain to Peru and serious drought to Australia. But the effects aren’t always negative: a strong El Niño can also bring needed rain to California, for instance.
This year’s El Niño has the potential to be the strongest on record according to experts.
CNN reported that the National Oceanic and Atmospheric Administration announced in August that this year’s El Niño is “significant and strengthening.”
“There is a greater than 90% chance that El Niño will continue through Northern Hemisphere winter 2015-16, and around an 85% chance it will last into early spring 2016,” the NOAA said in a statement.
2015 will likely be remembered as the year volatility returned to the stock market. The VIX fear index exploded to above 50 in mid-August as professional traders scrambled to prepare for a market crash.
While the crash never happened, the market gave a harsh reminder that it doesn’t always cooperate with the bulls. There is clearly a long term upward drift in the stock market, but these periods of extreme volatility can quickly reduce even the most confident investor into feeling like a beginner.
At the same time, the market turmoil has been a boom for active short term traders. Active short term traders need high volatility to ply their craft of profit extraction.
Right now, there is a very special situation setting up with El Nino forecasted to be the most severe on record.
Let’s take a closer look.
In the America, El Nino generally soaks California as well as the East and South of the country.
Heavy rains can act to cause corn and winter wheat yields to plunge. Not to mention the fact that all this extra moisture can trigger an increased risk of pest infestations like Hessian flies, fungal and bacterial diseases in agricultural products.
At the same time, the weather phenomenon ignites drought conditions to crucial agricultural locations in Brazil, India and Indonesia. Brazil is already been knocked down with a multi-year drought, the foulest in 80 years. This year’s EL Nino could truly exasperate an already dire situation it the South American nation.
Taking a look historically, six of the last nine El Nino’s dating back to 1972, crop costs climbed 12 month period on an inflation-adjusted basis. Research by S&P Dow Jones found that commodity sector returns have increased in each of the 12 months following all nine El Nino patterns since 1983.
So How Can I Profit From El Nino?
I can hear you saying, “interesting information, but how can I profit from it?”
We have discovered 3 stocks that will likely be affected in a major way by the 2015/16 El Nino phenomenon.
2 of these stocks stand a very strong chance of being hurt by the weather, therefore they are on our short list. However, we expect one of these stocks to profit handsomely from El Nino.
First, let’s take a brief look at the stocks to short. Since commodity prices will likely soar due to El Nino, food processers will be forced to pay higher prices for basic ingredients. This means that companies like Kellogg(NYSE:K) and General Mills (NYSE:GIS) will likely see their bottom line suffer and stock price fall.
Historically, General Mills has underperformed the overall market in 5 of the last six times El Nino. With this cycle expected to be the most severe on record, General Mills may plunge in value over the next 12 months.
The bullish news is that rough weather conditions, such as drought, are a boon for fertilizer companies. Difficult growing conditions force farmers to use more fertilizers therefore enriching fertilizer firms.
The number one company poised to profit from this fact is Mosaic Corp (NYSE:MOS).
The Mosaic Company is a producer and marketer of concentrated phosphate and potash crop nutrients.
The Company is a single source supplier of phosphate and potash-based crop nutrients and animal feed ingredients.
It operates in two segments. The Phosphates segment owns and operates mines and production facilities in Florida, which produce concentrated phosphate crop nutrients and phosphate-based animal feed ingredients, and processing plants in Louisiana, which produce concentrated phosphate crop nutrients.
The Potash segment owns and operates potash mines and production facilities in Canada and the United States, which produce potash-based crop nutrients, animal feed ingredients and industrial products. It mines phosphate rock in Florida and process rock into finished phosphate products at facilities in Florida and Louisiana. It also mines potash in Saskatchewan and New Mexico. The Company has other production, blending or distribution operations in Brazil, China, India and Paraguay.
Mosaic just settled a massive environmental lawsuit that will enable it to refocus on creating value for shareholders.
The Department of Justice and the Environmental Protection Agency (EPA) stated in a press release that a settlement with Mosaic Fertilizer LLC that will ensure the proper treatment, storage and disposal of an estimated 60 billion pounds of hazardous waste at six Mosaic facilities in Florida and two in Louisiana.
The 60 billion pounds of hazardous waste addressed in this case is the largest amount ever covered by a federal or state RCRA settlement and will ensure that wastewater at Mosaic’s facilities is properly managed and does not pose a threat to groundwater resources.
The DOJ press release went on to describe the settlement, Under the settlement, Mosaic Fertilizer will establish a $630 million trust fund, which will be invested until it reaches full funding of $1.8 billion. These funds will cover the future closure of four Mosaic facilities—the Bartow, New Wales and Riverview plants in Florida and the Uncle Sam plant in Louisiana—and also be put toward the treatment of hazardous wastewater at and long-term care of those facilities and two additional facilities which are already undergoing closure.
The Mosaic Company, Mosaic Fertilizer’s parent company, will provide financial guarantees for this work, and the settlement also requires Mosaic Fertilizer to submit a $50 million letter of credit.
Mosaic will also spend $170 million on projects to reduce the environmental impact of manufacturing and waste management programs at its facilities and $2.2 million on two local environmental projects. Mosaic will also pay a $5 million civil penalty to the United States and $1.55 million to the State of Louisiana and $1.45 million to the State of Florida, who joined the Department of Justice and EPA as plaintiffs in this case.
Add in the power of El Nino and a strong bullish cash can be made for the shares.