Thinking is Not Rewarded in this Market - Deere (DE) is Case in Point

I have to sort of snort at the results from Deere (DE) this morning and then look at the damage in our portfolio. We tried to be very selective in our "agriculture" exposure - when I closed out a competitor of Deere's back in January, I wrote in the piece [Jan 25: Closing Agco (AG)]

So despite the very good valuations in this group, I am going to stand aside for now and re-assess. I like the fertilizer names far more than the equipment names because equipment has issues such as higher input costs (steel, petrol products, etc) that affect margins negatively, whereas the fertilizer names are simply immune to just about everything.

So I was early on this call, and accurate. Before Deere reported in May I wrote [May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks]

On this week's earnings preview I wrote this in regards to Deere (DE):

Major ag equipment player Deere (DE) - I don't own the equipment stocks anymore; at some point the rising cost of steel, petrol products and the like will be hurting the bottom line unless they can pass all the costs along to farmers - over the next year if inflation does not abate this is the type of company who could see profit margins squeezed simply from the constant increase in input costs.

That was accurate then, and it continues to be accurate now as seen by today's results by Deere (DE) which has the stock down 10%.

• Deere & Co (NYSE:DE - News), the world's largest maker of farm machinery, reported a lower-than-expected profit in the latest quarter and said raw material costs would hurt profits in the fourth quarter, sending shares down 6 percent in pre-market trading.
• Like manufacturers everywhere, Deere and its rivals have been complaining about rising raw material prices, especially for steel. Analysts have said their ability to pass on prices to customers is key to the companies' long-term outlook.

This is an example of why this market has been so frustrating. Intellectually I believe I nailed this call by avoiding equipment and staying in fertilizer stocks, which frankly have shown no signs of slowing down, and have been able to raise prices far above the rate their input costs. While that mattered in January through June 2008 - the fertilizer stocks continued to romp while the equipment stocks faltered badly - it has not mattered one iota the past 2 months. So despite squirreling out a trend, and being correct on it, we've been punished just the same the past 60 days. In summary it has not mattered what homework you did, you just have to make a sector wide bet (regardless of fundamentals in the sub sectors of the sector) and either be "in" or "out" of the entire "group" - the market is not discerning between the individual niches of the sector. So fundamental homework is useless and everything continues to be about 'sector allocation'.

I am seeing many examples of this across our portfolio holdings and it is making for an exasperating experience of late for a person who relies on fundamentals.

No position