I’ll let you in on a little secret. Bunge’s assets are being heavily discounted in their financial reports.

They admit to as much themselves, under their explanation of pricing inventories.

Of their $6.7 billion in inventories, the preponderance (about $4.3 billion) are carried at fair value. However, the remaining inventories are not.

Most of Sugar & Bioenergy, Edible oil products, Milling Products, Fertilizer, and a small portion of the large Agribusiness line, are carried at the lesser of cost or market value. What this means is that, in a market such as this where agriculture products are increasing so dramatically, the most the company is ever acknowledging is what its resources cost.

What they cost, not what people will pay for them.

Excluding the edible oil and milling segments for a moment, what are the odds that inventories from their other lines of business are being fairly accounted for?

Sugar is held at fair value, but bioenergy is almost certainly being under reported in this high fuel cost environment. Agribusiness is where most of the action is at; yet there is almost $700 million worth of inventory being held, at best, at what it cost to acquire them. And the fertilizer division is the most intriguing of all.

Fertilizer inventories, all $777 million of them, are carried at the lower of cost or market. So how much are those $777 million really worth right now?

The price of fertilizers has tripled in the past decade. Something to keep in mind; I had created a graph, but my computer is blowing up, so you’ll have to use your imagination. Imagine a line starting at 1 and then zigzagging to 3, right now.

Do it.

There is no way that BG’s Fertilizer division is only worth $777 million. Not a chance.

And as for the lines of business where the environment is unfavorable, like the edible oils and milling products, well…they’re already carrying those at or below real value. There’s no surprise left in that.

The bottom line numbers for BG were phenomenal this past quarter. The company’s intrinsic worth has advanced past $77 per share, the level where I calculated it based on last September’s numbers. Their most recent earnings of $1.49 work out to roughly 2% per quarter.

That’s the lowest they’ve been since the third quarter of 2010.

Plus, those earnings have been growing at an average 5 year rate of 27%. That’s even after they succeeded in shooting themselves in the foot in the early quarters of 2010 and beyond.

And the party is not stopping for Bunge any time soon, as they have locked in the current prices in the markets with over 4 million contracts, futures or otherwise. These margin levels will continue for the foreseeable future. I fully expect Bunge to perform for at least another two years as static labor contracts, controlled input prices, and historically low grain reserves of potential buyers take them home.

The final conclusion is that BG is terribly undervalued.

They are undervalued because they trade at a steep discount to their book.

They are undervalued because that book value is calculated using extreme discounting, making the situation even more ridiculous.

They are undervalued because they trade at a steep discount to strong earnings growth.

They are undervalued because they are reaping full reward of this environment and its opportunities.

And they are a must own for me.

Just how undervalued is BG?

Well, that depends on the profitability of their inventories, of course. But to get a feel for it, let’s just look at the business with theoretical profit margins of 10%, 20%, and 30%. (As an aside, I have no idea as to the actual mark downs of their holdings, and just looking at the price of fertilizers, grains, etcetera, I’d guess that the profitability could be much higher. As a rule, each 1% of error seems to add about $0.10 to the value of the shares.)

On what we’ll just say is $1.5 billion worth of “questionably priced” inventories (itself an underestimate), that would leave us with $150 million, $300 million, and $450 million worth of uncounted value.

Thus, the real intrinsic worth of the shares is more likely somewhere between $78 – 80, using just modest assumptions. That is without considering (as crazy as this must seem) that BG as a performing and valuable company, should perhaps trade at a premium to its book, as opposed to a discount of it.

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Just another day in paradise, on this here Lazy Hedge River.

As the world lights up in a pyre and children go about the streets, I’m sipping on weak fruit cocktails with 8% alcohol by volume, not caring.

My positions are down for the day, but my “sanity investment” is all up, as my short on ERX plays off the general blow out occurring in the energy space and my losses are muted.

I want oil and related investments to bleed like it’s fall of 2008. As the American, European and Asian consumers suffer so thoroughly that they crawl into a hole I want oil to go to $60 a barrel and lower. On February 2, 2012, I want said consumer to see their finance-shadow, which of course will signify 6 more decades of “Oil Price Winter.”

I want all of this, so that the entire region known as the Middle East gets thrown into a wood chipper. I want those assholes so thoroughly buried beneath weak demand for their only natural resource that they literally start murdering each other, for the right to sell to the U.S. and similar countries for dirt cheap prices. I want them to be so utterly incapable of making a cent off of oil production that they are largely incapable of rebuilding their economies, and I don’t have to hear about their bullshit for the rest of my lifetime.

God willing, they will be so broke, my children won’t be bothered by them either.

Going forward, I will keep my position sizing and balance until I see developments within the U.S. government directing me to the tempo of the dollar. I will remain long half destroyed and uninteresting businesses like real estate, agriculture, utilities, uranium miners, and entertainment/gaming because, frankly, how much lower can these industries go?

I will hold cash because you don’t have any.

And in the meantime I will continue getting drunk on inner tubes while forgetting to apply sun lotion, that I might develop melanoma in my later years.

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This market is essentially an ADHD addled teenager fresh off of getting bombed on PCP.

ERX was down more than 3%. Now, with little to no improvement in the oil markets, ERX is for no real reason down only a few hundredths of a percentage.

Random other positions in my holdings skipped unexpectedly up, for no real rhyme or reason, while volatility is cropping up in surprising ways.

Meanwhile, Congress is no closer to coming to an agreement, and so any decisive relief that may be experienced remains out of sight. Until those things are known, disagreement of the outcome will keep prices jerking up and down in choppy swings. However, it’s equally as dangerous to bet these swings will continue as it is to bet on the wrong direction.

This is not an easily traded situation. You want to play all points of the field, while shirking the crowded positions.

To make matters more unstable, there are riots and unrest cropping up all over the planet. The Middle East is obvious, but now Europe is on the cusp of crisis, there are reports of massive shortages in developing countries, and the whole world seems on the verge of a complete restructuring of global leadership.

The second biggest danger right now, aside from all out rebellion and warfare, is the damage that is being done to food supplies and basic materials. There is no way, judging by the reactions of governments to these developments, that investment in critical infrastructure is being made. Take for instance Argentina. They’ve been waging war against the big grain exporters, like Bunge.

Watch closely as losses are forced on the grain exporters, forcing them to shut down operations, which will both drive prices up higher while paving the way for a future shortage. I would not be surprised if riots started cropping up in Argentina in the next year or two, or in some similar country in the South Americas, as they have in the Middle East.

All in all, these are interesting times we live in friends. Watch your back, and be safe.

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I’m less than pleased with my recent performance. I’ve succeeded in losing money six ways from sideways, in this asshole Jitterbugging I’ve been doing of late. Today should prove no different, looking at the oil futures.

ERX traded at $90 not too long ago; and if this correction should rebound too sharply, I will be bitch slapped upside the head with a tire iron.

I can only hope that the other garbage in my collection manages to keep up with the radioactive ETF I’ve decided to load up on. The last two days have been acceptable, with me up, but that could change.

This correction has been agonizing, and I don’t believe I’m up at all for this year. My singular hope could come from silver, if it rebounds to $50, taking my precious physical with it. However, short of that, if these REITs don’t start taking off soon, this year could be a red mark and what has thus far been a two year blitzed marathon of joyous wonder.

God willing, this market will make up its mind, so that this party can keep on dancing.

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If you missed the news yesterday, American Water Works Company announced a massive trade of assets with Aqua American, ceding their Texas operations in exchange for increased exposure to Missouri.

Through their subsidiary, Missouri American Water, they acquired 11 water systems and 59 wastewater systems, a deal valued at roughly $3 million. By consolidating their assets, they’re hoping to lower their administrative costs by also being able to consolidate their staff into a smaller area.

Despite the consolidation, AWK maintains presence in more than 30 states, hardly making it a centralized operation.

Needless to say, I am pleased with the company. This sort of strategy almost always brightens my day; the management of AWK has been working hard to open up value and take full advantage of their existing structure. I don’t know if this move will significantly improve earnings, but it definitely helps and shows the men and women in charge of AWK to be intelligent and willing to continuously improve the business that has been entrusted to them.

Combine that with my own positive outlook on utilities at the moment, and I’m glad I own AWK.

Elsewhere, I continue to be up for the day (about ¾ of a percent, at the moment) despite my ERX hedge jackknifing higher. I will hold this rally with suspicion until I have better reason to trust it. I wish to directly see where the currency is going before I’m willing to relieve myself of this small, but questionable, cash position.

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As I sit here in my office, running my fingertips gently across the finished granite surface of my desk and staring intently into my reflection as it pierces my gaze from the mirror across the room, I also feel a deep sense of calm about where I am in the world.

Aside from the twisting in my neck that is permitting me this angle, everything about where I am seems rather straightforward. I am back on the course I set myself upon in February. The only difference is now I am hedged a further magnitude, short energy from the highest levels prices, amongst them oil and gas, have been in three years.

And further, I am up for the day about a third of a percent, setting out from my most secured positions; real estate, utilities, and agriculture, with the gentle additions of beaten down names and cash.

I am at ease now, here in my office on this floor of mine. Whether the whole planet should come to an end, I will not be panicked when it does.

There is too much uncertainty. Until now, the direction has been clear, but now that direction hinges on the actions of some of the most unpredictable and untrustworthy men and women the human race has ever known.

What course will they take?

Until that is known, all of global finance is in the balance, and I do not care to press on such bipolar outcomes. Not until specific decisions have been made; decisions that will give current to future and create a polar outcome; will I be committing to an end.

And until then, my friends, you can expect me to remain tranquil and still up here on these stories of 9.

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