Morgan Stanley calls off its spec trade on ethanol

Buy on the rumor, sell on the news.  That is a time tested strategy on Wall Street. In late Nov, MS made a short term call to buy Ethanol stocks.  The stocks rallied in expectation of the Energy Bill passing. It has and is allbut law.  The House and president should get through it this week. So MS says sell.  I disagree, but here is MS logic:

CLEAN
ENERGY: CATALYST TRIGGERED; SHORT-TERM TRADE DONE - December 17, 2007
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David Wilson, CFA  +1 (1)713 512 4482  Morgan Stanley & Co.
Incorporated

Closing Our Short-Term Trade: In light of recent positive developments
surrounding the Energy Bill, we prefer to “take money off the table,”
locking in recent gains in the ethanol stocks, rather than subject those gains
to possible deterioration as we head into 2008. As a group, the ethanol names
are 60% above 52-week lows today.

The Background and Reasons: We put forth a short-term trade idea on
November 26 to buy the ethanol stocks due to impending legislative catalysts.
We now believe it is appropriate to close that trade in light of i) the
catalyst - a new renewable fuel standard (RFS) playing out and ii) some of the
near-term uncertainty facing the industry. (See our notes “Biofuel
Update: A Short-Term Trading Idea” Nov. 26, 2007, and “Biofuel
Update: Energy Bill Still Pending, Still a Catalyst” Dec 11, 2007). We
believe that significant upside to the ethanol stocks at these levels is
unlikely in the near-term based on the poor overall stock performance in 2007
(excluding recent weeks’ performance), the potential ethanol oversupply situation
in 2008, and higher corn prices. Furthermore, given these reasons and
uncertainty surrounding the industry in 2008, we see there is increased risk
that the stocks trade down from current levels as we head into 2008.

What’s New: Last week the US Senate passed a modified Energy Bill with
an increased RFS calling for 36 billion gallons of renewable fuels by 2022. The
House of Representatives must ratify the bill and the President sign it for it
to become law, but we see these as low hurdles as i) the House already approved
the bill once before and ii) the White House indicated its favor of the bill.
We expect the Energy Bill to be signed in to law this week. Performance of the
ethanol stocks on Friday December 14, 2007, suggests that this event is being
priced into the stocks.