Golden Pitchfork

Let's talk about the Golden Pitchfork. I'm in the mood... For Thurs the Golden Pitchfork... laced with potash... thwarted the ignorant Wall Street urbanites... Let me expound upon this...

Today the Street was looking for any kinds of cracks in the potash ship. Any intimation of demand weakness, of cost increases, of worker discontent, of declining corn prices sacking the potash business. Anything. The hyenas were out in droves. It was incredibly tempting... the monetary prospects had them salivating... sack one of the few areas of the market that has meat in it... bring down the potash fertilizers like they drank the blood of RIMM, of AAPL, of many other great stocks. At least for a day or a week or however long they could get away with it. New York New York was on the prowl again...

I promise you that many of the big funds hold POT and MOS and many other fertilizer names because they know these stocks are going up in the long run. Many of the hedge funds do as well I am sure. But right now, at this moment in time, they would love nothing more than to take the heavy investments that remain in these names like candy from a baby and then make the money twice on the way back up. The scene was set. The lighting was in place. The theatre was packed. Commodity prices were falling, the earnings estimates were impossibly high, and the workers were set to go on strike. This is a bear market... and the bears had already picked the low lying fruit, at least for now. Could they pull off a bear raid on POT and MOS and the other fertilizer names?

Add in an analyst downgrade (trust me... pre-determined... I've seen too many analyst downgrades... like the one of ISRG at 250... to know whose pockets many of these analysts are in)... and any demand issues or anything else at all would get the job done. It wasn't until I listened to the call and saw the analyst downgrade even with the tremendous earnings that I knew how ugly this was... how dangerous this was in fact... A miss would have pummeled this stock... in which case I would have done as mentioned... sold and gotten right back in when the oscillators turned. But when I saw what was going on I did even better... I beat them at their own game. I bought more MOS at 126 because this is the biggest bull market on the planet in my opinion and MOS is ridiculously cheap at 126... (I could also have bought POT but I am weighted more in POT and wanted some more balance) but I also shorted the same amount of MOS at 126.

They could only take it down so far in the face of these kinds of earnings and guidance... as I mentioned 112 to 114 area (in this range) is the support level under 120 for MOS... when we hit this area and started to turn I covered the short and rode the stock up, taking the gains from their hands. It was a hedge that protected my added investment regardless of which way the stock went until I covered or sold... it's a protected way to play volatility with little risk... and is I believe one of the best ways to play the game when the stock should be going up but the hedgies and traders want to bring it down anyway. It gave me all the power... take it down further... I was thinking... I dare you because that means the further you have to cover when it goes back up.

Fortunately I had time today to watch the markets and to try out these techniques. Not everyone does have the time... and I won't always either... if you do this is a powerful way to play this kind of situation. Profit on the volatility... take advantage of the bears greed because they are on the wrong side of the tracks... they are going against the fundamentals... they should pay the price... not you.

The only way I could do this was to do my DD ahead of time. I knew that demand destruction is not even on the horizon at this time because I listened to the presentations on the POT website a while ago. I posted that on this blog. I knew the fundamental picture was very very solid. I understood the deep roots of this bull. This allowed me to separate the fundamental picture from the manipulation.

I also knew my technicals.
Knowledge is power. Thinking outside the box is worth it's weight in...pitchforks. If there were only two things to take away from this site and nothing else perhaps these would be the two...
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Let's cover some other points... On the call:

• Demand destruction not even on the horizon unless corn and grain prices dropped a ton
• We are just in the beginning of a long term bull market in potash and other fertilizers
• China's demand will only go up as they are likely to drop their price controls on corn and/or subsidize farmers to encourage production because they need the potash to grow their economy's desire for food
• Potash prices going up and up and up for the foreseeable future
• Phosphate and Nitrogen fertilizers also in strong demand
• The Potash component of the fertilizer mix in the developing countries is much too low to be optimal. Potash is the ingredient that must be increased around the world to optimize yields
  
• POT has the biggest potash mines in the world by far.
  
• Increases in potash price do not cost farmers much relative to overall benefit
  
• The workers at POT are the highest paid in the industry... POT is the largest taxpayer in Saskatchewan and creates a ton of business there, POT is using its profits for the benefit of the towns and communities where the mines are... POT will not bend over backwards and sacrifice margins... in sum POT plans to meet guidance with or without a strike and believes a strike may be avoided
• Next year is expected to be even better than this one

So where to from here...? Now that the earnings are out and they exceeded even the highest expectations I do not plan to sell any POT or MOS until stock prices appreciate considerably or unless the whole market implodes. For MOS this is subject to their earnings but I expect them to be in line with that of POT as they have been so far. I personally am more weighted in POT because it is a purer play on potash but DAP is also doing very well so this is up to you. However, if the hedgies and the like want to sell this baby down anyway I am more than willing to buy short positions in POT and MOS with buy to cover stops. If the prices move down I gain the short and will cover when the ride goes back up (which it will... take a look at the charts). To protect from losing the majority of the gains in the upward movements these hedges are planned to have buy to cover stops set so that the give back is limited but the gain on the short covering hedgie play is unlimited. This combines risk management and strong fundamentals all in one basket. Sounds like a winner to me. If you are not comfortable with this method that is fine... I still contend that we see POT in the 300 to 350 range and MOS near 200 w/in a year unless the market implodes...

Do your DD. The posts I've written recently are a good place to start... One more point... as I mentioned on this post that POT has historically not shot up right after beating earnings but gone down or remained flat before taking off. You may want to be aware of this...
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Other stocks
The market went down and UYG was hit the hardest... we are in a very technically driven market... see the last post. I was considering going short UYG and CMED based on technicals but best not to have too many things on the plate at once...

Have to go to bed...
Best, Jon


"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.