Update-
The naz bounced directly off of the 38% Fibonacci retracement level for the overall market gains from the 20th century. The other indexes also lost 30% or more from their peaks to the low set on Monday. They are at very key short term support areas (10,000 and 1,000... round numbers like this are usually huge support and resistance areas). The Vix is off the chart.If there is enough cash to go around(and in a liquidity crunch there may or may not be) we may get that next bear rally I was looking for a few posts ago. I went short on MOS on Friday since I expected Monday might be a further sell-off. I will cover if this rally looks to continue from the inter day lows on Monday.
Let the market and charts decide.
On one other note: Hey the stuff on this post is more than meets the eye. Please remember for the rest of this market that only the demand/supply for stocks drives the market and nothing else. Fundamentals are very good indicators for demand in the long run and technicals may offer indicators in the short-run but always remember that these are nothing more than indicators for the real desire to buy/sell stocks and assets. One of the most dangerous things to do in the market is stick to a paradigm that everyone else is following when it does not work at the moment. Just because some names are trading at a PE of 5 with 30% growth it doesn't matter if there isn't the money or desire to buy.
That being said I paper-traded purchases of APWR, SDTH, and others Monday. Also note that FEED went up even on Monday bc they announced a buy back. See... they are where the cash is (China) and where the political machine that will do everything to satisfy the populace lives (China) and they sell 'what's for dinner'! For those with a longer range investment objective and plenty of cash I recommend this stock as a 'some purchase' at these prices (but do your own DD). If cash decides to come out of hiding (I know that some smart people held it and are ready to go) then we may see a nice bear rally again here. However, when it turns back down I believe we are likely still headed for Dow 9,000 or 8,000 or even 7,000. We'll see.
Note for those worried about POT and MOS and AGU in my estimation these are still very very good companies and should do fine. There is a long-term bull market in these names and in ag commodities and all commodities. It may take quite a while before we see the levels these names were trading at this summer (it may take years) but for those like mewith a very long horizon on these names there is no reason to sell as long as fundamentals remain intact. Note that MOS remained very bullish on the long-term phoshpate fertilizer market and I am glad that they are not buying back shares... I would rather they protect the health of their long-term business and insure that they have enough cash to gain sufficient liquidity to pay workers and operations.
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Skiers and snowboarders are familiar with the term "double diamond". The double diamond runs are the ones designated for experts only. On double diamond runs beginners tremble in their ski/snowboard boots, intermediates realize how much they still have to learn, and even experts fall..
I like to go skiing and snowboarding at the Sugar Bowl in Lake Tahoe. One of the most daunting runs, and clear double diamonds, at the Sugar Bowl is the ‘58’. I’m an advanced intermediate skier and an intermediate snowboarder and this run always scares the sh*t out of me. It’s a thrill but man is it always tough.
Guess what? We are now facing the ‘58’ of the stock market.
As I noted I have been pasted by the MOS, and especially POT, sell-offs recently. I have been very bearish on the stock market and very nimble but this the one case where I have really been nailed thus far. I am not the only one. In fact, quite a few of the pros, and even some of the top pros, have been caught off guard by the sell-off in these names. Mish Shedlock (Global Economic Analysis… blog at right) is a professional investor/trader. He wrote an article before earnings on how he was trying to defend MOS.
He was talking about earnings and PE ratios and the hedge fund unwind and many of the elements that I have broached. Bridgeway Aggressive Investors 2, run by John Montgomery, and a stock that had until recently returned an average of 20% a year over the last 5 years, has just fallen off a cliff recently. It has lost almost 33% of its value in a little over a month and was down over 11% on the day of Mosaic’s conference call. This company uses quantitative methods, designed by the MIT trained engineer John Montgomery, to pick stocks with great earnings momentum, fundamentals, sentiment, etc. Two of his top three holdings as of the last quarter were MOS and POT (ANR being the other one). The chart of BRAIX is posted below.
****WARNING
This chart is of an adult nature and may induce very strong or sexual language, strong violence and gore, or strong drug content. No children under the age of 17 admitted without parent. No adults over the age of 18 admitted without immediate access to extensive psychiatric therapy.
This market has been a tremendous learning experience for me. I am really appreciative of this (though the stock hits have been less than fun) as I never would have been compelled to search and learn so much in any other market. So… what is being missed here? Well… it is critical to look at the stock market for what it really is and to put everything in this context. Fundamental analysis, discounted cash flow, technicals, etc. do not drive stock price. They are just indicators of the probabilities of how stocks will be valued in the future. The real value of a stock is driven by only two things: I will call them the stock’s intrinsic and extrinsic value.
All investments, including cash and gold and stocks and bonds, have an intrinsic and extrinsic value. The intrinsic value what the asset is worth regardless of external conditions. A piece of gold is worth something no matter what happens. So is a bushel of wheat or a red ruby diamond.
On the othe hand the stock of any company is just a piece of paper. At any one moment in time the ‘instrinsic’ value of a stock is nothing more than the dividend it pays out and recoverable book value were the company to go bankrupt. Many stocks thus have an intrinsic present value close to zero (despite the stated book value... what do think you would actually get upon bankruptcy?.)
THAT IS WHY THAT WHEN PEOPLE SAY A STOCK MUST GO UP BECAUSE IS TRADING AT PEG OF .5 OR .2 OR ANY OTHER NUMBER THEY (AND I) ARE WRONG.
The rest of the stock value is completely determined by the demand for the stock’s extrinsic value. This can be defined as the willingness, and ability, for people to trade money for a stock. If either the willingess to buy (because people think the stock will go down rather than go up or because they think that competing assets such as cash and other stocks are more valuable than the stock at a given price) or the people’s ability to buy (because they are leveraged 30:1 and must sell no matter what for example) decreases then the value of the stock goes down irrespective of the underlying fundamentals of the company. Since people buy stocks for the purpose of making money by selling it at a higher price later, rather than for their underlying value (like they do for gold or other hard assets) the ‘extrinsic’ value determines the majority of stock price.
For these reasons the public’s psychology, perception, as well as available wealth are extremely important components of stock price. In a healthy market (an investment market) or when one takes a very long-term view (again an investment) underlying fundamentals may be very good indicators of future extrinsic value. However, in a traders market such as this one, over the short to medium term, the components mentioned at top become more important than ever.
Just as a test run I went onto the POT message board a few days ago and said that I thought the POT price was going to 100 (this was before the MOS results and POT was trading around 160 at the time). I did this because I wanted to see what people would say. I was curious what the psychology would be and why people would or would not defend the stock. It turned out that I was attacked from all sides as an imbecile. The reason? There is no way that POT could trade that low because it wouldn’t make sense from a PE relative to growth perspective. Everybody was telling me to buy and that the charts were an anomaly. I was a ‘rookie’ who clearly did not understand the way the stock market works according to the others. Then I realized that I had been touting the same principles for POT in the past as the others were now. Despite what the market, as indicated by the charts, was telling me. Despite the fact that we are in a deflationary market where cash is king. Despite the fact that every bounce in the market has been met with a pronounced sell-off. I thought of what V. had been saying on Earth to Wallstreet and I felt for the first time what it would be like to go against what everyone was saying, including some of the very smartest and most respected investors. I was starting to feel some clarity here. The stock market, though it does have a scientific element to it, differs from science in a very profound way: in science the laws are the laws are the laws but in the stock market the laws can change based on the psychology and investment capability of the market. In the bull market of the last 25 years PE ratios and PEG ratios and other scientific fundamentals have, for the most part, been very good proxies for the underlying demand for stocks. We have become used to using fundamentals as if the stock market was a science that followed certain laws of nature. It does not. As a result we must revert to the actual law of the stock market which is governed by the supply/demand for stocks as mentioned not the indicators and fundamentals that serve as one indicator of potential supply/demand .
Hold on a second. What about people like Buffett who value invest . Are they wrong? Absolutely not. It is very important to always distinguish between true investments and trades. If you are buying a piece of the company (even with a few shares) and are planning to hold on to it for a decade or so or more then the fundamentals still rule. However, when most of us ‘invest’ we are not thinking in these terms. We may say that we are planning to hold for years but we get upset or even panic when our stock goes down 25 or 50% and may not turn for several years or longer. We may be buying and holding but do not really have an investment objective in such a case. I have thus learned to look myself in the mirror and really ask myself whether I am looking to buy a piece of the company for the very long run or am really trying to trade for shorter term profits. We all need to do this and realize that in a trading environment the fundamentals only mean so much. What we cannot do is buy and sell with an investment mentality when our real objectives are of a trading nature. We have to be honest with ourselves here.
Let’s move back to MOS and POT for a moment here. We have just hit serious support around 40 for MOS (also the 200 week moving average area) and around 100 for POT. The PEG ratios may be ridiculous and they have cash flow etc. If we are looking to hold these companies (especially POT in my estimation) for a very long time this may be a great time to start nibbling on the long side. If we are looking for oversold bounces (RSI turned from the 30 region on Friday and was a great buy in the morning for a day trade until it turned back down) then it is also a good buy right now. However, if we are investing at these prices with the idea that these stocks must go up in the next few months because the PE ratios are so low and the companies are still fundamentally solid then we are fooling ourselves. The stocks may go up but they also may not. In fact, I would expect that POT may test it’s 200 weekly average around 80 at some point and I would not even be surprised if MOS broke below the 40 region at some point soon and fell to 30 or even 20. Why is that impossible? Because the PE ratio is… what? Because the earnings last year were less than now and the stock prices were double where they are now? That was last year when the extrinsic component of the stock price, that is the belief that stocks would go up and the capital necessary to buy, was there.
This is not last year’s market.
There are many other great stocks for the long haul. MA, V, PBR, GOOG, CMED… these are some of the stock I would just love to hold for years and years at these prices as long as the fundamentals remained in place. It is also true that commodities themselves, buyable through etfs such as DBA and DBC, remain very good long-term investments. That is why Jim Rogers is still buying… he is the antithesis of a trader. However, if I were going to buy these now I would have to accept the very real possibility of near to mid term declines. I would have to ask myself if holding these stocks was more important than holding cash right now. On the MOS conference call the management said that they were not increasing dividend or buying back stock because in a market that has liquidity problems the only thing that speaks is cash. They spoke of building a ‘fortress balance sheet’. This is not a financial institution or a homebuilder that may run out of money tomorrow. This is one of the companies that is sitting on acres and acres of gold (potash and phosphate). However, the State of California has to borrow from the Treasury because they can’t get the short-term credit necessary to pay their workers. In a world with limited credit the ONLY thing that speaks is cash. That is why the dollar has gotten stronger recently, that is why even the strongest companies are hoarding cash, and that is why it will be very difficult for stocks to go up (other than quick bounces) any time soon. In the light of all this doesn’t it make sense that we, too, heed the messages of these companies and try to build our own ‘fortress balance sheet’ by hanging onto cash and paying off debt/bills etc?
Did I mention that cash was king right now?
Returning to the market, then, it is obvious that fundamentals are not good enough by themselves to trade in this market. The only consistent indicator of where the market and individual stocks in the market, may be going in the medium term, in my opinion are the charts. The tell you what the market thinks. They are the comprehensive, all-inclusive, piece of the puzzle as of this moment in time. However, we care about the next period and what about in the Spring when financials were going up and in October 07 when the stock market was going up? Were those good indicators of the future? Yes and No. They demonstrated what the market felt at those moments in time but if one looked at indicators such as RSI, moving averages, Bollinger Bands, and more it was possible to see that the market was changing and put the probability of success in one’s favor. The bounce of the market off of the 200 day moving average in the Spring, and the island reversal of UYG in May, and the breaking of critical moving averages for the Ag names in the summer… all of these were tremendous warning signs that could have put us in the best position for success. That is, as long as we were willing to listen to what the markets were saying instead of chiding the markets for being unreasonable and irrational. Obviously, understanding the fundamentals could help make us aware of the turning in the charts (such as the financial an overall market downturn in the Spring) and thus fundamentals certainly do have value. However, they are just one piece of the puzzle that can put probability in our favor. If there is a battle between fundamentals and charts the charts almost always win. At the very least, in such a case, it is wise to stay the heck away. That is true both on the short and the long side of the market.
To summarize my action from here on out:
1. Hold on to cash as everyone will want and need it
2. Defy the charts at own peril.
3. Put the probability as much in favor as possible, try to determine the psychology of the masses and the smart money, and if I don’t know don’t go (do nothing).
Rough week last week. It’s called paying dues. That’s how you learn and improve.
BTW... The blog Snot Wheel recommended selling the fertilizers last summer when they broke long turn trend lines. They were not talking about fundamentals but the real risks of that event happening. Also, please note that Elliott Wave analysis shows a clear 'impulse wave' up on fertilizer names that ended at 160 MOS and 240 POT. Very clear as I look at it now having learned more about this topic.
Note: I have not sold my MOS or POT longs. They are in the category of very long-term investments for me unless the fundamentals change. However, if we break key support areas or reach key resistance areas I will once again go short along with my longs with buy-to-cover stops. Note that the quick bounce to 98/185 on POT/MOS took out my buy to cover hedges and when it turned back down I got screwed anyway as I made a mistake and did not re-instate them. Otherwise I would have been still been down but not nearly as much here. Every major bounce up has to be viewed as a trade and an opportunity to sell or go short as a hedge at the very least until conditions change.
This is probably the greatest ski jump of all time. It's only 3 seconds long but it is enduring and memorable.
"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.
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