MOS gets slammed on earnings miss... NO EXCEPTIONS- I don't duck mistakes

I have been big MOS and POT for a long time now. I have mentioned that I am more heavily weighted in POT (2:1) just because, among other reasons, phosphate and nitrogen demand is more elastic to lower grain price than is potash. All three produce multiple products but MOS is king of phosphate and POT is king of Potash. AGU has some seed related businesses as well I believe.

I was reading a few weeks ago that farmers were not laying down phosphate in certain cases because of the lower grain prices. This concerned me a bit and has been a reason that I have not added to MOS since the first purchase. I really wanted MOS because this serves as protection against earnings deterioration from the strike at Potash. Assumedly, companies like MOS and AGU should benefit if Potash is unable to sell as much supply due to the strike.

The charts were already pointing down due to the hedge fund unwind. It is also true that many of the houses that own the fertilizer companies also influence grain commodity prices. I have to assume that they knew that phosphate demand would slow with lower grain price. On the last POT call Doyle said that declines in grain price would have to drop by 2/3 to affect demand for potash and in fact on the MOS release it says that potash price had remained high and supply had remained tight.

So really this makes the case even more so for POT over MOS and I wish I had gone roughly 4:1 POT to MOS as originally planned. At any rate all of these names will be sold off with the current catalyst of the earnings miss and the statement by Mosaic that they will be decreasing phosphate shipments for the rest of the year due to essentially inventory buildup from sales over the summer and from slackened demand at the lower grain prices.

I am usually very very cautious but when a CEO like Doyle, who has been in the business for two decades, is as bullish as he has been on the last conference calls and the stock was trading at very low multiples I passed up on my rules of never letting a winner turn into a loser, don't take more than a 10% hit on any position, etc.

The lesson here: There are never exceptions to the rule. Never. I should have read my own post on risk management (under top posts) and NEVER EVER allowed any stock, no matter how promising, to be an exception. The charts rarely lie (the only case is like with CMED where I knew more about the company than the market because of my educational background). This is not a buy and hold market (as I have been saying all year), this is a market where cash is king and shorting, especially when the Dow was over 12,000, makes more sense then going long in most cases, and this is a market where cash is king. I would have been in almost all cash with a few quick trades but I really felt that these companies, especially POT, would be able to weather this recession fairly well.

These companies still produce a ton of cash and will be very viable for the long long run. However, near term, even if MOS offers to use their cash to buy back shares and provides a positive call tomorrow, there will be serious pressure in these names and unbelievable hedge fund selling. I think this sends us to the 200 weekly moving average around 40 for MOS (not all at once) unless something changes. On a bounce I may very well flip around and go net short... while keeping the longs for the very long term. I certainly will not buy any MOS anytime soon (unless we get a very oversold bounce for a trade) and will stick to POT for any additions for the very long term (and maybe some AGU). Mostly, though, I plan to treat these stocks like I have treated every other stock in the market and not give them any special privilege. It will be interesting to see what Doyle says on the 23rd as insiders have been buying at 180 and he is very bullish on the company. Of course, the 23rd is a long ways away.

The other thing to learn from this is that is imperative to hedge. I have protected some downside with hedging. However, were I to do it again I probably would have gone close to 1:1 long ferts and short UYM. That kind of protection is the only way to go in this market in my opinion if one is to go long. The other answer is just to stay in cash and be extremely nimble. Some people I respect have said that they rarely even let a stock stay in their account overnight. If they can't day trade it they don't trade it. This is probably going a bit too far and is not applicable/possible for all people... certainly I am not able to do that. However it does bring up a very relevant point: Cash is absolute King in this market so anything on the long side... I mean anything, needs to be made as a trade only with specific exit points in mind. Buying and holding anything, even the stocks that one may thinks breaks the rules, is just unacceptable unless one is willing to wait for a very very long time.

I still look to go short when the market stabilizes as I think we have further down to go before the end of this bear market. But shorts from here, now that the meat has been taken out, are also trades. Everything is a trade... even if that trade is several weeks or even months long.

Lesson learned. I'm not going to say it doesn't hurt because it does. However, I do not ever invest money that I need right now and I do not leverage beyond my means...ever.... so unlike hedge funds and others I can choose to sell or buy when I feel it is right to do so. However, I will be much more nimble right now (like I was with every other stock in the past year) and will be doing a lot of paper trading to sharpen my skill in this market. What has worked for me with other stocks in this market... including using tight stops and very defined risk management, always heeding the charts, being very cautious... that will be employed for all stocks from now on in all of my investing... as will the incorporation of new techniques as I learn them such as Elliott Wave Analysis.

Here are the Weekly Charts of MOS, AGU, POT, and UYM. If they test the 200 at some point we could still have a long way to go.



"I never make exceptions. An exception disproves the rule."
-Sir Arthur Conan Doyle






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