Added at bottom: POT discussion and More
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Happy Holidays Everyone.
Thanks for reading the Street Beat thus far. I hope it has been entertaining and helpful to you.
As we look at the year in review in the markets we can say that for even the best and most experienced investors/traders such as Buffett, Soros, Danoff, Rogers this market has lead many to, to paraphrase Bill Clinton, question what the meaning of 'is' is.
Many things people once thought they knew have been tried and tested. That is largely because the US has enjoyed a bull market in stocks since the 1940s with only a few hiccups along the way. It is hard to fathom that as recently as 1982 the Dow traded under 1,000. In 1942, the Dow traded around 100. That is to say in 25 years (82 to 07) the Dow went up 14 times, or more on a percentage basis, than it had in the prior 40 years. Those 40 years, additionally, include some of the most robust economic growth of any civilization, ever. Please think about that, and then consider how much of the most recent market rise was fueled by credit rather than true economic expansion. Then you may have some perspective on how low this market may go.
The corrective phase has begun and requires that the everyday trader/investor gain a whole new set of tools. In some ways, this is a great time to learn about the markets because investors today have an understanding of how markets operate in bull markets and now are learning in a hurry how to complete their understanding of how the market works in protracted bear markets (I do not consider the dot com bubble to be anywhere near what we face now). Even though I have been very bearish on the market going back to last year and was very nimble with most stocks as a result, I certainly have made some mistakes this year, particularly with POT (and to a lesser extent MOS)... and the results have been to force me to expand my entire thinking on how the stock market works. When I got into POT and MOS I wrote on here that I was going to throw my best pitch based on my understanding of the markets and what had worked in the past. Namely, a great company with tremendous long term prospects, good management, a product that is in short supply and cannot be substituted, in one of the safest countries in the world, and a product that takes advantage of the secular trends in global constraint on food supply.... and all at a PE that by all metrics measured in previous markets was quite cheap relative to growth over time.
Well, when you throw your 95mph heater and it gets slammed over the fence you have to figure out what you missed and what needs improvement. That is exactly what I have attempted to do. Before the year started I put much less emphasis on charts and more on fundamentals than I do now, was much more accustomed to the 'Buy and Hold' culture that we had been trained to follow, and knew nothing about Elliott Wave Theory. I also had not yet ascertained how inflation, deflation, the yen, the dollar, commodities, etc. all fit into the bigger picture. While I do not claim to now all of a sudden know all the answers I do feel that I have found where some of these pieces may fit together and the import of all of this. At another time I hope to share the thoughts that I have generated over the past months and the knowledge that I have surmised. For now I want to mention that I am not ducking POT. Yes they guided lower and this needs to be discussed. The company is still in very good shape for the long term but a global depression, as we are likely to face, is nothing to laugh at and has taken its rightful toll on the stock of this company. Even more importantly, the whole concept of linking stocks to corporate performance and using buy and hold as a vehicle for growing assets over time may be challenged here.
This is much deeper than still most of us realize. We are still very early in this bear market in my opinion even though we are set up nicely for a major rally sometime early next year.
As the credit crunch deepens.... stay tuned... we, as investors and as citizens, are likely to change our assumptions, approach, and attitude in many many ways. If ever there was a time to seek ideas that stray from the mainstream media that time is now. The truth, and the success that this knowledge can engender, is afterall what we seek...
But these topics are all for another time.
For now, I want to leave you with a clip from Bad Santa. No matter how much we learn and keep an open mind sometimes it feels like the market is just laughing at us. Oh well, sometimes you gotta jus' roll with the punches .
Best wishes this holiday season.
PS: On the long side the two best charts I could find right now? FXY (as long as it stays above the 20 Day Moving Average and EBS (ditto on the 20 Day MA). Check them out if you haven't yet. Also, as you may know, I have a background in biochemistry and am always looking for exciting biotechs. That is, when the market allows for any trades that are long stocks and the charts support an upward move.
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Added
POT and more
I discuss POT a great deal because this company and stock, more than any other ever, has inspired me to question everything I thought I knew and seek new knowledge... seek to understand how the markets really work. PE ratios, DCF models, cash flow statements, etc. are nice but what really matters is demand for stocks and it is imperative to realize that these indicators are just part of the story. Perhaps I can discuss this in much more detail another time. It is very important in my opinion if one wants to succeed. For now let me turn to POT and its recent lowering of earnings guidance. Here are some salient points on fundamentals:
- POT guided lower, citing that it has also been affected by the credit crisis
- Bill Doyle was certain that potash demand destruction was not in sight several months ago. According to him corn would have to go to $2 (as an indicator for also grains as well) to see demand destruction. Yet, corn is now at $4 and we have seen demand destruction for not just phosphate and nitrogen but also for potash. It is important to note that potash companies, including Potash, are reducing volumes rather than accepting significant price cuts. This implies that they believe that the tight supply of potash and the return of demand to grow food makes potash too valuable to sell at low prices. It is true that while other commodities do not need to be used in a recession food production cannot just stop or people starve and riots break out. No government wants this. This is a major reason that I stayed away from all other commodity stocks... I felt that food would be the only commodity to weather the storm. However, as bearish as I was on the global economy I still may not have been bearish enough when I bought in here. We will see going forward if potash volume sales increase in the near to intermediate term.
- The lack of credit may be responsible for demand destruction on potash. Perhaps farmers want potash but just can't get the credit right now to buy it. Farmers are among the lowest risk lenders there are and governments are likely to ensure that food production continues. Thus any easing of lending by governments or otherwise directly to farmers may help here
- Potash Corp noted on their press release that the credit crisis makes it more difficult for competitors to develop new mines. Potash has the world's largest reserves and has cash. Thus if it does build out, as it plans, when the credit crisis ends there is likely to be a major major supply squeeze for potash, other competitors will not have built out, and Potash Corp will be by far the best company to take advantage of this... remember that even without credit constraints it takes at least 5 years and a lot of $ to build a new mine (very high barrier to entry).
- Important note: only about 1/3 of Potash's revenue currently comes from potash. Phosphate and nitrogen also equal about 1/3 each... and both of these have seen BOTH volume decrease and price decline. Eventually Potash will likely generate a higher proportion of revenue from potash but until then, even if potash demand stays high, the business is likely to feel affects from the other businesses... For companies like MOS and even more CF these factors are likely to create bigger drags on earnings
- The biggest threat to potash fundamentals is a decrease in the demand for meat and better food as the citizens of developing nations like China move back to their old towns and resume their old eating habits. While in the long term I strongly believe that the genie is out of the bottle and developing nations will demand to eat better and more this credit crisis is so deep that the secular trend towards more and better food may be delayed for quite a while.
- Overall... fundamentally the POT story is still in very good shape for the long term. That is to say after the credit crisis turns around... which could be years and years... In the meantime the credit crunch will affect business and it still remains to be seen how much and for how long. If someone is going to be in any commodity food is still probably the best from a pure fundamental perspective. Of the fertilizers POT is by far the strongest company. Companies that mine potash are still likely in better shape than companies that do not at all. MOS>CF
- Lesson 1: CEOs do not determine stock price... investors/traders do. I have learned that one has to be wary of any CEO that is too bullish... even a seasoned CEO like Doyle. With many companies (outside perhaps technology/biotech) the big houses may know more about short term fundamentals/likely stock movement than the management. Note that the CEO of CHK was so bullish that he bought lots of his own stock on margin and then faced margin calls and losses when natural gas prices fell and the stock went with it.
- This credit crunch causes people to hoard cash. Even if fundamentals improve substantially for fertilizer companies there is no rule that says stock prices have to go up. Without credit and leverage stocks of any company may stay subdued. However... and this is a very important point... with so many shorts out there and so much volatility in the market there are likely to be major short squeezes and short term rallies in these stocks (and many others). Going long makes sense... but primarily for trades... the more a stock goes up the more we need to look at selling and/or going short. This is especially true when we hit major resistance areas.
- Fertilizer stocks tend to trade together... so those who hold MOS, CF, etc. should look at POT because it is the sector leader. Commodities trade together but may diverge as oil has from some other ones recently. It is still always important to know what Oil is doing and what commodities in general are doing. Also, I like to look at DBA... the Ag commities futures... it has gone up recently...
- The market and sector must be taken into account at all times. We are currently in an ascending triangle in the markets (corrective intermediate wave 4 in Elliott Wave jargon).....this enables some stocks to go up or go sideways... in a declining period most stocks are unlikely to go up... opposite is true for a major bear rally
- The recent major rise in POT and MOS (they nearly doubled from lows before falling back) has been a great opportunity to lock in gains. It was fueled in part by a major short squeeze (I tried to short shares of both as a test and could not find shares to short until recently.... in such a scenario a move up is likely). However, there is major resistance in most stocks when they reach their November 10th highs (around 85 for POT and 40 for MOS in this case). Please note that if the market overall gets this high this should offer serious resistance as well. November 4... the Obama election rally, would offer even more resistance if the market/stocks go there. It is important to study major points of support and resistance. I have come to realize that when stocks hit major resistance areas and fail... as POT and MOS did, it makes sense to sell (in my case I sold short along with the longs... I do this for bookkeeping purposes) and ask questions later. Let the market prove that it can overcome resistance. If it does we can always buy back a little bit higher... and prevent the risk of losing major gains. Currently I am fully hedged in MOS and POT... we are at RSI 50 and teasing the upper Bollinger so I really feel these stocks could go either way right now short-term. We still have to break major resistance before I would cover and let the longs run.
Here is a really good article entitled:Don't Believe the Hype that I recently came across...
My feeling is: be smart but don't forget to still cherish the Holidays... there is still good out there...
Let's Do it Again...
"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.
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