By G C Mays
In late October I penned a piece entitled, "What's Moving Mosaic's Stock?," in which I suggested that the EUR/USD exchange rate dictated a significant percentage of the movement in Mosaic's (MOS) stock price and not its stellar earnings. I also wrote:
It is very important to note, especially for traders, that correlations change over time due to the dynamic nature of the financial markets. When you make a trading or investment decision based on these kinds of relationships it's imperative that you continuously watch those relationships for signs of a weakening or strengthening association.
Five weeks later, as the chart below shows, the correlations between the EUR/USD exchange rate, and Mosaic's stock price did indeed change between October 20th and December 5th. The correlation declined from .70 on October 31st to .33 on November 11th before rebounding to an even higher .82 over the last couple of weeks. A simple correlation of .82 implies that changes in the EUR/USD exchange rate explain 67 percent of the price movement of Mosaic stock.
The EUR/USD exchange rate correlation weakened during the aforementioned period due to strong US economic reports on employment, factory orders, ISM and jobless claims, which offset the mixed to negative news coming out of Europe. Once the "hopium" wore off, the US markets returned their focus to the European debt crises and the correlation between the two tightened again.
The graph also illustrates the growing correlation between the S&P 500 and Mosaic's stock market price. Standard & Poors added Mosaic to its S&P 500 index on September 23, replacing National Semiconductor Corp, which Texas Instruments Inc. (TXN) acquired. Before you dash off to change your trading setup bear in mind that while both relationships are significant, the currency exchange rate has the highest level of statistical significance and is more reliable. We can see this by looking at the following two charts.
The first chart illustrates Mosaic's price relationship with the EUR/USD exchange rate:
There is a tight overlapping relationship here. In fact at certain points the relationship appears stronger than the correlation suggests. This next chart illustrates Mosaic's price relationship with the S & P 500.
While you can clearly see the relationship between the two, even visually we can see the relationship is not as strong. At the moment, the EUR/USD exchange rate is the primary cause dictating the price of grains, with demand issues being a secondary cause. The price of grains in turn dictates a farmer's willingness to buy fertilizer and thus fertilizer prices, which impacts company profitability. Current prices of wheat, corn, and soybeans still offer the farmer a strong incentive to buy, but those buys might happen at lower prices. We will know more when Mosaic reports its fiscal year 2012 2nd quarter earnings in January.
Of course the EUR/USD exchange rate does not fully explain Mosaic stock price movement; no single variable ever does. However, the EUR/USD is the most significant variable and its observable in real-time and that makes it a great tool for traders. Another reason the fertilizer companies are under performing is slack export demand, which by the way is being hurt by both the EUR/USD exchange rate and uncertainty surrounding the debt crises in Europe.
It will be some time before the european debt crises settles down enough for the euro to stabilize against world currencies. When it does traders will be able to regress back and use wheat, corn, or soybeans as a barometer for direction. However, I expect the EUR/USD exchange rate to play a central role in how Mosaic's stock performs for the foreseeable future.