Chicken Little...er...Morgan Stanley is Worried about Fertilizer

Aha! Finally we found a way to worry about even the bulletproof fertilizer stocks. Not even a week after stellar earnings from Mosaic (MOS) we now can find a way to even begin to worry about the biggest secular story out there. Classic action here. Nothing is deemed safe anymore since the sky is falling.If you look close enough you can find a wart on anything - for example, with the economy slowing won't nicotine addicted smokers finally begin to quit since they are running out of cash? Won't they cut back on toiletries (bad hygiene makes a rise as people are too poor to buy the basics)? Won't we stop flying on airlines (why are they going up as oil falls and mergers are announced - people will be too poor to fly anyhow)? Etc etc. Won't people make less visits to the doctor (who can make those co-pays - the great depression is upon us)?

As with McDonald's last week [No Safety, even in McDonald's] where the thesis is people will be so poor they will cut back to visiting the cheapest restaurant in America; we are now officially in over reaction / paranoia mode. When will we bottom? Perhaps when we see the analyst come out with the 'rigorous' analysis that Walmart (WMT) must be sold because people are too poor to shop there as well. This is classic move from bullish to bearish and from one extreme to another.

Where were these analysts six months ago? We went from an immune consumer six months ago to a consumer who will abandon even McDonald's (and next Walmart). All in 180 days. As I wrote last week - keep in mind these newly minted MBA's who have never lived through even a 20% market correction or any sort of recession (2001 was a recession on paper only) - and any slowdown will seem to be the "End of Days". It seems to be starting with the commentary and "analysis" I am reading the past week. And yes I am negative on the economy, but it is all relative. Some of the ideas I am seeing tossed around by analysts are harking to 1930-1939. Perhaps, but I am not ready to really go that far.

Thanks to Notable Calls on Fertilizer Morgan Stanley notes Wednesday's declines in fertilizer shares seem to be largely due to a somewhat surprising gain in potash inventory. While the bulls would argue that this inventory build is seasonal, the firm notes that historically inventory build generally starts in August or September and not in December. If the potash market is so strong, how could inventory have risen so sharply in the month of December? Firm believes the issue may go a bit deeper and may turn out to be a bit more ominous as customers may be over-ordering in light of tight supply and rapid price increases. This would distort what producers see as “demand.”

While producers continue to maintain that they are unable to keep up with orders and sales are on allocation or some degree of restriction, the inventory gain may have shown otherwise. The potash inventory gain may only be a small “hiccup” in the perfect stream of data we have been seeing, but points to a certain degree of vulnerability in the shares if the data turns less buoyant. Firm maintains Cautious industry stance but does not have enough data to call for a sustained downturn. Maintains Underweight rating on PotashCorp (NYSE:POT) and Agrium (NYSE:AGU) and are currently Equal-weight on Mosai (NYSE:MOS).

Just like with McDonald's, I think if we look back in a year we will see these as great buying opportunities. But for now, we live in fear and every shadow lurking around every corner is the beginning of the end for every secular growth market we have. They are all suddenly just "gone". After Apple (AAPL) reports the quarter of the century next week, you will see the same commentary I am sure - yes, it was a blockbuster quarter but with the consumer unable to even buy a Big Mac how will he ever buy a new laptop?

Look I could be wrong on all my theories and in fact fertilizer stocks are done, Apple is done, Petrobras (PBR) is done (who needs oil anymore anyhow?), etc etc. But you will at least know why the NAV of the fund is $0 if every great secular story ended last week. And please send me pictures of your fallout shelters as we move to this Mad Max world.

Folks, these analysts have moved the US down from our top spot in world GDP to Kiribati [World GDP by Country] levels of consumerism in the past 3 weeks. How quickly we've fallen. Look at Togo just pass us by in the still of the night. Katy bar the door. It's over for the USA.

Disclosure: Long Mosaic, Apple, Petrobras, and Potash in fund and in personal account

Comments

[northgoingzax]

Amazing isn't it. The world's going to hell in a handbasket, yet I still can't get near the mall on the weekend. You didn't touch on tech save for APPL so I will. How can it be that the enterprise market has dried up with the likes of IBM, ACN, ORCL and JAVA all beating and raising estimates? Either they are all outliers, ignorant or liars. Somehow in the age of SARBOX, when you can go to jail for issuing a rosy forecast, I don't think so.

[sophocles]

The fertilizer Institute put those inventory nimbers. we discussed it on the investorvillage VT.TO message board. You could see the same inventory numbers on POT website. You can see there is an inventory increase from Nov to Dec but inventory is lower than the 5-year average even after all those production raises by POT, MOS, AGU, etc. POT is opening a new mine in Brunswick and commissioned another one in Saskatchewan. BHP is doing a feasibility study in Saskatchewan. If there is no demand, why so much activity? I think the increase in inventory was NOT demand related. The Cornbelt potash price has increased $100/st in the last 4 weeks.


POT: Potash: Seasonality, rail delays behind potash restocking; buy on pullback- BofA

BofA says an there was an overreaction to inventory data. They see the recent pullback in fertilizer stocks (down 14-22% since 1/15 vs. 3.5% for S&P index) as an opportunity to add to positions in Buy-rated PotashCorp (POT) and Mosaic (MOS) ahead of what is likely to be a break-out year for potash. The firm suspects investors are overreacting to Dec producer inventory data, which showed a sequential increase to 1.8 mln short tons, but down 21% y-y. They think producers needed to replenish Dec stocks ahead of U.S spring planting, thus pushing the normal October/November restocking period out by one month. Potash shipments declined last month, adding to inventories, but railcar delays at C.P Rail rather than a lull in customer orders may be to blame.

[TraderMark]

sophocles, thanks for the BofA report. Look I am a bear on the economy - have been for a year. Well ahead of the curve. But its not overreaction to everything. A month to month uptick in inventory and suddenly we go to "double ordering is the reason for strength in fertilizer" It is laughable. But humans have a herding instinct just like most animals. It is very apparent in the stock market.

This inventory data reminds me of housing data. People get excited when one month sales shows a slight uptick from last month's sales, not realizing year over year its down 30%. Too much over emphasis on one 30 day period versus the last and a whole "scenario" is built off that. Same with employment reports. Same with inflation reports. Look year over year, it smooths out the rough edges. This is just classic analyst action. Why investors continue to react to these people who downgrade solar stocks after 50% down moves, who downgrade financials after 50% down moves, is beyond me.

I will be laughing when MOS has a $2 handle in 2009.

[TraderMark]

I would like the analysts to reconcile a 1 month pop in inventories with the 5 year trends in "everything"

seekingalpha.com/artic...

and then do a thoughtful write up on how "everything" will be reversing over the next decade - how we are going to push the emerging world's middle class back into the farm fields and tell them, no you cannot have the life you want. Very short sighted stuff I see, and I think these analysts are trained on retail same store sales analysis in business school, and apply that to every sector.

[thannagan]

If you are relatively sure that your product is going to be worth more next month (and the month after that, and so on) why wouldn't you 1) do whatever you could to find more to sell, and 2) why would you worry at all about having more on hand - for whatever reason? The stuff is going up in value by the day. And so is the NAV of the owner.

[sophocles]

We made the same argument on the investorvillage VT.TO board. Potash price was rising by $50/t in January, so it would not make POT unhappy if there is a shipment delay in December so that they can ship more in January at a higher price. Vale canclled some iron ore shipping to China driving the spot price up and putting a squeeze on China in the iron ore contract negotiation. POT and MOS could do the same to China. I think potash contract will settle earlier than the iron ore contract.

[sophocles]

A poster on VT.TO board noticed the irony that MS thinks demand for fertilizer is falling but another one says

Monsanto won't remain this cheap for long.

TraderMark, please send a mail to [e-mail]