A Personal Thank You to Momentum Investors

I would personally like to thank those investors who are willing to invest in any stock as long as it is rising, preferably at a really, really fast rate. I would also like to thanks those people who ignore economics and valuations and politics, as well as those who believe it is different this time or could not care less; and think that potash prices are going to stay at $800 a ton for any appreciable length of time.  Without you, none of this would be possible.

My family has owned PotashCorp (POT) since its IPO. As one-time residents of Saskatchewan, we were able to participate in the privatization of PCS (as it is known in the province) when the government was selling a portion of the company to residents of Saskatchewan nearly 20 years ago.

I was even employed by PCS during the company’s privatization, as PCS hired students from the College of Commerce at the University of Saskatchewan to man the phone banks and answer questions from inquisitive residents of the province who were clamoring to get a piece of the offering. 

In addition, why did farmers, nurses, homemakers, gas jockeys and so many others in the cradle of North American socialism want to participate in the sale of a government-owned entity?  It was because the government was giving the company away!

The offering unit, which, if I recall correctly, was comprised of stock and a convertible note valued at par, or C$100.  The issue was so over-subscribed in the province of less than a million people, that the maximum amount allotted to anyone was around C$6,000.  On the opening day of trading, the units hit C$142.  (We purchased more later.)

I was very grateful that the government chose to significantly misprice an asset that it was selling.  It reinforced my view that government was inefficient or irrational or just plain stupid.  “Best things are left to the market,” I thought.  “It is a more efficient, rational place.”

Then, I entered the investment business, and out went those notions.

In the so-called efficient market, we have experienced the technology bubble, the housing bubble and now the commodities bubble, all within the past 10 years. 

Bubbles are marked by a specific mindset. You cannot have bubbles without investors buying extremely high in the hopes stock prices go much higher. You cannot have a bubble without momentum investors who will buy at any cost. You cannot have bubbles without investors suspending their beliefs in the laws of economics. You cannot have bubbles without investors wanting to believe it is different this time.  You cannot have bubbles without investors believing that potash approaching $1000 a ton is a real price. 

And to those investors, I thank you immensely.  Truly, I do.  You have given me far more profits from an irrational pricing mechanism than the government ever did.

I am selling my Potash.  I have been scaling back my position this year, and I intend to do so again shortly. 

I will hold on to some of my holdings to play out the ultimate top. What price is that?  $300 a share?  $500 a share?  I have no idea, but after seeing the insanity of the tech and housing fiascos, anything is possible.  However, I definitely know I do not want to be on the other side of the trade when it inevitably collapses.

As an aside, I would also like to thank Alan Greenspan and the Federal Reserve Board, whose actions and policies made all these bubbles possible.  Yes, you created enormous excesses in the economy, and underwrote a financial put that has skewed risk and created tremendous danger in the financial system today, but I’ve profited quite handsomely, and that’s what matters.

Thank you kindly.

Comments

[R. Richard Schweitzer]

Consider:

Where are the markets (users of) Potash (K)?

What part of the costs of the users' products consists of costs of K?

Are new or expanded users of K coming onstream (increasing plantings and acreages - mny marginal acres w/o added K)?

Are price margins of users products (crops) rising to match marginal uses of K?

How long does it take to bring on new K sources (8-10 years)?

Are there any source substitutes for K, as there are for the other two major ingredients of crop nutrients?

Disclosure: Long,Long POT, MON, JJA, JJG & DE

[azz]

No stock can go up forever!

[bmusic]

Hey Toro, nice write-up. I'm also a one-time resident of Saskatchewan and a U of S grad as well, who also has been tracking PCS for a long time. There have been some truly insane movement here lately and like you, I'd like to thank the nutjobs as well.

[mark mchugh]

Toro, Toro, Toro,

Where are your manners? The "Rich Guy Codes of Conduct" clearly states:

Rule #4 - Don't taunt the serfs.

[The Red Cape]

Great article!

Why not put a trailing stop limit on your shares and ride the wave until it reverses? Why miss out on the upside potential of this truly crazy market.

I thought POT was high a year ago but was I wrong! Thank goodness for trailing limit orders.

[Carl Martin]

Dear toro,
I wonder if you have ever received an annual report of POT,MOS,SQM,AGU,CF,or MON??? If so,I wonder even more,if you have actually read them??? The case for investing in fertilisers over the next five years is incredibly strong.Have you not checked out POT'S potash growth plan??? They are sitting on most of the world's potash,and are known as the Saudi Arabia of potash,because they control the price of potash through their OPEC-style cartel along with MOS and AGU,not to mention their control of the phosphate cartel with...WHO ELSE...MOS!!!These two cartels determine the prices of potash and phosphates,not the markets.The ceo has stated that he intends to have his company JUSTIFY having the highest multiple in the industry.All these stocks might well correct soon,but what about the next five years??? I'm obviously long on all of them plus some others.

[windinmyface2]

Me thinks Toro is trying to pop this so called buuble. He will no doubt buy it back at a lower price. You are not trying to manipulate the market on this, are you? Maybe the government should control the market as well, is that what you were saying? The market is gambling, face it. I have POT, and will continue to hold. I don't bluff easy, or scare. I suggest all the others do the same. Pot will get to $300 before I consider to sell, then may sell, but will watch to buy it again. I can't stand people who write so called informed articles just to manipulate something for their own bennefit. You sound like someone who either works for the government, or one of the Democratic run media networks here in America. I hope no one listens to you, just like I hope no one listens to the crap Obama is spewing.

[DaveW]

windinmyface2, you seriously think one writer on S.A. can puncture this mega-sector?? Dream on danceswithwolves, Toro's got horns, but tiny little ones relative to the fertilizer behemoth. Have you read Toro's writings prior to this article? I don't find him to be market manipulative or powerful enough even to do so if he wanted.

Good move Toro, a 3/4 sale of POT is a disciplined move. A global contraction of demand is coming in the short term. Inflation and high energy costs will hammer valuations after Q2 and Q3 earnings are crushed. Look to repurchase POT in Q4 at a 20-30% discount or more.

[TA]

The speculator commentors above justifying the bubble are hilarious...

[windinmyface2]

Sell if you like, I hope POT hits $500, and your left out, kicking yourselves. I will hold, and go with the flow.

[Carl Martin]

blah-blah.

If you could be so kind as to justify your opinion with your reasons for such, perhaps you could show something of great importance to us "speculators,&quo... who research stocks as well as entire industries and can therefore back up our opinions with the relevant facts, as we understand them. It is by no means speculation to invest in a high price stock...if the high price can be reasonably justified.Therefore, please make your case.

[Blue collar guy]

Thank you all for your mahvelous comments. I think all of the advice has SOME merit.
Now I am more confused than ever and in that state of mind it never pays to make a histrionic move one way or the other.

[Mark Anthony]

Toro:

I absolutely agree with you and I like what I read here so much I added you to my watch list.

Want to move to the next big thing? Read this and tell me if this makes perfect sense to you:

seekingalpha.com/artic...

[User 207017]

Maybe the price of the stock will pop....in the form of a stock split?? I too like the trailing limit order further complimented with the sale of a covered call way out of the money to further enhance my yield and grabbing some gains when it falls. For now, its fun riding the wave. cheers.

[the social scientist.]

the law of diminishing marginal returns, indicates that as fertilizer is increased per acre the increase in yield associated with a unit increase in fertilizer gets smaller. Optimal yield is where the marginal cost per acre equals the marginal revenue per acre.

lets say that all other things being equal, an extra 0.1 ton of potash costing $20 produces an extra yield of 10 bushels worth $20 (at $2 per bushel). This is the ideal production level for the farmer, because if he/she increases potash by another 0.1 tons the yield increase may be only 7 bushels worth an extra $14, and resulting in a $6 loss on the extra fertilizer.

Are farmers aware of this? Probably not, but after one year of using extra fertilizer and seeing their farm income decrease, they are obliged to cut back on fertilizer use.

So now let's raise the crop price to $7 per bushel. At the fertilizer levels of before, the extra $20 of fertilizer per acre produces an extra $70 of output (10 bu. x $7). And another 0.1 tons at $20 produces another 7 bushels worth $49 = a marginal profit of $29. So the farmer pours on the fertilizer.

But, potash being a scarce resource quickly soars in price. If it goes to $70 for 0.1 tons, and the farmer gets 10 extra bushels worth $7 per bushel, that's $70, and there is no gain in increasing fertilizer applications and yields.

If you think about it, if the percentage increase in fertilizer price equals the percentage increase in crop price, there is no gain to the farmer from increasing fertilizer applications, in which case fertilizer demand does not increase, and the price for the fertilizer comes down.

Has the price of potash risen as fast as the price of corn? - no, but what future price for potash have speculators (they're not investors) discounted in the price for POT? Inane prices. For those of you who have never heard of Scott Neely of Sun Microsystem, I suggest you look up his statement about the price people were paying for Sun at one time (in 2000). It was more than 10 times sales revenue. POT is selling for 14 times trailing revenues. Those revenues are growing rapidly because of price increases, but do you see a 7-fold increase in revenues in the next few years to bring the stock price back to a reasonable level?

Neely said, if there was no cost to making our product, so that all our revenue was profit and we engaged in no research, but still managed to maintain our revenue, and we distributed ALL of that revenue to you the stockholders, it would take 10 years to return your investment. What were you people thinking?

Well, windinmyface, like you they weren't thinking. If you can follow my economics, you must realize that you take your profits now, and don't worry about the stock going to $500. It might, but it's going to go way below it's current price at some time. If you don't follow my economics, why are you betting real money in the stock market. You're up against some very good players. I suggest you read stuff on trading psychology - you evince all the traits of a gambler in denial. And POT is a trading momentum stock, you don't buy and hold it, and you only buy dips with tight stop-losses, which means you don't hold it overnight.


It will crash like Taser. don't know when or from what height, but it will, and a few like Toro will smile, and say thank you suckers.

[Carl Martin]

An interesting article, Sent/Visser, but I experience difficulty in believing it. My understanding is, that at today's prices one dollar of fertilizer bought and used results in three dollars of extra profit for North American corn farmers. In Brazil, India, China, Africa, and rest of world, it's even better due to the depleted soils, after years of inadaquate additions of fertilizers. The greater the depletion the greater the gain. It's true that economics will eventually limit North American use in your made up scenario but, I notice that you left out the "Monsanto effect". More efficient corn seed rapidly increases the rate of soil depletion, therefore more fertilizer is required to maintain or increase crop yields. POT'S annual report, if you read such things, clearly states the world's need for fertilizers. The world is only using about about half the fertilizers that it could be, and should be, using according to food scientists. PS I really like, appreciate, and will take to heart, your words about Scott Neely and Sun Microsystems. It's good food for thought.

[the social scientist.]

Carl:

Agreed, probably no farmers operate at peak efficiency in terms of fertilizer application, and in the tropical world they use little on poor soils. As tropical farming becomes increasingly commercialized, it will need to become less labor-intensive and more energy-intensive (i.e. mechanized). This raises the cost of all other inputs (except labor), especially those in short supply (i.e. oil).

My scenario above is just modeling to illustrate that there is a limit to the price that a supplier can charge, even on a scarce resource that they control. If they charge too much, demand will go down, even for something essential. The price cannot rise faster than the price of the product that the input is producing (if production is already at peak efficiency). So their revenue growth has limits, and the intriguing question is, what sustained revenue growth rate is the price of POT's stock pricing in?

Another thought: last I knew, dryland wheat farmers use no or little fertilizer, because soil nutrients are not the limiting factor on plant growth - water is. Fertilizer does no good unless the crop is irrigated. This places another restriction on the degree to which fertilizer use can be expanded in the future.

POT is a solid company with good prospects to increase sales and profits, but surely it is long-term overpriced. I have no positions in POT, and never have or will. I just noticed that it's price to sales ratio is way out of line relative to the other fertilizer stocks, presumably because of it's potash resources, and because I know a little about agricultural economics.

A nutty stock, by the way, is the James River Coal Company. A huge run-up in stock price, but a loss over the last fiscal year. Price to sales about 3, but price-to-book at 15. Yes, coal prices are going up, but coal is NOT a scarce resource. There is plenty of competition in this endeavor.

[Carl Martin]

The Social Scientist,

Thanks for your reply. I'm thinking of writing some articles, so I'm going to hold on to most of my ammunition for now. You can get lots of valuble information at" Potashcorp.com", click on their "World agriculture and fertilizer chart", when and if you have a few hours to spare. The key to understanding prices is that they largely control potash prices through their cartel CANPOTEX together with MOS and AGU. Control means that they set upper and lower limits in accordance with what THEY think the market can bear. It's not exactly a free market governed by the laws of supply and demand. Therefore they will not try to push prices too far. But if this one to three dollar ratio is true it means that they can triple the price of Potash, at any time. After that, market forces take over, as you have pointed out. But then they lose their pricing control power, and they wisely don't want to throw that valuble tool away. They want long term control over prices, rather than short term profits just to please short term speculators. Therefore I believe they are a very good long term investment. Most people at this site seem to be looking only at short term sexy stocks,and assume that POT is just one more of those, and it will soon crash, burn and never return. It is worth noting that both POT and MOS operate at only 85% capacity and intend to continue at that rate in order to give themselves this pricing power. The relevant question then becomes, have the markets got that correctly priced in? They are not the enemies of farmers but instead rather good friends, and want the good times to keep rolling for all concerned. Farmers don't just buy fertilizer, it's an investment for them, as they can get much bigger profits using it than not using it. What you see reflected in their stockprice now is the result of decisions taken more than two decades ago. They saw the food crises coming and positioned for it. I think the company is rock solid. If there is a better investment around I would like to hear about it. Any suggestions ? Also of course from the peanut gallery. I know what you mean about JRCC, there are plenty of other coal companies around that actually make money. Imagine that!

[mark mchugh]

I remembered this article when I saw that Citi is screaming that the selling is overdone.

Just in case no one else says so:

Brilliant call! You're the man!