Some Odds & Ends: Google, Mosaic, Central European Distribution and the VIX

I've got a couple random/unrelated topics to cover so I just decided to mash them all up into one post.

1. Capitulation. Everyone and his or her dog are looking for it, and frankly, that makes me think we won't get it for some time. If everyone is waiting for everyone else to panic and sell, then who is actually going to be selling? It used to be that not many people paid attention to the Volatility Index [VIX], but as the year has gone by, you see more and more people referencing it. It now appears that literally everyone is watching it.

Apparently, there also is a disconnect between the VIX and this market tumble (more on that later). At any rate, the VIX did spike on Tuesday morning's sour open. It spiked to 31 but then quickly retreated back down, laying down a nasty inverted hammer on the chart. We'll see how the rest of the day/week plays out.

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2. Mosaic (MOS) sold its nitrogen business (Saskferco) to Yara International for $1.6 billion (courtesy of Bloomberg here). I suggested in one of my previous posts that MOS was essentially 'top-ticking' or selling the top in the nitrogen trade, as they wanted to focus more on potash and phosphate. Although the stock is down on the news, this is a very buyable dip, as it will further their bottom line down the road. Nitrogen, although a strong part of their business, is not seeing the ideal pricing power conditions as their potash segment is.

Again, my thesis on these fertilizer plays all along has been to play them due to their potash exposure; nitrogen and phosphate were only added bonuses. The potash segment has very limited supply and strong demand worldwide. In addition, add in the fact that new supply cannot be brought to market for years, and you have the ideal combination for making lots of money.

3. Google (GOOG). On the chart, many of you know that this thing has a nasty gap to fill all the way down around $480. On Monday, GOOG broke down past $520 and gave me the signal to short. However, the company does have earnings coming up and that could obviously be a catalyst in either direction. So, for the meantime, instead of straight up shorting GOOG, I've put an option strangle to work. (If you're unfamiliar with a strangle, it's essentially an options position that makes money only if the underlying stock makes a big move in either direction. You can read more about it via Investopedia here).

I was going to play a straddle on this name, but GOOG options are ridiculously expensive and so even playing a strangle (typically cheaper since you're using out of the money options) is still expensive. Therefore, on Monday, I entered into the strangle of GOOG 480 Puts and 560 Calls. Obviously, with GOOG trading down again today, the put side of the trade is making money, while the call side is not. If GOOG continues to trend downward, I may just take profits before earnings altogether. However, we'll just have to see how that plays out.

I had drawn up this chart last week and intended to post it as a short, but I completely forgot. This first chart is the GOOG chart I drew last week. The second chart will show where GOOG sits currently. Since marking on that first chart, GOOG has fallen from $560 to $505, a pretty strong move to the downside. Here's the chart I drew a little while back.

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And, here's what GOOG looks like now.

 

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As you can see, GOOG has fallen pretty hard and could very well continue down and fill the gap at $480, as that is our final goal. Keep in mind though that earnings are coming up and could provide a massive catalyst for this stock to swing violently in either direction. That's why instead of just shorting it, that I have put on the strangle, to hedge myself.

4. The trend (is still) your friend. Seeing as how that phrase was the Quote of the Week for this week, I found it very appropriate to post yet another great up-trending chart in this terrible market. Central European Distribution Company (CEDC) came up while I was researching new plays in Central Europe/Eastern Europe/Russia. The following is taken from Google Finance:

Central European Distribution Corporation (CEDC) is an integrated spirit beverages business. The Company produces vodka at two distilleries in Poland and is a distributor of alcoholic beverages. The Company is also an importer of spirits, wine and beer in Poland. Its products are also exported out of Poland. CEDC offers a portfolio of alcoholic beverages with over 700 brands.

I'll be doing more research on this name, but you simply cannot ignore a great chart. Pull up any period: 1 month, 3 month, 6 months, 1 year, and they all look the same:

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That wraps up the odds & ends for now.

Disclosure: None

Comments

[David White:]

On my chart the VIX spiked to 39 this morning (7-16-2008). This may mark the near term market bottom. If it does, MOS looks like a great short term bet. The selloff news (of the notrogen part of the business) does seem to have had a negative effect on the stock. The results may end up trading some short term profits for a bigger long term gain. It is probably important to keep the long term gain in mind.

2008 Jul 16 11:13 AM

[David White:]

I should point out that the grain prices have been going down recently. This has probably been negatively effecting the Ag stocks. I am currently looking for this to change. As an example, Corn has excellent technical support in the 600-650 area. Corn is currently at approximately 650. The slide will likely stop here. The support in this area is very strong. Further the long term upside driving forces for food related commodities are still very much in place. These should start to take over again. They will likely drive the prices of commodities higher over the short term (and long term). This should cause a concommitant rise in the Ag stocks.

2008 Jul 16 11:19 AM

[David White:]

Of course oil is also off about $5 today after a huge fall yesterday. This has likely depressed Ag stocks a little as they are ethanol related and so oil related. They also tend to trade as the commodity index trades. However, now oil is at about $133/barrel. The economic experts are expecting a generally trading range of $130 - $140 over the summer. We are in hurricane season. Oil will likely rise from here. Ditto Ag stocks.

2008 Jul 16 11:24 AM

[David White:]

The fact that CLF bought ANR today should also give commodities and commodity stocks a lift.

2008 Jul 16 11:27 AM

[David White:]

Reuters announced yesterday, "Canpotex, the export marketing consortium for Canadian potash miners, has raised its spot price for some Asian buyers to $1,000 per tonne, an analyst at J.P. Morgan said on Wednesday. The new price is up 21 percent from current delivered values, and will take effect in the fourth quarter."

This should have a significant positive effect on earnings for POT (+$2/yr), MOS (+$1/yr), and AGU (+$0.60/yr). This might be a spur for the prices of these stocks to rise in the next few of days. This news only came out near the end of the day yesterday (Wed.).

2008 Jul 17 09:34 AM

[David White:]

MOS is currently near one of its support levels. It could go up nicely. Further the candlestick rational is behind it. The bears tried to take it down yesterday, but were unsuccessful. With good news out at the end of the day yesterday. It seems likely it will be up at the end of the day today. Corn prices are in a strong support range currently. It is likely the recent price drops are at an end. Corn should stabilize in its current range, then go up. Of course, if all of the markets take off from here, corn may just go up from here.

2008 Jul 17 09:49 AM

[David White:]

Further MOS and POT are both still on uptrends after recent bounces up off their lower bollinger bands and their recent journeys below their 50-day moving averages. Both stocks have made habits of going up dramatically in the 2-3 weeks after their journeys below their 50-day moving averages. The above news about the potash price increases should only further their near term stock price increases. If the markets have furhter managed to find a bottom, as many people are now asserting after the Wells Fargo and the JP Morgan earnings news, these stocks are really primed to take off.

2008 Jul 17 10:24 AM

[David White:]

Then of course there is the Cramer effect. Apparently he has told everyone that you should stay out of POT and MOS for the moment, until there is better reason to get back in. I don't agree with him on this. Still you can't ignore the Cramer effect. It's almost like being put on the GS conviction sell list (or is it really a GS thing?).

2008 Jul 17 12:40 PM

[David White:]

Forgetting about Cramer, grains and energies are down again today. This may have a lot to do with POT and MOS performance on the day.

2008 Jul 17 02:16 PM

[David White:]

Perhaps the prospect of PBR employees ending their strike is leading oil lower? They vote on management's latest offer tomorrow. We shall see. Oil seems likely to steady at the $130 level though. This would likely mean POT and MOS would go up from there. POT is currently around its strong support level of 215.

2008 Jul 17 02:22 PM

[David White:]

POT has now gone down to 208. It is at another support level. Since I have been dead wrong today about this, I don't feel confident. However, this does seem like a much better long term entry point for POT.

2008 Jul 17 03:14 PM

[David White:]

It does seem unlikely that oil will go down another $5 for the fourth day in a row. That probably means that POT and MOS will rebound tomorrow from the huge down move today.

2008 Jul 17 03:19 PM

[David White:]

The high today on POT was about 227. It is a long way from there now.

2008 Jul 17 03:21 PM

[David White:]

The news from POT actually seemed good today. They announced they were adding another 2.7M tonnes of capacity by the end of the year??? They also annonced they were adding 18M tonnes of potash capacity by 2012. This would certainly seem to allow for a good amount of growth. There was also the news that Canpotex is raising the spot price beginning in Q4. This should also have been good news. The behavior of the stock is a little bit of a conundrum today. Longer term, it will likely do great. One analyst recently raised his one year target for POT to $425 (about double its current price).

2008 Jul 17 03:28 PM

[David White:]

Corn is still in the 600 to 650 technical support range (about 630 currently), so this fairly key techinical support level has not been broken yet.

2008 Jul 17 03:50 PM

[David White:]

This should allow room for POT and MOS to rebound tomorrow on the relatively good news from POT about production capacity and from Canpotex about pricing of potash.

2008 Jul 17 03:53 PM

[David White:]

Barring a fall of oil to $100 in the middle of all of this geopolitical strife (Nigeria and Iran) and the hurricane season, it looks like POT and MOS are likely to appreciate considerably over the summer months from this point. It does appear that the market may have found a bottom. Leaders in the market should do well as it rebounds. Besides even in recessionary times, everyone wants food. India and China are still likely to pressure food supplies over the next few years. China's GDP growth was over 10% for its last quarter. Yet they are still talking about China as if it is in a recession. I guess everything is relative. I think its stock market was just overheated.

2008 Jul 17 04:01 PM

[David White:]

I need to correct an item above. POT is not adding 18M tonnes of capacity by 2012. They will achieve 18M tonnes of potash capacity by 2012.

2008 Jul 17 04:13 PM

[David White:]

They are adding 2.7M tonnes of capacity. A fair amount of this will get done in the next year. This should allow good growth.

2008 Jul 17 04:14 PM

[David White:]

Then too Bill Doyle, CEO of POT, was recently quoted as saying that global potash demand is continuing to grow more quickly than the increase in supply. This should give POT, MOS, et al continued good pricing power.

2008 Jul 17 04:19 PM

[David White:]

Toward the end of the day today, oil rebounded from about $129/barrel to about $130/barrel. This is likely good for the Ag sector because part of the driving force for growth has been the use of some Ag products to make ethanol. If oil is cheaper, there is less demand for this.

2008 Jul 17 04:34 PM

[David White:]

The major players reports after hours were a mixed bag. IBM beat and raised. MSFT has double digit growth, but missed analysts estimates by a narrow margin. GOOG missed. MER was a diappointment as it lost much more than analysts estimated. However, MER seems to have decreased its morgage exposure. MER later got cut to A2 from A1 by Moodys. AMD did worse than expected. TD Ameritrade did well. JCI met expectations with good results. Black Rock beat on good results. BAX beat and raised. Coca Cola Enterprises beat analysts estimates. PNC FinancialService Group beat on good growth. Amedysis raised guidance. In all a mixed bag of results. MER was fairly negative, but their picture going forward looks much better, so its negative result is not as bad as it might be. Tomorrow should be interesting.

2008 Jul 17 04:57 PM

[Market Folly:]

david wow you've been quite busy posting here haha. already seen all that info as it was my rationale for being long in the first place. but, thanks for posting it all up for others to see.

hopefully your mention of vix at 39 was a typo.... i think you meant it hit 30. and just my opinion but i don't think that was short-term bottom by any means. vix needs to see 32-34 before we're close

2008 Jul 18 03:05 PM

[Jim Punkroc...:]

I don't know Market Folly, I think MOS might have broken out to the down side. well at least it is a good risk reward trade right here. stop out above 131 but downside looks like 90ish. also the VIX as an indicator is broken, people use more dynamic hedges nowdays. just my opinion

2008 Jul 20 07:04 AM

[Glen Bradford:]

Tell David to stop commenting these.. gosh. I didn't read the article, just read the headlines and the stocks you commented. Good work. I don't know about MOS. I saw the oil bubble bursting and I got out of all agriculture/oil --- but now I'm back.

2008 Nov 27 01:04 PM