More on Fundamentals and Stock Prices: The Case of Potash Corp.

Earlier we posted an item full of skepticism about garden-variety claims concerning "fundamentals" and stock prices. Then, in our not-even-close-to-nightly fast-forwarding of Fast Money, we heard the following from Guy Adami, just after Jeff Macke suggested Potash (POT) might set up for a decent risk-reward trade in the neighborhood of $150:

Let's talk about Potash. It's trading as though potash prices were about $430 a ton. Potash prices are closer to $1000 a ton. $150 was resistance on the way up back in January, as Jeff pointed out it was support a couple times throughout March. Now's the time to take shots--intelligent shots--as long as you have a stop, everything is fair game. But I think Potash will bottom out right around here.

Now, Potash might turn out to be a perfectly fine trade here.* But here's the point that's relevant to this discussion: How in the heck are investors supposed to know (or even make educated guesses) what (small-p) potash prices are implicit in the current market price of (big-P) Potash? This is in the nature of markets, especially for momentum-driven names like POT.

Market prices depend not just on perceived or projected fundamentals, but on what multiples market participants are willing to pay for whatever combination of earnings and dividends those participants might want. $430 a ton? $600 a ton? $1000 a ton? Whatever the price of potash might be, the price of Potash is going to be a (potentially volatile) function of investor enthusiasm, not just a linear function of higher and lower commodity prices.

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* We're agnostic on that, but we are generally not in the business of committing capital to charts that look like this:

click to enlarge

Comments

[bryanz:]

The 50 is turning down pretty heavily, it failed against the 200 and got beat up (albeit with the rest of the market) today. 150 was resistance in the past, maybe it'll bounce, especially tomorrow if the market catches its breath. But right now there's no compelling reason for it not to go lower first, maybe even to 130. I'd be watching the 50 and the 200, they're getting awfully close on the downside...

2008 Sep 05 02:32 AM