Fertilizer or Bullshit?

Chart of fertilizer maker Potash courtesy of the always marvelous Prophet.net Click on the chart for a larger view.

We believe the demand for agricultural.......industrial.......commodities will see massive demand growth over the next twenty years because.......blah, blah, blah.

It's rather hilarious to listen to the prognosticators rattle on about commodities this cycle. How many actually know anything about commodities? Or agriculture? Or the oil industry? Most have never even seen a cow let alone understand the global dynamics that drive its demand or lack thereof. I don't believe many bullish prognosticators understand the dynamics of what is driving this cycle of commodity demand or the probabilities of its sustainability or lack thereof. And how to quantify the true risk of those probabilities. What they are is quantitative trend traders driving stocks into the stratosphere without any regard for future fundamentals or risk. I would be on suicide watch if I thought about holding commodities in this environment's unfolding fundamentals. Unless, that is I was a buyer in the 2000-20002 bear market or earlier. Most were not. The cumulative consciousness of plowing into momentum stocks and commodities as hedge funds and bank trading desks are doing (that we've written ominously as parallels to stock pools in 1929) might make fast money rich but is it based on reality? Invariably, most will stay well beyond what they should and that will likely create an avalanche of falling prices as many attempt to unwind and exit simultaneously. This environment of unregulated capital is not good for the health of economy or the finance industry. That is, unless you like what happened after 1929. But how often do we beat that drum?

If Potash, Deere, Freeport, Valero, U.S. Steel, Schlumberger and all of the other commodity stocks and commodities are truly reflecting fundamentals, then I'd like someone to answer a simple question. Would anyone like to tell me how many years of future earnings, future cash flow and future revenue growth are being discounted in these stock valuations? Could today's commodity-related asset prices be discounting twenty years of positive fundamentals? More? Is that really so unbelievable? We have seen twenty plus years of price gains in a few years. It was less than a decade ago Wall Street told us Sonera, 724 Solutions, EMC, Intel, Cisco, Digital Island, Exodus, Sun, Microsoft, Ariba and other technology stocks had achieved a new level of enlightenment with their valuations. They too were discounting twenty plus years of anticipated fundamentals. Fundamentals that never materialized. Analysis that was completely wrong. Given technology stocks are still decade(s) away from recovering their losses and many of the prognosticators' favorite technology stocks aren't even in business anymore, why would anyone believe such massive pricing action in commodity investments and companies such as Apple, Google, RIMM, Baidu are any different?

The above chart is of Potash, a fertilizer producer whose stock traded between $3 to $10 dollars for decades. We are now told the new world wealth is increasing demand for its goods. Demand and profits are indeed up. Although, that in itself is a very interesting topic with depth beyond the obvious. Potash's pricing action is indicative of commodity stocks, commodities and companies benefiting from commodities this cycle. These investments have achieved gains in a few years that are significantly in excess of gains seen in the stocks over the last twenty to forty years. Gains based on supply & demand metrics or on Wall Street's vision of the future? A vision based on reality? A vision discounting any and every major risk factor? There is substantial quantitative evidence to support a position that we could be in the process of setting the ultimate peak in many or all commodity-related assets for the next ten to twenty years. But, we are told to expect a twenty to thirty year bull market in commodities by nearly every single investment professional. My position remains that we are in a bubble and that we are more likely to see massive volatility in commodities rather than continued upward pricing for twenty or thirty years. Volatility that will break most investors who are not adept at trading mechanics. That being 90+% of investors. Including professionals. That includes your pension fund, that is if you haven't already had yours taken from you, that has likely invested in this scheme Wall Street has been selling.

Would you bet your future that Wall Street is right? That we mindlessly invest in commodities with an expectation of a twenty plus year bull market simply because someone with no sense of reality has decreed it so? Do any of those making their recommendations have quantitative work based on fundamentals and risks to back those statements up? Work that passes the test of reality? Or, are they simply regurgitating what everyone else is saying based on a foregone conclusion that global growth will remain robust for twenty years? From people that generally know nothing about the economics of these products or their markets? Or economics period. Or have generally missed calling every recession since the advent of such a term? From those who brought you the bubbles of 1929 and 2000 and many messes in between? From those who are bringing you this credit crisis? From those who have proven time and again to have no concept of risk? Just something to think about.

A month or so ago I saw a comment from a hedge fund manager that I like personally but has shown a lack of appreciation for topics that should be at the forefront of his skill set. He made comment that we are all looking at the same data but the bulls are just smarter. Really? You mean like in 1929 or 2000? What data were the bulls looking at then? The same data as today? Is that why everyone was given the same set of rules and Albert Einstein got extra credit on his high school science project? Or is that why we all took the same test comprised of the same data and some people got a failing grade and others got a perfect score? Everyone is not looking at the same data. It's a little like that science project. Your science project might be better than mine. Maybe it's more accurate. Maybe it's more sophisticated. Maybe you understand science better than I do. As I've said before, just because I can't or you can't doesn't mean it is so.

So, on that note is the global economy going to buy enough fertilizer to sustain a positive return in Potash's stock price from these levels over the next twenty years? Or is Wall Street selling us more bullshit? Take it from a farm boy. The best form of fertilizer is in fact bullshit. And we have an excessive supply of it. Economics 101 tells us excessive supply of bullshit...........