So says the MarketBeat blog.
The post lists all sorts of related companies noting how much they are down and throws in a comparison to Microsoft and the tech bubble.
The ag companies have earnings, there is clear and obvious demand for their product as part of the resource theme and the global ascendancy theme as opposed to internet stocks which were valued based on eyeballs.
So clearly ag is different!
Hang with me here, I'm not going where you think I am.
I do think ag is different but that may not be right. The fundamental case for ag in terms of the world needing their stuff seems different but that may not be right. The ag companies make a lot of money and trade at valuations that can be measured but that may not matter.
Ag is either different or it isn't. If you have a 2-3% weighting you don't have to be right about it being different. It would be better if you could be right but you don't have to be. If you have 10-15% or more in ag well it does matter whether you are right or not.
I have had Monsanto for a long time, bought on the way up in the high $80's, sold some in the $120's and still have the stock down here, a few points under water. The way things have worked out it is maybe 1% of the portfolio.
There is no convincing me that the name will not be a moon shot. I like the name so much I would have it over to Thanksgiving dinner (trying to inject some humor). If I am wrong and the name goes to zero that will be bad but not ruinous. I preach on and on about moderation in themes like these for this very reason.
If you follow the logic of the MarketBeat post then we can conclude that there are people who made the same mistakes with ag as with tech from way back when.
All ag stocks are down a lot. All mining stocks are down a lot. All emerging market stocks are down a lot. All oil stocks are down a lot. All industrial stocks are down a lot. All financials stocks are down a lot. Owning some of these is not a problem. Owning too many could be. This might sound subtle but in terms of portfolio impact it could be quite meaningful.
BTW I am not suggesting anyone buy Monsanto. It is just an example, I assume you have stocks that you would like to have over for Thanksgiving dinner.
Wikinvest Wire
23 comments:
Roger,
I hate to put too fine of a point on it, but isn't owning too much of anything just too risky, period?
On a sad note, a friend of mine called me to let me know that his father's retirement account was down 25%. I was outraged because what financial planner would have a man trying to retire exposed to that much risk? I'm no FP (I only play one on the internet) but aren't there some very basic rules that should be honored no matter what here?
I think the AG stocks reached excessive evaluations (100+ on some IIRC). There was too much momentum buying, ignoring fundamentals (just like CSCO with a 300 PE during the tech bubble.) Of course, "the bigger they come, the harder they fall".
Of course if a stock's momentum is played during the upside, it's probably played during the downside too.
Ken
I could have lots of stocks over for Thanksgiving dinner but it's because they're all turkeys.
Bill B, how old is friend's father? Is he relatively healthy? I would ask if maybe the target allocation was correct but the strategy and execution poor?
The difficulty with theme investing (you've touched on this before, Roger) is that hot money turns the theme into a fad. For me, a watch out is when new sector etfs come to market (MOO.) The trick is to stay away until sanity returns or take some money off the table like you did with MON. Easier said than done, of course.
Roger, thanks for the follow up. He is healthy, ~60 years old.
He was already retired once, but went back to work because he was given some bad advice and realized his money wasn't going to make it.
It may be poor execution, but stocks are down 25-30%, so if he's down 25%, it looks to me like he's probably mostly in stocks.
maybe not all stocks, the fixed income market, save for treasuries, is a mess.
it sounds to me like a lack of defensive planning.
Everything is down a lot. So 1% of everything adds up to 100%. That's down a lot. And it's going to get worse so we'll be down a lot more. Unless of course 1% is in shorts so you're down 99%. That's a lot!
anon 616 the comments above are not meant to supplant the hundreds of posts i've had about defensive strategy.
from anon 616 to roger
Just trying to inject a little humor. Sorry for my failure.
Roger,
I'm not sure if it's my business to ask much more about it, but if I can, I'm very interested in his allocation mix. You may be 100% on, could be defensive, but I don't show bonds as off by 25%.
bond funds are down a lot combined with some equity funds that are down more than the market and you could have a recipe for down 25%
Roger...off topic...but do you see;
if the bill passes today:
dollar tanking and fed lowering rates? should gold rally?
if bill is postponed...over the weekend = big time stock dive?
sincerely,
90% cash
thinking about PWJ & VBK
sometimes i have a great feel for the things in your question and end up being very right.
sometimes i have no feel and end up being wrong. if i was right this week i would have sold that bit of SDS a day later.
long way of saying i do not have a great feel right now. sorry, but that is an honest answer.
how much is your avg portfolio down since the highs last year?
i plan to talk about the portfolio in this week's video; normal quarterly recap
thanks, I ask because my mother's portfolio is down over 25% and she has a 60(stock)/40(bonds) split which was supposed to be less risk. It has dropped to levels not seen in years which is painful.
as discussed earlier parts of the bond market have been crushed. many investment grade corporates are trading in the 80s (cents on the dollar). that combined with a little bad luck, relatively, with equties makes that within the realm
My, my: Bailout bill passed and the market dropped like a stone; guess there was some buying the rumor and selling the news going on, probably more capitulation too.
Good opportunity to adjust hedges and line up some longs; I suspect we'll see a better week or three before Armageddon comes.
To RW,
Not sure that the lack of response to the House passing the bill is a case of "selling the news". If so, they were a day early (yesterday).
At this point, the market is (in my uninformed guessing opinion) waiting and seeing. With Europe already closed, we don't know if the passage represents the confidence boost that the euros are looking for... in any case, I'm guessing the key measure will be in the credit markets, and whether or not we see some tightening of the TED and whether there is any movement away from treasuries.
I do think that the "market solution" for Wachovia (Wells is doing it without the gov'ts backstop) may give some pause to those that have been arguing that the sky will fall if the bailout bill doesn't pass. Could be that people are now working to figure out what the "unintended consequences" will be from the bill - and whether treasury is necessarily going to end up with only the rotten apples, since the stronger banks may decline to participate. (I guess we can all look forward to the huge surge in the importation of wooden shafted arrows, of course.)
R in NY
RnNY, your point is reasonable and some folks are doubtless taking a wait and see approach but others definitely aren't and/or had no interest in leaving anything open over the weekend: The quick scalp took place this morning -- stock indexes up before the vote and down after -- but the credit market's response to the bailout was not immediately positive and the employment report, U6 in particular, was rotten; the TED spread grew and what looks more like a real market sell-off followed this afternoon.
My trading model still indicates likelihood of market strengthening over the next few weeks but both it and I have been wrong before so scaling in and out is the order of the day with stops no more than a bollinger band away. But that's just swing trading in a separate account, my strategic portfolio and retirement accounts are reasonably resistant to the madness.
It also matters if you are a leveraged hedge fund and the drop in these stocks is FORCING you to sell. I have a feeling this is a big part of the move here.
Got long Mosaic (MOS) yesterday.
I do believe ag has several long term positive drivers see http://www.maxkapital.com/MacroFundamentals.pdf. Frankly MON is a stock I love long term because its seed technology is one area which could bring in the next green revolution.
But in the near to middle term there are two risks:
1) For food, there have been several supply side constraints, including Australian drought conditions; with ever increasing demand this restriction on supply is inflationary. A simple good crop would be bring down short term food inflation; coupled with increased acreage in response to good spot and forward prices, the short term impact might be profound.
2) For the chemicals side of things I feel there are troubled times ahead.
a. Share prices normally fall ahead of declines in the values of the underlying commodity. The price of Potash has yet to show significant weakness. I has risen from just under $200 to over $1000 in a very short time.
b. At present price levels, the sales price is well over marginal cost. Equilibrium prices are where marginal cost equals marginal revenue. I expect prices to fall to approximately $400/$450 on Potash before they bottom.
c. The kind of cash flows being generated are of such magnitude, that competition will enter the field to drive up capacity and reduce long term price expectation towards marginal cost. As new competition will have higher entry costs (they come in at replacement cost), MOS will still have a first mover advantage (i.e. marginal cost of new investors > MOS marginal cost).
d. After a significant reduction in potash price, you can expect the stocks to bottom while potash prices continue to fall. Cuts in production and cuts in capacity are other indicators that a bottom is near (i.e. a good time to buy shares in producers); but these become relevant only after price damage has been completed.
e. Normally, this is a nice defensive space to be in; after all food must be consumed, it is a necessity. The growth in China/India demand is the principal reason why analysts forecast price increases to a level closer to $1350 before they peak. The sad truth is that incremental demand from emerging markets is very price sensitive. India is growing, but enormously poor. Over half the population lives on less then $2 a day. When people buy grain they do not buy by the kilogram (based on physical need), they buy by the Rs (based on ability to pay). As prices rise, the amount consumed falls as a consequence of absolute poverty.
Falling food prices coupled with price sensitivity on phosphates/Potash does mean that the sector did have bubble like valuations.
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