The Precarious & Problematic Potash Pyramid at Potash Corp. (Part IV)

As this ongoing series of articles on Potash Corp. (POT) unfolds itself (see parts I, II and III), I continue to be amazed at some of the lingering bearish attitudes towards Potash and this company, that are prevalent in various articles and blogs. As I have done my best to explain the obvious in words and numbers, apparently to no avail, I now feel reduced to try to explain it in a children's story, that the average six year old should be able to relate to and understand.

In the safety of your living room, take ten red colored blocks out of your toybox, and place them in a row on the floor, each one touching the next. Ten! That's how many fingers you have, counting both your thumbs, but not your ears. Each block represents one unit, or 100 million dollars of the 2007 gross margin for the combined Nitrogen and Potash segments.

As there were only nine hundred million dollars, or nine units, plus 68.9 million dollars reported as gross margin, the tenth block only represents a fraction of 100 million dollars, 68.9 million dollars, or roughly 2/3s of a block. To understand what a fraction is, take a large red apple, cut it into three equal pieces, and eat the third piece. What you have left, a 2/3s fraction of the apple, equals what the tenth block represents, a 2/3s fraction of 100 million dollars, or 68.9 million dollars, or 2/3s of a unit. Units are what you are supposed to be thinking in, as a million dollars is too big a number for you to understand, and each one of your toy blocks equals one unit.

Now take ten orange colored blocks out of your toybox. If you don't have enough of these, you will have to ask mommy and daddy to start investing in your education,and buy some more toy blocks for your learning collection. Then using those fat and funny, uncoordinated fingers of yours, try to carefully place each orange block on top of each of the ten red colored blocks. Red! Remember that red apple, that you just ate a piece of? These ten orange colored blocks represent the nine million dollars, or nine units, plus the 12.3 million dollars, or 1/8th of a unit of the 2007 gross margin for Potash.

To understand how much 1/8th is, take one large orange and divide that into eight equal pieces. Then give mommy, daddy, and your little sister two pieces each, for them to eat, then eat one piece yourself, so everyone in the family gets two pieces of fruit to eat, so that everything is fair and equal to all concerned. That last piece of orange, which is 1/8th of the whole orange, equals 12.3 million dollars, or 1/8th of a unit, which is represented by the tenth orange colored block.

Now compare the sizes of 1/3rd of an apple to 1/8th of an orange. Notice how the size of the piece of apple left over, is much bigger than the size of the piece of orange left over. That's why the tenth orange colored block can easily balance upon the tenth, red colored block. That's how you compare the potash oranges to the combined nitrogen and phosphate red apples! Now you have a pyramid of Potash dollars resting on a foundation of combined Nitrogen and Phosphate dollars.

According to the "Wizards of Wall Street", and quite a few other all too serious adults, who are all trying to twist your little mind, you have constructed a very precarious and problematic, pyramid of Potash. They think your pyramid of Potash is soon going to come crashing down with a big bad bang, just like that time you foolishly tried to build that crazy twisting tower of red and orange colored blocks, half way to the moon.

Now they are calling your pyramid a big bubble that's soon going to break,and a lot of people are going to get very badly hurt. Just like that time those big nasty soap bubbles got too close to your face and burst, which caused you to get soap in your eyes, which hurt you and made you burst into tears. If you think your pyramid is safe and stable, then you are already much smarter than all those weird and whacky wizards, some of whom actually live on wall street, while most of the others, unfortunately, live quite happily off of wall street.

Now it's getting to be time for bed, and for the 199th time, your bed time story will be Goldilocks and the Three Bears; poppa potash bear, mother nitrogen bear, and baby phosphate bear, until you learn to value the importance of all the different sized things great and small, just like the Ancient Mariner had to do. Remember when he had that dreadfull dead albatross around his neck,and he felt that he couldn't live much longer, with the weight of all that guilt holding him down.

Then one night just before he almost died of his delusion; hungry and very thirsty, his tired eyes stared wearily at the water and saw all those squirmy little creatures that he used to love to hate, called phosphorescents, that lit up the southern ocean at night like millions of fireflies. What lights up these little creatures, as well as fire flies, is called phosphor, and all the ocean's phosphor eventually ends up as phosphates.... the least loved segment of Potash Corp.

When he finally realized the beauty and value of these tiny sea creatures, that are also part of the whole wide world, that awful dead albatross loosened his grip on the Ancient Mariner, slipped into the ocean and sank like lead. That's when the wise old Mariner told us what his suffering had taught him. He said, "The one who best loves all things great and small, is the one most loved by God, who made and loves all."

Part five coming soon.

Disclosure: Author holds a long position in POT

 

Comments

[User 58419]

If it didn't say at the end of the piece that you had a long position in Potash I still wouldn't know what you thought of it.

[manwithapiano]

Despite what the fundamentals show, it is the crowd sentiment and fears that will move the price. So if the kid thinks he is going to experience the pain of soap bubbles in his eyes again, ne may sell his POT!

[will]

Potash sees 240 this week

[AGU_MAN]

You lost me!

[GabesDad]

I believe in the long position but...................... don't know how to write so people can understand you.

[wsigler]

I feel your pain :-) Condescension born of extreme frustration. It will piss off some, go right over the head of others, and cause a few to think. Unfortunately, MANWITHA pretty much has it right...crowd sentiment will ultimately move the price...

Wayne (not long nor short POT)

[User 223247]

I could not follow the argument as the allegory is much too obtuse.

[truthinvesting]

If you really like this company you should sell the 170 strike price jan 2010 puts and collect about 30 dollar premium to minimize risk .If the stock does well you get a nice rate of return and if it falters your basis becomes 140 and not 216

[trade]

Carl:
Do you understand supply and demand? Do you understand what is going on with energy? Do you, your mommy or daddy know this word… “ethanol”. Please don’t be naïve. In the 60’s Polaroid was a strong buy and hold for ever…but it went from $ 150 to $ 10 to bankruptcy…so POT is a great company but right now the POT P/E ratio is 51.2..it is not so good. Sorry… but do you have a concise conclusion!

[trade]

truthinvesting is giving you a free-great advice..."you should sell the 170 strike price jan 2010 puts and collect about 30 dollar premium to minimize risk"

[leh]

Agree the writing style here is tedious, condescending, and extremely annoying (never mind a logical mess). It's telling that the writer's so-called simple argument for POT's strong fundamentals has become a 4-part windbag of obfuscation--even the title is misleading. I'd suggest he give it a rest--is anyone really interested in trying to navigate his labyrinths of sarcasm?--and I'm surprised SeekingAlpha has published this blather unedited. Enough.

[ctaran]

As long as Mr. Humpty Dumpty doesn't take an active interest in POT, I think I will buy on another drop. Don't like the writing style...

[User 214118]

Your article was a waste of space. I did notice that POT keeps raising their estimated future earnings. If they deliver the P/E will drop like a rock and this stock will go ballistic. In other words - stay long.

[Louis610]

I got so lost, I couldn't tell if you were long, short, or smoking POT.

[User 93139]

Could you explain that using marbles.
I had a hard time understanding red blocks[colored is rudundant]
I even had a harder time understanding yellow blocks.
When you got to the part about the fruit it made me hungry so I went out and had a corned beef sandwitch.
I think your a typical white person cling to his red and yellow blocks.

[SCovert]

Next - the screenplay.

Sorry for the chartspeak (some people REEAALLLYYY hate charts and only enjoy the stories), but POT keeps bouncing up off its 50-day moving average. Hence it is a buy on those bounces, such as last Monday-Tuesday. One day the pattern will break and the 20-day moving average (for example) will cross under the 50-day, and it'll be time to take a loss without fussing about "the story". In other words, it will start going down one day, and it will be the fundamentalists more than anyone else who will ride it all the way down to $whatever instead of using a disciplined stop.

[User 93139]

Watch out EGO ALERT.

[Think-About-It]

Carl Martin should be banned from writing "articles." He has no conception of the value of time or respect for others. His 4-part series is an attempt to fill in the empty hours and feed his ego.

Carl, waste your own time not ours. Get off Seeking Alpha.

[podiddly]

People who can "do the math" have pegged POT at $425 CAN in Q2 of 2009, based on a reasonable P/E ratio and nearly definite (e.g. booked) sales and earnings. Some "analyst idiots" along with a number of TV analysts keep confusing the price of "the company" with the commodity prices of the Fertilizer Potash, Phosphate, and Nitrogen. While prices for these are increasing world-wide...the main reason to be bullish on POT of Saskatchuwan is the largest, most mature, most able, and most recognized supplier of these fertilizers on the planet.

[Blue collarguy]

You seem to be telling us that the sky is falling on POT, yet you still report being Long in POT. Might I ask the amazingly dumb question...
WHY are you still holding a LONG position in POT?

[pothead]

This article is nothing more than an attempt to bash this stock, in four parts no less. I guess that Carl is looking to scare shareholders into selling so he can buy more at at cheaper perice. Why is this tripe even printed? A complete waste of time.

[jonreagan]

Aside from this being the most obnoxious Seeking Alpha article I've ever read, I at least enjoyed the second comment (manwithapian). He makes an excellent point, that touches on momentum and technical issues. If the Fed were to pull a surpise interest rate hike--highly unlikely though possible--people will pile out of commodities and commodity related stocks en masse. In fact, any thing that increases the value of the dollar will have that effect, so investors should be alert to the possibility.

[Louis610]

User 93139 takes the gold for:
>>Could you explain that using marbles. <<
I take the silver for:
>>I got so lost, I couldn't tell if you were long, short, or smoking POT.<<
Bronze goes to:
>> Goobly gook is goobly gook. Which are you: the goobly or the gook? <<
Honorable mention goes to SCovert for:
>>Next - the screenplay. <<
And 93139 for "EGO ALERT" (sorry '9', only one medal contender per player!)
Let's all give Carl Martin a hand for writing an article inspiring such hilarious responses.

[secmaven]

The rate of return for owners in POT is based on the greater fool theory that somebody will always buy the stock at an ever higher price even though it is a wasting asset company that is obviously short of cash, otherwise it would pay a dividend.

[Did U ThinkThe PonziSchemeWould Last?]

How many times have we seen numbers and estimates put together to support an exponential stock chart.

How many times have the stocks turned down and crashed. Are you old enough to have gone through dot bomb? "It's different this time" was the claim back the. The chart will revert to the mean. I continue to buy 5 put contracts each month, as far out of the money as possible and as far out in time as possible. I am dollar cost averaging myself into a leveraged, long term position not against POT, but against any exponential run up mania chart knowing full well that it's NOT different this time and that the chart will revert to the mean.

When it crashes I would like to know what your little crayon story will sound like. I assume it will involve using crayons to pry your arrogant foot out of your mouth.

[User 152589]

Mr. Martin,

I understand your logic and argument concerning POT, but allow me
to say your presentation is a smidgen condescending and far too
convoluted to be understood by the average person who hasn't
the slightest idea of who the Ancient Mariner was (thanks to the
slothful american educational system among other sources of ig-
norance). Besides there are other stocks in that sector that show
promise and are much less expensive than POT.

EDT

[windinmyface2]

It should pass it's high, if not this week, next week. Stick with it, and wait. If I sold last week at it's low, I would still have made money, or increased my number of blocks.

[trade]

please no more "Part" it is a good web...please we try to read investment not "ego"...plea... you should go to otehr web...please..no more Part five ...thank you ...thank you...

[PHILLYCUPCAKE]

LOUISE 610 YOU SURELY GET THE GOLD FOR WRITING "I GOT SO LOST I COULDN'T TELL IF YOU WERE LONG, SHORT OR SMOKING POT". THAT LINE WAS FUNNY AND TO THE POINT.

SURE THE FUNDAMENTALS TELL YOU WHY TO BUY A STOCK AND THE CHARTS INDICATE AN ENTRY AND EXIT POINT BUT ALWAYS KEEP IN MIND THE MANIPULATIVE TECHNIQUES OF THE MARKET MAKER. DID YOU NOTICE THE HUGE HIT POTASH, MOSAIC AND INTREPID POTASH TOOK THIS PAST FRIDAY ON OPTIONS EXPIRATION DAY?