"There is a very easy way to return from a casino with a small fortune: go there with a large one" Jack Yelton

Here it comes again... All over the media one can read never ending stories about another "sure thing" investment opportunity- this time it is agriculture and anything related to it. I mean, some times it takes a lot of effort on my part to understand, how could the public that is still recovering from the bursting of one bubble, is now herding en masse into another "sure thing" sector that is quickly becoming the next bubble of gigantic proportions...

I guess that's why being a skeptic, in my opinion, is a "must have" quality for anyone who aspires to be successful investor long term. Too often we all forget that in aggregate the stock market is simply a giant supermarket where two nearly identical products could be selling at vastly different prices just because one has a better advertisement, temporarily low supply or because it is simply more "fashionable" or "hot" at the moment.

If you are a permanent investing optimist who just accepts the "rosy" management projections and likes to move in a lock step with trendy "popular" opinion- you are very likely to one day learn a very painful and expensive lesson. Cheerful momentum and growth investors learned it in the late 90s when buying AOL was just as fashionable as buying MOS or POT is today. Even value investors, who once claimed that they would never do such a stupid thing like invest based on "hype", learned a painful lesson over the past 18 months. It all started with a same notion that one group of stocks or a sector deserved a "premium" over its "historical" valuations because "this time was different".

In a case of the tech crash it was the revenue growth and/or anything related to Internet, in the case of the "financials bust" of 2006-2008, it was the financial/banking sector that deserved a historical "premium" just because its earnings grew in healthy double digits for several years... The whole notion of cyclicality inherent in the financial industry was quickly forgotten even by the "rational" value gurus. We all heard numerous explanations why LEH, C, BAC and GS were supposed to grow in double digits forever and thus were "extremely" cheap even at historically "sky high" multiples...

"This time is different" stories that we all heard just a few months ago were just as prevalent during the "Shanghai boom" time last fall as they where during the tech boom. Now after 40% plunge- it's simply amazing to go back and read some of the explanations people came up when justifying why PetroChina was valued higher than Exxon, or why ICBC should be valued higher than BofA. We've heard stories about decoupling of emerging economies, a billion of hungry Chinese consumers etc...

The scary part in my book is that a similar bubble has now almost certainly formed in the agriculture related stocks. We are now hearing stories about "how the world is running out of food" and how the "same" billions of "hungry" consumers that were just recently predicted to make Asian economies immune to the woes of the mighty US, are going to put the "again never-ending" pressure on food prices for the years to come...

Come on guys, give me a break! No one is going to run out of food- world's population during the last several years has barely grown and while eating habits towards more protein consumption are increasing the demand of the AG commodities somewhat, the multi fold increase in prices of corn and wheat is definitely not the result of the increased consumption. Rather it is a direct outcome of the incompetent politicians doing what they do best- wasting money and excess sector liquidity driven by greed... Ethanol and other alternative grain based fuel subsidies are absolutely ridiculous, stupid and irrational. Period!

All the stories about how the farming industry is only entering the beginning of the next "sure thing" boom and thus super cyclical companies like POT and MOS deserve the ridiculous valuations because they will grow by 20% a year for the next 10 years are simply silly. Remember - we've heard that about China, Real Estate, AOL etc...

And just as like all other "booms" the agriculture is now sure to go through a "bust" cycle that will surely cost a lot of retail investors' money. Does one reasonably believe that pure commodity plays like Potash and Mosaic with 12,000+ employees and less than $2B in free cash between the two of them, are worth a $100 billion market cap just because there is a short term shortage of fertilizer????

Once again, let's get real here- how many years do you think the fertilizer prices need to go up by 50% a year to justify a sustainable cash flow sufficient to pay investors dividends worthy of current "sky is the limit" prices? How about the fact that both companies spend 50% + of operating cash flow on capital expenditures? How about the "sky rocketing" costs on everything from labor and industrial equipment, to energy required to produce the final product? How about the almost certain long term threat from substitutions that are virtually guaranteed to show up every time there is such a heavy shot term supply/demand imbalance? How about the fact that neither company has yet been able to provide some real return to shareholders through dividendsor stock buybacks?

My take on it simple- while it is always difficult to predict when the bubble is going to burst, it is very easy to avoid suffering from the eventual consequences. In the game of "bubbly" musical chairs someone always loses, and one while one would hope that small retail investors won't be the ones left behind- unfortunately, more likely than not, they will end being the ones who are going to pay for the "greedy" mistakes of 'big" boys.

While neither MOS nor POT fit my short selling profile, I think that risk reward here is definitely not in the long side investors' favor. Don't be surprised if the AG rally could go on for a few weeks or may be even months- but it could also abruptly end Monday because while greed is a powerful momentum driver - in the long run- fear always wins and the outcome is likely to be quite painful for whoever is left holding the bag...

Stay safe and ignore the AG sector,
Skepticalcapitalist@gmail.com