Dipping a Toe Back in the Market

With this week’s Global Bull Market Alert pick, I’m going to place a small bet that global stock markets have stopped their free fall — and that the next few weeks may mark a long-awaited turnaround. I highlighted a handful of reasons some market technicians think the stock market may have bottomed in a recent issue in The Global Guru. If the market has indeed bottomed, that is good news for stocks. During the last 10 recessions, equity prices have soared on average 24% within just six months of hitting their lows.

While the market is still very fragile, there is a growing sense that the Federal Reserve is managing the credit crisis successfully. After reaching a high point of 35 on March 17, the Chicago Board Option Exchange’s volatility index, (also known as the “fear index”), fell to 23 on Friday — the lowest level since the end of February. On average since 1950, April has been the best-performing month of the year for the Dow, with an average gain of 1.8% for the month. But in my view, the biggest reason for a potential turnaround in the market is thanks to a nod from the Securities and Exchange Commission that banks will be able to account for subprime losses in a more reasonable way — a change that I believe actually goes to the heart of the current crisis.

All in all, the balance of risks is such that I think it is a good time to tip toe back into the market. The safest bet is with the strongest stock in the strongest sector: Canada’s Potash Corp. of Saskatchewan, Inc. (POT), the world’s largest manufacturer of fertilizer products.

I’ve made the case for agriculture repeatedly during this past quarter. Indeed, one of your current holdings, the iPath DJ AIG Agriculture TR Sub-Idx ETN (JJA), is a bet on the rising price of agriculture products.

But let me summarize the investment case for Potash in particular.

First, here’s the demand side of the Potash pick. Increased global demand for corn, grains, soybeans and other farm crops from China has pushed prices for such commodities to record or near-record levels. But as Potash Corp. Chief Executive Bill Doyle noted, the potash market is so tight that it doesn’t even require demand from China, given strong demand from India, Brazil and Southeast Asia. Rising demand for corn-based ethanol also has driven up prices. As a result of the sharp price hikes, farmers have planted more crops and sought better yields — all of which requires more fertilizer.

Second, the supply side favors Potash, too. Just as there seems to be little reason for global demand for food, feed and fuels to decline anytime soon, potash supplies are expected to remain tight for the next two or three years. As Goldman Sachs recently observed in a research note: "Everybody wants as much (fertilizer) as they can get but you just don’t have enough supply." 

Third, as a result, fertilizer giants like Potash have been making money hand over fist. Potash prices have gone up from $77 a ton to $221 a ton — and analysts say prices have nowhere to go but up. Consensus earnings estimates for Potash are soaring, and were recently revised upward to $14.00 for 2009 (up from $9.80) and $16.00 in 2010 (up from $11.00).

After a strong run, how much farther can Potash go? RBC recently upgraded the stock from “outperform” to “top pick” with a price target of $250. CIBC World Markets has a price target of $240 on the stock. That’s a 40%-plus upside from current levels. Potash also has just broken out of a trading range, after rival Monsanto posted strong results last week.  

So buy Potash (POT) at market today and place your stop at $125.00. For potentially even bigger upside, try the $180 June calls (PYPFP.X).

P.S. Join my Eagle Publishing investment colleague Mark Skousen and me for FREEDOMFEST 2008, "The Trade Show for Liberty," on July 10-12, 2008, Bally’s/Paris Resort. FreedomFest will feature more than 88 speakers, 100 exhibitors, and 1,000 attendees. Guests will include John Mackey, CEO of Whole Foods Market, Congressman Ron Paul, a 2008 Republican candidate for president, Steve Moore, of The Wall Street Journal editorial board, David Boaz, vice president of Cato Institute, Robert Poole, Jr., of Reason Foundation, Jeremy Siegel, "The Wizard of Wharton," and Rick Rule, one of the country’s top money managers. Also hear Frank Holmes, Doug Casey, Larry Abraham, Ron Holland, Frank Trotter, Bert Dohmen, Keith Fitz-Gerald, Peter Zipper, John Mauldin, and many more.