Potash is a mineral form of potassium, and a key ingredient in fertilizer. For the last 20 years, farmers have bought potash for about $125 a ton. But the BPC started the year selling potash for $270 a ton. It quickly raised the benchmark price to $450 a ton. In March, it raised the benchmark to $650 a ton. Last week, the BPC announced its latest price hike. On June 1, it will begin selling potash for $1,010 a ton. That’s a 274% price increase in six months… and a 709% leap from its 20-year norm.

Prices for potash are rising so fast, stock analysts can’t maintain their spreadsheets. They update their models on Monday. By Friday, the models are obsolete…

And the stock prices of potash producers are arcing into the sky like fireworks, too. Take the Potash Corporation of Saskatchewan, for example. The largest potash producer in the world, its stock price has risen 1,000% in the last five years and 620% since June 2006. It’s now the second-largest company in Canada, ahead of EnCana and the Royal Bank of Canada. It trades for 10 times book value and more than 46 times earnings.

———- Advertisement ———-
Haven’t saved a penny for retirement?

No problem. An investment opportunity we call the “801(k) Plan” may be the perfect solution.

“801(k) Plans” have been shown to pay up to 1,000% – 2,000% more than 401(k)s or IRAs. It’s no wonder thousands of soon-to-be-retirees are already taking advantage.

Click here to find out more.
———————————-

Uralkali, a large Russian producer, has seen its shares rise 1,984% in the last three years.

Intrepid Potash, the only American producer, floated shares on the stock market for the first time last week. Its shares rose 58% on the first day of trading.

You couldn’t make me invest in the big potash producers if you put a gun to my head. This is a classic investment mania. Commodity producers have huge capital expenses and nearly no competitive advantages. They should not sell for 46 times earnings.

Here’s the thing: While I wouldn’t touch the major potash stocks, I still think potash, the commodity, could go much higher.

China is the world’s largest consumer of potash. In 2007, it bought 2.5 million tons in a contract with the BPC. The supply crunch is so serious, this year the BPC could only sell China 1 million tons. My point is, even at $1,000 a ton, potash supplies still cannot meet demand.

So potash prices can keep rising. How far? Consider this: Before potash was discovered in New Mexico, Germany was the world’s only supplier. In December 1915, when World War I cut trade between the United States and Germany, potash prices jumped from $35 per ton to more than $500. In today’s money, that’s the equivalent of more than $10,571 per ton.

My advice: Don’t buy the major potash stocks. The upside is already “priced in.” If potash doesn’t rise, these stocks could collapse.

If you want to invest in potash, buy the potash “juniors” and use a stop loss to limit your exposure. These small potash companies are building mines in risky countries. They’re risky, but you get a big discount on the potash in the ground. If potash keeps rising, you’ll multiply your money. If it doesn’t, you’ll lose only as much as you’ve put at risk.

Good investing,

Tom

P.S. In my newsletter International Strategist, we’re getting into the potash business. I’ve found a potash mine that I think is worth $2 billion. And because it’s in a third-world country, you can buy this mine today for just $520 million. To learn about a trial subscription to International Strategist, click here.

JL: So I’m guessing you had a busy week.

CASH: How can you tell? I know you can’t see the dark circles under my eyes through the phone. Is my voice twitching?

JL: Haha — no, you sound fine. But the calendar really picked back up. You had to be in there making all kinds of moves.

CASH: You’re starting to sound like a trader now! I like it!

JL: Whaddaya mean “sound” like a trader? I’ve been runnin’ and gunnin’ for as long as you… maybe just not as quick on the draw…

CASH: I know, I’m just playing with ya. Our mutual love of markets is how we became friends in the first place. And yes, there were a bunch of deals this week. It’s definitely kept me busy. We already talked about what a success Intrepid Potash (IPI:NYSE) was right out of the gate, and the stock actually booked an even higher close on Friday. What a great story!

JL: Are you buying more IPI then?

CASH: Not right this moment. I’m still holding half of my position to see where the momentum takes it, but I wouldn’t be a big buyer again just yet. Patience is a virtue…

JL: Indeed. Speaking of patience, what happened with American Waterworks? You weren’t too excited about the short-term prospects on that one. I think you were getting a share allocation when we last talked.

CASH: Ugh. Yeah, I got all I wanted on that deal.

JL: Uh-oh. If you never get enough of the good ones, that’s not great sign.

CASH: You can say that again. When you get all the stock you signed on for and your guy calls you back and says, “Great news! I can get you another 10,000 shares, no problemo!” you know it’s going to be a long day.

JL: So did you, ah, take a bath on American Waterworks then?

CASH: Ouch, bad pun alert. Nah, I’m too slippery for that. I got dinged, but it was small beer compared to my IPI gains. I’m now actually out of American Waterworks completely. But my guys are all thankful that I took shares off their hands… and their managers are excited to see that I’m still long.

JL: Come again? You said you were out of the stock completely, but the managers still think you’re long it?

CASH: Heh. This kind of thing is a big reason why we use a pen name in these conversations.

JL: That and the fact it’s fun to goof around with your name.

CASH: True — can’t underestimate the value of having a little fun. But as far as day-to-day trading goes, I play little games with these underwriters all the time. It’s not uncommon for a “long” position with one investment house to be neutralized by a “short” position elsewhere — without the first party being any the wiser. This isn’t anything exceptional. It’s just a part of doing business when your business involves maintaining relationships on the street. With a stock like American Waterworks (AWK:NYSE), I knew I’d have to protect myself by taking some “covert action.” So I did.

JL: For the benefit of our readers, can you quickly hit the highlights of what made AWK a bad deal? What were the danger signs, or clues, if you will?

CASH: Sure. Since AWK didn’t have enough demand from the get-go, they had to lower the price significantly to get the deal done. That was clue No. 1. Clue No. 2 was when I got all the stock I asked for from at least from different brokers. With that, I knew they were having trouble finding a home for all the shares — certainly not a positive development. Finally, when the actual stock issued, it immediately traded down 50 cents or more. That put me in full damage-control mode.

JL: So what does that look like? Explain how you control the damage without stepping on the toes of the underwriters. Obviously, we know that if you just liquidate your holdings en masse, the underwriters will get their feelings hurt and you won’t be on the list the next time a good deal prices.

CASH: Right. I went to a good discount broker, another of my many contacts, and got a borrow on the stock. In other words, I found someplace else to short it. Sometimes this is difficult and I have to look more than one place before I find stock I can short.

JL: To keep our readers up to speed, let me get this straight. In order to short a stock, a trader first has to get a legal “borrow,” which involves finding someone else’s long shares. The trader then sells this “borrowed” stock on the market, with the understanding that he will eventually re-purchase the shares and return them to the broker. And this is all usually pretty cut and dry established stocks, but can take a bit more time to pull off with a brand-new or thinly traded stock.

CASH: Exactly. So once I got hold of a borrow, I spent the rest of the day shorting the same amount of American Waterworks stock I held long in my underwriter accounts. So now, if AWK trades up big, I’ll be ticked because I’ll lose just as much on my shorts as I make on my longs. That’s the price of neutralizing the downside.

JL: But you don’t see a big uptick for AWK anyway.