Thursday, October 2, 2008

Warning on Potash, Encana and RIM

TSX down 800 to below 11K today as Potash got annihilated. Last week it was RIM getting annihilated.

While I feel horror and sympathy for anyone heavily invested in the TSX or other markets, I wrote these words back on May 13 (as the TSX hit a new high) to try to help people:

It bears repeating again: Just recognize that the TSX is not a very diversified index. 75% of the TSX in 3 groups (mining, oils and financials). There are 3 mega cap stocks in Toronto (Encana, Potash and Research in Motion). We all remember what happened to the TSX (TSE back then) in the Nortel crash. This could be similar...

Say we get a 30% hit to energy/materials and 20% hit to the financials everything else, that would be an 11,000 TSX (25% off)

These are not outlandish scenarios in my book. If we get a typical 30% bear in the US and the commodity bubble bursts, I would expect the TSX to at least test the 11,000 level.

Keep these things in mind as we hit a new record...

I think we still go lower but please remember this the next time we have a boom and the TSX chart looks like the Eiffel Tower.

The TSX is not diversified and will probably never be diversified (in that it is unlikely to have high weightings in pharma, retail and consumer goods and not be dominated by more than a few megacaps). It was Nortel and a bear market in 2000, it is RIM, POT and ECA and a bear market in 2007.

Please remember this the next time that experts (Jeff Rubin) are touting that Canada has decoupled (and TSX 16,000 and $200 oil) in the midst of an obvious US recession.

I know what it is like to be on the imploding side of a bubble. I invested heavily (not big dollars since I was starting my career) from 1996 to 1999 in technology. I made fantastic returns but gave all those gains back in 2000-2001. I even saw overvaluation (calling it a bubble but not fully understanding what that meant) in early 2000 and raised cash, but I got back in too early in late 2000 and stupidly on margin.

Since then, I have tried to learn about bubbles. When bubbles burst, they often do a round-trip (ie return to the levels that the bubble started) or more. Potash at $100 has arguably not done a round-trip (it depends where you decide that the bubble started). RIM and Encana probably also not a round trip. I am not using any of my cash to buy these imploding bubble stocks here as they could still go a lot lower here. These 3 stocks are back to 2007 levels. I think that they could easily go back a few more years...

Full disclosure: I was short Potash last week for a profit but I covered about $50 ago

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