Roughly 1 in 50 Californians is a Realtor

This article is from late May, but it's astounding. 1 in 52 adults in California is a realtor (agent or broker). And as of the first half of this year, 2007, the numbers are still increasing... talk about a lagging indicator.

I looked up the stats on population in Wikipedia. California has 36.5M people. So assuming 1 in 52 adults is in this industry, backing that back into the total population that means of the 36.5M people in California 24.75M are adults or 68%. Why did I do that? Just curious how it compares nationally.

There are 1.3 million members of the National Association of Realtors (pure agents). Of those about 390K are in CA. Of 24.75M people in CA, 390K are realtors or 1.57% of the adult population.

The rest of the country has a population of 270M, assuming 68% are adults that is 184M adults.

So take out the 390K CA realtors out of the 1.3M total and that leaves you with 910K realtors for the other 49 states or 184M adults. Or 0.5% of the adult population.

So takeaway #1, CA has triple the number of people, as a % of population, who can be classified as a realtor (how many are active vs inactive could be a question), versus the rest of the nation.

Takeaway #2, 1 in every 200 Americans adults is a realtor (or at least has a license). That doesn't include the brokers. So you don't think the employment picture will be affected nationwide by this real estate issue?

Now this is back of envelope analysis, working backward and I don't have independent confirmation but mostly I wanted to see how the 1 in 52 number compares in CA versus the rest of the nation. Keep in mind, as an economy, if CA was a stand alone economy it would be the 7th largest in the world. So a slowdown there effects us all. They have a major gravitational pull.

More Retail Tells?: Harley Davidson (HOG) and Office Depot (ODP)

I mentioned early last week about Coach (COH) as "the" retail tell, due to the consumer it serves. (as an aside the stock rallied to its 50 day moving average at $47 and was pushed right back down, typical behavior for weak stocks). I followed that up with some comments about a similar company, Polo Ralph Lauren (RL) (whose chart is about to get the dreaded 'death cross').

Another one I didn't think about that is a perfect tell, due to it's consumer base which is very similar to the Coach crowd.... overextended middle to upper middle income who in many cases use the house ATM to finance these sort of purchases. Well Harley Davidson (HOG) had some poor results, lowered guidance for the year and withdrew guidance for 2009. Oops.

"The company points to dropping demand and a promotion-heavy July to explain the shortfall."
"About 35% of purchases financed by Harley-Davidson Financial Services were subprime, and the troubles in this market are bound to be reflected in sales declines, much as they have in the auto sector."
"Growing unemployment figures could also have an impact on sales."
"Our U.S. dealers' retail sales have fallen sharply during August," said Harley Chief Executive Officer Jim Ziemer on Friday."
"Against the current economic background, we no longer expect worldwide dealer retail sales to increase during the second half of 2007."
"The company now expects 2008 earnings growth between 4 percent and 7 percent on moderate revenue growth and lower operating margins. It previously forecast earnings growth between 11 percent and 17 percent for 2008 as well as 2009. The company said it was not providing 2009 guidance now."
"Dealers of all leisure vehicles, such as motorcycles and all-terrain vehicles, are reporting that it's increasingly difficult to make sales as consumers become more cautious with their money, said Greg Badishkanian, a leisure analyst with Citigroup, which has Harley as a client."

And yes, don't get confused by the word subprime - many people who you'd consider to be well off in "income" are terrible with their credit - just because you make $90K a year doesn't mean you manage money well or don't spend above your means.

Next up, looking at the economy from a different perspective, small companies, we have Office Depot (ODP).

"At the Goldman Sachs retail conference yesterday, its CFO, Patricia McKay, said small businesses are slowing their spending and the retailer is also being hurt by the sagging housing market."
"The Office Depot miss follows a late August warning from Staples Inc that reported a 2% drop in same-store sales, down from 4% positive comps last year."
"The office supply sector has proven a good measure of economic activity for most of this decade, forecasting the 2002 economic recovery and now, apparently, an economic slowdown."

Just for data points that point to a 'reality' of a consumer who, without his main arms merchant, the house ATM, is pulling back.

No positions

Bookkeeping: Weekly Changes in Fund Positions

Positions can be found in the right margin under the label cloud and recent comments areas. All positions of 1.0% or more are shown each week. Being a long only fund, via Marketocracy rules, the only hedges I have are cash or buying short ETFs.

Cash: 22.5% (vs 31.3% last week)
57 positions (vs 56 last week)
54 long bias: 65.7% (vs 58.2% last week)
3 short bias: 11.8% (vs 10.5% last week and close to 15% mid week)

Top 10 positions (excluding cash): 33.7% of fund
30 of the 57 positions are at least 1% of the fund's overall holdings

Major changes
A quiet week overall in terms of large dollar moves, but some of the larger moves:

1. Added to deep sea drillers, especially heavy into GlobalSantaFe (GSF) which was the brand new position of the week.
2. Added to the short ETFs early in the week and lightened up a bit Friday on the selloff,
   
3. Added to Apple (AAPL) and Sandisk (SNDK) on their pullbacks to support
4. Added to Gmarket (GMKT), a Korean version of EBAY, on its breakout over the 50 and 200 day moving averages in latter part of the week.
5. Added some Riverbed Technology (RVBD) on it's pullback to $40
   

Long GlobalSantaFe, Apple, Sandisk, Gmarket, Riverbed Technology in fund; long Apple and Sandisk in personal account

Bookkeeping: Rising Tide Growth Fund Performance

I will update the fund's performance every so often, either monthly or quarterly. I am measuring myself against the Russell 2000 since the majority of the holdings in my fund are small and mid caps. Marketocracy.com measures as a default against the SP500.

The fund is now about a month old; and due to a quirk of when I started the fund which was in effect Monday August 6th, my start date for all measurements is the close of Friday August 3rd which just so happened to be (aside from the close on August 15th during the worst of the correction) the lowest close of the year 2007, and in fact the lowest close since early November 2006. So this quirk will hurt my performance in the near term, as the fund was obviously nearly 100% in cash the first day, and it takes time to ramp into positions.

Meanwhile the Russell 2000 ramped up from 755.4 on Monday August 6th to 774.1 by Wednesday August 8th (+2.47%) and a day later on Thursday August 9th it was up to 795.7 (+5.33%). Meanwhile the fund was just transferring from 100% cash to some entry level positions during that time frame, missing out on most of that 2.5-5% jump. So it was a volatile time to start the fund, and if I had officially started 3 days later my starting point for the Russell 2000 would of been 795 instead of 755, well over 5% of difference. Since it took a few weeks to get the fund fully invested that was just bad timing. In 2-3 years time it won't matter much, but for month 1, quarter 1, and year 1 of the fund, that bad luck in timing will hurt near term performance measures.

With that said, since inception the fund is +3.54% vs Russell 2000 +2.70% = +0.84% outperformance. Nothing special there.

However, if I had 'officially' started the mock fund 2 days later, the Russell 2000 (basis 774.1) would of returned +0.21% and if I had started 3 days later (basis 795.7) it would of returned -2.50%. So the fund's Year to date return of +3.54% vs either of those numbers would look more impressive. With the Russell 2000 trading in the 770s/780s for most of the 2 weeks after inception, that is probably a more accurate 'start' point. Mentally I am using Russell 775 as a fair value starting point.

In the past week, the Russell 2000 has returned -2.15% vs the fund's return of +0.11% - so now that I am fully invested some of the returns are looking better. Obviously having the ETF short positions as the #2, #3, and #4 holdings in the fund, along with a >20% cash position the past week also helped to offset the losses in the long holdings.

Sector Strength: Deep Sea Oil Drillers

I laid the case out Tuesday why this sector looked attractive and mentioned I was buying for the fund after a technical breakout. On a very negative day for the market this group is flat; a show of strength.

As of 3:40 PM with the all major averages down nearly 2% and breadth running over 8:2 negative

• Pride International (PDE) -0.6%
• Diamond Offshore Drilling (DO) -0.4%
• The team of GlobalSantaFe (GSF) and Transocean (RIG) - future marriage partners +0.3%

One day does not make a trend but this group has shown a lot of strength of late as my post noted, and seem to be holding the resistance levels they finally broke through after a lull.

Another group I would consider for trading (not quite the secular story) is the coal group - they are almost ready to break out after a long lull - the story is not as good as the deep sea oil drillers, but for a trade the refiners and coal stocks are generally nice multi month moves you can do a few times a year. Will keep an eye out for them as they are nearing breakout stages.

Long Pride International, Diamond Offshore, and GlobalSantaFe in fund; no personal positions

This MOO for You? An ETF to Play the Global Agriculture Boom

One of the themes the fund is currently investing in is the secular agricultural boom as people in developing economies upgrade their food quality, as their incomes grow. Thus far, I have been focused mostly on the fertilizer companies, although the equipment and seed plays have also done great. However, in the past few days I have read multiple articles on a new ETF which, if you want to play this trend in 1 fell swoop, provides an interesting (and global) way to diversify across multiple subtrends on this play. The ETF is called Market Vectors Agribusiness (MOO) ... yes MOO. How cute. Here is a fact sheet about the ETF.

Anyhow multiple press outlets have reported on this from Realmoney.com today (subscribers only), to Investor's Business Daily to IndexUniverse.com blog (this latter article has a chart of the top 10 holdings). Here are some details from the two free articles.

• The fund tracks the DAX Agribusiness Index, and charges 0.65% in annual expenses.
• Its only ostensible competitor, the Powershares DB Agriculture Fund (DBA), takes an entirely different approach to the space. DBA invests in agricultural futures contracts, while MOO invests in agriculture-related companies. The two are driven by completely different dynamics, and have performed very differently: DBA is up 9.67% year-to-date, while the index underlying MOO is up 32.40%. Both figures are as of July 31.
• MOO is a truly global fund, holding 40 companies trading on 13 global exchanges worldwide. In addition to meeting minimum volume requirements, components of the index must be worth at least $150 million. The United States dominates the index with a 55% weighting -- the next-largest country is Canada at 9.3% of the index.
• The DAX Agribusiness Index covers several areas of the agriculture market, including agriculture chemicals at 34.3% of the index, agriproduct operations (33.5%), agricultural equipment (24.3%), livestock operations (5.6%) and ethanol/biodiesel (2.3%).
• Tokyo-based Komatsu, the world's second-biggest maker of construction and mining machinery, is the fund's largest holding. It accounts for 9% of assets.

Interestingly our old pork friend Smithfield Foods (SFD) is a small holding in this fund (1%) - hah.

So for one who wants exposure to this trend, but not necessarily picking and choosing individual names, this looks like an attractive offering.

No positions

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It is not very frequent that one comes across an amicable business opportunity. People usually tend to follow whimsical whims, leading to bad credit loan and eventually debt help. Not everyone is cut out for business card, however. This alone is responsible for quite a lot of mortgages. However, the incidence is less in individuals who have term life insurance policies. The frequency is somewhat balanced in credit cards users though.
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Juniper Networks (JNPR) the Networking Good Times Continue

Tech Trader Daily blog has some analyst's comments following a meeting yesterday - these basically reiterate the "networking is back" theme I keep repeating. (as always take analysts' comments with a grain of salt, but with multiple takeaways being very similar, it seems to bode well for the space)

• RBC Capital’s Mark Sue raised his price target on the stock to $35 from $3, citing “further clarity in the company’s ability to improve operating margins.
• Sanjiv Wadhwani, of Stifel Nicolaus, upped his target on the stock to $41 from $30. He raised his 2008 EPS estimate to $1.14 from $1.10
• Samuel Wilson, of JMP Securities, raised his target to $38, from $31, and says he “came away feeling appreciably more positive about Juniper’s financial prospects over the next 18 months.” He says Juniper “is on positive product cycles in several areas and actively addressing its previous execution issues.” Wilson raised his 2008 EPS estimate to $1.10 from $1.03.

Juniper Networks is a 1.5% holding in the fund, which I'd like to add to, but the stock never pulls back save for the waterfall selling in mid August. Current consensus on 2008 is $1.08 with a range of $0.83 to $1.15. The $1.08 is up from $1.00 two months ago. At $35, Juniper is trading at forward PEs of 42x 2007 and 34x 2008. Still pricey, but most likely we will see these estimates revised upward over time. While a company like Ciena (CIEN) is not a pure play competitor, I like Ciena (CIEN) more from a valuation standpoint (30x 2007 and 23x 2008), although the 'lumpy' revenue of Ciena makes it more of a quarter to quarter risk in terms of pleasing the street. Ciena is the fund's largest holding.

Long Juniper Networks and Ciena in fund; no personal positions

Apple (AAPL) in similar position to Sandisk (SNDK)

Both have very similar technical set ups, falling to their 50 day moving averages ($130 or so for Apple) so to be consistent I added to my Apple (AAPL) position here as well. Essentially the same reasons as my previous post with Sandisk (SNDK).

Just for bookkeeping, I reduced my 3 large short ETF positions by about 15%; just to lock in some profits. Still expecting more downside in the coming weeks.

But I like these specific tech names to hold up relatively well; or at least outside of a waterfall selling event as we saw in mid August....

Long Apple in fund and in personal account

Sandisk (SNDK) is first in the "buying list" to pullback

Sandisk (SNDK) is the first stock on the shopping list to pullback to support. It is now just below $53, from $58 just a few days ago; a 10% haircut and now scraping against its 50 day moving average. I will be adding some here, about 100 shares to build up my position. SNDK was already 2.7% of the portfolio going into the day.

Please note, Sandisk (SNDK) is very expensive on 2007 estimates of $1.36 but 21x 2008 earnings of $2.53 which will probably be quite understated by the time we get there. A move to $47-$50 if the market should tank would not surprise me.

With that said, getting more long anything right now is probably early. I think the whole market needs to rethink the earnings outlook for those companies tied to the US economy. So I will be patient overall. Everytime we have a bad Friday people trot out the Black Monday 1987 ghost, so look for some commentator today to call for it, along with the calls for 50 basis cuts needed today blah blah. Of course interest rate cuts take many months (quarters in fact) to work their way through the economy so if you cut on the 10th or 18th, does it really matter? Not a bit, other than for psychology.

Also word out Bin Laden will have a new video out .... also word out Greenspan calling current times mirror image of 1998 and 1987. 1998 I get... 1987? Seems a bit extreme, and I sure hope not. Not a great backdrop. Amazing how psychology changes so quickly in this market - wasn't it just Tuesday the market was up so much when people got back from the Hamptons? Not that I understood that move, but just shows you the emotion that goes into the daily white noise of the market.

Long SNDK in fund; no personal positions

The Real Problem with Housing

An interesting local article on the front page of yesterday's newspaper.

New Houses Out of Most Families Reach

This speaks to the main problem with housing nationwide; not just in Michigan. Without the exotic mortgages, most have been priced out of the range of the 'common man'. Now one might read this article and say "yeh Michigan is an outlier, it's in a recession... blah blah" but the truth is Michigan still has some of the highest wages in the nations, although the economy is faltering. Teachers were the 2nd highest paid in the nation earlier this decade; still in the top 10 - the average blue collar worker still makes far more than anyplace else in the nation due to the unions, many engineers, designers, corporate headquarters are still here. So the wages here are very representative of that of the nation.

Yet with a median home price far below that of most of the nation, nearly 6 in 10 cannot afford a $175,000 house by traditional Debt to Income ratios. So how are people doing it in high cost states? Where medians are $350K? $400K? $450K? The bottom line is it's impossible - you can't have a housing market where 6% of the people can afford homes if you use a traditional fixed mortgage. Even with $0 down! Or even with 3/1 ARMs or 5/1 ARMs (remember those from the early part of the decade? Those used to be 'exotic')

The big picture being lost in these bailout schemes are house values have completely disassociated from wages in many large population centers in this country. So even with 0% Fed fund rates, short of a new era of exotic mortgages these homes are unaffordable except for the top 5% demographic. But when the median house (50 percentile) is only affordable to the top 5%, what does that bode? A retrenchment in prices just has to happen for the common man/woman to afford a home - the policeman, the teacher, the accountant, the postal worker - the jobs most of America does - remember we are a 'service' economy now, and service jobs by nature don't pay as well as the jobs they replaced. Wage inflation has been stagnant this decade, adjusted for inflation yet home prices in many areas have doubled in the past 5 years alone. It doesn't make sense, and people cannot put 60-70% of their take home pay towards a house payment - it leaves nothing for auto, food, energy, and "life". This is what the bailout herd does not get....

One Ugly Jobs Report

That was an ugly jobs report. I anticipated bad news, but I thought the employment hit would really start in earnest in next month's report, as there is some lag in employment numbers but seeing this level of degradation in the employment picture shows us that "the bad" is coming sooner. Not only was this month's number bad but downward revisions in previous month's numbers as well.

This scenario was outlined in Et tu, September?

• Construction jobs - they are going to be accelerating into an abyss. Granted, some portion is illegal workers who were never on payrolls (official ones, that is) in the first place. But this is a trailing indicator. Who needs more homes when inventory is >9 months, on the way to ? 12?
• Mortgage jobs - huge cutbacks already announced and will be filtering through the future unemployment reports
• Financial jobs - we should start seeing lay off notices soon enough (next week?) I already read that across the pond there are cuts in credit departments already hitting. If we go back to pre 2004 levels of 'credit' (revert to the mean?) what does that mean?

We were told this issue was contained... right? No spillover? Yeh, right. Even government jobs saw a reduction (that one even surprised me)

Well now the last pillar to the strong economy (employment) is starting to see the fallout; and without confidence you really can see some bad things happening. Those who worry about their jobs, or see peers lose them --> that's the quickest way to lose confidence.

All those hoping for weak numbers so Big Ben can save the economy with a 25 basis points cut, you get your wish. It was silly to think that this will someone 'save' us before this data comes out, and now looks even more silly. Now the conversation will turn to 50 basis points cuts and that sort of talk. The bottom line is, the cuts will only ameliorate the situation - a downturn is a downturn; this is more systematic of an issue - overinflated spending due to overinflated assets. Now when we revert to the 'mean', it will look like a downturn vs where we came from. Even though we should of never been at levels we were previously since those spending levels and asset levels were 'goosed' by cheap tricks.

The equity market seems to not be pricing any of this. Lower confidence, less jobs = less spending. Less spending = less profits for companies levered to the US economy. It's a chain reaction. As my earlier piece stated, earnings are going to need to come down. I see September a month full of earnings warnings, and October a month full of guidance reductions. Anyone who does not have a large hand in either secular growth markets and/or levered strongly to foreign economies has an issue - their future earnings are overstated. By the way Bear Stearns (BSC) and Lehman Brothers (LEH) are set to announce in the next 10 days. Should be some eye opening experiences.

If the market rallies or falls today is not really the issue - we have bigger fish to fry. The equity market has seemed to be 'wrong' for much of the past few weeks, so a continued flight to the "Fed will make everything ok" story, if it occurs in next few weeks, is still misguided... at least from this perch.

No positions

Tomorrow's employment report

The market awaits with baited breath tomorrow's employment report. Now, with employment being a lagging indicator I don't expect too bad of fireworks - more to come in the fall/early winter. But from some readin