Bookkeeping: Weekly Changes in Fund Positions

Fund positions of 1.0% or greater can be found each week in the right margin of the blog, under the label cloud and recent comments areas; I highlight each week the larger position changes.

Being a long only fund, via Marketocracy rules, the only hedges to the downside I have are cash or buying short ETFs.

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 19.4% (vs 23.0% last week)
58 positions (vs 58 last week) - Completed exited Baidu.com (BIDU), initiated Titanium Metals (TIE)
55 long bias: 69.6% (vs 68.1% last week)
3 short bias: 11.0% (vs 8.9% last week)

Top 10 positions (excluding cash) = 31.1% of fund (vs 30.1% last week)
36 of the 58 positions are at least 1% of the fund's overall holdings

Major changes and weekly thoughts
Quite an eventful week - everything was quiet and traders were awaiting news of the Fed decision Tuesday afternoon. Up to that point all index charts and most individual charts I follow were sitting near to a major support/resistance level. I had positioned the fund cautiously going into this announcement and the huge spurt upward left the fund really lagging the indexes on Tuesday, lagging behind the SP500 by 1.5% and the Russell 2000 by 2.5%. However, the fund made most of that up on Thursday and Friday. Considering the fund has been between 20-25% in cash and 9-14% short for most of the week, the results were pretty good since I was able to replicate most of the market's upside with only a 70% long exposure. This shows the fund's long positions were really working great; I just did not have enough scale to outperform, due to my caution on the market as a whole. Some of the larger changes to the fund below:

1. I scaled back out of both long and short positions ahead of the fund meeting Monday. Since the action Tuesday was more akin to Vegas, I didn't want to be quite as exposed to a random event.
2. I cut back my largest position Ciena (CIEN) from 5.7% to 3.4% when the stock spiked a bit. This is simply a move to try to keep as much money churning forward as possible. I am very bullish on the fundamentals in this stock, but due to a convertible debt issue with strike price $38.15, this has put a ceiling on the shares from best I can tell. Once the stock shows signs of life again I plan to jump in, probably in even heavier scale than I had these past few weeks.
3. I cut back a bit on the oil deep sea drilling names; the chart for Pride International (PDE) took a turn for the worse early in the week, breaking the 50 day moving average Monday and Tuesday, but of course the Fed decision changed everything.
4. I was adding to the fund's Suntech Power (STP) position throughout the first half of the week as it broke out above its 50 day moving average and held it; Suntech Power at 4.2% of the fund is now the largest long holding.
   
5. I bought back some of my ultrashort ETF positions after the run up post Fed - partly because I think there are still a lot of cockroaches to be found once we hit earnings season in October and partly because on down days in the market this is the only way (aside from cash) to have any buffer for the fund.
6. I added to my 2 coal positions, Peabody Energy (BTU) and Consol Energy (CNX) that I started the previous week as I said I would when they pulled back closer to support levels.
7. I added to my Crocs (CROX) position on the bad rumor of the week; i.e. kids die on escalators when they wear Crocs... Crocs is now a top 10 holding in the fund. Why a retail name when I am bearish on the domestic consumer? First, this name has a lot of international exposure - second, there is a big difference in a $15K Harley versus a $24 shoe. My one concern is the CFO mentioned a move from 60 to mid 50s gross margins - I know that but does the average Joe who loves this stock know it or will he/she be 'disappointed' and flee in panic come earnings. Hopefully unit volumes sold will offset this.
   
8. I initiated a sizable position in Titanium Metals (TIE) as its chart (along with many other metal stocks) changed 180 degrees post Fed.
9. I followed through on my strategy to overweight Blue Coat Systems (BCSI) and underweight Riverbed Technology (RVBD) - although I like both names fundamentally, I like the valuation on Blue Coat Systems (BCSI) better at this time considering they have very similar growth outlooks. Hence I added quite a bit Blue Coat (up to 2.7% of the fund) and cut back my Riverbed (down to 1.0% of the fund) - this is almost the exact reverse of where the 2 stocks were two weeks ago in terms of weight in the fund.
10. I closed the fund's Baidu.com (BIDU) position - great gains % wise, but I certainly did not buy enough back in August considering the tremendous run in the name. Right now anything with the word Chinese is behaving as anything with the word '.com' did back in the late 90s so it makes me nervous to see a repeat of this lemming behavior. I'd like to buy Baidu.com back, just at a lower price - this is simply a valuation call but momentum traders can take this stock onward and upward - but the risk/reward is now too weighted towards risk for my taste.

So that's the week in a nutshell. Going forward I am torn between knowing the Fed gave us a license to thrill/speculate versus my thoughts that many of the domestic related stocks (without heavy international exposure) are going to follow the fate of Harley Davidson, Ralph Polo etc and disappoint the street in October (especially in regard to forward guidance). Also the smaller, regional banks won't be able to hide their losses as the large 'black box' investment banks can. So it's a mixed bag. I think avoiding (most) retail (save those who have good international exposure), most financial, and restaurants is still the way to go.

Thus far, even on very strong weeks like this, the fund has been able to keep pace despite only being about 70% long, so if this can continue on 'up weeks', and can provide a some buffer on 'down weeks' I will be content. The long positions I have been picking have done extremely well, so on that I am happy. Post October earnings season, we can re-assess this strategy.

Bookkeeping: Rising Tide Growth Fund Performance

Price of Rising Tide Growth: $10.731
Performance to date (vs Aug 3, 2007): +7.31%

SP500: 1,525.8 (+4.13%)
Russell 2000: 813.1 (+4.92%)

Fund vs SP500: +3.18%
Fund vs Russell 2000: +2.39%

Since the market cap of the median stock in the Rising Tide Growth fund is significantly below the SP500 index but higher than the median market cap in the Russell 2000, I am measuring the fund against both indexes to be more accurate.

Basis for indexes
SP500 (5 day weighted average Aug 3-9): 1,465.2
Russell 2000 (5 day weighted average Aug 3-9): 775

To see why I use the 5 day weighted average of the first 5 trading days to smooth out the volatility of the indexes as the fund launched, see here.

Please click here: fund performance for previous updates

Norway Energy Policy vs US Energy Policy

Pretty sad to see the differences between attitudes in Europe vs US in renewable energy. Where is our Manhattan project? You'd think Democrats would be behind this due to environmental causes and Republicans due to national security (less dependence on people who hate us for their oil) Instead we have almost nothing, especially comparative to the size of our country.

• OSLO, Sept 21 (Reuters) - Norway's Prime Minister Jens Stoltenberg appointed a new energy minister on Friday and vowed continuity in policies for the offshore oil and gas sector as well as its renewable energy projects.
• "We will continue our historical work with environmental friendly energy, we have one experienced minister stepping down, and one experienced minister stepping in," Stoltenberg said.
• Haga said she will focus on boosting the role of renewable energy. Norway already mainly uses clean hydropower to produce electricity and has piled billions of crowns into projects to capture and store carbon emissions blamed for global warming.
• "My biggest project is to speed up work on renewable energy," she said, calling it the "green gold of the future".

Amazing what lobbying money can buy you....

Meanwhile back in China - Price Freezes!

This was before my time but I believe the last person who tried price freezes in the US was President Nixon. That didn't work out too well.

Well, now China has decided inflation has gotten out of hand so it's time to go to the tried and true price freezes. Once again, we see free markets rule on the way up! But when they cause ill effects its time for regulation. Click on the label at the bottom of this post ('china market') for my earlier thoughts on how this is all coming together. And yes this has an impact on the US consumer, as when wages go up in China to pay for inflating goods, that means inputs to US companies buying Chinese product goes up which means US consumers have to pay more out of their pocket - and we already are facing an increasingly strapped US consumer without his house ATM. (not to mention the value of the dollar is deflating by the day)

While the China Shanghai market can go on this crusade upward on onward into bubble land indefinitely (just make sure you have a chair when the music stops), let's look at what's going on, on the ground.

• BEIJING: The Chinese government on Wednesday froze prices that it controls for the rest of the year, in the latest sign of Beijing's mounting concern over inflation.
• Beijing also stressed the importance of holding down market-driven prices during the forthcoming holiday period, saying it would have a direct impact on the country's "development, reform and stability."
• Ensuring stable prices would also create favorable conditions for the opening of the ruling Communist Party's five-yearly congress on Oct. 15, a statement issued by six ministries said.
• The government still administers a vast array of prices, including those for land, transport, utilities and fuel.
• The statement urged local governments to raise minimum wages as soon as possible to make up for inflation, which jumped to 6.5 percent in the year to August. <--- hear that? raise your wages....
• Chinese leaders are nervous that a rapid erosion of living standards could trigger social unrest, as it has before in China, most recently in the run-up to the pro-democracy demonstrations in Tiananmen Square in Beijing in 1989 that were put down by the army.
• The main source of inflation has been an increase in the price of pork, China's staple meat, caused by disease, rising feed grain costs and low prices last year, which deterred farmers from rearing more animals.
• Separately, China is set to provide more aid to dairy farmers as part of an effort to control rising food prices, which have driven consumer price inflation, industry officials said.
• They said the State Council, China's cabinet, was to meet Wednesday to discuss financial support for dairy farmers after increasing feed costs and low milk prices forced many to stop raising cows. "There has never been a meeting before of State Council leaders to discuss dairy cows," said an official with the China Dairy Association.

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China is and will continue to be one of the great growth stories of our lifetime. However, 10% GDP growth and massive movements of population from rural to urban cannot happen without dislocations, possibly severe ones. We are starting to see some of them. When all this starts to effect markets is anyone's guess; and the government will do everything in its power to keep up appearances up to 2008 summer olympics. Past that point, it's going to be dicey. This is a 20-30 year story but all growth stories have their speed bumps. Right now markets are not pricing in any.... food for thought. Wait, food is too expensive. Dairy for thought.... wait, that's too expensive too... ummmm, toys for thought? Never mind... bad idea.

Quick fact - statistics show those living in rural areas and the urban poor spend 1/3 of their money on food. No, these are not the daytraders pushing the Shanghia market to bubble status. These are the regular folk..... and the vast majority.

An Apple (AAPL) a Day?

As mentioned yesterday I try not to talk about this stock daily since one could create a whole blog around Apple (AAPL) but the good news just keeps on coming, forcing me to continue to write glowing blog posts...

Today's news from Scott Moritz over at TheStreet.com: Apple Mac Sales Surging

• iPhone fever may have obscured the robust growth in Apple's (AAPL) Macs.
• People familiar with the company say Apple is selling computers at a blockbuster pace. The Cupertino, Calif., company is expected to sell 2.35 million iMacs and MacBooks this quarter, TheStreet.com has learned. A sales number that high would beat analysts' estimates by nearly 400,000 units.
• Pegging the average Mac sales price at a conservative $1,500, a beat of that magnitude stands to boost Apple's top line by about $600 million. Analysts expect the company to post fiscal first-quarter revenue of $5.94 billion.
• The popularity of Apple's computer lineup has been fueled by a robust back-to-school buying spree and a revamped iMac roster, say industry watchers.
• Apple has about 3% of the world's computer market share
• Looking ahead, people inside the company and those close to Apple's plans say there will be a big announcement regarding a so-called subnotebook Mac. The ultra-thin device will have a 10-inch to 12-inch screen; sleek, rounded edges; and weigh less than 2 pounds.
• The subnotebook's introduction is planned for next quarter, and the product is expected to be available for the holiday sales season. In preparation for a big year-end sales push, Apple has told some employees to cancel vacation plans "between Thanksgiving and Christmas," says one source familiar with the memo.

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Takeaway: What more is there to say? This company is a home run in every way - cool stuff, that is easy to use, that teenagers love, teenagers that turn into college students, who turn into young consumers. A company that can charge a premium on the same mass market components than other companies just due to cool factor. Think Nike of consumer electronics. This constant consternation about a price cut here, or XXX amount unit miss there, blah blah. Missing the forest for the trees. 3% computer market share. What happens if Apple gets 6% in the next 3 years? or 10%?

Looking at the numbers above, we are looking at potentially a 20% surprise to the upside on computer sales and a 10% upside surprise on revenue from the computer division alone! And now we are talking about an even lighter and smaller notebook? (other than concerns about too small of a keyboard) all I can say is "hit". But wait it took them 74 days instead of 43 days to sell out a million iPhones. Tragic ;) Again, the only fly in the ointment is this Steve Jobs options backdating situation... but operationally this company is turning into a 1 stop shop for everything consumer electronics; and can sell it all at a premium to competitors on 'brand' name alone.

Long Apple in fund; no personal position

Fertilizer Continues to Run: Potash (POT) and Mosaic (MOS)

The 2 leading Canadian potash makers continue their run, with Mosaic (MOS) up 7.5% and Potash (POT) up another 4.5%. I mentioned the strength in Potash yesterday. While Potash is the Google (GOOG) of potash, Mosaic might be the AskJeeves ;)

Some more good news out earlier this week for this group:

• Mr. Lee told clients in a note that Canpotex – a potash exporter wholly owned by Saskatchewan potash producers, Agrium Inc., The Mosaic Company, and Potash Corporation of Saskatchewan Inc., – has announced potash prices in Brazil will increase by $50 to $360 per tonne effective Dec. 1, 2007.
  
• In Southeast Asia, meanwhile, the price of potash is set to increase immediately by $30 to $360 per tonne.
• And even better for Potash investors, Mr. Lee doesn't expect the global price hikes to end there, saying there is room for significant increases in India and China as well.
• "On a delivered basis, potash prices in India and China are currently about $270 per tonne and $235 per tonne, respectively. Based on prices in Brazil and Southeast Asia, we believe there is room for potash prices in India and China to move significantly higher in 2008."
• Mr. Lee added that she feels her 2008 financial forecast for PotashCorp based on an average realized potash price of $208 per tonne appears to conservative. (I'd say!)
• He noted that a $10 per tonne increase in her average realized potash price assumption would result in a 20¢ bump in her 2008 earnings per share estimate and an approximately $4 to $5 increase in her price target.
  

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Takeaway: The only stock of the 3 mentioned above the fund does not hold is Agrium (AGU), as it's a mix of fertilizer/retailing, but that stock has also been on an incredible run. I discussed the squeeze on prices in yesterday's posting on Potash - simple supply and demand, economics 101. Here we have the results -> 10% increases in Asia immediately and by year end 15% increases in Brazil. Now the drawback is one of the biggest markets for fertilizer is the US and with the demolition of the value of the dollar this will hurt from a currency perspective on any sales to the US but the rest of the world looks like it will more than make that up.

So current consensus for Potash is $3.97 in 2008 - the analyst in the story mentioned every $10 increase in price adds $0.20 in EPS bump, so $30 = $0.60. The market is really putting a premium valuation on Potash right now, valuing each dollar of 2007 earnings with a 30 PE ratio. So from that standpoint $0.60 more EPS x 30 = $18 more in share price just from these price increases alone.

Looking at Mosaic (MOS), the street only values 2007 earnings at 19x (Mosaic has less growth potential/expansion versus Potash), however we can reasonably expect the $2.94 in 2008 estimates (listed as year end May 2009), to go up in scale as well.

It is very hard to put a good valuation on these companies - obviously fertilizer does not traditionally sell as such premiums, but we are not in a traditional time either. I hate to use words like "it's different this time" but with 20-30% of the world's population migrating to urban centers - its going to be different for a while. If these stocks are over or undervalued is hard to call, but if you felt the valuation of the companies was accurate pre-pricing change, this price increase alone means you need to push the stock price targets up as earnings will increase.

I will be looking to add on these names on any sizeable market pullbacks, and am kicking myself for selling off any I had at much more attractive prices in early/mid August.

2 PM EDIT: My research staff (uhhh, being me) missed the fact that there was an analyst upgrade today on Mosaic as well.

• Shares of Mosaic Co., which makes phosphate and potash crop nutrients, rose in Friday morning trading, after a Citi Investment Research analyst upgraded the stock on stable pricing of a main fertilizer ingredient.
• Citi's Brian Yu raised his rating on Mosaic to "Hold" from "Sell" and lifted his price target to $48 from $31.
• Yu said the price of diammonium phosphate, a main ingredient in fertilizer, is unlikely to decline, as long as Mosaic can maintain its market position and production.
• Yu hiked his fiscal 2008 earnings per share estimate to $2.78 from $2.27, and 2009 estimate to $2.69 from $2.05.

Talk about "behind the curve" - oh analysts. And he completely missed the potash story in the name. Bleh.

Long Mosaic, Potash in fund; no personal positions

Suntech Power (STP) Gets an Analyst Upgrade

I have been adding to the fund's Suntech Power (STP) position on this breakout; today the stock is touching $40 on an analyst upgrade. This is currently the fund's largest long position at >4%, after I cut back on Ciena (CIEN) the past few days. (I will update the portfolio on the right sidebar by the end of the day)

• NEW YORK (AP) -- Shares of solar cell maker Suntech Power Holdings Co. Ltd. edged up in premarket electronic trading Friday after a Jefferies & Co. analyst initiated coverage with a "Buy" rating, saying the company's Pluto technology will allow it to keep costs down.
• Paul Clegg set a price target of $45 per share, a few cents above the all-time high the stock set in July.
• Clegg expects Suntech to introduce Pluto technology next year. The company says the technology is less expensive to make than competing technologies, and also more efficient at converting solar energy into electricity.
• "The company has developed a good overall reputation for quality modules at a reasonable price and continues to develop additional means of improving product quality and per unit economics through both better manufacturing and conversion efficiency gains," he said.
• Clegg said Suntech has a history of exceeding production estimates. He said that trend should continue, and the company should beat analyst expectations for the year. He expects a profit of $1.13 per share this year, and far surpass Wall Street estimates by earning $1.78 per share next year.

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Takeaway: With the recent run in Chinese stocks, many now trade at valuations higher than their US counterparts. One can argue with the accounting standards in China, this might be an iffy proposition. I believe what many see as a 'not so expensive' Shanghai market, might look a lot more expensive if companies there universally used internationally accepted accounting standards - from many things I have read there is a lot of chicanery going on, but we can leave that for another day, and another bubble. I don't have such concerns with this solid company - they are the best capitalized, best managed, heaviest R&D spender, best connected Chinese PV solar player. Due to the quite large float, and larger share count (vs peers) Suntech Power gets left behind by the retail crowd since daytraders and momentum guys cannot push a stock like this up 40% in a week; but I believe as institutional interest increases in this sector they are going to be pushing themselves in the names that have some liquidity, and Suntech Power is the obvious choice.

The major US peer to Suntech Power is SunPower (SPWR). Let's compare the valuations:

Suntech Power (STP) $39
EPS 07: $1.01
EPS 08: $1.59
PE on 07: 39
PE on 08: 24.5

SunPower (SPWR) $82
EPS 07: $1.18
EPS 08: $1.96
PE on 07: 69
PE on 08: 42

So Sunpower, the US counterpart to STP trades at over 70% of its value - both companies have similar market caps and similar growth rates - Suntech Power actually has better margins across the board. With the market now 'marking up Chinese merchandise' to levels above US merchandise (for example CNOOC (CEO) is now valued higher on PE multiple than Exxon (XOM)), why such a discrepancy here?

One can argue if it makes sense for Chinese coutnerparts to trade at par or even higher values than US - there are good arguements both pro and con - but certainly in this sector we do not see that. So if this inefficiency is closed, we should see a nice ride up on Suntech Power despite its premium valuation. I am looking for a run to upper $40s by Q1 2008 - if we get more clarity on the polysilicon shortage issue in the upcoming months, it could be even quicker than that. For the longer term, much like the analyst I believe 2008 estimates are probably understated and if this shortage begins to clear up by latter 2008, earnings leverage will explode as polysilicon is 65-75% of costs for many of the Chinese PV makers.

Long Suntech Power, Ciena in fund; no personal position

Closing my Baidu.com (BIDU) Position for Now

I am completely exiting my Baidu.com (BIDU) position at this point. While the general strategy of the fund is to never completely leave a position it likes, (but instead to lever in and out of names as they go up and down).... since the stock can continue to run far past what one might consider legit, this one has just risen too much. I never had enough Baidu.com in retrospect judging from the magnitude of this run but the stock has risen >20% in 5 sessions ($230 to $280), and is up enormously from my purchase points on Aug 10th (upper $180s, up almost 50%) and August 16th (mid $160s, up almost 70%)

With the crazy run ups in Chinese stocks the past few days as speculators latch back on regardless of fundamentals driving some stocks up 50% in just a week, it's just getting too hot and heavy in here for me; and generally I like beta.

I am exiting here; although the stock certainly should make a run to $300, with hopes of getting back in somewhere in the sub $240 range, or at least 15% lower than current prices. Even on the $8 or so in earnings for 2009, its approaching 40x earnings for 2009 at these prices. Too rich (for me); I will leave it to the speculators. And yes, I know all the bullish arguments - that's why I am in the stock in the first place - but at some point valuation does begin to matter, although we all have different perception of value, but that's what makes a market.

No position

Now What Ben?

Ok the black box financials are out of the way - what did we learn from them? Nothing other than they can pull levers to make their earnings pop out "not so bad" (vs lower guidance of course). Ben's chopper dropped 50 basis. Now what? It's been 48 hours since Ben cut, and singed the bears.

Now what? When do the calls start for 50 basis points at next meeting? Or wait; things are so bad we need an intrameeting cut. Do we wait until next Monday for that? Or tomorrow? What can be done to make these homes affordable and not make a few million people default in the next 1