Monday, October 29, 2007

FMC Technologies (FTI) Reports Solid Earnings

Well it is hard to compare anything to what CF Industries (CF) just did, so everything pales in comparison, but FMC Technologies (FTI) reported a very solid quarter and a bit of an increase to guidance so everything looks on track. Subsea systems are the driver for this stock and they were fantastic with an increasing backlog (read: visibility).

Analysts were in for $1.14 B revenue, and $0.55 EPS
Revenue came in line and they beat the bottom line by $0.04 EPS, at $0.59
  • Inbound orders in the quarter totaled $1.5 billion of which $766 million was in subsea systems. Backlog reached $3.7 billion, including a record $2.6 billion for subsea systems.
  • We continue to see positive returns from being positioned as the technology leader in our industry, said Peter D. Kinnear, President and Chief Executive Officer. Our energy segments again showed robust growth improving year-over-year in orders, backlog, sales, and operating profit, allowing us to raise our estimate for continuing operations for the full year to $2.16 - $2.21 per fully diluted share.
  • We are also announcing our intent to spin-off our FoodTech and Airport Systems businesses to shareholders in a tax-free distribution. With the growth in the energy businesses over the past few years, FoodTech and Airport Systems have become a smaller part of the total company. We now feel that they would perform better as an independent public company focused on their respective markets.
  • Energy Production Systems third quarter revenue of $683.8 million increased 21 percent over the prior-year quarter, due mainly to increased subsea systems sales. Revenue for subsea systems was $521 million in the quarter, up 17 percent from the prior-year quarter. Surface wellhead revenue improved 31 percent from the prior-year quarter.
  • Energy Production Systems operating profit of $70.4 million increased 43 percent over the prior-year quarter. The increase was due both to higher volume and operating margin in subsea systems. Surface wellhead operating profit improved due to higher volume.
  • Energy Production Systems inbound orders were $943.0 million for the third quarter, up $533.0 million over the prior-year quarter due to the strength of orders for subsea systems. Subsea systems inbound orders were $766 million in the quarter, up 178 percent from the prior-year quarter and 81 percent year-to-date. Energy Production backlog of $2.9 billion was up 88 percent from the prior-year quarter and up 10 percent sequentially. Subsea backlog was a record $2.6 billion at the end of the third quarter.
  • Energy Processing Systems third quarter revenue of $199.6 million was 14 percent higher than the prior-year quarter. The revenue improvement over the prior-year quarter was primarily the result of strong demand from service companies for fluid control products, including WECO®/Chiksan® equipment, which were up 25 percent from the prior-year quarter and 11 percent sequentially.
  • Energy Processing Systems third quarter operating profit of $38.0 million was 41 percent higher than the prior-year quarter. The improvement was largely the result of higher volume and operating margins in both fluid control and measurement solutions.
  • Energy Processing Systems inbound orders were $219.3 million for the third quarter, up 4 percent over the prior-year quarter and up 16 percent sequentially. Backlog is $357.2 million, up 31 percent from the prior-year quarter on strong fluid control, loading systems and measurement systems orders.
  • FMC Technologies announced its intent to combine its FoodTech and Airport Systems businesses into a separate, publicly-traded company and distribute it to shareholders in a manner that is tax free to shareholders. The Company estimates the distribution will occur in mid 2008.
Funny thing is the Foodtech business actually grew 40% year over year as well - not that I want anything to do with it. Let's keep focused on energy, spin off that non related product line, and keep going. Another solid quarter much the same as Core Laboratories (CLB). The stock is starting to get pricey but I thought the same after the CLB quarter and that stock just went on to tack another $10. I guess my definition of pricey is old school - the new school investor just buys, buys, buys.

Long FMC Technologies in fund; no personal position

#1 Position CF Industries (CF) Monster Quarter

Earnings for CF Industries (CF) came in better than I could of imagined.

Estimates $537M revenue, and $0.97 EPS
Actual $583M revenue, and $1.52 EPS

As I have stated repeatedly the past few weeks, analysts are really underestimating forward earnings growth for the entire fertilizer sector. I'm just Joe Schmoe, not a fertilizer analyst, so not sure why they are still so wrong, other than their natural conservative nature. Just last week I waxed poetically....

CF Industries has yet to report but 08 estimates 90 days ago $3.27. 30 days ago $4.19. Now? $4.93. Only wrong by 51% (and we are still awaiting the new estimates post earnings) from 90 days ago, and wrong by 18% (so far) from 30 days ago. Oops.

Back to the valuations. I hesitate to even post the PE ratio on 08 estimates because as I've shown above, its faulty at best since the estimates are rising monthly. But as of "today" this is how it stands

POT on 07 - 33x, on 08 - 25x
MOS on 07 - 20x, on 08 - 17x
CF on 07 - 16.7x, on 08 - 16x

Again, better than expected and the stock just got cheaper instantly on current and forward earnings estimates. This is a >50% beat on the bottom line, and margin expansion of a serious manner, as pricing power benefits the entire industry - look for those 08 estimates to take a huge hike up. So we were talking a company that was valued at 16.8x 2007 estimates, and 16x faulty 08 estimates (remember 2008 was at $3.27 just 90 days ago; they just did $1.52 in 1 quarter, a traditionally SLOWER quarter).

We could be talking about 11-12x 08 estimates for a company growing in excess of 50% with pricing power for the next few years. Pricing is so strong it has detached from the normal seasonal trends (see below)
  • The sharp improvement in third quarter performance is a clear reflection of the optimism pervading U.S. agricultural markets today, explained Stephen R. Wilson, chairman and chief executive officer of CF Industries Holdings, Inc.
  • Seasonally slow third quarter demand typically results in price pullbacks during the period, Wilson noted. This year, it seems that the prospect of record farm income for 2007 and the optimistic outlook for next years spring planting, coupled with what appear to be low fertilizer inventories throughout the supply chain, led many customers to begin locking in their fertilizer needs earlier than in the past. This helped produce continued pricing improvement for almost all of our products, not just compared to last year, but also in relation to this years strong second quarter, Wilson explained.
  • It also drove a sharp increase in the companys Forward Pricing Program (FPP) bookings for the fourth quarter and the spring of 2008. Improved pricing produced substantial margin improvements in both our nitrogen and phosphate segments for the quarter, he added.
  • The third quarters 46 percent increase in net sales helped CF Industries achieve a nearly six-fold increase in gross margin to $151.3 million compared to the third quarter of 2006.
  • During the quarter, the nitrogen segment benefited from significantly improved pricing from year-earlier levels for all products, reflecting a positive outlook for North American agricultural markets and a favorable supply/demand situation in world markets.
  • Net sales for nitrogen totaled $388.8 million, up 41 percent from $275.4 million in third quarter 2006. Segment sales volume for the quarter totaled 1.35 million tons, comparable to 1.38 million in 2006s third quarter. (so for the same amount of product vs a year ago, they got 40% more revenue)
  • Gross margin on nitrogen was $80.2 million, up substantially from $9.6 million in the year-earlier quarter, due to significantly higher prices. Gross margin in the 2007 quarter represented 20.6 percent of sales, compared to 3.5 percent in the 2006 quarter.
  • Prices for nitrogen products not only showed substantial improvement over the year-earlier quarter but, in the case of urea and urea ammonium nitrate solution (UAN), continued to improve over strong second quarter 2007 levels. The average selling price for ammonia was $366 per ton for the quarter, up substantially from $293 in third quarter 2006 but down from $390 in 2007s second quarter. Average selling price for urea was $334 per ton, up from $226 in the 2006 quarter and from $331 in 2007s second quarter. For UAN, the $230 per ton price in this years third quarter compared to $155 in the year-earlier quarter and $206 in 2007s second quarter.
  • The companys phosphate segment enjoyed significantly improved sales revenues and gross margin compared to the year-earlier quarter, as pricing for both diammonium phosphate (DAP) and monoammonium phosphate (MAP) strengthened compared to both third quarter 2006 and second quarter 2007 levels. Worldwide demand in phosphate remains strong, which has clearly strengthened the North American market, CF Industries primary focus in phosphate.
  • Third quarter average selling price for DAP was $388 per ton, up substantially from $241 in last years third quarter and from $349 in this years second quarter. The third quarter average selling price for MAP was $403 per ton, again up substantially from $243 in last years third quarter and from $341 in this years second quarter.
  • Phosphate net sales totaled $194.1 million in the quarter, up 58 percent from $123.2 million in the year-earlier quarter. Phosphate sales volume totaled 497,000 tons, down modestly from 510,000 tons during third quarter 2006. Phosphate gross margin for the quarter totaled $71.1 million, or 36.6 percent of sales, up substantially from $16.2 million, or 13.2 percent of sales, reported for third quarter 2006. (pricing is so strong that revenue was up 58% despite LOWER volumes year over year)
What's left to say; a home run on all counts. Now on to guidance.
  • We are looking forward to a strong fourth quarter, as this years large harvest, historically high crop prices, and the prospect of another excellent crop year in 2008 have buoyed the farm economy, Wilson commented.
  • As of October 25, 2007, we had approximately 3.5 million tons of product booked under our FPP, significantly higher than the 939,000 tons at that time last year, Wilson explained. Approximately 1.5 million of those FPP tons were scheduled to ship in the fourth quarter of 2007, with the majority of the remaining volume scheduled for the first quarter of 2008. The margins built into the companys forward orders reflect the upbeat outlook for nitrogen and phosphate fertilizers for the fall and spring.
  • Looking at nitrogen, demand could benefit from an early harvest this year, which could give farmers plenty of time for fall ammonia application, assuming favorable weather. With todays record wheat prices, it is possible that acreage for that crop could be at its highest level in many years, Wilson explained, adding that wheat is also a significant user of nitrogen fertilizer.
  • In phosphate markets, Wilson suggested that expected record farm income could lead farmers to increase fall application rates. Phosphate, unlike nitrogen, is retained in the soil from season to season, so farmers can vary application rates each year. When farm income rises, as it will in 2007, it can provide an incentive for farmers to increase phosphate application rates.
  • The CF Industries executive noted that recent volatility in crop prices had created some uncertainty regarding planting intentions for the coming spring season. We typically have a better handle on the acreage outlook by this time of year, but today the outlook is still a bit murky. While there is a general belief that farmers will plant substantial acreage next spring, the various crops are still competing for available acres, Wilson pointed out.
  • For corn, the current expectation is that 2008 could see a decline in acreage, but to levels we would still consider very good by historical standards. However, the potential decline in corn acreage could be offset by a crop price-induced increase in wheat acreage as well as, to a lesser extent, increased acreage of sorghum. Both wheat and sorghum use significant amounts of nitrogen fertilizer, he explained.
So now we have more visibility and backlog building in an industry that usually has very little of each. And they threw in a little dividend to boot.

Due to CF Industries (CF) being exposed more to nitrogen and less of a global player and more of a North America player, it has traded at a major discount to peers. But much like crude oil is becoming a worldwide resource, and inventory levels in the US don't affect worldwide prices, the same seems to be happening in fertilizer. As more demand is drawn into emerging markets, the global price still goes up, even for those producers serving just the North American market. While I don't expect CF Industries to get a multiple similar to Potash (POT) or even Mosaic (MOS) [remember, potash production has a much wider moat or higher barriers to entry than nitrogen or phosphate], I'd expect this sort of growth to push the multiple to a higher level. The one risk is natural gas prices but so far they have been moribound and with natural gas being a 'local' commodity, unlike crude, and the US economy slowing I don't expect ng to be picking up substantially in price anytime soon - hence the inputs for CF Industries business should remain relatively tame. The story here is gross margin expansion. Expect the same and more of it next year - as Potash CEO said, 2007 was the year of volume, 2008 will be the year of margin. The amazing thing for CF Industries is these knockout numbers came on similar (or in some cases lower) volumes than in 2006 year ago levels.... just imagine if they actually increase production...

Long CF Industries in fund and in personal account

Milestone of $12.00 NAV Reached

In mutual fund world NAV = Net Asset Value = Price of your mutual fund

Every fund starts with $1 million and a NAV of $10.00

We just hit a milestone as of 2:30 PM, of NAV = $12.00 meaning 20% return as we near the end of quarter 1 of the fund's life; just over 4 days to go to the quarter is in the books.

Been a fabulous day with the fund up 2.45% on the back of a bevy of winners. I have taken cash up to 11.75% with the sales today in some of the high fliers.

If the market weakens I will be applying this cash into some short ETF positions but right now I think all bears are cowering in the cave until Uncle Al unleashes the next bags of liquidity into the market. As I've mentioned the past week, the playbook is very clear whether it be 25 basis or 50 basis - usually the market will rally on unexpected events - is anything Uncle Al potentially going to do Wednesday going to surprise us anymore? It just seems like deja vu with 6 weeks ago where everyone assumed 25 basis points, and then we got the aggressive move to 50/50 fed funds/discount. Will the same move really 'surprise' this time? Pundits were saying before the last meeting if the Fed were so desperate that it needed to cut by 50 that should spook the market because it meant they saw something far worse than they were letting on - however the market did just the opposite. Hence, I wonder if *this* time, when everyone expects a cut, and it would not surprise to see 50, and *many* expect the same playbook (fed cuts, market rises, all problems go back under the bed), that the opposite will happen. Whatever the 'reaction' in the near term, I am going to play it with a more cautious stance - I don't like big market moving events which can move things up or down tremendously on the basis of something that has very little to do with each individual companies fundamentals.

It's been a stellar past month, and this pace can't continue indefinitely, but I continue to knock on all wood products I pass by. Usually when it's this 'easy', the market has a way of knocking your teeth out :) So I am going to find my mouth guard.

Long teeth

A Couple of Great Articles Today

If you are a subscriber to I recommend you read these 2 articles - sometimes the best thing to do is listen to how others view the markets and it helps explain "why" things are the way they are. Due to this being a subscription service I won't cut and paste the whole articles but will throw a few excerpts in here. These struck me particularly strong today as I try to reconcile some of the huge moves in sectors where I cannot make head or tales of the valuation - and how stocks continue to run in the face of major economic headwinds. I've been trying to do more of this over the years, suspending the 'logic' of macro economic viewpoints in lieu of just making money. Sometimes knowing too much hurts you in the market. Strange, but true. Sort of like the woman in the NCAA office pool who wins because she picks the basketball teams with the cutest colored uniforms or the best mascots, versus the guy who stays up til 2 AM watching that Pac 10 game in the dead of January. Bottom line, you are judged at the end of the day by what is your on P&L, not that you were 'intellectually correct'.

First from "Rev Shark" (his nickname) who writes a daily blog and has a very short term (day/swing) trading perspective; an article titled Don't Lose Sigh of Short Term
  • We are in one of those environments where the short-term traders are creating lots of good action for themselves. With the Fed looming, the bears are on the sidelines, and that makes for a friendly environment for those who don't dwell on long-term negatives.
  • Many small investors handicap themselves greatly by focusing on long-term negatives. The big problem is timing. It doesn't matter if you are right if your timing is off. You can make a tremendous amount of money sticking with positive action even though you are convinced that something very ugly is soon to occur.
  • One of the ironies of investing is that as you become more experienced and sophisticated, there is often a tendency to focus more on macroeconomic conditions. We dwell on the big picture and all the weighty discussions about how matters are going to unfold.
  • It tends to be the grizzled market veterans who have been around for ages who tend to be the macro bears. They no longer focus on the crazy momentum trading that can be so lucrative if you play it right. They want to warn us about how such things always end badly. They are right, it will end badly, but they have forgotten how well an aggressive short-term player can do.
  • For example, we all know the China bubble will end badly at some point. What we don't know is when. Your choice is whether to sit on the sidelines and contemplate this question or to to try to take advantage while you can. If you are a small individual trader, you have the ability to exit in the blink of an eye. Don't waste that power by contemplating the big picture.
So the lesson to me here, is take advantage of these times when the going is good, and the 'speculators' drive stocks up to heights that make no sense when you apply logic, and try to bank the profits over time - eventually times like this will end; and it will end badly but to leave all this profit potential on the table defeats the purpose and the goal of making money. I also have to agree with his comment about as you become more experienced and sophisticated you tend to look at the big picture more and (sadly) that is in fact many times a hindrance. One tends to think everyone in the market views it as you do - but the reality is there are many approaches, and many are of the most simplistic nature i.e. stock ABC is up today, its up 50% for the month, therefore it must continue up. This seems to be a very popular methodology in certain sectors. Which can drive anyone trying to utilize fundamental analysis batty.

On to a very interesting piece by Cramer titled 'China Bubble? So What?'
  • I don't care if China's a bubble. I care about making money. And that's one of the reasons why I am so disliked by so many "professionals" on Wall Street.
  • What amazed me, oddly, was that any of the critics really thought I believed that Baidu "deserved" to be at $500. I could care less what Baidu's worth. I care about what it could trade to. I couldn't care less if it is "overvalued." Of course it is overvalued. It was overvalued at $100, $200 and now $300. Oh, and stop trading, it will be overvalued at $400.
  • What I care about, as I said at the top of this piece, is making money, and sometimes you have to suspend the rules to make money if that's what you really want to do.
  • Some people want to be "right" and make money, and I am telling you that being right is not always the same as making money. Sometimes the really rigorous thing to do is to "suspend" your judgment temporarily and play the bubble because the money can be made so fast and it is so lucrative that it is worth playing.
  • "Aha, the intellectuals say, "how do you know when it will stop? How do you know you won't get caught in the bubble's bursting?" To which I say, "I don't know, who cares?" I think what is more important is that you choose the right instrument to play the bubble and play it whole-hog.
  • Again, I don't care that it is a bubble, I acknowledge that it is a bubble. I just want to be able to capitalize off the bubble rather than simply say "Nope, it is a bubble, I know better."
  • I will ride them to the bank, and then I will give some back when the bubble bursts. But not before I have taken enough off while the critics sniffed.
So again, a similar theme. And it is important to realize how others think, even if it does not totally reconcile with your way of thinking. As both commentators said; what is going on now in certain sectors i.e. solar, i.e. China makes little sense from a valuation metric, but that doesn't mean these stocks cannot continue a relentless ascent, drawing in more 'intellectual' shorts (and crushing them along the way up). At some point these sectors will falter and give some (or a lot) back, but if you take gains along the way - you will have banked a lot of profit. In fact with some of these breathless moves up, you could sell the entire original stake and just let the 'house money' go from there until an eventual implosion. This is very similar to NASDAQ in late 90s. Many were calling it (correctly) overvalued at 3000. Unfortunately for them they missed out on another 2000 points of ascent in a very short time frame. Eventually they were proven correct as NASDAQ fell well below 1500. But the opportunity cost of being intellectually correct was huge. (as long as one cashed out along the way) With that said, there is a big difference (to me) from buying absolute junk that is rising 50% a month versus real companies with real futures that are simply 'overvalued'. At least with the latter there is some fundamental reason for the rise, as opposed to the former....

Myself, I constantly like to look at valuations on future earnings, and I try to be lenient in my assumptions on true secular growth sectors, as I use forward estimates as opposed to trailing (I care a lot more about where a stock is going, not where it came from). But I don't look out 3,4,5 years because other than in very stable industries or sectors such as where a Procter & Gamble sits, its nearly impossible to predict what the sector will look like half a decade out. (Do you realize in the late 90s Yahoo, Lycos, Excite were the 3 main search engines? and the future "kings of the internet"? 2 of which I think most people under the age of 20 have never heard of nowadays - it's only 8 years later and 2 are basically meaningless and the 3rd (Yahoo) is struggling under the assault of Google) Huge price swings, new technological innovations, input costs rising, new competitors - many things can change in 3-5 years. So I try to look 1-2 years out and limit it there. Even on that basis, a few sectors in this market make little sense on any basic valuation basis, so sometimes you miss out on those gains. But a safer way to participate is to keep smaller positions, and let them run, and to take profits along the way. And realize there a lot of investors in these stocks that either don't know, nor care about the fundamentals....

Suntech Power (STP) Up 8% ... on a Downgrade

Shows you the power of herd mentality; massive move up on a downgrade. Right now solar is king. Every stock in the sector up from 4 to 14%, regardless of valuation or fundamentals - even the recent poor performer LDK Solar (LDK) is ramping. Obviously selling that Trina Solar (TSL) was not the right decision; once it broke $54 it had cleared its resistance that it had been fighting for a while; now with that cleared out there was no resistance until mid $60s. With that said, these stocks can continue to run as there are no earnings reports on the near term horizon, but perhaps some reality will set in once earnings reports start hitting. However, it does look like the polysilicon shortage should be fixing itself by back half of 2008 through 2009 which would be a large benefit to all these names, save for First Solar (FSLR).

Suntech Power is now up 50% in the matter of a few weeks; amazing. The scary thing is it's actually one of the 'cheaper' stocks on valuation in the sector - some of the other stocks I can't make heads or tails of their valuation even based on 09 estimates. Oh well, PE ratios are for old fogeys I guess - this is a 'new paradigm' (I believe the 15th new paradigm in the past decade) ;)

Long Suntech Power, LDK Solar in fund; no personal positions

Blackrock (BLK) Might Lose CEO to Merrill Lynch (MER)

It appears in this news of Merrill Lynch dumping its CEO that Blackrock's (BLK) Laurence Fink is one of the top candidates to replace him. While that is good for Mr. Fink, it would cause some uncertainty in the stock, and unfortunately would take away a man I really like from the company.

I wrote after Blackrock's recent earnings

On top of it, I really like the head honcho, Mr. Fink - everytime I read anything from him or see an interview on CNBC he is level headed, and realistic unlike the pollyannas (or head in sand types) that tend to dominate the financial world.

So while I really like the Blackrock business, losing the CEO would certainly be a blow. Unlike many CEO's who I view as interchangeable, and overpriced guys like Fink and Jobs create true value. It wouldn't be so much the near term that would cause me concern but the long term vision and execution of the company. Hopefully the bench is deep at the company, if indeed he is the one chosen for Merrill.

Long Blackrock in fund; no personal position

Bookkeeping: Cutting back New Oriental Education & Technology (EDU)

Everything I just said for the Indian Banks, I apply to New Oriential Education & Technology (EDU). I have very little direct Chinese exposure but the few I have such as EDU and (CTRP) are ramping hard today. New Oriental Education is up 18%+ in 3 sessions, so I am going to cut back this position (unfortunately its a sub 1% position since its so expensive on a valuation basis)

Some recent articles on this company which I don't talk about enough...

Via Forbes:
  • With a growing number of Chinese students taking English tests to study abroad, New Oriental Education on Monday posted a 55% jump in net profit for the quarter ending in August.
  • New Oriental reported net revenue for its first quarter increased 42.5% to 612 million yuan ($81 million) from the corresponding period last year. Net income rose 55.1% to 256 million yuan ($33.9 million). Basic earnings per ADS were 6.86 yuan ($0.91).
  • Chairman and Chief Executive Officer Michael Minhong Yu said the first fiscal quarter is most important to the company, as it includes the two-month summer holiday, during which many Chinese students have to prepare for language tests.
  • “This summer we exceeded 440,500 student enrollments in our language training and test preparation courses, a 30% increase over the same period last year,'' Yu said. It expanded its number of locations, opening two schools and 17 learning centers, bringing its total numbers to 149 schools and learning centers, up from 115 a year ago.
  • Looking ahead, New Oriental Education expects its total net revenues in the second quarter of fiscal to be in the range of 211.2 million yuan to 224.8 million yuan ($28 million to $29.8 million), about 25%-33% higher than previous year.
  • New Oriental is the largest provider of private educational services in China in terms of program numbers, total student enrollments and geographic reach. It enjoys a near-monopoly on prep services for language and entrance exams used in the United States, including the Test of English as a Foreign Language (TOEFL), the Scholastic Aptitude Test used to qualify for undergraduate programs and the Graduate Management Admission Test, required of business school applicants.
Via Motley Fool:
  • Rapid growth in China's economy has providers scrambling to keep up with the increasing demand for educational services. To accommodate the demand, New Oriental opened two new schools and 17 learning centers and initiated a new mathematics program. The company is also seeking opportunities to expand into new areas such as vocational schooling and kindergarten classes by using some of the cash raised from the secondary offering.
  • To buck the rising competition, the company has aggressively tried to continue winning additional market share. Last quarter, selling, general, and administrative costs (SG&A) rose substantially as management stepped up marketing and promotional activities, which paid off with enrollment rates increasing 30.5% year over year. Costs continued to rapidly rise again this quarter, with cost of goods sold up 48% and SG&A costs up 42%, because of New Oriental increasing the number of courses taken and continuing brand promotion.
  • Despite the rising costs, New Oriental still improved its operating margin through better efficiency as revenue growth outpaced the growth in expenses.
  • There are more than 10 million students who take the Gaokao (Chinese SATs) every year, fighting for a mere 3 million spaces available in universities, so the rivalry among students is fierce. Students and their parents seem more than willing to shell out the additional costs to gain an edge, even at a young age. And the hard work pays off: The number of just the top 25% of people, according to IQ tests, in China is greater than the total population of North America.
Takeaway: I really love this company and its done good for me since it's been public. While it is extremely expensive (to me), compared to the absolute junk that speculators have been pushing up 50-300% (what it has China in it's company name? Must be worth 200% higher!) it's a heck of a franchise. At this point it is very difficult to value these companies because investors are not valuing them on normal metrics - essentially every company is China is based on the calculation "company's product x 1.3 billion people = limitless profits for ever and ever". Obviously that is ridiculous but that's the psychology of this sector in the past 8 weeks or so. Out of these 100s of Chinese stocks there will be clear winners/leaders in the long run, but trying to identify which will be the winners out of the mountains of Chinese issues is the tricky part.

I read last night that 78 Chinese IPOs hit the world markets last quarter alone (in various exchanges) - so you can see the same thing that was happening in the late 90s in tech stocks. Any and all companies were rushing to the market, regardless of quality, to take advantage of the 'gold rush' mentality. Back then if you had .com at the end of your company name you had 'limitless' profit opportunity. So replace the word 'China" with '.com' and replace '1.3 billion' with 'number of eyeballs' and it's the same mania, with the same ending (eventually). Once again, this is not saying anything negative about the Chinese economy and the powerhouse it is becoming - there is a difference between that and saying any company that sprouts in China and comes public is the heir apparent for world domination. But investors don't care right now, and all merchandise in China is worth multiples of multiples because of unending profit potential. I keep going back to China Mobile (CHL) which has nearly 400 million subscribers. How many China Mobiles could there be in China? Answer - at most 3. And that's if China Mobile itself decides it doesn't want to grow any more. 400 million x 3 = 1.2 billion people. So the company if it had a virtual monopoly could double twice from here - then what? And how are all these "me too" 'cell phone' companies investors are clamoring over also going to grow to 200 million subscribers? I am using 1 sector as an example but it applies to any sector. Again, the economic growth is real but the math right now is unrealistic. Every company in every sector cannot grow to 1.3 billion customers. But as with all mania's play it until the music ends; but I am trying to stick to the high quality names.

As an aside I also took a bit off (CTRP) since it spiked today as well. You know 1.3 billion people x airline ticket to Shanghai or Macau = limitless profits.

Long New Oriental Education, in fund; no personal position

Bookkeeping; Compelled to Take More of the Indian Banks Off the Table

Well I have to say the recent moves in the 2 Indian banks I own is starting to get a bit frothy - what do they think they are? Chinese banks?

I am cutting back yet again on the Indian banks here as they skyrocket for a 2nd day in a row
  • HDFC Bank (HDB) is up from $117 to $137 in 2 sessions: +17%
  • ICICI Bank (IBN) is up from $60 to $68 in 2 sessions: +13%
Just too much too soon; I'll look to re-add when things cool off - these are now both sub 1% positions so I won't be selling the exposure any lower. This is where I hand off the stocks to the momentum lemmings who love stocks making new highs; the 'buy high sell to the next fool higher' crowd.

It appears the love of emerging markets is back - I see the Chinese stocks are ramping back up (yet again)

Long both in fund; no personal position

Potash (POT) Upgraded by Bank of America

It appears from this that the mine situation is accurate and truly an issue (can never tell with such sketchy details)
  • Shares of Potash Corp. of Saskatchewan Inc. climbed in Monday premarket trading, after a Banc of America Securities analyst upgraded the shares of the fertilizer company and said a major competitor may exit the market, which could lead to higher potash prices.
  • Analyst Marshall E. Reid said Silvinit, a Russian potash producer, may be forced to stop shipping potash when it loses a main rail line.
  • Reid said Silvinit is likely to lose its only rail line in the next few weeks, which will take the company out of the market, at least temporarily. Reid said a new rail line will be built, but that will take at least four months. Silvinit ships all its potash on one line.
  • "The potash market is already very tight," Reid wrote in a client note. "Therefore, a major supply disruption ahead of the spring planting season in the northern hemisphere is likely to send a shock wave through the market, leading to a surge in prices."
  • Reid, who upgraded Potash to "Buy" from "Neutral," said Potash is poised to gain the most from higher prices, given its capacity and market leadership position.
  • If Silvinit steps out of the market, Reid said Potash will likely become a main supplier to China before its spring planting season. China is Silvinit's biggest customer, Reid said.
Takeaway: I could care less about the upgrade, I am more interested in the actual news - this gets more interesting by the day - Silvinit ships all its potash on one line? Ouch. Potash has rumbled well over 20% since it dipped below $100 on the 'fake out' move post earnings so I am not sure if it can continue going straight up in such a short span but clearly the next few quarters look wonderful and I'll be trying to add on dips as its still a sub 2% position. Of course this will benefit Mosaic as well, but again both stocks have had massive runs in just 2 sessions so I'd expect some near term pullback.

Long both in fund; long both in personal account

Bespoke Blog with a Hilarious Look at an Analyst's call on Cummins Engine (CMI)


Ok I don't think this was supposed to be funny but when I read it, I had to chuckle for a few minutes to self.

Here is the link to Bespoke's full blog entry on the topic but essentially after Cummins Engine (CMI) dropped from $133 to $111, Citigroup upgraded the stock from sell to hold.

Sounds reasonable right? Stock falls a lot - gets a better valuation - you had a sell rating, you upgrade. Here is the kicker - the Citi analyst has had a SELL on the stock SINCE September 2005.

Stock price in September 2005? $43.74.

So this call would of cost you 202% from the $133 price before Cummins sold off (and it was higher than $133 in the previous week), and even as the stock tipped to mid $110s it would of cost you about 160%.


We all make some bad calls from time to time, but the key is to eventually recognize the reality and change course. By eventually I mean within a few months.... not 2+ years. Ouch. Another "value add" analyst - you know the type - those who downgrade after a stock has fallen 40% from a bad earnings report or upgrade a stock up 150% from their sell/hold.

Bespoke shows the graphical story below... as they say, a picture is worth a thousand words

Long Cummins Engine in fund; no personal positions

Sunday, October 28, 2007

Still Sketchy Details on the Silvinet "Sinkhole" Story

As mentioned last Thursday, we have some potentially big news on the global potash production front with the news of a sinkhole that could curtail potash shipments from one of the largest potash producers in the world.

Some updates from Mosaic (MOS), and Agrium (AGU), which along with Potash (POT) are partners in the Canpotex 'cartel' - it appears Agrium has taken the same action as Potash in terms of suspending pricing until more details are free, and Mosaic would of done the same but they already are sold out for all of 2007 production.
  • Fertilizer maker Mosaic Corp (MOS) said on Friday it is reviewing its position following news of a sinkhole problem that threatens to disrupt all potash shipments from Silvinit, a major Russian potash producer.
  • The sinkhole from a flooded potash mine could halt shipments from Silvinit, which accounts for about 10 percent of world supply.
  • "The potash situation was already very tight. We had stopped sales (two weeks ago) because we were already sold out through December," he added. "We had announced a price increase and we were trying to put together a program on new sales and it's all on hold right now while we examine the situation," said Hoadley.
  • Potash Corp of Saskatchewan (POT), the world's largest producer of potash, announced on Thursday it had suspended new potash sales. Agrium Inc (AGU), the smallest North American producer of the nutrient, earlier Friday announced that it was taking the same action.
  • Potash Corp, Mosaic and Agrium together own Canpotex, a marketing and distribution company which is also the world's largest exporter of potash. Most potash exports from the three companies' Canadian operations is sold through Canpotex.
  • Belarussian Potash Co, the Russian equivalent of Canpotex, will also suspend new sales contracts, Russia's Uralkali said. Uralkali and Belaruskali each own a 50 percent stake in Belarussian Potash Co.
  • Canpotex and Belarussian together control about two thirds of the world's potash exports.
  • Disruptions to the rail line serving Silvinit could also impede exports from other Russian companies, said Downey, director of investor relations for Calgary, Alberta-based Agrium, the smallest North American potash producer. "If the rail line got interrupted over the next week or two, that would be pretty significant," Downey said. "You'd lose some of that export volume for a number of months."
Takeaway: Again, details are still vague but if this comes to fruition, this could have a significant near term price affect. We have 2 cartels that essentially control 2/3 of world supply and the 2nd largest cartel might have just lost a big portion of its supply for the near term. Still too early to tell, but this could make an already great investing situation that much better for the next few quarters. Keep in mind, Potash already had customers on allocation as supplies were so out of whack with supply. From an investors standpoint, you just have to love a situation like this - not so good for consumers of potash of course.

Long Mosaic, Potash in fund and in personal account

Please take part in the new poll - Fed Funds Decision

Will Uncle Ben gives us treats or tricks - or is it all 1 and the same in reality?

Earnings of Note Mon - Wed

While there is a the normal heavy slew of earnings reports the first half of the week, I don't see a lot of bell weather type of companies in the Mon - Wed time frame. Pre Wed 2:15 PM, it will be all about the Fed, and post 2:15 PM it will all be out the Fed so perhaps this is fitting.

Specific to the fund

#1 holding CF Industries (CF) reports - obviously the numbers will be good - just a question of "good enough for the market?", but with a relatively low valuation for the sector it seems to be in a good spot and the stock has performed very well the past few weeks despite a choppy market. Hopefully we get a nice run to par...

Top 10 holding, oil service company FMC Technologies (FTI) reports - similar to National Oilwell Varco (NOV) and Core Laboratories (CLB), I expect some good numbers - however many energy names have not been rebounding with the price of crude. Not sure what to make of this....

Agco (AG) - tractor maker; should see some sterling results like CNH Global (CNH) - Agco is not a current holding

Under Armour (UA) - not a current holding but a favored retail name; the stock has been weak of late but made a nice jump Friday. Also a momentum favorite. Since I am currently out of it, I'd like to see some sort of miss or not so rosy guidance to bring the stock down and chase out momentum investors and get this stock to a more favorable valuation level - love the story, but oh so pricey. I'd love to see a mid $40s print but it would take quite a calamity in the earnings for this to happen.

Chipotle Mexican Grill (CMG) - if I had to own a restaurant stock, this would be the one, but not at this valuation. Also will be curious to see if rising input costs such as cheese start to affect this "teflon" stock.

Transocean (RIG)/GlobalSantaFe(GSF) both report as they go into the Nov 9th shareholder meeting to confirm their merger. These 2 large deep sea drillers should report similar numbers to Diamond Offshore Drilling (DO) - good news on the deep sea front, some signs of pricing pressure in shallow water. See comments above for the stocks not generally popping along with the price of crude....

General Cable (BGC) - this producer of cable is making some nice moves to become of a more worldwide player and diversify across the globe. Good long term moves. Near term however, the stock has weakened quite a bit the past week, and sits right near its 50 day moving average of $68.70. I have this as a 1.5% position currently and we could see some similar issues that other 'industrials' are seeing - a weakening domestic market impacting their business more quickly than investors assume. So much like Cummins Engine (CMI) we *might* get a better price level to build up a position.

Mastercard (MA) - obviously credit card transactions; this stock tends to sell off after earnings as it reports solid earnings but "never quite good enough" and then rebound through the quarter. Let's see if that pattern repeats itself - I am looking at it's international growth numbers most keenly.

Garmin (GRMN) - I just closed this position late Friday; again I expect a good Christmas and would not be surprised to see yet another blowout quarter but there is always major earnings risk with these high fliers. If not for tax reasons, I'd prefer to be out of every position ahead of earnings since investors are so fickle and 1 missed penny or 2% lower forward guidance can chop a stock by 20% instantly. Blah.

Manitowoc (MTW) - I don't own this one, but essentially a crane maker; and it's become a global growth story type of stocks. As goes world growth, so goes demand for cranes. So it is one to keep an eye out in terms of guidance. This could be the type of company that, if it indicates any type of slowing down the road, could be a canary in the coal mine for global growth.

Saturday, October 27, 2007

Bookkeeping: Weekly Changes to Fund Positions Week 12

Week 12 Major Position Changes

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 weekly 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: 7.5% (vs 5.8% last week)
48 long bias: 84.5% (vs 86.9% last week)
4 short bias: 8.0% (vs 7.3% last week)

52 positions (vs 57 last week)
Additions: UltraShort Oil & Gas (DUG)
Removals: Broadcom (BRCM), Bolt Technology (BTJ), Juniper Networks (JNPR), Garmin (GRMN), Trina Solar (TSL), Tata Motors (TTM)

Top 10 positions = 35.0% of fund (vs 31.9% last week)
40 of the 52 positions are at least 1% of the fund's overall holdings (76.9%)

Major changes and weekly thoughts
Entering this week I had a relatively low short ETF exposure and relatively low cash exposure as I had been selling the short ETFs into last Friday's heavy 'emotional' selling and trying to pick through the rubble for new long exposure. With Monday a down day I continued this tact and quickly began running out of cash. Going into Apple's call on Monday night which one knew would be tremendous I wanted to be on the long side. So we had a decent bounce Tuesday but Tuesday and Wednesday were chopping and by mid afternoon Wednesday I was at my lowest short ETF position in months, and out of cash so extremely positioned on the long side. If you look at a monthly chart for the S&P 500 you can see we were testing lows of last Friday mid afternoon Wednesday and a break of that level would of led to a significant downside. It was strange how we sat at that level for literally a few hours, not budging. Then out of the blue came a large futures order (most of my positions did not move up, just the averages) but that slowly led to more buying. Seems like a strange coincidence.... Friday was a mostly up day but the indexes were still a bit misleading as Microsoft is a major part of every index and its weight alone pushed them up more than the 'average' stock.

Specifically to the fund, I kept building my fertilizer and agriculture exposure. We had a great report from CNH Global (CNH), an agricultural equipment maker early in the week and then a very good Potash (POT) report later in the week which would of been even better if not for the strong Canadian dollar and tax issues. However, this is one of the few areas where I see pricing power and visibility in a slowing US (and potentially global) economy. I keep saying, once the genie is out of the bag and people move up in living standards and want to eat better, thats not something that will change if China's GDP dips to 8% or 5% (or India). Meanwhile a slowdown in those economies could hurt the mining companies (which have been commodity favorites) much harder - hence my overweight to agriculture for the months (quarters ?) ahead. Coal was also strong this week, and I lightened up on my positions a bit late in the week. India also had a late week surge. On the negative side was networking stocks which stunk up the joint. Top 5 position Blue Coat Systems (BCSI) which had hit my year target of $50, has been whacked nearly 27% in 7 sessions, even though it has done nothing wrong, other than being associated in a sector with some blowups. One of the guilty parties was Riverbed Technology (RVBD) which was a sub 2% position which I added to as the week went by. Two other >20% losers which I had sub 2% positions in, were Cummins Engine (CMI) and NII Holdings (NIHD) - I felt both sell offs were overreactions and have built both positions up. These won't rebound immediately but in time these stocks will show their worth, I believe. They were held by too many hot money momentum investors and hopefully now the change of character in their investing base to "good growth at decent value" will lend to some stability. That said, if any of these show another bad quarter they will get blasted even harder the next time around.

Going forward I remain cautious as the US economy is heading, if not to recession, something very close to it, in my opinion. And I'm not the only one thinking that way - some smart cookies like Jim Rogers and Julian Robertson are also of like mind. As I mentioned last week, now the question is how much the world economy's will be affected. And if western Europe follows us down this path to slowing growth (which it will), will this finally be the driver to slow down emerging markets? Another interesting factoid - I am curious why gas prices are not rising - gas is around $3.00 locally - but it was $3.00 back when crude was in the low $70s as well. The refiners have been taking it on the chin as they have not raised gasoline prices in the face of much more expensive input (crude oil) - why is that? Strange to see. How much longer will they keep that up? Their margins are paper thin as it is - what happens at oil $100? What would $4.00 gasoline do? Many energy stocks related to crude have not reacted much in the past few weeks as crude pushes from low $80s to low $90s so that strikes my curiosity - what is that telling us.

As for the Fed, well we all know they are in full bailout mode, as the assure us they are not. Liquidity being created, which I assume is in large part of the reason the market seems to levitate in the fact of unending bad news in 70% of it's stocks. Transports looking week, financials pathetic, homebuilder - haha, retailers awful, restaurants weakening, and now industrials showing weakness - even the multinationals. Yet we continue rebounding. I still think its basic supply and demand - so many large stock buybacks with companies flush with cash, and so much more worthless dollars being printed and handed out, it needs to find a home somewhere (and I guess real estate is out for a few years). So it's a tough market to call. However going into this week, my expectations are 110% of a cut, as I have been saying since Ben showed his true character 6 weeks ago (no different from easy Al), and I am now leaning to a 50 basis point cut (40% chance). This will devalue dollar further, push commodities up further (including oil), inflation continues to ramp, and the pattern continues. I have been calling for 4% Fed funds by very early 08 and I stick to it. But when does the market stop cheering these cuts, and ask why exactly we need such strong action when everything is in such good shape as government officials continue to tell us. So it is tough to be bullish on the market as a whole, but being a long mutual fund I need to find areas that will provide the safest harbors. I think shorts are shell shocked from the Fed's recent actions so I don't expect much shorting into the action - everyone now expects when Ben moves the markets pop - since the market likes to do what people least expect, its very possible we get the opposite reaction this time; especially with the short sellers adding fuel to the fire with forced buying. I think (from my reading) and my own experience many 'intellectual' shorts who are against the market due to 'logic' have thrown in the towel and think there are many forces working together to keep this market up no matter what bad news comes down the pike - so after being burned repeatedly they will wait for true weakness to re-short and not position themselves badly (yet again) of a proactive Fed strike. That's just my view on it. The market will fall when we least expect it. (i.e. potentially in the fact of yet another 50 basis point cut which had bailed out bulls in the past?) So I remain at the party, with many others, wondering why it continues, but stuck here for now, knowing good times must eventually end... the piper must be paid eventually.

Below are the fund changes this week - the specific rationale for each of these major moves is explained in the weekly posts which can be accessed in the left margin under archives.

Some of the larger changes (chronologically) to the fund below:
  1. In the selloff Monday, following Friday's large dip (Early Bird Special) I added to CGGVertias (CGV), Core Laboratories (CLB), CF Industries (CF), New Oriental Education (EDU), Crocs (CROX), Sterlite Industries (SLT), Consol Energy (CNX), (CTRP), Foster Wheeler (FWLT), and Jacobs Engineering (JEC) - all were down heavily except for coal play Consol Energy which had fallen a lot on Friday but I had missed the move down, so I bought Monday instead. Most of the buys were in the $5000-$7000 range execpt for fertilizer play CF Industries which I had bought about $18K worth in the $74s and $75s - CF had peaked at $89 by Friday so at its best these purchases had returned nearly 20% in a week.
  2. I closed a smaller position in Broadcom (BRCM) which promptly tanked the next day on earnings (whew!) and cut back on iShares Hong Kong (EWH) which just continued upward later in the week.
  3. LDK Solar (LDK) was up 16% to the low $41s so I cut back my position, and funneled the money into Mosaic (MOS) which was below $60 at the time (later in the week almost hit $70) - good tradeoff there.
  4. Sold down some Garmin (GRMN) and added some Apple (AAPL) ahead of earnings as the stock would not sell off and give me a better entry point; along with Potash (POT) - and sold down some of my short ETF positions ahead of the Apple report. Monday was a busy day.
  5. CNH Global (CNH) reported a great quarter, was up 12% - so I took some profits in a disciplined manner, along with Apple (AAPL) which had jumped off its earnings report, more LDK Solar (LDK), and some Indian exposure.
  6. I also felt I was overexposed to energy after doing a self analysis of the portfolio, so I cut back on some deep sea oil drilling exposure along with Core Laboratories (CLB) which had bounced in a day from $120 to $130.
  7. I closed my position in recently re-opened Bolt Technology (BTJ) - this proved to be foolish as the stock promptly tagged on 15% - you mock me BTJ, you mock me....
  8. I started a smaller type of position in UltraShort Oil & Gas (DUG) - this is supposed to be a hedge again my energy positions, i.e. if crude falls it should go up as it holds a lot of exploration companies. So far it's worked against me. If oil does get to $100 I do plan to increase this position as assets tend to sell of when they hit a psychological barrier the first time. Either way, I am net very long energy so this can (hopefully) be a small offset to that exposure. So far a losing position.
  9. I continued to add to the smallest of the 3 fertilizer positions, Potash (POT) ahead of its earnings. Also added some more Consol Energy (CNX) below $50 and sold some National Oilwell Varco (NOV) since it had run up north of $74.
  10. Wednesday, after Riverbed Technology (RVBD) imploded the night before, I began rebuilding (too soon) my position with some smaller buys in the $36s. I outlined my thoughts on where to place future buy orders in the sector here. Catching falling knives is never easy, so remaining patient is the key - layer in, in pieces.
  11. Both CNH Global (CNH) and National Oilwell Varco (NOV) pulled back after great earnings reports so I took the opportunity to buy back some of the positions I had let go earlier in the week - thank you Mr. market.
  12. What can I say, I kept adding CF Industries (CF) as it showed no sign of letting down despite a (at that point) scary market.
  13. Cummins Engine (CMI) and NII Holdings (NIHD) imploded Thursday, so I began rebuilding these positions - I was out of cash at this point so sold some short ETFs, some some Core Laboratories (CLB) and sold some sleepy Diamond Hill Investment Group (DHIL). I later added more Cummins Engine in the mid $100s.
  14. I closed the remnants of the Trina Solar (TSL) position - with so many bargains appearing in other sectors, I needed cash. Plus, Trina has just not participated with the rest of the sector as most stocks in the group have been on fire; even sleepy Suntech Power (STP) had a 15% gain in 1 day this week. It is just not acting like a stock ready to post blowout earnings - something seems amiss. Hence I'd rather be safe, than sorry and will re-assess post earnings.
  15. I started to rebuild my Blue Coat Systems (BCSI) as the stock had cratered down to lower $40s; I was hoping it would hold its 50 day moving average of $40, but it fell through that Friday - normally I would not keep catching a falling knife but I did add more Friday in the upper $30s as well. Technically, the stock could be in trouble if it doesn't rebound quickly back above $40. We shall see how this one plays out. I still like the valuation proposal, and I think much of the expectation has been kicked out of the stock this week with the poor stock performance of some peers. That's the theory anyhow and I am sticking to it.
  16. I missed the early morning pullback in Potash (POT) since I was not at the computer (when it dipped below $100) so instead as the day progressed and Mosaic (MOS) fell back to $60 I got more Mosaic instead - this proved fruitful as both stocks reversed hard in a few hours and we had some interesting news on a potential mine issue from Russia which will provide even better prices for their products - in fact Potash has suspended pricing of new sales until we get further news. Mosaic hit nearly $70 the next day so I had to take some off the table.
  17. In my theme of reducing dependence on oil related stocks and to raise some cash to redeploy into hard hit sectors I did take some off the table in Atwood Oceanics (ATW), a deep sea oil driller.
  18. Friday, I sold some of my refiner Frontier Oil (FTO) on news of Kerkorian going after one of its competitors. I am a bit confused by this sector - with oil >$90, why they are not raising prices is beyond me. This has crushed margins in the sector - so eventually something must give. If the refiners raise prices I'd be jumping back in as their margins will improve but thus far they have not been doing it. Not sure why.
  19. I closed smaller positions in Juniper Networks (JNPR), and Garmin (GRMN), for reasons outlined in each entry.
  20. I closed Tata Motors (TTM) as I want to keep my focus in the India stocks on companies that will be least affected by the strong currency. These stocks had a great week.
  21. Coal also had a great week so I trimmed a bit of my Consol Energy (CNX) - with only 4% exposure now in this space I won't be trimming any further, and look to rebuy on pullbacks in the names.
  22. I bought back some UltraShort ETF exposure late in the day on Friday.
Overall - there were a lot of transactions and the 2% move in the general market indices belied a VERY volatile week - many stocks in the portfolio were up/down 10-20%. So when the opportunities were created to buy low, I did - and when some of these literally reversed on a time 24-72 hours later, I took some off the table. This keeps with my strategy of always keeping a reasonable sized core in positions I like, but lowering and increasing exposure as the market gives/takes away on the prices. I did tidy up the portfolio and 48 long positions is the smallest since probably week 2 of the fund. The markets have been very volatile intraday of late and it has been tiring to watch this huge swings - unfortunately we might have yet another one next week with the Fed meeting - I'd prefer nice even keel moves but the ability to find some nice trades this week led to some nice sized short term gains so I took them when offered.

Friday, October 26, 2007

Bookkeeping: 'Rising Tide' Performance Week 12

Week 12 performance of the mutual fund

Comments: With 1 week to go until (my) quarter 1 closes, it was an interesting week of earnings. After the indexes I follow fell roughly 4% last week, they made back more than half of that loss this week, helped on Friday by Microsoft (MSFT). To be blunt we stood at the abyss Tuesday, as the market was testing Friday's lows mid day - technically a break of that level would of lead to a much larger selloff. Then out of the wild blue yonder a massive futures buy order appeared, and the market reversed - pulling itself from the abyss. One really wonders, and I am not the only one on what the heck is going on out there. (required reading if you dare to be short for more than a few days) Anyhow, a very choppy rest of the week and then a Microsoft led rally on Friday - with the 9.5% move in Bill Gates puppy helping all the indexes as its found in every index!

For the third week in a row Rising Tide Growth Fund had a heck of a performance versus its peer group. The fund was +4.37% versus S&P500 +2.32% and Russell 1000 +2.24%. Despite some blowouts in fund positions, especially weighted by the large position in Blue Coat Systems (through no fault of its own), and some smaller positions being swatted down 20%, the strength in coal, agriculture, infrastructure, and India helped performance this week. I was extremely bullishly positioned as of last Friday with my short ETFs reigned in and very little cash, so that worked out, although at the nadir Wednesday that bullish exposure was about to turn out poorly - but those white horses in the distance came galloping to the rescue (yet again). As of Friday (today), I began doing some selected selling and starting to raise cash incrementally, along with some small buying in short ETFs to begin rebuilding 'insurance' against my long only fund. I expect this to continue as we move to Halloween's Fed meeting.

This is the 3rd week in a row the fund outperformed its measures by >2%; my informal goal is beating indexes by (on average) 0.3% each week which would lead to a 15% outperformance over the course of a year. (surely worthy of you investing in my fund!) :) So it's been a great stretch here, and I am especially happy during the recent downturn the fund lost less than the market, and then on the rebound gained more then the market; even with a few individual implosions in specific stocks (it's going to happen with such a large portfolio). It's also been fun to pull this off with very little exposure to the "sexy" sectors in this recent market post August lows - large cap tech or Chinese stocks.

Price of Rising Tide Growth: $11.718
Lifetime Performance to date (vs Aug 3, 2007): +17.18%

Comparable SP500: 1,535.3 (+4.78%)
Comparable Russell 1000: 836.1 (+5.02%)

Fund return vs SP500: +12.40%
Fund return vs Russell 1000: +12.16%

Last week's results here.

Since the market cap of the median stock in the Rising Tide Growth fund (median $9.9 Billion as of October 07) is significantly below the SP500 index (median $13.1 Billion as of September 07) but higher than the median market cap in the Russell 1000 (median market cap $5.8 Billion as of September 07), I am measuring the fund against both indexes. Click here to see fund's holding by market cap as of October 2007.

Basis for indexes is 5 day weighted average of closing prices Aug 3-9
SP500 : 1,465.2
Russell 1000 : 796.2

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

Bookkeeping: Closing last of Garmin (GRMN)

The big cap tech rally has been impressive. I just am not sure how much more Apple (AAPL), Research in Motion (RIMM), and Google (GOOG) can take us.

I don't want to sell any Apple, and my Google position is quite small as it is (around 0.6% of fund), so I am going to clear out the last of my Garmin (GRMN) - this is the one I have the least amount of long term conviction with, although I do like it for a "Christmas gadget" trade. However, it has not rallied with the rest of the group in a very "tech" happy day; and I have some nice gains on this stock I'd like to lock in; while raising cash. Since its a small position I will close out the remaining 50 shares, raising $5900.

I bought Garmin off the Navteq (NVT) - Nokia (NOK) panic, when it sold off 20% immediately - and the stock has done very well for me since; I took it up to nearly 3% of the portfolio on the panic selling and am going to bid goodbye for now. Certainly the stock can continue upward, I am just going to focus in other areas, unless Garmin pulls back about 10% to lower mid $100s. Out in $117s.

Long Apple, Google in fund; no personal positions

The Day After: NII Holdings (NIHD)

Ok let's circle back and see what they are saying about NII Holdings (NIHD) since this was a stock that was destroyed yesterday on what looked on the surface to be solid earnings and revenue growth; but it's chart had been weak the entire quarter telegraphing this "bad"? news. I added a bit yesterday to my previous 1.7% position, but once again, when growth stocks implode, they usually will dead cat bounce, and then go sideways for quite a while, so I believe this to be the fate for NII Holdings.

Yesterday morning I wrote

NII Holdings (NIHD) - Ok this one confuses me; the only thing I can figure out is there is some cell phone industry growth ratio that analysts had, which the company did not exceed. Or guidance was not good enough. They beat on the top and bottom line and the stock was trashed by 18%. I had a 1.7% position in NII Holdings and bought 130 shares to the 290 I had, increasing the position by 44%. Just like with Cummins I don't expect a quick rebound but when I can buy these quality businesses for a nice discount I will take the opportunity.

The day before I had written:
I hope they come out with bad news, disappoint, and can finally sell down to an area it makes a bottom so it can begin the rebuilding process. I really like the potential in this company, but its been stuck the entire quarter in molasses.


So what's the word on the street now...

via Forbes:
  • A company lives and dies by its numbers come rain, shine or hurricanes in Mexico. So despite a 24% increase in profit for the third quarter and earnings per share which blew away Wall Street’s expectations, it was NII Holdings lower sequential subscriber growth that disappointed analysts.
  • The mobile communication provider for businesses in Latin America saw its net income increase to $81.6 million, or 46 cents per share, up from $65.7 million, or 38 cents per share in the prior year. This includes a $22 million charge related to its debt offering. Excluding the charge earnings were $104 million, or 61 cents per share, which beat analysts expectations by 8 cents.
  • Sales soared 39% to $852.9 million up from $615.6 million in the prior year driven by higher subscriber numbers with net additions rising 23% compared to the same period last year.
  • NII added 327,000 net subscribers during the third quarter for a total of 4.4 million subscribers, a year-over-year increase of 38%. But the company had added 331,000 net subscribers in the second quarter.
  • The sequential difference in subscriber growth disappointed investors and they let the company know it. The Reston, VA.-based company’s shares plunged 21.3%, or $14.82, to $54.62 on Thursday afternoon.
  • Steve Shindler, chief executive officer of NII, said that the slower subscriber growth was due to an increase in competition in Mexico and bad weather which impacted businesses in some of the company’s key markets for the quarter. He said the company is working hard to meet its previously raised guidance of 1.275 million net subscriber additions for the year.
  • Wachovia Capital Markets analyst Gray Powell said the hurricanes in Mexico cost the company between 10,000 and 15,000 additional subscribers. Although, Powell says, the hurricane doesn’t explain all of the third quarter’s subscriber shortfall, the company believes things will improve in October, which should begin to show in the fourth quarter.
  • The company also said the number of net adds in 2008 will be higher than 2007 and should be up in Mexico next year. “This indicates to us that the story is NOT broken and that the potential for strong growth still exists,” Powell said. Although Powell said “stock is likely dead money for the next few months due to a lack of catalysts” he thinks the stock over the longer term is more compelling. He rates the stock an “outperform.”
via AP:
  • Shares of NII Holdings Inc. sank Thursday after the wireless service provider to Latin American businesses posted what one analyst called "worse than feared" third-quarter results.
  • NII added 327,000 net subscribers during the quarter, below analysts' consensus estimates of 350,000, noted Thomas Weisel Partners analyst James D. Breen.
  • He said the weakness in net customer additions came mainly from Mexico, due to disruptions from hurricanes and increased competition, and from Brazil. Breen nonetheless kept an "Overweight" rating on the stock.
  • "Despite lower than expected net adds in Mexico, we continue to believe that the company's growth prospects in both Mexico and Brazil remain strong," he wrote. Breen said NII remains his top pick in the wireless sector amid high growth prospects in Latin America.
  • Stifel Nicolaus analyst Christopher C. King, meanwhile, called the quarter "worse than feared" and said competition from Telefonica SA's Movistar unit in Mexico, along with weather problems, likely hurt results. He nonetheless kept a "Buy" rating on the stock.
  • Deutsche Bank analyst Rizwan Ali called the stock price drop a buying opportunity. "We believe the weakness in the quarter should not indicate a long term trend as the level of service and the technology offered by NIHD is still very attractive to its target market segment," Ali wrote.
Takeaway: Well there you have it folks; classic Wall Street fear. A growth stock that as it gets bigger actually slows down a bit growing (law of large numbers). So they beat top line; they beat bottom line but their SEQUENTIAL net subscriber growth was negative, hence it means trash the stock 20%. It all makes sense now. Yes there will be competition; very few companies are able to operate in monopoly conditions but we have young markets where cell phone penetration is far below US or western Europe (or even many parts of Asia), and a focus on the business customer which has more profits. Anyhow that's all thrown out the door.

So let's say the company can only grow (gasp) 28-32% over the next 2-3 years, instead of 40%. Let's say next year's $3.59 is at risk and they are going to be 10% lower at $3.23.

At a price of today's $59, I get a company growing 30% for the next few years in a young market and trading at 18.2x my $3.23 earnings number. Now keep in mind I just made that figure up; despite the (gasp) lower sequential subscribe adds (year over year adds are still very high), the company still beat their earnings number ($0.61 vs $0.53 analyst expectation) so my lowering to $3.23 is truly saying things are going to go downhill.

If you still believe the $3.59 figure for 2008 than it trades at 16.4x next year's earnings. And I am claiming only 30% growth - the projections are still upper 30%s. So that should expand the PE ratio even higher.

So what we have here is a very technically broken stock (both the 50 and 200 day are way up there in the low to mid $70s range), which is trading at about half its growth rate simply because wall street is obsessed with sequential growth and could care less about year over year growth. If the PE here was 60 before the earnings I could understand the sell off, but it wasn't even half that. So it looks like yet another overreaction. While the stock might not rebound soon, it has now turned into a 'value' in the growth space so a year from now when they hit mid $3.00 earnings with a 30%+ growth rates I think it will be worth a bit more than this measly $59. Amazingly the stock is at its lowest point in 12 months, despite tacking on a whole lot more of earnings power from where it sat in October 2006. Shows the power of multiple contraction. For those with patience this will reward... as I wrote in green above, we now have the bad news out in the open that the stock was telegraphing this quarter by its weakening stock price, so the boogeyman is now a bit less scary since its not under the bed and instead on the P&L.

Long NII Holdings in fund; no personal position

Bookkeeping: Compelled to Take Some Profits in Mosaic (MOS)

Mosaic (MOS) is up 17% from its low of the days yesterday where I added, from $60 to $70. Spectacular move. I am going to sell some here and bring the position down to 3.55% of fund, 600 shares. It is only prudent in this volatile market to take some off the table when you have such massive short term gains. Mosaic won't be below 3% of holdings for a long time - I will add back these pieces I sold off on any pullbacks.

I trimmed a bit off my 2 major infrastructure names as well McDermott (MDR) and Foster Wheeler (FWLT) as they have bounced very strong from last week's lows when I rebuilt my positions, but again I plan to keep these as major positions as areas of growth are going to be far fewer as we move forward and the domestic economy slows (and I contend global) begins to slow. So companies with backlog visibility and pricing power will be even more valuable - hence the huge moves you see in large cap tech stocks of late.

I continue to look for places to cut to get the cash position closer to 10%, and so I can rebuild short ETF levels to more protective levels.

I'm trimming as we go into Fed Trick or Treat time - I just don't know what the next catalyst is going to be. 25 basis cut is now 'expected' - the Fed "now gets it" (which was an issue of doubt before the last cut) - and if they go 50 basis points people really need to start asking if everything is so happy go lucky why we had to cut 100 basis points 6 weeks. I remain cautious and hence I am taking profits as they are offered. Are we really going to go to record highs when 20% of the S&P500 (financials) are hitting new lows almost daily? These dogs will probably rally on the Fed anticipation which will be a great time to add to the UltraShort position against them. As I have been saying for months, more cockroaches await us in the future - now we will begin talking about "next quarter's write offs" and just how big they will be. I can't wait to hear the rejoicing when there is "only" a $2.5 billion write off from one of these banks. What are write offs anyway? Do overs? They don't count? Why can't I write off my mistakes....? Make them go poof and wash my hands of it all like our financial institutions appear to get away with. Blah.

And maybe it is just me, but the bears literally seem afraid of Uncle Ben. Fearing another 50 basis points crammed down their throats, and the bulls romping. They don't want to get burned yet again (once on the surprise 50 basis discount cut, then the double whammy 50/50 fed funds/discount cut 5 weeks ago) So if they are all positioned NOT to be burnt this time, what will fuel the 'expected' rise post Fed cut this time? Won't be nearly as many shorts to cover in panic this time since they are all so shell shocked from Uncle Ben's helicopter barrage of the past. Hence, why *this* time it might be a sell the news reaction. Another reason to be cautious. But that doesn't mean we cannot rally into the expectation.

Long Mosiac, McDermott, Foster Wheeler in fund; long Mosaic in personal account

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