VISA IPO? Priceless

If you missed the Mastercard (MA), you will get a second chance with VISA - however I think the cat is out of the bag and I expect the 2nd biggest IPO in US history to open with a huge premium. Therefore the only people who benefit are those connected folk who get the IPO price. (this is why I need a real mutual fund) ;)

• Visa Inc., the world's largest card payments processor, filed plans for a $10 billion initial public offering late Friday, following its main rival MasterCard Inc., which went public in May 2006.
• Visa said it generated net income of $771 million in the first nine months of this year and operating revenue of $3.73 billion. Last year, the company made $437 million on $3.91 billion in sales.
• Visa said it has the potential to grow as people, companies and governments change from paper-based to electronic payment. Global card purchase transactions are set to grow 11% a year from 2006 to 2012, with particularly strong growth in Asia, Latin America, the Middle East and Africa.

All the same reasons I outlined to favor Mastercard [Rebuilding Mastercard], apply to VISA.

Long Mastercard in fund; no personal position

Chinese Big Caps Struggling Since Petrochina (PTR) Shanghai Debut

Sometimes, in retrospect, we can look back at a moment in time that seems either outrageous or telling, and see a warning signal is flashing in the middle of a mania. I have pointed this out in previous entries ranging from

1. The Macau gambling stocks (Steve Wynn cashout), on the heels of private equity 'cash out' via Blackstone IPO (BX), on the heels of Sam Zell cashing out at the top in commercial real estate during the private equity feeding frenzy [A Top in Casino Names?]
2. The Chinese small cap bubble frenzy earlier in October [This Day in Bubbles Series]
3. The dry bulk shipping frenzy [A Chorus for Dry Bulk Shippers - Enough Already?] and [A Near Term Drop in Dry Bulk Shippers?]
4. And our most recent frenzy, that of the solar companies [Closing LDK Solar on the Mania that is Solar] and [Suntech Power Up 8%.... on a Downgrade]

What is consistent is the speculative frenzy and I have been amazed to watch it move from 1 sector to another. (I left out the 'teflon stocks' in high tech in the list above - the same 'horseman' which go up week after week with no break). Unlike the late 90s when this speculation was contained to one sector and persistent month after month; we seem to have rolling speculation now - as capital flies from 1 area to the next. Whether this is due to hedge funds, retail investors, or simply too much capital chasing too little equity in this world (which I've written entire entries on - thank you Uncle Ben and Uncle Al) - the locust type nature of feeding frenzy and moving on to the next sexy sector for a few weeks, is relentless. I actually like many of these sectors in the long run but it is very hard to be a "buy at a reasonable multiple" type of investor the way capital flies in and drives prices to levels that make little sense. You try to make sense of valuations on 'out years' (2010) but then realize you are simply trying to rationalize things that make no sense. And again, I repeat, I *like* these sectors so am not a basher. Just a basher of the behavior of the markets short term.

The sector that is of interest of late is the Chinese big cap. I have mostly avoided these names because I was thinking a few months ago - $200 BILLION market cap names surely cannot put in moves of 50-60-70% in a short period of time; the paper wealth creation alone would not be possible. Well I certainly was wrong. I can understand this action on small cap, low float issues but when companies are tacking on $200 Billion in market cap in a quarter [How to Make 75% in a Quarter], this really is amazing to watch.

I've marveled at Petrochina (PTR) the most because I have found it confounding that somehow, a global commodity is somehow worth more if it comes from a company in China than from a company in Saudi Arabia, Venezuela, or the USA. Somehow because a company is based in China the value of their output is worth more - when the value of their reserves is set in a worldwide market. Strange. But these are strange times. [Shanghai the Mystical Land of Premium Valuations] First PetroChina was almost the largest company in the world [Petrochina 12% away from being the largest company in the World] and then "on paper" with its Shanghai valuation at least it became the largest company in the world by a factor of 2 [Petrochina the $1 Trillion Dollar Company - is *this* the top?]

Perhaps, at least for now - that was the top. Even before this week's sell off, Chinese stocks had been weakening (the week previous while everyone was focused on China I was focusing investments in India, which was doing far better).

Eventually, with these large caps the law of large numbers eventually hits. It happened to Microsoft (MSFT), it happened to Cisco (CSCO), it happened to Yahoo (YHOO), it happened to Ebay (EBAY), it *will* happen to Google (GOOG)and Apple (AAPL) (although I'd argue these companies are branching themselves off to new areas so their growth rates can continue at 'above average' for longer than people give them credit for). I listed a slew of tech companies above, but it is irrelevant to sector. Large size makes it harder to grow. And part of the multiple (a large part) awarded to any stock is based on future growth rate.

Take China Mobile (CHL). It will add more in 1 quarter than most cell phone companies worldwide have in total. Impressive. But it is off an increasingly larger BASE, and hence the growth RATE must eventually slow. This company already has just under 1/3rd of all Chinese as its customers. The raw numbers are enormous. And yes it could "in theory" add another 800M customers. But how many more times can it double? And at what point does growth slow? The low hanging fruit is now gone - the urban coastal areas. Next come the rural customers. Two issues - more expensive buildout over a vast geography to get to them and further, they don't have the same income to pay for cell phones... hence lower incremental revenue gains. And of course China Mobile won't have the market to themselves, already China Unicom (CHU) - a much weaker competitor - has 30% of the installed Chinese base of customers - and there are rumblings that China will allow competition from hard line phone companies. All potential risks.

This is not to say China Mobile won't have years of growth ahead - it will, the question is at what pace. And can that pace match or exceed the past? (keeping in mind PE multiple is in large part based on future growth expectations) The simple law of large numbers says no and thus far no company has been able to defeat the law of large numbers. Now I do assume numbers work the same in Shanghai as they do in the USA.... even if valuations don't.

This is why large companies don't double from $500M market cap to $1 trillion (unless you're Petrochina of course and have a listing in the land of mystical valuations) - the growth is just not there after a certain level so the PE multiple contracts.

So let's see how the "Big 3" mega cap Chinese stocks (trading as ADRs in the US) have done since Petrochina's Shanghai debut

Petrochina $257 -> $202
China Mobile $99 -> $85
China Life Insurance $97 -> $83

Again it's been a tough market overall, but even in the week preceding the IPO Chinese large caps had stalled and were weakening - so perhaps this $1 trillion valuation was one of those 'moments in time', which signaled to investors - whoa, let's think about this for a minute. Ironically all 3 names have settled nicely just above their 50 day moving averages so for those seeking a decent entry point to begin a position this might be a good place to begin. However, keep in mind while growth rates are absolutely stellar on an absolute basis, growth rates going forward will become more and more affected by the law of large numbers. This is why I am staking my Chinese claims in the smaller (albeit expensive) companies such as New Oriental Education (EDU), Ctrip.com (CTRP) and WuXi PharmTech (WX), whose longer term growth rates should be more sustainable at ultra high growth levels.

Long New Oriental Education, Ctrip.com, WuXi PharmaTech in fund; long WuXi PharmaTech in personal account

Bookkeeping: 'Rising Tide' Performance Week 14

Week 14 performance of the mutual fund

Comments: After a stunning start to the fund life in "quarter one", quarter two has begun with an ominous week! To summarize the market was bad early, rallied to be more bad mid week, than ended with ... you guessed it, a bucket of further bad. Any questions? It stunk. Many of the economic problems outlined in the blog since we started in August finally came home to roost in the mind of investors after being ignored for months on end. As I have been saying "when will it all matter?" Not until it matters. Apparently it began mattering again.

The S&P 500 and Russell 1000 were both down 3.7% on the week; unfortunately the first time in a long time Rising Tide Growth Fund could not outperform and was down 4.4%. Between Monday and Thursday the fund was actually beating the indexes by 0.3% which is my weekly 'target' to achieve a 15% annual out performance vs the indexes, but that was overwhelmed by ugly action Friday. As many of you can see with your own portfolios the action in the indexes did not reflect some of the ugliness in individual names which were down much farther than 3.7% for the week. With this week's action both the S&P500 and Russell 1000 are now DOWN from their beginning points since fund inception. They were up nearly 7% a month ago. Quite a turnaround.

In terms of the portfolio I had some downside protection with cash and UltraShort ETFs for most of the week but not quite as much as I would like; I tried to remain patient through the week but finally on Friday I went "all in" and sold off my the vast majority of my hedges and started buying more long exposure. The problem here is I cannot short individual names, so even if I had more short exposure today in indexes it would not of offset some of the long positions. For example even UltraShort Financial (SKF) was up just a whopping 0.5% today. Hardly any sort of hedge in the face of some of the carnage out there. With all that said, I have mentioned that my positions were subject to greater than average correction on the way down since they had much greater than appreciation on the way up. This is why I take profit along the way, to preserve some of the profits (although it does make me leave some of the profits on the table by going this route). So I was able to make hay while the getting was good, and now need to give some back. So while I would love to beat the indexes on both the way up, AND way down - each week, every week it's tough to do when you are mostly long only with just minor hedges going on. Previous down weeks I have been able to do so, but this week was just too much.

With that said, I like the long positions the fund holds and when the sell off subsides I feel confidant that the fund is correctly positioned in the sectors and stocks that will outperform in the upside. This is very similar to the mid August situation for the fund when it fell in line with the rest of the market (actually underperformed at the very massive selling in mid August; see graph here), but due to correct sector/stock selection, outperformed to a great degree in the ensuing good times. Hopefully history repeats. Also in the big picture I am still way ahead of the indexes for the "year" (the year being where the fund started) - the main worry now is the emotional panic type of selling (if it arrives) next week - the baby out with bathwater type - especially essentially being 100% long at this point in time. Financials actually looked ok today, as did some retail stocks - so those sectors seem washed out to some degree, but previous strong sectors did get hurt finally late in the week - first the large cap tech 'teflon' stocks and finally today, solar even sold off. Now we have to go through yet another weekend of "Black Monday" inferences... you know the ones, we hear about three times a quarter. TGIF!

Price of Rising Tide Growth: $11.400
Lifetime Performance to date (vs Aug 3, 2007): +14.00%

Comparable S&P 500: 1,453.7 (-0.78%)
Comparable Russell 1000: 792.8 (-0.42%)

Fund return vs S&P 500: +14.78%
Fund return vs Russell 1000: +14.42%

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 all fund's holdings as of mid 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

Revisiting Dry Bulk Shippers

In retrospect my article on October 21st [A Near Term Top in Dry Bulk Shippers] looked quite accurate.

But with all the momentum in this sector; did you notice 2 sector upgrades this week alone - one by Bear Stearns, and another by Jeffries, is there anyone left to jump on this bandwagon? Even good ole Cramer jumped on the heavily sagging bandwagon this week with his picks of Diana Shipping (DSX), Paragon (PRGN), OceanFreight (OCNF).

Much like the Macau casinos I don't think this is the 'end' of the dry shippers, and the underlying fundamentals *do* look strong for the mid to longer term. In fact, much like the casinos, at lower prices the dry bulk shippers would strike my fancy. But my question is to a near term top, and potential pullback from here. Since Wynn sold, Wynn Resorts (WYNN) is down 11%, and Las Vegas Sands (LVS) is down about 13.5%. So far those short term calls look pretty spot on.

Just to make it clear (a) the timing was a bit lucky and (b) that was a near term call, and while this is not a 5 year story, it can provide some upside here in the next 18 (maybe 24 months) before the new ships start hitting the oceans. Since I did hit the nail on that call, I just want to make it clear I am a lot more constructive on these names at this level and have put my money where mmy mouth is with my purchase of Excel Maritime Carriers (EXM) which I added to today. As I wrote in the article, the type of specula...err investors in the stock at the time would flee en masse at the first hint of anything wrong, which they are proving to do. Creating opportunities. But again, falling knives can fall much farther than one expects, as emotions are overdone both on the top side (going up) and downside (going down). But I like these prices much more than the prices on these stocks 3 weeks ago. It seems those speculators just moved en masse from dry bulk shipping, to solar stocks. Ah, always a bull market somewhere ;)

There are so many names in this sector but just picking 3 names that are investors favorites
DryShips (DRYS) at time of call $129, peaked $131, today $98
Diana Shipping (DSX) at time of call $36, peaked $44, today $31
Excel Maritime (EXM) at time of call $76, peaked $82, today $48

Once again, any whiff of global slowdown and these stocks could go much lower but thus far Baltic Price Indexes are stabilizing and even if they fell 10% from here it would be record times for the industry but I still think if they fell even 10% you'd see panic in the streets, even if gthe medium term outlook for the sector was fine at those prices. That's the balancing act of being in this type of sector with those type of frantic investors. Hence why I am only allocating a bit to this sector.

Long Excel Maritime Carriers in fund, no personal poisition

Short Covering on Crocs (CROX)?

Crocs (CROX) actually shows signs of life. Up 7%. I had to reboot the computer to make sure it was not an error. Talk about sentiment out of whack with reality. As I mentioned earlier today I have been layering in on each major step down in this stock; yes way too early starting at low $50s, but I've felt every price point under $55 is a steal. (keep in mind the last time I was selling Crocs heavily was in the upper $60s) And this is why I buy in smaller scale at the beginning and in larger chunks as it falls farther. So if they give it to me at mid $40s and then unbelievably mid $30s, I am taking it. I am getting more earnings, and higher future estimates for about half the price. What a country. This is a stock shorts have been waiting to crush for a long time and they finally got their chance after being wrong for well over a year.

That said, this (to me) creates one of those buying opportunities that can turbo charge a person's long term portfolio. (or a fund's). With my purchases earlier today Crocs is just a whisker under 5% of the fund. There are hundreds of things one can read about Crocs (CROX) so I won't rehash the arguements I posted earlier, but here is a note from just last evening:

• In a client note, Thomas Weisel Partners analyst Jim Duffy said he met with Crox management and concluded that investors' concerns surrounding Crocs were "unfounded" -- despite recent troubles.
• Duffy said demand in the U.S. market remains healthy and will likely boost distribution with new styles. In 2007, Crocs had 60 different models in the marketplace, but Duffy said this number is expected to grow to 150 in 2008.
• Looking abroad, Duffy said opportunities are promising, as well. Crocs expects international markets to be the largest growth driver in 2008. "Throughout 2007, international demand has been far stronger than expectations," Duffy wrote.

Anecdotally, I am in a cold weather state and Crocs is supposed to be a warm weather selling item; but I am seeing people wearing them even in this cool weather. And they now have versions with fleece. And I am not talking about grandma's and 4 year old girls; very attractive women in their 20s are wearing these gosh ugly things. (again just anecdotal evidence and I was only staring at these ladies to do research for my investors, honest)

So until I stop seeing those type of trends first hand, I am going to have a hard time saying the story is dead. And again, the international story is just getting started - yes knockoffs are a problem, but the pie is very large and in many parts of the world no one has even begun really eating. I am also curious if they get any traction with apparel (I am not counting on it, but it would be a nice icing on the cake) Also this "Prima" style for women is interesting, these ballet type shoes seem to be a big hit for whatever reason that I don't get, so Crocs has the knockoff - I like. It shows they are not just sticking with those darn hole filled ugly things. With that said, damaged momentum stocks don't just bounce straight back (although they do bounce strong when shorts do cover), so it could take time to see a meaningful comeback but mid $30s for this stock is approaching outrageous on a valuation basis. These are valuations retail type stocks who only have domestic sales (no international) and are far more mature get... I will remain patient with Crocs. Analysts actually RAISED 2008 estimates from $2.50s to 2.70s post earnings. Classic!

Long Crocs in fund and in personal account

Kudos to Cramer on Under Armour (UA)

I don't watch the Cramer show often, but I do try to skim through the "Mad Money" highlights from the website. I get enough Cramer all day from the RealMoney.com site :)

I do have to give kudos to him, for last night's show. Per the recap it says

During his "Sell Block" segment, Cramer urged viewers to take Under Armour (UA) off the table. He said it is a high-multiple stock that has lost its momentum.

Usually when he hears about increases in inventory from a company during a conference call, it is a red flag, Cramer said. But when he heard about it from Under Armour he went against his rules and thought it was OK to buy it because the company's CEO Kevin Plank was so positive on the stock.

Then three insiders sold some positions of their stock. Cramer said he doesn't know why these insiders sold, but they crossed a line. He said he doesn't believe Under Armour would have been up nearly as much after its inventory increase if he hadn't championed it.

Cramer said he feels like a dope because these three insiders were able to sell their stock at higher prices.

Moreover, he said the company is losing momentum. He also said retail is a tough place to be right now and the remaining markets Under Armour wants to get into are going to be defended like crazy by competitors like Nike (NKE).

"Sell Under Armour," Cramer said.

In my entry [Cramer and Under Armour] I wrote:

Now back to Cramer - I remember his comments struck me on Under Armour (UA) because he got down on Crocs for basically the same issue he was lauding Under Armour. The only difference? One stock was going up, and one down - hence he was applauding the inventory issue at UA, the same issue he was not happy about with former fan favorite Crocs.

I believe on this one he let the price action get ahead of his better judgement; in face he basically said as much.

So again, there is no way Cramer could of known about the insider selling, but his cheering of a higher inventory number (which he would crucify any other retailer for) only because the stock was up post earnings, is what troubles me. Again, momentum begets momentum - and Cramer has become the king of the momentum investors. This works in today's day and age, more often than not, (see Baidu.com, see First Solar, see Research in Motion) but instead of blaming insider selling, I believe Cramer should say "I was wrong on the inventory issue" - it's never good for any retailer.

******
Hmmm... almost verbatim. Per my Google web page analytics, I do have a lot of readers from New York.... ;)

No position

Bookkeeping: Initiating JA Solar (JASO) Position

I will write more late and edit this entry but I am beginning a position in JA Solar (JASO) on absolutely stellar results. JA Solar is in a similar place to LDK Solar (LDK) on the food chain, and a reason I really liked LDK Solar - however LDK has the accounting issues. If JA Solar's results are a precursor LDK Solar should have blow out earnings, but until these audit results come back there will be an overhang on the stock. LDK Solar without accounting issues is probably a $80 stock. That said, I thought the results in JA Solar were outstanding and despite polysilicon pricing issues - JA Solar was able to maintain 23% gross margins which is solid. THe stock had run up ahead of earnings yesterday and along with the First Solar hoopla - so todays pullback to the upper $50s provided a nice opportunity.

I am out of cash now so I was considering First Solar at $200 but went with the 'less extended' stock technically, although operationally First Solar has the better situation. More later.

Long JA Solar in fund; no personal position

Market Action and Morning Buys

aWell this market action is like trying to tackle Barry Sanders in the open field - evasive!

I feel peeved at self as I was positioned quite well as of 3:40 PM yesterday with a 10% Ultrashort exposure, but I was duped by that head fake in the closing half hour and lightened up. Ugh. That said, I liked what I bought late yesterday, I just wish I had waited til this morning.

What I am seeing today... it looks like we are moving over to fear stage which is 'good'. High beta teflon tech getting hit again and FINALLY solar is getting hit. Leadership needs to get swamped before we recover. That said, most days that start this ugly don't end well, but there are always exceptions to the rule. (I am not counting on it)e

Today I took a hatchet to my Ultrashort ETFs and am down to the lowest exposure in a very long time; I also closed my UltraShort Oil & Gas (DUG) - not because I don't think oil prices won't go down but this was supposed to be a hedge against my heavy energy positions and since then I've lightened up on my energy exposure and hedged in a different way; with refiners (which will benefit if crude falls) - plus I need cash.

I did a lot of buying this morning

1. I bought some of these teflon stocks - I restarted a position in Google (GOOG), I opened a new position in Research in Motion (RIMM), and I added to Apple (AAPL) and Baidu.com (BIDU)
   
2. Crocs (CROX) is actually not down for the first time in recorded memory, I added more to my now largest position - at these prices this could be a double within a year.
3. I have been very impressed at the two stocks I found through the best performers list of the past quarter - Mechel (MTL) and Millicom International Cellular (MICC) - so I added more today to each. I wanted to see how these did in a downturn and their relative strength has been magnificent.
4. I added to 2 Indian stocks - ICICI Bank (IBN) which is the weaker of the 2 Indian banks I track and near a support and Sterlite Industries (SLT)
5. I bought 2 stocks hit enormously hard - WuXi PharmaTech (WX) - I had just started a smallish position this week and the stock has been terrorized. I also added to the similarly blown out Excel Maritime (EXM) my own dry bulk shipper.
   

Am I catching the bottom? Who knows. I doubt it. But I have been waiting for this kind of weakness so you need to have your shopping list ready and when opportunities come, put the emotion to the side and buy what you are interested in. If the market truly melts down, well I suppose it happens but sentiment seems extremely negative and I truly do not know what more bad news there could be in the financial sector other than Goldman Sachs (GS) coming out with a huge write off :) Everyone else has already confessed. Granted I don't think these kitchen sinks are the last we will hear ... but for now it should suffice.

Last can I say, how incredible are these fertilizer stocks? I had been hoping Mosaic (MOS) or Potash (POT) would take a 10-15% spill so I could add, but nothing.... Blue Coat Systems (BCSI) is also beginning to look interesting here in lower $30s but I am running low on cash again. Cisco has really put a dagger into networking stocks.

Again, days that start this bad don't usually end in a great recovery but at this point we are nearer to the end than beginning of a meaningful correction but definitely could see worse if fear truly hits the market. (remember how bad it got in mid August) I am just trying to accumulate higher quality stocks and realize I won't get the absolute bottoms or tops. With earnings season nearing an end, I have a lot more data on what should be outperforming the next quarter so I keep moving the portfolio in that direction. That doesn't mean in the very near term, won't take some hits... but I expect these to rebound the best once we get back on track.