Bookkeeping: 'Rising Tide' Performance Week 15

Week 15 performance of the mutual fund

Comments: After a rough Friday last week, this week started off to a gosh awful start. After hanging out in the 2 sectors that had essentially ignored the sell off (agriculture and infrastructure) those sectors were hammered Monday, while the market sold off in general - but since the indexes are full of stocks that had been 'washed out' by the previous week and a half of pain, the fund truly underperformed on its worst day (or at least worst since mid August?). It was bad. Tuesday the market bounded up with a massive move, and the fund was able to recapture about 80-85% of losses; but the rest of the week was at best flat at its best moments and painful at its worst. Thursday was a standout for a return raid to the favored groups. I did lighten up on some long positions midday Wednesday after large rallies, but short of completely going to cash or closing long term positions there was no way to avoid the pain with the sectors I have been holding.

The S&P 500 and Russell 1000 were amazingly up this week; the former up 0.3% and the latter up 0.2% - recession proof conservative plays held up better this week, along with a lot of rebounding in very oversold financials. Rising Tide Growth Fund had its worst week versus the indexes since mid August with a 1.41% loss. Actually compared to how bad Monday was, that's not a performance I am bemoaning. So the fund under performed the S&P500 by 1.7%, and Russell 1000 by 1.6%. Hey, we are not used to that around here. As I mentioned this week many names in the S&P 1500 are down 20-25% from peak to current levels whereas the indexes are down closer to 8%. Hence the inability to short individual names is a drag in times like this.

In terms of the portfolio, I was 1 day off in trimming my Ultrashort positions (sold heavily last Friday) instead of waiting 1 more day - but I am not a market timer, so being off by 1 day is a victory. That said, nothing would of helped Monday because the indexes and areas I have been short against (financials, real estate) actually were up Monday (meaning the Ultrashorts were down), so it would of added insult to injury to see a large exposure to Ultrashorts go down on such a lousy day. Many of the fertilizer and infrastructure names were down 10-15%; and just no way to come back from that too easily in a week. If I were more actively trading, I would be selling much more heavily into rallies such as Tuesday/Wednesday but I'm trying to think more like a 'fund' guy. Needless to say, the rest of the week was damage control and catch up, and anytime the market had a breather the positions in the fund, in general did well. But those market breathers have been in short supply. I will say I have positioned the fund into names I was hoping to get into, but the charts were very overextended, or valuations were extreme - so this pullback has created nice entry points on just about every name I want to be in for the coming months. I continue to expect these names to outperform to the upside once the market stabilizes. Overall the fund is right back to where it was in week 12 (3 weeks ago), in beating the indexes by nearly 13%. Considering the damage of late, that's not bad.

Price of Rising Tide Growth: $11.239
Lifetime Performance to date (vs Aug 3, 2007): +12.39%

Comparable S&P 500: 1,458.7 (-0.44%)
Comparable Russell 1000: 794.3 (-0.24%)

Fund return vs S&P 500: +12.83%
Fund return vs Russell 1000: +12.63%

Last week's results here.

Since the market cap of the median stock in the Rising Tide Growth fund (median $9.8 Billion as of November 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 November 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

Cramer Goes off on Private Equity

I was going to write an entry on Blackstone (BX) earlier this week because they so represent the transfer of wealth that is happening in the USA, in return for such important economic contributions to the country- aka "financial gyrations" .I did not get around to it, but after seeing Cramer's rant last night I was "inspired". From their last earnings report, one number just blew me away

• Blackstone reported losses of $113.2 million, or 44 cents per share. The loss included the impact of $802.6 million of non-cash charges for compensation and other items linked to its IPO.

So in layman's terms, we are issuing stock - selling to sucker investors, and pocketing nearly a billion. And the CEO is already a billionaire. As I mentioned a few months ago, when very shrewd guys are 'cashing out' into a mania you know its getting close to the top. If you remember this spring/summer we had private equity deal after private equity deal - one topping the other. Now, many of those deals - the private equity guys are just walking away from saying "business conditions" have changed. Amazing stuff.

After I read this Business Week article about the IPO of Burger King, my eyes were really opened how "finance" really works behind the scenes. I already knew about all the horror stories in other parts of the food chain (pardon the pun) but this private equity takes the cake. It's worth the read if you really want to know how money is made by 'the smart people in the room' - in a sentence, buy a company, lever it with tons of debt, take that money and pocket it for yourself and call it "management fees" that the company owes you for your expertise, and then re-sell the debt ladden company as a new IPO to the public. What a gig.

• Nowadays private-equity firms often spend hundreds of millions of their own money on an acquisition (BW -- Feb. 27). Just as often, though, they load up the companies with debt and use the money to pay themselves special dividends and other fees that allow them to profit even if the company itself struggles. Then the backers take the company public, often pocketing the lion's share of the offering.
• Then this past February, Burger King borrowed an additional $350 million so its owners could pay themselves and its two partners a special $367 million dividend.
• In addition, Texas Pacific and the other investors are getting $30 million more to end a contract in which they received $9 million a year in management fees from Burger King.
• Assuming the private-equity owners use part of the $600 million raised in the IPO to pay down the $350 million loan, that leaves as much as $250 million. Add that to the $367 million dividend and the $30 million kill fee, and their take totals $647 million, nearly double their original investment. It's all good for the owners, but Burger King ends up with $1 billion in long-term debt -- or more than double the relative debt loads carried by rivals like McDonald's, Wendy's, and Yum! Brands. That leaves Burger King in junk territory.

It's worth a full read if you want to know what is really going on behind the scenes. After reading that article I did a lot of other reading on similar deals and they all pretty much work the same way. So basically you (the investor) are funding these new era Gilded riches.

Anyhow, Cramer had a rant of all rants last night on Private Equity. I can only assume either this has been building up for months after he heard about all the boy geniuses in private equity the past year or some specific event triggered him. But this has to be one of the most entertaining (and truthful) monologues I have ever heard - it is awesome to see an 'insider' go off like this. If you have 10 minutes I really recommend you watch this video - hilarious. Such classics as describing private equity leaders as so golden that they have "flatulence that smells like rose petals". Here is the Cramer link.

Boo Yah!

Market Seems to be Holding - Added 2 Weak Dollar Plays

The S&P seems to be holding that 1440 level - we are still very oversold so I lightened up on my UltraShorts going into traditionally a very good week (hopefully the market doesn't change its mind in the last 2.5 hours) Even sticking at 1455 would be a victory at this point. Hopefully we can get a nice rally into 1490 next week... we deserve one after the past few weeks ;)

I mentioned last weekend in my weekly review that there was some VERY crowded trades out there:

There are some extremely crowded trades (meaning a lot of people are *in* them), such as short US dollar, short financials, short retailers, long oil, long gold, etc.... While Big Ben is painted into a corner and must continue to cut rates in my opinion (watch what they do, not what they say) due to our over leveraged financial society, and this will only serve to weaken our dollar further, you'd expect some counter trend rally in these areas soon. When everyone is doing a trade 1 way, usually something snaps and you have a counter rally (however brief). But I still think these trades work for a long time to come because as we continue to cut interest rates, other countries such as Australia are actually raising rates (just last week) to fight inflation so capital will flow to those currencies - the world realizes inflation is real and rising.

So this week those trades reversed very nicely (good timing! pat self on back)

1. Oil is weaker
2. The Gold ETF (GLD) is down from $82s to $77s = 6%
3. The Silver ETF (SLV) is down from mid $150s to $144 = 7%
4. And the 2 currencies I favor, Australia (FXA) and Canada (FXC) are down quite a bit too, the Canadian peaked last week at $113 and is now $103, and Australian peaked at $94 and now is roughly $89.50

Again, most of my portfolio (90%+) are long term secular trend type positions but I am going to 2 plays today as shelter against a weakening dollar. As I stated last week, "everyone" is doing this trade, but the news so pervasive last week I didn't want any part of it. Now that these trades have reversed a bit, I want to begin positions. While the Fed is jawboning no cut, I believe we have series of cuts and inflation be darned. I think the credit markets are just that bad... so the dollar should take some hits (a thousand cuts).

I actually was going to buy the Australian dollar as a hedge because they are actually raising interest rates, but the Canadian dollar fell so much this week, I bought the Canadian dollar ETF instead (FXC). I bought 175 shares around $103 or a $18K position. Full disclosure - this is my first currency trade ever. :) [that might be marking a top!]

While I do think Canada will be affected by the US slowdown (more than Australia), both are 'strong commodity' countries, and relative to the US have a brighter near term. So it's a simple play on us continuing to bail out the financial system and more cuts to the system.

Instead of buying the gold or silver ETF I bought Silver Wheaton (SLW) which is a company I have traded in the past - very interesting small company, which trades with more volatility than the silver ETF. Earnings are not something I am too interested with; they are profitable but the value of their company simply rises and falls with the value of silver. So its a proxy on silver prices which again, have fallen severely this week. The stock is sitting nicely right above a key support level ($14.70), it's 50 day moving average; and was as high as $18.20s two weeks ago - so it's had a >15% pullback.

I bought 1400 shares right above $15, or $21K for a 1.9% position.

I will be using these 2 similar to hedges with the Ultrashort ETFs. (more active trading in these type of names as they ebb and flow). I do think the long term trend is up for both but a global slowdown could hurt the commodity based economies as well as demand for silver since its used for industrial purposes - those are the risks.... aside from a strong dollar. The next Fed meeting is mid December and while the consensus has been they will be holding rates steady, especially right after the Halloween meeting, I disagree. And if not this meeting, a cut will come next meeting. But I think it will come this meeting, Merry Christmas! :)

Long Canadian Dollar ETF (FXC), Silver Wheaton (SLW) in fund; no person positions

An update on Market Vectors Agribusiness (MOO)

A reader asked about MOO, the Agriculture ETF; I have not looked at the name much since I wrote a very popular entry (usually in the top 5 most read every week) about MOO back in early September [This MOO For You? An ETF to Play the Agriculture Boom]

Upon revisiting this name, nearly a quarter later, I see its a living organism that is changing. It used to have 40 names, now its down to 37, and its chemicals (read: fertilizer) exposure has increased substantially. I actually like this ETF even more now than I did when I first saw it (back then it had a lot more equipment exposure and some other names I did not recognize). It also gives you some extra international exposure with names that do not trade in the USA.

As I told the reader, it's actually quite an easy and painless way to get exposure in the group without buying multiple names - I created my own narrow MOO for the fund, i.e. I don't hold top holding Monsanto (MON) simply because while I think its a great holding and very stable, its very rich - I think there is more upside in other names; same with Agco and CNH Global over Deere, etc.

I will post the top holdings as of 10/31 here so that I can look back it in a quarter and see how its evolving

1. Mosaic (MOS) 9.6%
2. Monsanto (MON) 8.6%
3. Potash (POT) 8.3%
4. Deere (DE) 7.3%
   
5. Komatsu 7.2% (this is a Japanese equipment maker, think Deere/Caterpillar)
6. Yara Int'l 5.1% (overseas name, not familiar with this one)
7. IOI 5.1% (overseas name)
   
8. Wilmar 4.7% (overseas name)
9. CNH Global (CNH) 4.5%
10. Bunge (BG) 4.4%

So that top 10 makes up about 65% of the fund; it also holds Agrium (AGU), Agco (AG), CF Industries (CF). If you go back to my 'Separating Chaffe from Wheat' entry earlier this week (which simply listed the stocks with best relative strength) it is full of agriculture names.

From its peak of $52, the ETF has fallen about 8.5% in the correction which is inline with most of the major indexes, but has been outperforming by a large measure on the way up. Direct link to MOO ETF here.

Starting Small Stakes in the 2 Emerging Solar Leaders

I am beginning very small stakes in the 2 companies that (to me) have emerged as the solar leaders

First Solar (FSLR) and Suntech Power (STP); one could argue that Sunpower (SPWR) is also in that group, and its relative strength is very good as well, but I can get Suntech Power (STP) for about 2/3rd the valuation on 2008 estimates that I would have to pay for Sunpower (SPWR)

Suntech Power is currently at $1.68 for 2008 estimates; I think it will be north of $2.00 (well north potentially)
Sunpower is currently at $2.04 for 2008 estimates; I think it will be higher but not sure how much more; their margins still concerned me. Even at these levels Sunpower trades at a rich premium to Suntech Power. I also have been an investor in Suntech Power since late 2006 so I know the history much more intimately. I've held the name in the fund in the past but unfortunately it was not performing so I jettisoned a large part of the position far too early. But after this most recent quarter, these are names that need to be in the portfolio for the long run. Size and scale will (eventually) matter in this commodity business and these are the 3 names that have it already.

I bought $5000 worth or a beginning position of 0.45% or so in each name. Both companies are refusing to budge downward in an ugly tape. Both companies earnings were just fantastic and the guidance is tremendous. Now First Solar might disappoint the momentum lemmings in a few quarters since it has guided first half of 2008 below Q4 2007, but thats something to worry about in a few months.

I still hold hope some panic ensues and I can get these stocks at lower prices, but I wanted to establish a small beachhead in these names; which I can add to later. While more money can be potentially made in the more speculative names, I can sleep at night with the industry leaders.

Long First Solar, Suntech Power in fund; no personal position

Potash (POT) Expands Mine for $2 Billion

There was an announcement this week about Potash (POT) expanding their mining capacity by 15% over 5 years... at a cost of nearly $2 billion.

• Potash Corp of Saskatchewan Inc (POT) plans to expand a Canadian potash mine and mill for $1.8 billion to boost the company's output of the fertilizer by nearly 15 percent within five years, it said on Wednesday.
• Potash Corp, the world's largest fertilizer producer, said it will expand the capacity of its Rocanville facility in southeastern Saskatchewan by 2 million tonnes a year amid strong global demand and high prices for the crop nutrient.
• The expansion will boost company-wide potash production capacity to 15.7 million tonnes annually by 2012, three years earlier than previously estimated.
• UBS Securities analyst Brian MacArthur said the new output is expected to be low-cost, tax-efficient and eventually boost Potash Corp's allocation in Canpotex, the exporting joint venture of Canada's potash fertilizer producers.
• The price tag for the project is 25 percent less than building an all-new mine and mill in Saskatchewan, which would require new infrastructure such as transportation links, Potash Corp Chief Executive Bill Doyle said.
• "With our existing facilities at Rocanville, we have a significant head start," Doyle said in a statement. "For example, we only need to sink one new shaft instead of two, which will save considerable time and money."
• Saskatoon, Saskatchewan-based Potash Corp said the deposit and facility are valuable due to the high quality of the potash and close proximity to the U.S. market.
• The company is also working to boost output at other mines, including Patience Lake and Cory in Saskatchewan and its facility in New Brunswick.
• In September, Doyle said he did not expect his competitors to add new production capacity any time soon. Potash Corp has said it expects to sell 9 million tonnes this year.

This shows 2 things (a) their confidence in the long term trend and (b) how darn expensive it is to expand capacity. I wrote back in late October after Potash's last earnings

Worried about new potash mining supply coming online?

As global demand for potash grows, the prospect of greenfield projects continues to be discussed, but no one has committed to undertaking such a long-term project. The cost to develop a conventional underground 2-million-tonne greenfield mine and related mill - if constructed on a viable deposit - is estimated at more than $2.2 billion, excluding infrastructure outside the plant gates, with costs and lead times for construction inputs and new equipment continuing to rise. Such an investment would not generate positive cash flow for five to seven years. Given an expected potash consumption growth rate of 3-4 percent annually, roughly equivalent to one new greenfield mine per year, we believe long-term potash industry fundamentals are very positive. Through debottlenecking and expansion projects at existing facilities, PotashCorp is currently developing approximately 6 million additional tonnes of production to come on line incrementally over the next several years, providing additional gross margin leverage based on expected higher volumes and prices.

So here is that expansion... again as I have stated, I favor Potash and Mosaic (MOS) because they have the 1 nutrient (of the 3 main ones that go into fertilizer) that cannot be 'manufactured' - you literally have to mine it, and that is a natural constraint. Potash has the premium valuation in the space because its the only one with "easy" ability to expand production; and by easy we see it will take a few billion bucks and half a decade. This is why the supply constraint in this industry will be such a bottleneck. To bet against these companies is saying (a) we are not losing farming land to urbanization (b) we are not losing people who farm - i.e. they are not moving to cities in emerging markets and (c) they will not want a higher standard of food. You can also throw in such factors such as more and more severe droughts and weather conditions worldwide, or the world push to biofuels on top of that as well; but since some would argue those I will stick with my 3 points above.

Both Potash and Mosaic are now back to their 50 day moving averages - I continue to nibble at both; Mosaic is now my largest position and I continue to believe this is one of the most sheltered places to be in terms of company execution (stock wise, nothing seems to be very sheltered). You have great demand if China and India GDP goes to 2% or 5% or 12%. And more of our food supply is going to "energy" instead of "eating". And pricing power in this sector is among the best out there. While one could make a case against the farm equipment makers in a slowing global economy, it is just hard to find one against fertilizer since its 'consumed' and needs to constantly be replenished. I am not worried about them as businesses in any way, shape or form - its simply the market itself that is the issue, but for long term investments these are now attractive prices.

Long Potash and Mosaic in fund; no personal position

Garmin (GRMN) Withdraws Takeover Bid, I am Selling

Garmin (GRMN) is withdrawing its $3.3 Billion Takeover bid for Tele Atlas, and the stock is up 15% this morning on the news. While probably not a great thing for the very long run, its good for the short and middle run. The really good news is the deal with Navteq through 2015; this removes one of the major worries overhanging the stock.

I missed the spike this AM to $100 since I was too busy blogging and lost in my thoughts, but with the stock near $96 (up 15%) I am going to sell and close my position and revisit the stock later. I like Garmin, but with so many other stocks on sale, and this huge spike I am going to get my cost out and look for a lower entry point either in this name or others. In a better market I'd probably actually be buying off this news. I think the market is oversold here, but until I see a break above 1490 on the S&P, I am remaining in cautious mode.

I bought this last stake post earnings, and when they announced the acquisition and these shares were bought in the $91 to $96 range. With the stock down to near $80 of late and the overhang of this acquisition hanging over the shares, I feel fortune to get out with a small profit. Garmin was a 1.4% position, which I am now closing; this raises about $14.4K.

• Garmin, the world's largest maker of personal navigation devices, withdrew a $3.3 billion takeover bid for Dutch digital mapmaker Tele Atlas NV on Friday, clearing the way for rival TomTom.
• Separately, Garmin said struck a deal with Navteq Corp., the only other digital mapmaker other than Tele Atlas to have global operations, guaranteeing access to Navteq maps through 2015.

No position

Darn, I bought the Wrong UltraShort

I was debating UltraShort Emerging Markets (EEV) versus UltraShort China (FXP) yesterday, and went with the more cautious EEV over the scary volatile FXP - EEV is flat this morning. UltraShort China is now down 8%.

Ugh.

FedEx Tells us the Economy is Slowing - So is Starbucks (SBUX)

Not that we needed any reminder but the twin towers of cost inflation and slowing growth eating away

FedEx Cuts Forecast

• FedEx (FDX) lowered its earnings projection for the current quarter and fiscal year, citing increased fuel costs and weak freight trends.
• The parcel-shipping giant now sees earnings of $1.45 to $1.55 for the quarter ending Nov. 30, down from its previous forecast of $1.60 to $1.75. Analysts polled by Thomson Financial anticipated earnings of $1.70 a share.
• FedEx had already offered weaker-than-expected projections for the periods in its first-quarter report in September. But the company said Friday that its fuel costs have increased 8%, or $85 million, since that time.
• FedEx, considered a bellwether for the U.S. economy, also said its less-than-truckload freight trends remain weak, despite signs that a decline in industrial production has hit a bottom.

So "government reports" say a decline in industrial production has hit a bottom; but what does a real company which is a bellweather of industry say? Something quite different. Shocker.

"Government reports" say there is little to no inflation - in fact gasoline prices FELL in their PPI report... hmm, why so different from what the actual companies are telling us? Laughable. Truly.

Starbucks (SBUX) for the first time reported a negative growth in customers... first time. Ever. And did I mention cost inflation? Cost of milk through the roof.

• The stock is down about 32 percent year to date, reflecting a series of issues from higher dairy prices to increased competition and concerns about the economy that make it harder for customers to shell out cash for the chain's high-priced beverages.
• In a note to clients, Tarantino said the fourth-quarter results make it appear that Starbucks' U.S. business "seems more exposed to internal and external issues than we had factored into our prior thesis."
• Tarantino said the loss of customers may partly reflect a reaction to a price hike in July, put in place to incorporate higher dairy prices, but he noted that other coffee chains have reported stronger trends. "While we have considered Starbucks less sensitive to declines in discretionary spending, we now believe these headwinds may be having a slight impact on demand," he wrote.
• Deutsche Bank analyst Marc Greenberg, who kept a "Hold" rating and $24 price target on the stock, pointed to competition as an issue he didn't see the company addressing strongly enough. "Starbucks is not imagining the bad guys are coming to get them ... they really are," he wrote in a note to clients. He called the traffic decline "a sure sign of competition, a tired consumer and saturation."

Eventually this slowing economy thesis gets priced into the market. What is shocking to me, is everyone is so 'surprised' by it. Again, the kool aid of "Fed will fix everything" was so pervasive in September and October... I was early in my calls that this line of thinking is wrong, but it finally seems to be sinking in to the market that 2008 is going to be a tough economic year for the country. Stagflation is going to be on the tips of many pundits about this time next year. Because the inflation we face now is not due (that much) to the business cycle, but simply a world of shortages.

Long inflation; short US economic growth

Chinese Small Cap Speculators Wiped Out

I had written a series of posts back in late September through early October at the height of the US "Chinese small cap" bubble when stocks were going up 100s of percent for no reason other than some loose affiliation with China/Asia. Some examples

1. This Day in Bubbles: 3 Random Chinese Stocks
2. This Day in Bubbles: China Natural Resources
3. This Day in Bubbles: Let's Review Yesterday's Group
4. This Day in Bubbles: Party on Garth!
5. This Day in Bubbles: Chinese Small Caps are Back!

Literally for a 4 week period, once Uncle Ben gave the green light to speculate and served notice he was here to bail out the speculators, these stocks went on a rampage. Stocks with revenues of $1M, or $2M, some with massive year over year growth of ... 3.4%... were shooting up like mad. Truly what you could do at that point is to go to the highest % gainers list for the day at 3:50 PM, and buy the 5 that had gone up the most (50-60-70% in 1 day), and then sell the next day for another 30-40-50% gain. Madness. And in retrospect that was the time when the general markets hit their highs.

I noticed last night on the CNBC ticker the AMEX largest % losers some familiar names. Or at least familiar symbols... ORS and KUN - both down nearly 40% yesterday. Hmm... I wonder what happened - I thought all these stocks had a market of 1.2 billion customers and hence should be $100s of dollars higher?

This is a healthy sign... the speculation (and speculators) in these stocks getting smashed. Now I will see I am fully sure at some point in the future these names will have a similar run. In fact probably many times over the coming years as speculators run to stocks under $5, and try to run them up to $20, $30, $40. (I am sure the list below will be a great starting point to find these companies ready to take over the world!) But this is the other side of the trade. Somewhere out there some snarky OTC message board operators are laughing at the ponzi scheme they pulled off, and on the other side a lot of newbie (or greedy veteran) traders have lost a lot of money. And it's a healthy thing; should be part of the bottoming process.

Here is an example of that "unending growth to 1.2 billion customers" when put to reality:

China Shenghuo Pharmaceutical Holdings (KUN) posted third-quarter net income of $900,000, or 4 cents a share, compared with $300,000, or 2 cents a share, in the year-ago quarter. Net sales fell to $4.2 million, from $5.1 million in the 2006 quarter, resulting from the company's adoption of more stringent credit policies which caused a shift in its customer base and a decline in sales volume.

The company revised its guidance and now expects full-year revenue of between $20 million and $22 million and net earnings of between $4 million and $5 million, between 20 cents and 25 cents a share for the full fiscal year. It previously predicted revenue between $24 million and $26 million and earnings of between $5 million and $6 million, or between 26 cents a share and 31 cents a share, for the full fiscal year. Shares fell $1.80, or 25%, to $5.52.

-OR-

Orsus Xelent (ORS) likewise took a pounding. Shares of the China-based mobile phone maker were down 26% after the company cut its full-year sales-growth outlook to between 20% and 30%, compared with 2006. Prior guidance had the increase at more than 30%. Third-quarter earnings rose by a penny from last year to 9 cents a share, but shares were still falling $1.20 to $3.39.

So once again this path to world domination by every chinese company is not really a foregone conclusion. Yes they have demographics on their side but for every 1 company publicly traded in the US there are likely 100s of others competing that we have never heard of.... as I like to say, there are hundreds of "me too" companies out there.

As for our markets themselves; S&P saved itself once again at 1440 - that level has now held 3 times. Until it breaks, we are stuck in a range of 1440 on downside to 1490 on the upside. Again, next week is traditionally a very good week for the market as its lightly traded and retail tends to dominate (and speculators) - however I am not sure how many are in the mood right now after getting smacked around so severely in their favorite names of late.

A random sampling

Mr Yun Meet Wells Fargo's CEO - Housing Worst Since Great Depression

Mr Yun of "The housing market will bounce back strong in 2008" err, I'd like to revise that to "The housing market will be flat with 2007", please meet someone who is a realist and in the trenches, Mr. Stumpf, CEO of Wells Fargo (notably the one major financial institution ex Goldman Sachs not to have a writeoff)

More Mortgage Woes to Come

• Evoking Depression-era memories, Wells Fargo & Co. President John Stumpf on Thursday became the latest banker to predict continuing difficulties in the U.S. housing market as risky mortgages made to overextended borrowers disintegrate into large loan losses.
• Stumpf said the current real estate conditions are the worst he has experienced during his 30-year career. He then punctuated his gloomy assessment by harking back to the deepest downturn of the 20th century.
  
• "We have not seen a nationwide decline in housing like this since the Great Depression," he said.
• San Francisco-based Wells Fargo, the fifth largest U.S. bank, so far has fared far better than virtually all of its peers. (read: credibility)
• That's because Wells Fargo sold most of the $2 trillion in home loans that it has originated since 2001 and invested relatively little money in the mortgage-backed securities that have been saddling other big banks with huge losses. In contrast, Wells Fargo ended September with $581 million in unrealized investment gains on its books.
• Stumpf said he didn't even know about some of the exotic mortgage investments that enticed other banks until he read about them in the newspaper. (read: credibility)
• "It's interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine," Stumpf said.
• He blamed much of the real estate turmoil on low interest rates, unscrupulous lending practices and outright greed as housing prices steadily climbed until 2006.
• "The losses have turned out to be greater than expected because home prices have declined faster and deeper than expected," said Stumpf. He cited the Midwest's "auto-belt" states and California's Central Valley - a swath stretching from Sacramento to Bakersfield - as Wells Fargo's biggest headaches.
• Stumpf indicated 2008 will be even more challenging, particularly if home prices continue to erode while more adjustable-rate mortgages reset to higher payments. The result is that some families can't pay - or stop paying - their mortgages.
  
• "I don't think we're in the ninth inning of unwinding this," Stumpf said. "If we are, it's an extra-inning game."

As I've said, anyone calling this the 7th, 8th, 9th inning is just kidding themselves... or the organization they represent.

Long truth and reality; short affordability of homes in the US

The "Rally" Fizzles - Back to S&P 1450

In yesterday's piece where I noted all the positions I was either selling or cutting back on to raise cash [Raising Cash], I mentioned sell when you can, not when you have to. Amazingly, most of those names are already down 6-10% from where i sold them. For traders this is a fun environment, but trying to be a 'long mostly' fund, not so much. I did some small nibbling here as Potash (POT) and Mosaic (MOS) are back to where they were Monday when I was buying into the teeth of the selloff. Could it be so easy that we just get another spike so I can keep repeating this process?

I doubt it. As I stated Monday, if we break this 1440s/1450 level, next step is down to near 1400. This time while I am doing some light buying, I am not letting go of any of the Ultrashort ETFs. This market just seems so much more weaker then the indexes appear to tell - we could be heading for the next leg lower - getting my shopping list out (hey next Friday is the biggest shopping day of the year!) Suffice to say this is not a chart you'd bring home to meet mom. Get seatbelts ready.... could be a rocky ride coming. And yes, I hope I am wrong on this call.

Initiating Massey Energy (MEE) on Continued 'Shortage' Theme

Following up on the identical strategy for the buy in Agco (AG), I am starting a new position in Massey Energy (MEE), which will be the 4th coal stock in the portfolio. I know, coal the other white meat ... zzzz....

But when I went through the charts of my watch lists yesterday, this name was among the best. Today, as with Agco its down about 4% and has pulled back to only its 20 day moving average. So I began a similar size position to Agco here, 300 shares bought in the upper $28s, creating a 0.8% position. I have a larger buy down at $27.00 which would be near the 50 day moving average so I am hoping for a fall to that level. Obviously this is a startr position and I don't want to over do any new long exposure as this market looks quite sickly. So much for that financial revival.

Anyhow for earlier posts about the thesis on coal you can go here, if you are new to the blog. Massey is different than my other coal stocks in that its focused on metallurgical coal (that which goes into steel) - I was a bit hesitant to go in that direction because of potential global slowdown but in this world of shortages, it appears China's build out of entirely new cities is going to strain all sorts of energy sources, whether their GDP drop to 10% or 7% or 3%... once those cities are built, and people move in, energy needs go up. And urbanization begets urbanization. Thus steel. So with falling dollar, and this turning into a global market, coal is looking more like a typical commodity - much like metals or agricultural products. And US exports are now cheap and destined to stay that way for the foreseeable future. The chart strength tells me more than any fundamentals.

A recent story specific to Massey Energy here:

• Coal producer Massey Energy Co (MEE) said on Friday it was spending $480 million to expand its Central Appalachian mines so it can export more and take advantage of increasing demand from the global steel industry.
• The two-year plan to produce about 8 million more tons of coal would also position Massey as the dominant low-cost producer in the declining coalfields of Virginia, Kentucky and West Virginia, Chairman and Chief Executive Don Blankenship said.
• Right now, he said, U.S. coal producers could benefit from a "perfect storm" to export more because of a weak U.S. dollar, high shipping rates and Asia taking much of the available coal from Australia, the world's largest exporter.
• Steel-making, which needs metallurgical, or coking coal, was growing, especially in China and emerging economies. "Supply issues and the weaker dollar are making U.S. met very attractive," he said on a conference call. "That's why we are increasing our production over the next two years by 8 million tons." Massey produces about 40 million tons per year.
• Massey projected 2008 coal shipments topping 2007 levels, with higher prices and forecast shipments increasing in both 2009 and 2010. New metallurgical coal business is expected to close at prices more than $10 per ton higher than a year ago.
• On Friday's call, Blankenship said that in contrast to previous bullish coal markets, "the big difference now is the weakness of the dollar. "Also vessel freight rates are high and there is a shortage of vessels and (high) diesel prices."
• "Given the costs, it does not make sense for Australian coal to be so prevalent on the Atlantic market. So we believe a large portion of our coal will be exported," he said.
• Because it was expanding existing mines and using new equipment, Massey would be able to keep down costs. "The rest of the industry couldn't add 8 million tons collectively," he said.

So it is interesting how this all ties together - worldwide demand going up, dry bulk shippers rates skyrocketing, causing exporters to ship closer to home so that they don't get killed on the shipping rates any further than they already are (remember it now costs more to ship iron from Brazil to China, than the actual iron costs), which in turns leaves vacuums in the market, which are now being filled by exports from weak currency countries like... (sigh) the USA.

Now these coal stocks won't jump or fall 25% in a day like the dry bulk shippers, but they should be a more sustainable secular play (past 2 years). The risk of course is when the globe eventually slows (which it will) the baby gets thrown out with the bathwater and investors flee any "global growth" story. But the reality will show itself soon enough and those companies in the right areas will rebound.mee

Long Massey Energy in fund; no personal position

Bookkeeping: Initiating Agco (AG) Position

Consistent with what I wrote yesterday about buying those that have held up the best, I am intiating a small position in Agco (AG) as the stock pulls back 4% today to its 20 day moving average. Thus far this has been among the strongest of stocks in this correction, not pulling back to its 50 day moving average which is down there at $53.

An earlier post about Agco's strong quarter can be found here. I had originally considered adding the company in early October, but wanted to do more research first since it was a relatively new name to me. Suffice it to say, while still more expensive than my other agricultural equipment play CNH Global (CNH), it's chart is in far better condition right now. Also, Agco is a pure agricultural play while CNH has some construction business in it. After the stellar quarter Agco's 2007 estimates were raised from $1.76 to $2.28. 2008 estimates raised from $2.60 to $3.13. There is some risk in analysts getting ahead of themselves and raising the bar too far; unlike fertilizer I think there is more risk in equipment sales but this has been among the strongest charts in one of my favorite sectors, so I am branching out a bit.

I am hoping for a further pullback to $54 to buy a larger position but I started today with 150 shares for a 0.8% position (just under $58). With the 50 day moving average at $53 and rising and a nice 'gap' in the chart created when Agco reported such stellar earnings a move down to $54 or so would be quite poetic so that is where I have a larger buy order waiting.

The company now trades at 25x this year's estimates, and 18.5x next year's.

AGCO Corporation manufactures and distributes agricultural equipment and related replacement parts worldwide. The company's products include tractors, combines, self-propelled sprayers, hay tools, forage equipment, and implements, as well as a line of diesel engines. It offers tractors used on small and medium farms, and in specialty agricultural industries, including dairies, landscaping, livestock, orchards, and vineyards; and self-propelled, three and four-wheeled vehicles, and related equipment for use in the application of liquid and dry fertilizers and crop protection chemicals. The company's hay tools and forage equipment include balers, self-propelled windrowers, forage harvesters, disc mowers, spreaders, and mower conditioners used for the harvesting and packaging of vegetative feeds used in the beef cattle, dairy, and horse industries. It also produces diesel engines, gears, and generating sets for tractors, as well as off-road engines in the 50 to 450 horsepower range. In addition, it offers a range of implements, including disk harrows, heavy tillage, and field cultivators; planters; and other equipment for its product lines. Further, the company provides precision farming technologies that enable farmers to gather information, such as yield data by utilizing satellite global positioning systems.

Long Agco in fund; no personal position

Airline Inflation?

For those readers who have been around a while, you see I post far less about the government CPI and PPI reports than early in the blog. Essentially I have given up, since these reports are so laughable; I was reading yesterday somewhere that yesterday's PPI actually showed a decrease in gasoline prices. Really, what world do they live in. So I am basically striking against commenting about these reports. Suffice it to say that they severely understate the reality on the ground, so whatever number you see you can probably double (or more)

What I found striking in a story today was this note about airline tickets.

• The cost of fuel is prompting some businesses to increase prices. Airlines have raised fares seven times since Sept. 1, and all five of the biggest U.S. carriers last week added a $10 round-trip fuel surcharge to ticket prices. Today's report showed airfares jumped 1.6 percent in October.
• ``Since fuel prices affect airlines across the board, consumers should expect prices to continue to increase,'' Rick Seaney, chief executive officer of Dallas-based FareCompare.com, said in an e-mailed statement Nov. 9.

Now some of that is seasonal "pricing" (i.e. stick it to the consumer when he travels for holidays) but still... 7 times in 2 months? Ouch.

Other somewhat understated 'facts' from the report this time around

• Prices were 3.5 percent higher than a year earlier, the biggest 12-month increase since August 2006. Compared with 12 months ago, ``prices are uncomfortably high for the Fed,'' said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. ``It has to raise the question about the limits of how much the Fed will cut rates.'' (no question for me, they continue to cut until the financial system is 'saved')
  
• Food prices, which account for about a fifth of the CPI, increased 0.3 percent after a 0.5 percent increase in September. (right... somehow this is very different than what companies that actually produce food tell us... milk, eggs, poultry, beef, grains, wheats)
• Almost 60 percent of the CPI covers prices that consumers pay for services ranging from airline fares to movie tickets and laundry charges.

With that said, thank god for Walmart and the Chinese for pegging to the dollar - if they were not pegged (which we fight them tooth and nail on) they would be importing inflation as their currency rose against ours....

• Wal-Mart Stores Inc. marked down 15,000 holiday items, 20 percent more than last year, and started discounting toys in the beginning of October, more than two weeks earlier than in 2006. The strategy was aimed at taking customers away from Target Corp. and Kroger Co. as Americans grapple with the housing slump and high-cost fuel.

So as some others have been saying so perfectly, we have inflation in things we NEED, and deflation in things we WANT. Unfortunately I cannot eat iPods, cell phones, or plasma TVs. Or heat my house. Or pay my insurance. Or send kids off to college (if I had kids). ;)

Anyhow back on strike.... the only inflation numbers I care about are what the companies are telling us...

Rolling Correction Continues and a New Short Position

My favored sectors continued to get hit today as the agriculture complex in particular is getting some damage, so despite pushing the cash stake up to 15% and increasing the UltraShort stakes up to near 10%, treading water is hard to do when one is 75% long and the top heavy positions are getting hit. I did lighten up on these positions yesterday which is helping to some degree. A very difficult market to say the least; most of my watch lists are in the red so for the indexes to be holding up, I can only assume money is flowing into recession type of sectors today (i.e. Coke, Procter & Gamble types).

To offset some of the long side exposure I have added one new UltraShort - the very volatile UltraShort MSCI Emerging Markets (EEV); talk about a hot potato. I only took a 2% position (about $23K) since this instrument has volatility like one could not imagine, but if the market were to put another leg down it should pop nicely. With that said, this can turn into a losing position very quickly but its a small hedge against a lot of foreign exposure in the fund. This is not for the feint of heart, and in fact might not be for me either, but we shall see.

Overall the market is in a tight range with S&P 1490 on the top side and S&P 1440s/1450 on the bottom. Until we make a move one way or the other it's hard to determine the short term trend. However speculation is still not stomped out as seen in the solar space, so I still think we have more down to do, since we need to get rid of those last embers of hope to truly bottom. While I do understand the moves in the leaders in this space (deservedly so), speculators continue to run up the operationally weak companies on promises that the future will be so much more brighter (sorry for the pun). I realize a growing pie helps all (or a rising tide lifts all boats) but unless this is the first industry where competition ceases to exist and business cycles do not matter, and there won't be winners and losers this running up of any company in the solar space no matter what the performance is still troubling. I do expect it to continue for a few years, on and off, as this will be a sexy sector for speculators for a long time; until clear cut winners and losers emerge and people see that eventually there will be business pressures on the weakest, no matter how great the overall "pie" might be.

Long UltraShort MSCI Emerging Markets in fund; no personal position

LDK Solar (LDK) To Report Audit Findings in Early December

Finally some guidance from LDK Solar (LDK) on a timetable for reporting their 3rd party audit.

• LDK Solar Co Ltd (LDK), a manufacturer of solar wafers, said Thursday it expects to report its inventory audit findings in early December and post third-quarter earnings shortly thereafter.
• The company said it expects fourth-quarter fiscal 2007 revenue of $165 million to $170 million and earnings per share of 37 to 41 cents. It sees wafer shipments for the quarter between 82 and 88 megawatts.

Interesting guidance. Analysts are in at $143M and $.37 EPS. This revenue guidance is much higher than analysts expected but the EPS is not much higher. Therefore it signals that gross margins are going to take a hit (potentially). Reason being, somehow LDK Solar (LDK) was claiming low 30% gross margins which was far above industry average. So if they drop to say mid 20%s, then it takes more revenue to generate the same amount of profit.

With that said, this company has huge revenue growth, and Wall Street prefers BAD news to uncertainty (this is why you see the financials lift after they get yet another kitchen sink out of the way - but since we don't know how many more sinks there are, the financials are still scary). Once LDK Solar has this out of the way, even if gross margins fall to mid 20s, at least we have this 'contained' and we can move forward.

Earnings estimates for 2008 are currently $1.87 - this should be hittable even with a lower gross margin and at a measly $32 this is under a forward PE of 20 for a company growing in excess of 100% for the near future. Hence it will be a bargain buy in my opinion once this audit is out of the way. In fact one who has a high risk tolerance might start buying ahead of the news. As I have stated, this one has the potential to pop 40% overnight once the air is clear. I might take another look at this name soon, as I exited near $40 and the stock was as low as $29 range yesterday.

No position

Suntech Power (STP) Reports Outstanding Results

Suntech Power (STP) follows First Solar's (FSLR) lead and also reports some great numbers. I think in the rush to get into Sunpower (SPWR) investors have missed the boat with Suntech Power - while Sunpower has some efficiency advantages at this time, Suntech Power has the Chinese mfg base and in fact, already has surpassed Sunpower's gross margins which were a concern of mine.

• Revenue growth up 137% year over year to $386M (vs analysts $355M)
• EPS $0.36 vs analysts $0.28
• The all important (to me) gross margins up to 24.4%
• New production lines lets company expand 2007 capacity from 480 MW to 540 MW
• Next year expanding capacity from 600 MW to 1 GW (2 years ahead of schedule!)
• Guidance for next quarter gross margins up 50 to 100 basis points (fantastic)
• Suntech has currently secured enough silicon to produce more than 530MW in 2008. Based on this level of silicon supply, Suntech expects revenues to be in the range of $1.9 billion to $2.1 billion for the full-year 2008. (Analysts currently at $1.95B)
• Analyst day on Dec 11th
• Overall polysilicon procurement looking much better going forward

Overall very very impressive. The gross margins in this industry have been my major concern but with size comes scale, and hence why Suntech Power has been one of my favorites. Unfortunately, in terms of the portfolio the stock price did not budge for the first 2/3 of the quarter so I got impatient and sold, which obviously was a mistake. As I noted yesterday [Separating Chaffe from Wheat], Suntech along with First Solar are the 2 stocks who have held up best in this selloff and are emerging as the 2 leaders, and companies I need to get into (hopefully at lower prices). If Suntech Power got half the hype its American peer, Sunpower got....

While a very pricy stock, the $1.65 2008 estimates now look seriously under where the company should hit, something closer to $2.00 should be in order. Due to its larger float, this is also a company that mutual funds can actually buy in some scale and have liquidity unlike the smaller fare. This was also a thesis of mine earlier in the year - why don't I listen to myself? :)

At this point, if I were one of the larger players, I'd be lowering Average Selling Prices (ASPs) in 2008/2009 to crush my smaller competitors over the next 2-3 year period, and then once they are weakened, grab as much market share as possible in this commodity business for the years ahead... sort of what a small company you might of heard of before did... Intel.

No positions

Housing Will be Flat Next Year! Whew!

Home Prices will be flat next year, as will home SALES - whew! Thank god, I was worried after a 7 year bubble it might take more than 9 months to wash out all the ills... but according to the always accurate Lawrence Yun of the National Association of Realtors - nothing to fear people.

Now Mr Yun is of course unbiased and one of my favorites, since he has been calling for a bottom and quick recovery for about as long as Mr Hovnanian. I see either the NAR has no such thing as performance reviews and/or prefers incorrect information as long as its BULLISH. I really start to wonder if our major industries, much like government, they overlook bad information as long as its information they want to hear. I mean it works for the government - and "yes men" are famous for trailing along with their favorite CEOs.... truly his track record is sad.

I always love how the media trot out his 'updated' predictions every 4-6 weeks and cheer. Never pointing to his previous track record (abysmal) Plus really this is probably the most biased economist you could ask about housing in the entire country, no?

I spoke about Mr Yun's track record in early October [Realtors Group Lowers Forecast But Lawrence Yun Still on Kool Aid] I will save you the time from clicking on the link - here is his history regarding 2007 sales as of early October. In reverse chronological order.

(October prediction) Yun now calls for home sales to be down 10.8% from last year.

(September prediction) 30 days ago, Yun thought it was (drumroll) going to be 8.6%, so he is only off by a factor of 25.6% in 30 days.

Here is the kicker... he thought back in February the year over year drop off would be only (drumroll) 0.6%! Don't even make me try to calculate by what magnitude that 'economic forecast' was off by.

******
What did Yun think about 2008 - 6 weeks ago?
You guessed it
Sales will INCREASE! (he now says FLAT?) and a few months before that he was calling for an even larger INCREASE!

(October prediction) Yun now predicts 6.12 million in sales, UP from the 5.78 milion predicted for 2007 (which goes down monthly) - thats a 5.9% INCREASE! woo hoo!

(September prediction) Now the kicker of all kickers is that 6.12 million in sales is down 2.4% from his forecast LAST month, so this is his CONSERVATIVE number. He was even more bullish last month - what were we looking for last month? 8% increase in home sales for 08??

So let's review, completely wrong on 2007 and in the span of under 3 months he has taken down 2008 from a 8% increase (September) to 5.9% increase (October) to flat (November)

Mr Yun, this Buds for You....

Tougher Sledding than it Looks of Late (and This Year)

An interesting post on Realmoney.com today about how the median/mean stock is faring far worse than the indices would have you think. I'd argue that has been the case all year (remember, the Russell 2000 is down for the year). In the heavy corrections, the indexes do tend to hold up better than the median stocks - institutions stick to liquid names and by definition there is just so much more money in index funds and large cap mutual funds than small cap or mid cap. Also most of the major bull markets have been in very narrow areas - ask anyone tied to financials or consumer stocks how they have been faring since summer.

But the actual numbers since this "2 week" correction began are quite startling.

While the broad cap weighted indices are down mid single digits from their highs, the average stock has been hit much harder. The median decline for all the components in the S&P 1500 is 19% and the mean is down 22.3%. Clearly, small/mid have been hit hard, creating some very cheap stocks in a middling valuation market.

Separating Chaffe from Wheat - The Selloff Identifies Future Winners

Although this selloff was painful for many portfolios it can be a useful tool in many ways. One of the most important, in my book, is separating the proverbial chaffe from the wheat - identifying which stocks have been run up by speculators (many of the solar stocks, dry bulk shippers et al) versus those with 'strong hands'.

I'd argue that more money could in theory be made playing with those stocks that have been hit the hardest... once risk is adopted again and speculators flood back into the market. But in this type of market that does not appear to be on the near horizon. Wouldn't it feel more comfortable to have the more stable stocks in your portfolio right now? Those that held up best in this market correction and held key technical support levels? It would be for me, and this sell off was a great opportunity to see who has the best relative strength - this is where technicals come in for me. When I see a stock holding at its 50 day moving average in the ferocious selling of last week thru Monday I see a stock that has strong hands, and institutions supporting it. Those are names I want to be in, so I am compiling a list of these names, most of which I will list below. Now that is not to say these stocks are impervious to sell offs or when true panics happen they will not succumb. But now we have in just a 48 hour period seen a "throw in the towel" near term bottom followed by a major oversold relief rally. So we can see which potential candidates for a portfolio both held up the best, and rallied the hardest. Those are companies we want to put our money with in the quarter to come if you want to balance risk/reward.

I've broken down the stocks below that held their 50 day moving average in the selloff (at most they closed just below that average at the height of the selling either Friday or Monday, but for not more than 1 day) and then rebounded. I've highlighted in bold those that were so strong they were not even sold off down to their 50 day (in general these stocks only sold off to their 20 day average or a bit lower) - these would be in the strongest of hands....

All names below are either in the portfolio or stocks I have strongly considered or monitor on watch lists for consideration to add to the portfolio. I am am still working through my watch lists for additional names, but these are the lion's share. (by sector) These are the names I will be overweighting (or already am overweight) as we move forward for the next quarter. Now that I've raised some cash in this short term spike, I will be looking to redeploy into these names on a re-test of their support levels.

Agriculture - overall this sector was holding up fantastic except for Monday but many names still held their 50 day moving average
Potash (POT) - fertilizer
Mosaic (MOS) - fertilizer
CF Industries (CF) - fertilizer
Agco (AG) - Equipment
Monsanto (MON) - Seeds
Bunge (BG) - many areas of this sector
Agrium (AGU) - fertilizer/retail

Infrastructure - much like agriculture this sector was holding up fantastic except for Monday, but many more names have been damaged technically than in the ag sector - the best of the bunch
Foster Wheeler (FWLT)
Chicago Bridge & Iron (CBI)
Jacobs Engineering Group (JEC)
Shaw Group (SGR) <-- barely holding on

Tech - the 'teflon' stocks as I call them, held up until middle of last week and then had a 3 day bear market of epic proportion; very few survivors after all was said and done
Baidu.com (BIDU)
Google (GOOG)
Ciena (CIEN)
Research in Motion (RIMM)

-> Apple (AAPL) just missed the cut

Coal - all 4 coal stocks, interestingly made the cut; and steel coke producer Massey Energy was in fact the best of the bunch; interesting. Blog readers will know I've been overweight this sector since September but after the recent run up, I cut back but this strength is impressing me. Coal is one of the few things we have left to truly 'export' so the weak dollar helps these guys.
Consol Energy (CNX)
Peabody Energy (BTU)
Arch Coal (ACI)
Massey Energy (MEE)

Solar - the 2 American stocks continue to hold up, and my favorite Chinese stock (for stability - Suntech Power) is finally getting the respect it has long been overdue - but it has been amazing to watch the wipe outs in the smaller, less established names that speculators were taking up to heights that made no sense at all
First Solar (FSLR)
SunPower (SPWR) <-- yes even after losing so much value in the past week it still held its 50 day moving average; this shows just HOW overextended the name was in the $160s
Suntech Power (STP)
JA Solar (JASO)
Yingli Green Energy (YGE)

Refiners - this is a group I have started to warm up to in the past few weeks, the names I bought were the best performers of the bunch technically as well
Frontier Oil (FTO)
Tesoro (TSO)

Other Oil Service/Drilling - most of these have been hit with the fall in oil even though again, oil at $105 or $75 won't adversely effect the vast majority of those I follow; only sentiment changes.
Core Laboratories (CLB)
CGG Veritas (CGV)

Metals/Mining I am/was a bit worried about this group being hit if the 'global slowdown' stoy begins catching fire, but thus far certain names have held up well
Rio Tinto (RTP) [obviously the offer from BHP Billiton has held the price up]
CVRD (RIO)
Mechel (MTL) - this Russian producer of coal / iron could be categorized either here or in the coal area - whatever the case it has held up remarkably well
Sterlite Industries (SLT) - Indian copper

Financials - yes you heard me, financials - I had to sell Blackrock to raise cash to buy other fallen angels, but the relative strength has been wonderful
Mastercard (MA) - credit card processing
Blackrock (BLK) - asset manager
Goldman Sachs (GS) - the news yesterday from CEO that they will have no write offs sort of opens the flood gates for bulls in that name (he would not be saying such things if not true right/ otherwise the lawyers climb out of the woodwork)

Foreign/Other - most Chinese stocks have fallen hard but 2 (pricey) ones I own have held their own, as have the Indian banks
Millicom International Cellular (MICC) - cell service to Africa and smaller South American countries
Silver Wheaton (SLW) - I have been watching this one for a few weeks, but have yet to pull the trigger - might have missed my opportunity as people continue to flee the dollar
New Oriental Education (EDU) - dominant Chinese education/language servicer
Ctrip.com (CTRP) - Chinese travel
HDFC Bank (HDB) - Indian bank
ICICI Bank (IBN) - Indian bank
General Cable (BGC) - surprising strength from this cable maker - sort of a backdoor infrastructure play

So again, this is my 'relative strength' shopping list; they should provide some downside protection if/when they retest their support levels, and should provide some very good upside return once the market regains its footing. I will leave the speculative plays for others at this stage of the year.

SA/SS

Long much of the names above in fund

Canadian Solar (CSIQ) Up Over 40% - What's the Fuss About?

The headlines for Canadian Solar (CSIQ) blare

"Doubling of profits!"
"Smashes Analysts Estimates!"

Wow, breathtaking stuff. My heart rate sure is up. Must of been a wonderful earnings report? Uhhh, not so much. Unlike First Solar (FSLR) which truly delivered some ground breaking stuff, Canadian Solar is like a retail stock that has lowered expectations so much that anything short of losses makes the stock rally massively. I am still not buying the hype. This plays on my theme of speculators... err investors too in love with massive revenue growth but not looking at what matters in the end.... profits.

Let's take a closer look at the numbers.

Revenue surged year over year from $17.8M to $97.4. Impressive in anyone's estimation

Last year on that $17.8M in revenue they generated gross profit of 17% and EPS of $0.01 EPS

Now a year later with an additional 80 MILLION of revenue, that EPS doubled to.... $0.02 EPS. Exciting! Not so much. Gross margins? Down to 6.5%. But hey that's better than last quarter when they managed to sell their product at below cost. (yes that means a loss).

On top of that they have continued to shuffle almost all their profits to "management" - earnings would of been $.11 if not for the quarter after quarter handoff of almost all profits to management (this quarter it was $2.4M) This is similar to the amounts handed off the past 2 quarters of public life as Canadian Solar struggles with profitability.... each quarter the management got the lions share of all public profits.

Let's take an even closer look at the numbers shall we? Gross profit was $6.34M
Gross expenses? $7M
So they actually lost nearly $700K running the business (and it would be worse if they actually spent any change comparable to peers in R&D spendings)
So how did they manage a profit?
They somehow generated $1.7M further in their P&L on "Others Net"
So one would need to dig into the SEC documents to see what "Others Net" is, but the bottom line is this was another losing quarter on operations... despite the headlines. "Others Net" did not appear in Q1 or Q2 this year, but somehow appeared out of the blue this quarter. Hmmm....

If you back out the $1.7M in "Other Net" Canadian Solar lost $1.2M this quarter or close to 5 cents. Of course 80% of people in solar stocks today won't be reading the P&L statement, they never get past the headline number....

So on the bear side, gross margins have been destroyed from a year ago, and with all that massive revenue growth they can only add 1 cent of EPS (post management getting "theirs").

The bulls will argue - well now the future is looking bright (pardon the pun) - increased guidance (more revenue which will generate a lot lower profit than competitors), 90% of polysilicon secured for 2008 (ok I will give them that, that is a *GOOD* thing), and in house cell mfg (also I agree, a good thing as it should help the close to industry low margins). But don't let today's huge ramp in stock price make you forget the fundamentals. While Canadian Solar is shuffling from negative gross margins to + 6%, the better executing companies in this sector are at worst doing upper teen gross margins and the better are in the lower 20s.

The company is guiding for 8M-8.5M non GAAP operating income for next quarter (which will be an improvement), and of course the typical $2.5M or so will go to management. But next quarter it appears they will finally be making money from making solar products (they didn't this quarter, no matter what the headlines blare)....

With expectations so low for this name, any positive news would be greeted as triumphant but if you are looking for 'best of breed', there are far better choices in the solar space... just about everything else in fact.

SA/SS

No positions

Bookkeeping; Raising Cash

I am taking some off the table into this rally to raise some cash - below are the positions and why. As stated yesterday this is my near term strategy (raising cash, building some more hedge positions) until the market is clearly back to bull mode. S&P 1490 was a support level on the way down (it held 5 times before the dam burst) and now is acting as near term resistance on the way back up. Most of these trades below are simply taking back off the table some of the stock I bought at fire sale prices Monday when my favorite sectors were hit indiscriminately

1. McDermott (MDR) - I sold about 27% of my position in McDermott. I have bought many infrastructure names in this downfall Friday and Monday, and am favoring other names for the very near term. McDermott's chart is now very much in the same league as the names I sold yesterday. The stock has fallen below its 50 day moving average, and now has come right back up to touch that level ($54). McDermott is now down to a 2.5% position; when McDermott has a better technical chart I will consider buying more (or if it falls back further; it was as low as $47s yesterday) I am very overweight this sector but right now prefer other names for heavier exposure. I did take a 6.5% loss on these shares sold today, but if the stock rallies further its chart can improve very quickly; and I really like the fundamentals here even if the analysts don't.
2. Same reasoning as above for 2 oil service names I favor National Oilwell Varco (NOV) and FMC Technologies (FTI) - my 3rd oil service name I already reduced quite heavily - Core Laboratories (CLB) - at a higher level. I still like all 3, but the former 2 are in same chart position as a McDermott - right below its 50 day moving average and it could go either way from here. A fall back to a weaker level or a push back up and we are back on track. Until I see it, I am cutting back both positions by 25-35% range.
   
3. Foster Wheeler (FWLT) - I bought more yesterday AM in the low $130s; the stock has rallied nearly 15% from that point in 25 hours. I am going to book those gains - this name remains one of my favorites for the months/quarters ahead, but it would not be prudent not to look in such short term gains. This is still a top position at 3.9% of fund.
4. Mosiac (MOS) - I had built this position up to nearly 5% in the selloff Monday. I took out the shares I bought in the $61s for a 10% gain in 2 days. This remains a favored position and 4.1% of the fund.
5. JA Solar (JASO) - My entry point in JA Solar was poor; I had bought on the initial pullback to the $59 to $61 range post earnings report when the stock was bludgeoned. The stock fell as low as $48, so with this bounce to $54 I am going to lighten up on the position and take it from 1.9% to 1.1% of fund. JA Solar is certainly not my favorite solar stock, and I believe it is possible to get a better price in the future or find other opportunities in this space if the market returns to test lows. I continue to be cautious on solar despite favorable news from Canadian Solar (CSIQ) today (up nearly 40%) - still far too many speculators in this space.
   
6. Crocs (CROX) - I continued to average down in this position to the mid $30s ($36s range to be specific) - with the stock now rebounding to $41s and below its 200 day moving average of $43, I am going to take out the shares I bought in the mid 30s around $40; I was not at the computer this morning so missed the highs in the $41s. This is still a short term gain of 12%.
7. Excel Maritime Carriers (EXM) - This was a shorter term type of trade, but this sector (dry bulk shipping) still has me wary. I sold stocks yesterday on the basis they could be effected by fears of global slowdown and despite stellar results yesterday they "did not beat analysts expectations" and after a huge gain yesterday the stock is down 8% today. More worrisome is Diana Shipping (DSX) knocked the ball out of the park on its earnings and is barely up today. So I am going to step away from this sector, just like I have (mostly) done with solar and let the speculators romp. I will revisit at a later date. I sold the last of my position - 400 shares for a 10% loss in this name. If I return to this sector it will probably be with Diana Shipping... but at this time I prefer to stay in sectors I have more conviction in. Excel was a 1.7% position when I sold.
8. Potash (POT) - On the fright that was Monday I bought a large swig of Potash at $103; today the stock is in the upper $110s. So I have a 14% gain since Monday 3:59 PM. I am not selling the entire stake I bought Monday because I really like this name for the long run, but I am taking 75% of that stake off the table. This reduces my exposure to Potash from 2.9% to 2.2%. I don't plan to reduce any further come hell or high water in this name, and am hoping for a fall back to the lower $100s to rebuy back what I just sold.
   
9. KBR (KBR) - everything I wrote about McDermott above applies to KBR to the tee - I reduced my KBR exposure by 40% (1000 shares down to 600 shares) - on the 400 shares I sold I took about a 5% loss. KBR's 50 day moving average is $38 so we'd like to see a close above that level to feel more confident near term
10. Shaw Group (SGR) - this stock has regained its 50 day moving average unlike KBR and McDermott (MDR) but I did have some buys in the low $60s Monday so I want to book those gains and not give it all away if the market turns back down. So I've reduced this position by 28%, but it remains a favored name for the quarter ahead. This sale has reduced it from 3.2% of fund to 2.3%
11. VMWare (VMW) - I am closing this position with a 2% loss. My entry point in this stock was poor - the stock had fallen from $125 to low to mid $90s in just a week where I pounced. However the stock continued to fall in the NASDAQ carnage to upper $70s, and since my cash was deployed in other areas I did not average down in this specific name. It's valuation is quite extreme and in this sort of environment valuations might actually matter for the near term. I bought in the low to mid $90s about a day too early, and the stock is now back to low $90s. I'd like to be back in VMWare but with a lower cost basis. So I am selling this smallish position (1.2% of fund) for about a 2% loss. This was part of my basic of high beta teflon stocks that I bought in the NASDAQ selloff.
12. Baidu.com (BIDU) - Everything I wrote for VMWare applies to Baidu.com - as I noted in the blog I tried to by in the last minutes of Monday at $300 (stock is now in $350s), but I could not get the order in, in time. So I am exciting this position flat (very small position on 30 shares) - if we retest $285-$300 I will be interested in buying back.
    

So the natural question is why sell some of the stocks above you believe in for losses. Again the very near term, I use technical analysis (nothing fancy) to see how stocks are reacting. The infrastructure group is a great example - some stocks have held their 50 day moving average despite the carnage - Foster Wheeler (FWLT), Shaw Group (SGR), Chicago Bridge & Iron (CBI) and others have failed to rally above this key technical area - McDermott (MDR), Fluor (FLR), or KBR (KBR). This is usually a sign of what stocks near term the market is favoring or not. The group that has rebounded already back above those technical levels are also the ones with the most impressive earnings report - no surprise there. While all stocks in this group should have great long term results, the market is a very short term looking animal at times and is now shifting its focus to the group that did the best in the last earnings report; so I will shift with the herd, despite liking the entire group.

Another answer is "sell when you can" not when you "have to". On Monday, if I panicked or were an over leverged hedge fund facing margin calls I would of had to sell into the worst of the action; instead I was buying where I could (although I was buying more heavily on Friday with my remaining cash). And now I am selling into some strength when these stocks rebound from absurd levels. If the stocks continue to rebound and this is yet another "V" shaped recovery (sharp sustained bounce off a drastic low) as we saw in February 07 and August 07 I still have a lot of skin in the game. If we fall back, then I have some cash to redeploy at lower prices when others are panicking (like Monday).

These sales get my cash position up to about $157K or just under 14% of the fund. I am starting to shuffle back into some of my UltraShorts which I had basically sold down to nearly 0% exposure as of Friday.

Long all names above in fund ex-Excel Maritime Carriers and VMWare; no personal positions

Fund Positions by Market Cap - Mid November Update

I'll look time to time to see what the median market cap of the fund's holdings are. The last time I looked was early October and the results were found here. The median then was $9.9 billion so let's see where things stand now, 6 weeks later.

These are the parameters I use:

1. Mega cap: >$100 Billion market cap
2. Large cap: $12-$100 Billion
3. Medium cap: $3-$12 Billion
4. Small cap: $500 million - $3 Billion
5. Micro cap: under $500 million

As always the exact cut offs are debatable... I exclude any index ETFs or UltraShort ETFs

Mega Cap
GOOG $206 B
AAPL $148 B

Large Cap
RIMM $63 B
POT $35.7 B
VMW $34.7
ACH $30s B
MOS $29.4 B
IBN $29.2 B
MA $24.9 B
NOV $23.2 B
GRMN $18.7 B
GSF $18.5 B
SLT $17.3 B
HDB $14.5
BTU $14.2 B
CNX $13.3 B

Mid Cap
FLR $11.9 B
BIDU $11.6 B
MDR $11.2 B
MTL $11.1 B
MICC $10.9 B
FWLT $10.2 B
JEC $9.8 B
CNH $9.5 B
NIHD $9.1 B
TSO $8.1 B
FTI $7.1 B
KBR $6.0 B
SGR $5.1 B
CBI $4.9 B
CF $4.9 B
FTO $4.8 B
CIEN $4.0 B
CTRP $4.0 B
BGC $3.7 B
CROX $3.2 B
CLB $3.0 B

Small Cap
EDU $2.9 B
JASO $2.5 B
RVBD $2.0 B
CGV $1.7 B
BCSI $1.1 B
EXM $1.0 B
WX $0.7 B

Micro Cap
DHIL $0.2 B

*******
Remarkably the median cap is now $9.8 Billion which is just about exactly where it was 6 weeks ago. (again it is not dollar weight averaged). In fact the exact same stock is the mid point, Jacobs Engineering Group - strange. So while the names have changed that sweet spot of $5 B to $30B is where I have been focusing - while they don't normally have quite the same upside potential as smaller fare, they usually can provide some more stability. While easier to hit home runs with the smaller companies (sub $5B), it is also easier to strike out.

Where to from Here

What a hectic market. After a disaster yesterday, the fund made back about 80-85% of yesterday's losses. Everything ex-oil services rebounded very well today. While this is good, I am way behind the indexes this week. Up until last Friday, the pace of outperformance was really great, but the previous 2 sessions (Friday/Monday) showed a lot of underperformance as the market finally came around to finding sectors I have been hiding in.

Where to from here? Good question. In 1 day, the S&P500 already made back all of its lost ground and now sits right below its 200 day moving average. So we are back to "in can go in any direction from here" just like that. My plan was to sell into strength to lighten up, build some cash and start rebuilding these (currently tiny) UltraShort positions, but I did not expect this all to happen in one day. Talk about a traders market...

It will be interesting to see if the market can follow through tomorrow to the upside. For now my bias is we continue to the downside (maybe not "tomorrow") until proven otherwise but for the near term. That said, usually Thanksgiving week is very light on trading but most years it always seems to be up for some reason. However, my cash and hedge positions are too low so I need to increase both. On the short ETFs I am debating what to go with going forward - since August I've been going with Financials, Real Estate and the Russell 2000 (small caps) which has been the correct way to go. While still bearish on all of them for the mid term, they have been really hammered of late and probably washed out for a while, whereas the NASDAQ only fell (really hard) for the past 3 days. So perhaps a broadening of short exposure might be necessary.

How did those UltraShorts perform today?
Financial -9%
Real Estate -6.5%
Russell 2000 - -6%
Nasdaq 100 -7.5%
Technology - 8%
Consumer Services (closest thing to retail) -6%
Oil & Gas -4%

So I am considering everything above; if we can get 1 more really nice day like today that would provide nice entries to begin rebuilding some of the positions above as hedges against my very heavy long exposure. I am also looking at gold/silver as a hedge - one stock I have used in the past is Silver Wheaton (SLW) which seems to have more beta (movement) than the Silver ETF (SLV) - Silver Wheaton has pulled back 15-16% in just a few sessions so I might begin a stake tomorrow, as yet another way to hedge continued dollar weakness (which is taking a break for a few days)

I did lighten today by completely closing 4 smaller positions. Generally I try to keep positions for the duration and cull them here and there, but I decided for reasons outlined in earlier entries, to go cold turkey on these 4, along with the 2 I closed out yesterday. The fund was approaching 60 names so it was getting too broad for my intentions. While many names are parts of "sector" baskets (i.e. fertilizer or infrastructure, or foreign ETF indexes) I still want to be closer to 50-55 names.

The quandry one faces now is it appears when people wake up to the reality that the US is slowing, there is nowhere to hide. Up to yesterday the infrastructure and agriculture complex held up - but even they fell yesterday. So there truly is no harbor when it gets really bad. However as seen today, those areas also rebound the most. I still think the fundamentals are great in the sectors I am overweight even in a slowing world economy - but the market won't care some days...

So for now, the best scenario would be a bit more rally to lighten up, get some cash, get some more short exposure and see what happens from there. I still would not be surprised to see a test of August lows or at least S&P 1400-1410. That's still 5% down from here after today's rally. Unfortunately we are in a similar environment to when the fund first started; the first 5-6 weeks (August to mid September) everything in the market was up, or everything was down. When there is no discerning from 1 stock to another or good sectors from bad, it is very hard to outperform. Everything is either trash or gold. So we are now in a similar time. Hopefully it passes relatively soon.

It is interesting to see all the crowded trades I spoke about this weekend as needing to reverse doing so - I think the long term issues are still in tact but every website, every author was saying the same thing, short dollar, long crude, long gold blah blah. Even supermodels and rappers.... sort of like the short retailers and financials trade. There will be a time (probably very soon) to get right back on those bandwagons. Despite jaw boning I still see yet another cut at the next Fed meeting... and another... and another....

• Gold prices fell more than 3.5 percent to a 10-day low on Monday as sliding oil prices and a rising dollar prompted investors to cash in on bullion's recent lightning rally to 28-year highs.

Bookkeeping: Closing Cummins Engine (CMI)

For much of the same reasons I closed the other 3 positions earlier today I am closing Cummins Engine (CMI) although I love the story long term and *will* return. This is more of a technical call and slowing US economy call - I still think this is a premium franchise way ahead of the game in China and India.

Cummins is up nicely 5% in a general market rally, and has actually been a very stable stock the past 2 weeks since its earnings 'disappointment' (not a disappointment in my book). Technically the stock has been stuck under its 50 day moving average ($124-$125) since the earnings report and I think investors will keep it in limbo until we get more info in about 2 months. With the potential for market weakening I am going to liquidate to cash and sit on the sideline. If the market were to push it down close to its 200 day moving average of $100, or a range of $100 to $105 I would become interested. Actually from a pure technical trading standpoint you'd want to buy this stock on a clear break of its 50 day moving average (north of $125 on a nice volume surge) or on a breakdown to a lower support level like $100 (200 day moving average). It is sort of in no man's land now.

Due to some averaging down I actually did ok in Cummins Engine although it is down about 11% from my original buys in the low $130s. Post earnings when the stock tanked (way overdone) I average down in the mid $110s and mid $100s, and have been liquidating (mostly to raise cash) around the range Cummins is today. Therefore despite taking a large hit due to market unhappiness with its earnings, I am leaving the position with only a cumulative 1% loss. I've held Cummins Engine since late September, and sold the last 100 shares in the upper $110s today; this was just over a 1% position entering the day.

Again, strong franchise, the company is executing, and has made great long term inroads in the 2 fastest growing markets in the world. But a large part of business is still US based and I could certainly envision an environment where the baby is thrown out with bathwater (US slowing = fears of Cummins slowing) and we can potentially get a nicer entry point. If not, the market has created many other opportunities in the past 2 weeks.

No position

7 Scary Headlines on a Random Day: What Are the Smartest People in the Room Doing? Leaving Emerging Markets

Well they say the news is worst at the bottom, but some of these news articles are (in combination) shall we say... bearish. I just went to the Business page of the UK International Herald and these are basically a cross section of the main headlines. Makes you want to go run into a cave. It also points out the almost comic level it has reached when the US powers that be essentially tell us inflation is moot or maybe an issue for the 'next quarter'. When will they stop this farce? If you keep saying it, will you eventually believe it? Maybe that's the policy.

First, Goldman is cutting back on exposure to Asia, Eastern Europe and Latin America. And they *are* the smartest guys in the room. These are more near term calls, but they sort of coincide with my views in that these are going to great long term booms, but once perception changes from "growth to the sky every quarter from here to infinity" to "a great long term story but potentially slowing from hyper growth GDP rates to just darn good GDP rates" will certainly effect perception. (I did close out my position in iShares Hong Kong (EWH), held since August, yesterday). Much like tech stocks which were the safe haven (up until the implosion post Cisco) now people are talking about these countries as safe havens. Really? 2 communist countries, one with authoritarian leadership? Superior growers for the next decade? Yes. Taking advantage of the global commodity boon? Yes. Safe havens? Not so much. Not after the huge gains and not with everyone assuming "just invest in China until Olympics, you cannot go wrong".

• Goldman Sachs has begun to cut exposure to emerging markets, fearing that turmoil in the global credit markets risks triggering a "painful" correction in the high-flying assets of Latin America, Eastern Europe and parts of Asia.
• In a series of client notes over recent days, the US investment bank has advised cashing in profits as a precautionary "near-term" measure. The MSCI emerging markets index has risen 28pc since the credit crunch in mid-August.
• The warnings are likely to raise eyebrows in banking circles since Goldman Sachs has led the charge into the frontier economies, coining the terms "BRICS" to describe the quartet of Brazil, Russia, India and China.
• The bank has closed its positions on Brazilian and Mexican stocks after reaping fat rewards in the latest rally, hoping to buy back later. "We see ongoing vulnerability. As the August pullbacks showed, the market could easily begin to worry more about the transmission of the latest financial problems to US and global growth. While contamination to emerging market equities in that episode proved short-lived, it was painful. We think it is prudent to book a gain," it said.
• A growing number of analysts fear that emerging markets have succumbed to a dangerous bubble, replacing US property and structured credit as the new locus of systemic risk. Credit rating agency Standard & Poor's warned investors last week to cut the portfolio share of emerging markets from 6pc to 4pc.
• Goldman said it remained "very bullish" on the emerging markets for the longer run but added that investors need to pick and choose at this stage. Much of Eastern and Central Europe was at risk from overheating, with hot money flows now plugging huge current account deficits - 11.3pc in Romania, 17pc in Estonia, and 25pc in Latvia.

Second, Bank of England is going to have a hard time cutting rates because they actually have somewhat accurate inflation measures (I assume, it can't be worse than ours), and much like Australia realize inflation is real and affecting people. And it is hitting corporations. Unfortunately they still have people over there on the "core CPI" fence; i.e. if you strip out minor things like food and energy which make up about 25-35% of a person's monthly outlays, inflation is just gone, poof! So while we will continue to cut rates to create a new bubble and bail out the terrible decisions of our financial institutions, the rest of the world will be combating inflation. Can't wait to see the dollar depths in about a year's time.

• Inflation has surged back above the Bank of England's 2pc target for the first time since June, in the latest sign that rising prices remain a threat to the economy. The Consumer Price Index (CPI) rose from 1.8pc to 2.1pc last month, according to the Office for National Statistics.
• The increase was greater than economists had anticipated, and was driven largely by higher petrol costs as well as the annual increase in school fees. Economists said the figures would severely undermine the likelihood of an interest rate cut before the end of the year.
• Food prices were also on the rise, with supermarkets reporting an increase in meat prices, along with the cost of fruit including strawberries and bananas. However, Howard Archer, chief UK economist for Global Insight, said there was also some more reassuring news. He pointed out that so-called core inflation, which strips out the more volatile parts of the index, dropped to a low for 2007 of 1.5pc.
• "This suggests that a number of retailers feel that they need to contain their prices in order to encourage increasingly pressurized consumers to spend," he said. (which makes profit margins go down, which makes the "E" in P/E ratio go down, which makes stocks go down - ok glad to hear it is not a problem)
• "October's rise in consumer price inflation does not completely rule out a December interest rate cut, but it is likely to add to the Bank of England's caution about an early move given that headline consumer price inflation likely to be pushed up further in the near term by higher energy and food prices."
• The headline Retail Prices Index inflation, which includes mortgage payments and the effect of house prices, increased from 3.9pc to 4.2pc during October. (but if you convert from pounds to pesos, err dollars you can cut that figure in half! ;) I knew that conversion rate would work out somehow in our favor) <--facetious comment

Third, what a headline "OPEC confident global Oil Addiction Will Grow"

• Saudi Arabia's oil minister, Ali Al-Naimi, told the world that its dependence on crude will increase and that the race to develop alternative energies will not dim demand for fossil fuel. Speaking ahead of tomorrow's official start to the Opec oil producers' summit, Mr Al-Naimi mounted a strong "defence" of oil, criticising experts who say crude is in decline or that green energy is a viable alternative.
• But he warned that consuming nations – particularly in the West – should be under no illusion that more environmentally-friendly sources of power would reduce carbon emissions. "Let's be realistic about this," he said. "Take developing countries. They are growing at a very fast pace – 7-10pc or more a year. These countries are going to need energy, and fossil fuels will be the source.
• "Let's be realistic about this," he said. "Take developing countries. They are growing at a very fast pace – 7-10pc or more a year. These countries are going to need energy, and fossil fuels will be the source.
• But Mr Naimi argued that there was enough oil in the market, and blamed the recent price hikes on "multitude of factors" including speculative investors. He said: "Price is no reflection of the fundamentals. We don't like it when the high price hurts the economic growth of any country. (Hmm, but I am sure they are not complaining either, since it makes them that much richer as each barrel sells for an inflated price. Also I love the quote, price is not a reflection of the fundamentals. Really? I have to agree with this guy - I wonder if he has been investing in Chinese small caps or solar stocks of late. So you mean there are consequences when Uncle Al and now Uncle Ben flood the world with liquidity? Bubbles get pushed from one part of the globe to another? Fascinating ;) Well at least someone is getting rich off all this liquidity, somehow its not the Average Joe.... yet again. ) He said the price had been driven higher by "pessimists" and "agitators" who scare the market with talk of tight demand or oil supplies having peaked. "Any pessimism results in fluctuations of markets. The role of speculators has been a big factor," the minister said.

Fourth, Morgan Stanley Cuts Card Spending Limits. Folks, thats going to be the next one, we should start hearing about this in summer 2008. All these tapped out consumers are now fleeing to credit cards. Unless they can somehow push it all back into home equity by next fall, we are going to be onto the next crisis. This is sort of like a drug dealer - they keep giving people who can't handle it, more and more credit allowances - but now that the consumer is weakening and having a hard time paying, the drug dealer is starting to cut off supply. First the UK, when will this hit us? Poor consumer - keep moving debt from 1 area to the next and keep overspending while inflation and limited wage growth eat away at you. Unfortunately, unlike the federal gov't who also engages in this behavior, we do not all have printing presses at our home to print out new pesos.

• Morgan Stanley has slashed limits for thousands of credit card customers, as the credit crunch continues to bite. Cardholders saw their borrowing limits cut by thousands of pounds last week, with immediate effect - but the card company now says that a quarter of the letters were sent out in error.

Fifth, Northern Foods to Pass on Food Inflation

• Northern Foods said that it is ready to pass a 10pc hike in commodity prices on to its supermarket customers, which could knock sales. The food manufacturer and supplier which counts Tesco, Marks and Spencer and Asda among its customers, said that while it has agreed adjusted prices with supermarkets, it was not clear how that would affect shelf product prices, and in turn what impact that would have on sales volumes.
• It said that cereals, dairy, cocoa and fats had been particularly hit by price increases, caused by lack of supply, and that it was braced for rises between 8pc and 10pc in the full year.
• Chief executive Stefan Barden said: "The impact of these cost increases has been recovered for the second half through selling price increases to customers, although the extent to which customers pass these onto consumers and the resultant potential impact on future sales volumes remains unclear."

So a large supermarket supplier raising prices, so now the markets can choose to take the hit and lose profits or pass it along to the consumer, creating demand destruction and more stress on the consumer. 2 great choices. Luckily we are not seeing this in the US per gov't statistics (whew!) I've only talked about this theme 100x - A World of Shortages. And no, unlike the talking heads who will say this all disappears once the worldwide economy slows (it *will* help to slow it down to some degree) the long term trend will not change unless we start pulling newly urban Chinese, Indian, Brazilian, (insert country here) and tell them to go back to their villages and leave all the conveniences of modern life. Just don't see that happening.

Sixth, or maybe Teun Draasima is the smartest guy in the room? FTSE Higher Despite Recession Fears

• There is a growing risk that the bull market of the last four years is coming to an end, according to Teun Draaisma, Morgan Stanley's contrarian chief European strategist. He believes it is increasingly likely that the credit crunch will lead to a US recession, with damaging global consequences.
• When stock markets were pushing new all-time highs in June, Mr Draaisma said his model was flagging up a triple sell signal. Then he turned bullish during the lows of August before predicting an impending "equity mania" last month.
• Now he says he has "serious doubts about the fundamental growth outlook due to the deepening ongoing financial crisis and the apparent reluctance of central banks to cut rates as inflationary risks still loom".

Seventh British manufacturing inflation at highest rate in 12 years. I believe we call this PPI - luckily we have none of this in the US either thanks to government statistics. Whew! What is wrong with those Europeans? They keep getting stuck with inflation that we so awesomely avoid!

• British manufacturers are raising their prices at the fastest rate in 12 years, in a sign that inflation is threatening to bubble over into the wider economy. Factory gate inflation rose by a full percentage point last month to 3.8pc - the highest since December 1995, the Office for National Statistics said. The news undermines hopes that the Bank of England will soon start cutting interest rates from their current level of 5.75pc.
• Surging petrol and food prices are forcing businesses to pass on their extra costs to their customers. Retailers are likely to raise their own prices as a result in the coming months, experts believe.
• Food prices are increasing at the fastest rate since the summer of 1993, the ONS figures also show. They have risen by 6pc in the past year, while petrol prices increased by 2.4pc in October alone, as higher worldwide oil costs affected prices in forecourts and wholesalers in the UK.
• And in another sign of rising costs, it said input prices - a measure of raw goods prices - rose 8.5pc in the year to October, the fastest rate in more than a year.

Folks, I do get readers from outside the US to the blog. My advice to you poor non USA souls facing these type of problems is simply move to the US. Here, all those problems disappear into the wisps of air per our government reports. It is like magic. Or should I say... like illusion.

Long just another fun day reading economic tea leaves....

If You Love Some Volatility

May I point you to the two new UltraShorts related to Emerging Markets

1. UltraShort MSCI Emerging Markets (EEV) - this is double the inverse return of the iShares MSCI Emerging Markets Index (EEM) - down 10% today after being up 10% yesterday.
2. UltraShort FTSE/Xinghau China 25 (FXP) - this is double the inverse return of the iShares Xinghau China 25 (FXI) - down 16% today after being up 14% yesterday
   

Have at it... you first..

New UltraShorts Being Introduced for Foreign Markets

No positions

Bookkeping: Closing some smaller position: Freeport McMoran (FCX) Atwood Oceanics (ATW) Perini (PCR)

With the market up (for now), I am taking this opportunity to cut back on some names in the sub 1% portion of the fund. My near term bias, until the market chances character and improves technically is we are still in downtrend until we back break above certain resistance levels on the index charts.

I am also looking at candidates who broke down below their 50 day moving average, and are not bouncing too well today. While obviously the recent downturn has not spared anyone, I'd like to see on days like today some dead cat bounce and some names have shown very little. These are 3 examples and they also tie into some fundamental themes.

First, Freeport-McMoran Copper & Gold (FCX): While I do like the gold aspect that is only 10% of sales; 80% of this company is copper. If there is indeed a global slowdown like I predict, copper is the type of base metal that will get hit first. The metal has been pretty weak the past 6-8 weeks as well. If I want exposure to metals I'd rather be in iron with some firm 1 year contract pricing (although in case of global slowdown people won't care about the 1 year pricing in iron either and toss out everything commodity related). I do still have copper exposure through Sterlite Industries (SLT) but since this is more directly exposed to the Indian domestic market which (while potentially slowing in the future) should still show far more growth than domestic markets.

Technically, Freeport-McMoran has broken its 50 day moving average of $104, and is not bouncing much today, in fact flat as I write this. Hence I will exit the last of this position. Most of my purchases have been in the low to mid $80s and most of my sales have been in the $107 to $114 range, although today's sale of 75 shares was in the $99s. With the 200 day moving average down at $83-$84, I will take my own advice about a potentially slowing global economy and exit for now. I still like the long term global growth play, but we could be facing some bumps in the road. Also, I am a big believer in "top tick" type of acquisitions and perhaps this BHP Billiton/Rio Tinto might be signaling a near term top - not sure, but my whole portfolio is based on global growth and I'd rather be emphasizing more insulated growth themes at this stage such as agriculture and infrastructure. Those groups are in general bouncing very well today and in a heavy sell off, they will pummeled like anything else, I have a lot more confidence in their fundamentals over the next 2-3 years. This company had been a position in the fund since day 1....

Second, deep sea driller Atwood Oceanics (ATW): While I do still like the 'energy' space long term, I have more than enough exposure and if a lot of the 'crowded' trades I spoke about this weekend reverse, albeit temporarily (short dollar, long crude, etc), sentiment might turn for many energy names. This is my same worry in the solar stocks. While other parts of the energy chain have much more reasonable valuations than solar, if crude drops, lemmings tend to act in concert and throw everything out.

Atwood Oceanics is also in a very similar situation technically to Freeport; in that it broke yesterday below its 50 day moving average of $78 and has not bounced that much today. It trades at just a hair below $78 so if we get a meaningful move up it can regain a nice technical aspect on its chart quickly, but I am taking the conservative route. The 200 day moving average is down at $66, which conveniently would match August lows in the name - so if we see continued selling this potentially could be where it falls. Not saying that it should, but in a 'sell the farm' scenario or "the world is slowing down, crude goes to $70" type of mentality, it could.

I've lost about 2% on my Atwood Oceanics position since inception as the stock has traded in quite a narrow range in the time I've owned it (just over a month) - I had cut back the position earlier but these are the last 100 shares out at just under $78.

Third, and probably the toughest to sell is Perini (PCR) an infrastructure play. Perini reported very good earnings, and a nice outlook but the stock just has not reacted as well over the past quarter as its more international flavored peers. While I think this is an error of the market, the price action continues to be weak and the stock continues to trade below its 50 day moving average. That said, the same could be said for a stock I have been adding of late, Shaw Group (SGR) but Shaw Group has much more international exposure, along with large scale energy projects in nuclear so should offer some protection from domestic downside potential.

I do have a lot of infrastructure names as I built quite a basket but I am going to focus the next 90 days on those that most impressed in the most recent quarter - Foster Wheeler (FWLT), Shaw Group (SGR), and Chicago Bridge & Iron (CBI) - that group (ex Shaw Group) along with Jacobs Engineering (JEC) have held up the best in this selloff, so I expect when the market does stabilize later in the year, these stocks should outperform to the upside. Again, on fundamentals alone it is hard to justify a sale of Perini - but it appears the perception (which seems to have held the stock down all of the last quarter as well) is it is too tied to the US economy and hence must slow - even if the latest earnings report and guidance disputed those claims. It is hard to argue intellectually with the herd that is the market and make money consistently, so I will cease to argue (for now).

I sold 200 shares of Perini in the $55s, this was the biggest of the 3 positions at 1% of fund. Most of my purchases were in the upper $40s back in mid August, and most of my sales have been in the mid to upper $50s, so despite a relatively quiet performance I was able to pull out about 7% gain - lagging many of its infrastructure peers of course. However, it's been a difficult stock to time for short term moves...

These sales also help me raise some (not a lot) much needed cash....

Long Foster Wheeler, Shaw Group, Chicago Bridge & Iron, Jacobs Engineering, Sterlite Industries in fund; long Foster Wheeler in personal account

Hmm, LDK Solar (LDK) Down 9% While Rest of Sector Bounces

I don't have any special insight on why this is, but LDK Solar (LDK) is down 9% as the rest of the sector bounces 2-8% from it's enormous sell off. This is the type of price action that is quite scary. I exited the last of my position in the solar mania of ... .last Thursday? (oh how quickly things can change) and reinforces the Wall Street adage - sell your losers. I took a 12.4% loss in the position. [Selling LDK Solar in the Mania the is Solar]

I still think this is name that could spike 40% in an instant if the "all clear" signal is sounded, but each week that passes where we don't hear about the 3rd party audit makes me more concerned. Should be one of the most interesting earnings calls of the quarter - potential for a move either way of a huge magnitude. For riverboat gamblers, a great stock. For me, not so much.

However, it it does report some issues and the stock trades down heavily (err, even more heavily) post announcement - it could create a good opportunity for long term investors. Their business is still legit, and in a nice place in the food chain of the solar industry - and even if their true gross margins are low 20%s instead of low 30%s, they have a booming business. But until we hear from the horse's mouth (3rd party auditors) it's too much risk. My assumption was that they would get those 3rd party auditors in immediately, and we'd have results within a few weeks. Since that did not happen, I chose to take the low risk route and exit.

Seriously, were these stocks really that much higher last Thursday? What a sector - manias are so interesting to watch ;)

No position

Chinese Worried About BHP Billiton(BHP)/Rio Tinto (RTP) Deal

I keep saying these Chinese communists are some of the best darn capitalists I have ever seen....

Interesting article from Forbes detailing some of the behind the scenes moves China is doing to try to block this potential mega merger in the mining industry between BHP Billiton (BHP and Rio Tinto (RTP). There is also some connection to the dry bulk shippers the article states, but I am not buying that angle. I did write on this last week [Rio Tinto Up... $108!] and this kind of merger should raise some serious questions due to concentration of power in such few companies.

this should have serious world regulatory issues as combining the #1 and #3 mining companies in the world should cause some concerns - together they would control 1/3rd of the world's iron ore according to CBSMarketwatch.

Now if thos move only affected 2 US companies I could see it flying with no problem (only superficial jawboning before giving in) - here we celebrate such concentration (anti trust? hahah) but since those pesky Europeans seem to like competition more than our domestic regulation bodies (wait, I thought we were the pure capitalists? Aha, corporations pay for politicians influence, hence when they try to surpress free markets as much as possible its ok - got it!)

• In addition to roiling the mining industry, BHP Billiton's aggressive move to buy rival Rio Tinto has left the dry bulk shippers on the rocks as investors wait to see how China will react. China is the largest customer of the two mining giants and a buyer of 50% of the world’s iron ore production. It appears keenly worried at the prospect of the greater power that BHP and Rio combined could wield over iron ore pricing.
• “Instead of three miners controlling 75% of the market you’ll have a duopoly controlling the market,” said Oppenheimer analyst Tim J. Tiberio.
• The state-owned China Development Bank was reported on Monday by Britain’s Daily Telegraph to have started building up a stake in Rio Tinto (RTP ) aimed at blocking any deal. China Development Bank issued a denial of the story. [Look at those capitalists go!]
• A worst-case scenario is that China could downplay iron ore demand and hold off on purchasing, causing mining and shipping stocks to fall.
• Another scenario is that if the deal goes through, China will accelerate consolidation of its state-controlled steel and coal mining industries, which it has been talking about doing for the last two years. Consolidation could create distortions in the supply chain which could impact dry bulk shipping in the near term, Tiberio said. However, in the long term, dry bulk shipping fundamentals remain strong, he said.
• The last 12 months have seen enormous gains in the shipping industry as steel production and demand for raw materials in China have soared, allowing shippers to raise their rates. In the dry bulk shipping industry, seen even the worst stocks have skyrocketed as much as 150% in the last year.
• But Chinese steel officials and importers have made their displeasure with high shipping prices known ahead of upcoming negotiations for iron ore prices for 2008; the Chinese Iron Ore and Steel Association has said that smaller steel mills could not afford any price increases.
• Commodity analysts predict that China will have to endure between a 25% to 50% price increase on iron ore. Analysts have said that China has tried to hold off or slow down on chartering ships in order to “spook” the shipping industry.
• But Chip Hanlon, president of Delta Global Advisors, said Monday’s pullback was to be expected given how much shipping stocks have risen over the last year. He called the fundamentals on the shippers “unbelievable.” “Every time the market worries about a recession and the market pulls back these stocks pull back,” Hanlon said. “If we do roll over into a recession the stocks will get roughed up. If not, it’s another buying opportunity.”

Takeaway: I agree with Mr. Hanlon, and more than any true pricing decreases for the dry bulk shippers - the risk is more in sentiment. You have seen the past week what it looks like when investors flee en masse out of a burning building. So that makes even investing in the global growth story 'tricky', because the coming US recession (err slowdown), will impact the world. Global growth will slow. But until new ships come online in 2-4 years, pricing will still be high. But as each month/quarter passes investing in a sector like this carries more risk - unlike the areas I have over weight which I believe are far more insulated come heck or high water on the global economy. With that said I am sure once the market gains its feet you will see another ridiculous move up as lemmings clamor for risk in this type of sector. Just keep in mind, every story has a time line and I'd argue dry bulk shippers is a shorter time line than many other secular moves.

The problem is investors won't care about such fundamentals even if ship prices stay relatively high (even a tiny dip a few weeks ago saw these stocks lose 20-30% overnight) and as the past few weeks have shown the stocks will suffer, and suffer badly. These 'perceptions' would also hurt mining stocks. In times of panic fundamentals don't matter. Sentiment can change in a hurry and everything is thrown out. We saw this yesterday in the areas I find most protected from any slowdown - agriculture and infrastructure. The comment I highlighted in gold above also points to why I like Mechel (MTL) despite a huge run in the stock. Coal, and iron ore - and a friend of China... all in 1 stock. With long term contracts I continue to favor iron over the other base metals which will get hit by a slowing global growth story first.

Long Mechel in fund; no personal position

Bookkeeping: Early Morning Buys

As stated late yesterday I could not get my orders for Shaw Group (SGR), Baidu.com (BIDU), or CF Industries (CF) in, in time for the closing bell. So I took today's cash and bought a big swig of Foster Wheeler (FWLT) and a bit of Apple (AAPL).

I am blown away I can buy the company with the probably the best earnings report of the quarter (FWLT) at the 50 day moving average - and again I mention this is the cheapest stock on 2008 estimates in the entire group; and I'd argue those 2008 estimates are too low. While these drops are causing short term price pain on the fund, these are going to be the type of buys that turbocharge returns once calm returns.

One reader said McDermott (MDR) was downgraded yesterday - I did not catch that - and that was the reason the sector was down so heavily. I am more of mind, when the market or a sector wants to go up, they will find an excuse to move it up, and vice versa. Just today McDermott got an upgrade but the stock is still down. So essentially these computers running Wall Street at these quant funds avalanche over each other once strong stocks take a dip, and exaggerate the moves downward (or upward). Now word is out, wow oil could fall to the 80s! (gasp) Perhaps all these energy contracts these global engineering firms have will get cancelled! Oh of course! No mention that when these projects were in planning/negotiation crude was in the $55-70 range, but now that it pulls back from 98 to 94 (with potential to move to low $80s? ohh scary), these projects could be cancelled! Or no more projects will be coming down the pipeline. Got it! :) Much like the oil service stocks, these companies will have demand at crude $65, $75, $85, $95, or $105 - the only difference will be investors perceptions and hand wringing.

The more I watch of late (past 2 years) the more it makes sense how pervasive these quant funds are on price action - when stocks are in uptrend they go far above what makes sense from valuation because these quant funds are momo traders in sheep's clothes... if its up, you keep buying. Once it falters you sell heavily. This would explain the crazy moves in stocks like Baidu.com, Sunpower and stocks that make no sense from any valuation perspective but just continued to go up the past month day after day in relentless fashion. Something I have to store away once the market gets back on its feet, since my propensity is to sell when I see things reach "rich" valuation. I have to remember the computers that run the street are more and more only going off of price action, and valuation is for old school "losers". (until it matters... like this past week)

Going forward my plan is to see if the S&P 500 can rebound to near 1490 and then adopt a bit more of a defensive plan (lighten up on some positions, raise cash and add to some of the UltraShorts). This market still seems headed in a bad way, but it has been so oversold it had to bounce at some point. We've almost had a full 'official' correction (10%) in the NASDAQ in 4 sessions. (about 8% in 4 sessions) Amazing to watch but again, so much of the index is now tied to Apple, Google, Research in Motion, et al - they drove this index up (along with recent moves in Microsoft, Intel and Cisco) and now they drove it right back down.

p.s. if anyone has detail on either the downgrade or the upgrade for McDermott please post it as a comment on this entry. While I still like the company long term, I am focusing more near term on the companies in the sector which reported stellar earnings and 'surprised' up - the ones I was buying yesterday and mentioned in this weekend's "2 Portfolios for Valentine's Day". In general those will be the ones to outperform in the next 90 days (people are so very short sighted in the market).

Long all names ex Microsoft, Intel, Cisco; long Foster Wheeler in personal account

Earnings: WuXi PharmaTech (WX)

One stock that held up well today (up 12% most of the day, finished up 7%) was WuXi PharmaTech (WX) a recent addition to the fund. Earnings came out post close and earnings still matter, right?

Expectations for the company were $33.4M in revenue and $.09 EPS. The revenue number was a slight beat at $34M but a very good beat on the bottom line at $.12. Gross margins on the research mfg side showed a very nice bump but this is the smaller of the 2 business lines. Overall good results, and good growth - analysts are expecting $0.71 EPS for 2008 but I expect that to be bumped up. If they can achieve $0.80 EPS the stock now trades at pricey 37.5x forward earnings but this could be a premium franchise and as they prove themselves I expect to see a lot more business to come there way.

• Revenue increased 77.8% year over year - Laboratory services were $26.7M up 59%, and research mfg was $7.3M up 211%
  
• "Our strong financial performance over the first nine months of this year leads us to raise our full-year 2007 revenue target to the range of $131 million to $135 million, representing 87% to 93% increase over full year of 2006."
• Overall gross margin was 47.0% in the third quarter of 2007, slightly down from 47.4% in the third quarter of 2006. Laboratory service gross margin was 48.2% in the third quarter of 2007, decreased by 4.1% comparing to the same period of 2006, primarily due to an increase in depreciation as a result of expanded laboratory facilities to support future business growth and the appreciation of Chinese Yuan. Research manufacturing gross margin improved significantly from 12.2% of the third quarter 2006 to 42.4% of the third quarter of 2007 as we started to achieve economy of scale as more and larger research manufacturing projects were carried out in 2007 compared to 2006.

Founded in 2000, Shanghai-based WuXi PharmaTech is the leading China-based pharmaceutical and biotechnology R&D outsourcing company. As a research- driven and customer-focused company, WuXi PharmaTech provides pharmaceutical and biotechnology companies a broad and integrated portfolio of laboratory and research manufacturing services throughout the drug discovery and development process. WuXi PharmaTech's services are designed to assist its global partners in shortening the cycle and lowering the cost of drug discovery and development by providing cost-effective and efficient outsourcing solutions that save its customers both time and money. Its operations are grouped into two segments: laboratory services, consisting of discovery chemistry, service biology, analytical, pharmaceutical development and process development services, and research manufacturing, focusing on manufacturing of advanced intermediates and active pharmaceutical ingredients for R&D use. In 2006, WuXi PharmaTech provided services to 70 pharmaceutical and biotechnology customers, including nine of the top ten pharmaceutical companies in the world, as measured by 2006 total revenues.

Long Wuxi PharmaTech in fund and in personal account

Bookkeeping: End of Day Transaction - Selling Strength & Buying Weakness

One day we will all look back at this and share a great laugh ... ;)

In the last 10 minutes I decided to sell some of the stronger positions since I wanted to raise some cash. I was debating whether to do that Friday and did not - of course those strong positions were decimated today. I did not get all the buy orders in time.

I closed 2 positions
Blackrock (BLK) this was a sub 1% position. I really like this financial but with some of the other stocks down so severely the near term upside in those positions over the next few months is now greater in those names than Blackrock.

iShares Hong Hong Kong (EWH), this was roughly a 1% position - if China panics all the Asian related ETFs I hold (Malaysia, Singapore) will fall, but Hong Kong probably most. The ETF was only down 1% today so I just needed to raise some cash.

I reduced
Ciena (CIEN) which has been a relative strength champ and held up today as well, near flat - I just needed to raise cash so I sold 200 of 550 shares; it is still a 1.5% position - same theory as Blackrock, with the panic selling in other sectors I just see more upside now in other names in the near term.

I tried to buy the following 4: Potash (POT), Shaw Group (SGR), CF Industries (CF), and Baidu.com (BIDU)

Only Potash triggered in time - of the 3 fertilizer stocks I own, I as most underweight in this name, since its valuation was the highest. It held better than the other 2 all day but fell on its sword there in the last hour or so. I picked up some at $103s; and its now up to 2.9% of the portfolio. As I said, I want to be overweight agriculture and infrastructure going into 2008 and I sure am now.

Baidu.com is still a small position for me, but I wanted to double from 30 shares to 60 shares, as the stock is now down suddenly to its 50 day moving average. That order did not go in time, and neither did the other two stocks I was looking to buy. So I will have a bit of cash if we open with more carnage tomorrow.

Solar stocks imploded even worse than agriculture and infrastructure today - still not that interested....

As always, keep days like this in mind when everything is easy and everyone is printing money hand over fist. Keeps us grounded. Suffice to say the fund seriously underperformed the indexes today as all overweight groups were smashed to pieces. Amazingly outside of NASDAQ the indexes were not really down much today. Unless we are going back to 2002 type of environment there should be some light at the end of the tunnel here relatively soon as all hot sectors have now been humbled. To say sentiment is awful would be an understatement.

How was your day? :)

Tyson Foods (TSN) Continues to Point to Food Inflation

I have been loosely following the chicken/meat business due to Smithfield Foods (SFD) potential for massive increases in pork exports in the coming decade if a more substantial deal with China falls into place. However, what has held me back and kept my interest in the sector is the specter of inflation in their inputs to feed their animals. And it is also an interesting sector to watch due to the inflation they are passing along to the consumer. If you are newer to the blog I wrote a few entries about this back in September, so click on the labels at the bottom of the entry for more.

But for now Tyson Foods (TSN) reported earnings and despite a big push into (where else) Brazil and China as their quality of food improves (I keep going back to that theme), we have a lot of inflation throughout their business chain.

• Tyson Foods is buckling under the pressure of rising commodity costs. On Monday, the meat processor swung to a profit in the fourth quarter, thanks to drastic cost controls, but issued a dismal forecast for 2008. Tyson now predicts that it will net 30 to 70 cents a share next year, a range that was far below the Street's call. Analysts hoped for a forecast of $1.05 a share.
• Food producers have been hit hard by rising corn and grain prices for multiple quarters. The boom in alternative energy and growing demand for U.S. food items abroad, has tightened supply and boosted prices. The rise in commodities has made it more expensive to feed livestock, which in turn, increases the cost of meat. Thus, companies that process meat, such as Tyson, have felt pressure on their profit margins.
• To offset these challenges, Tyson has dramatically cut operational costs and raised prices on its products. Over the fiscal year, the company saved $265 million, from cost controls, layoffs, and plant closings.
  
• In the fourth quarter, Tyson also increased average chicken prices by 12.0%, beef prices by 8.6% and prepared food by 2.3%. While the tactic worked well in the first and second quarters (See: "Tyson Gains By Sharing The Pain." ), with Tyson exceeding Wall Street expectations, the price hikes have continued to dampen consumer appetite. In the fourth quarter, the volume of chicken sales slipped 3.3%, beef dropped 0.3%, and prepared foods dropped 8.0%.

This is almost a carbon copy of the situation last quarter, except the company if going to run out of low hanging fruit to save costs. So I can only see the pricing issues getting worse for the consumer. Keep in mind the government tells us this is all a figment of our imagination. In their reporting when something gets too expensive, they switch to the next cheapest item and say consumers will substitute - therefore the consumer feels no inflation... i.e. steak too expensive? Well we will ignore steak prices and substitute hamburger for steak and since hamburger is cheaper than steak, prices actually went down. I am generalizing but this is the general methodology. Therefore until we move down to Starkist tuna fish I suppose we could keep saying inflation in food is just in our imagination.

So you are seeing 2 things... many quarters in a row of persistent inflation and I am not talking 1.9% increases, and consumer destruction from higher prices. Things like this is why I say for many companies 2008 estimates are still way too high - profit margins do get squeezed by inflation. And if they are not, the consumer has to pay more to keep margins flat - and the more the consumer pays the less he/she buys. Its a non virtuous cycle - and short of worldwide recession I don't see these trends reversing anytime soon. Again, we live in a world of shortages and it's only going to get worse (with ebbs and valleys of course) as we progress through the next few decades.

On the plus side, it's good for agriculture stocks although you can't tell today. ;)

Long inflation

Really Ugly Out There

This is another day the tape is not telling the story. Looks like the emotional selling is coming to fruition now - as many winners are being tossed out, and entire sectors with no regard for differences between 1 stock and another. Even the teflons, i.e Research in Motion (RIMM) are seeing double digit % losses. My watch lists look like a personal bear market, yet the indexes are flat for the day - shows you how much financials and consumer discretionary weigh on the indexes. Talk about a bipolar market.

This is very similar market behavior to the lows in mid August in fact (although back then entire indexes were falling whereas now we seem to be doing a rotational correction), but at least then we had a Fed surprise cut to change the mood. Right now we just have to wait for people to give up. People like me who continue buy on dips. :) I see page views to the blog today took quite a dip from levels of the past 3 weeks, so I am going to use that as a contrary indicator that otherwise bullish people have started to give up. Or it could just mean... that my blog is not that interesting today. ;)

On the good side, this is creating some nice values in sectors that previously were either expensive or fairly valued. This is also healthy to wash out the speculation we had been seeing roll from one sector to another over the past 2 months. On the bad side, we don't usually like things that are healthy for us, and this is no exception. This is going to be a very ugly day, and it's going to take a lot of work the rest of the quarter to make up for some of the damage done today.

Gosh, it seems like only yesterday that a NAV of $12.00 was so nice; now we've already crossed below $11.00. How fleeting the good times are. ;) And again, index shorts would not really be helping much today nor would UltraShort Financials or Real Estate which are down 2-4% today from oversold levels. The Russell 2000 is only down a fraction. So even the UltraShorts would be working against me.

Not much to do now but hold on for the ride and look at that chart in August (and February) and remember how that was a great buying opportunity. It is very easy to look back at a chart 2-3 months later and think "why did I not buy then" or "why was I selling into that pain" - the chart doesn't show the emotion of the moment. Actually the uglier it gets now the quicker we can begin forming a bottom in these former high fliers. And since its getting ugly we might be getting there by mid week at this pace.

What's Working Today? And Why Not Cutting Bait.

Someone made a comment earlier today re: moving out of stocks that had broken trends in sectors I am favoring. For those following along at home, but not reading the comments my response was in a general sense, running a mutual fund is different than how I'd treat say a hedge fund or a personal account. One example I used was Blue Coat Systems (BCSI) - just a few short weeks ago this stock broke its 50 day moving average, made a run back at it (from below) and failed - this was around $40. In my better safe than sorry vein I sold 1/3 of this very large position (500 of 1500 shares) In the interim the stock has dropped to low $30s (but what hasn't). In a personal account or a hedge fund with active trading you'd probably dump the whole position and come back later once it has put in a bottom. Same could be said for some of the stocks weakening of late, especially today. But I am trying to take a more mid term perspective with this fund - I try to keep a core in positions I like in the long run and then trim them back when they are really doing well, and buy more when they fall to major support levels. Even simply by doing that, I show a much larger than normal 'turnover' ratio than the typical mutual fund so hence this is not the type of fund you'd prefer to have in a taxable account since gains are distributed and taxable at year end.

But if I went to a full bore trading strategy (which again is not suitable for this type of vehicle) I'd be cutting positions much more wholesale and making much more aggressive short term moves. For example, last week I was a day early and bought Nordstrom (JWN) since retailers were seemingly washed out. This is a non typical 'trade' since 90% of positions here are longer term in nature (even if I add/remove from the edges of each position). But as of Friday you could see financials were stable as were retailers. So in a hedge fund where you are actively trading you'd go (for a short time) into a heavy long position in these names due to their relative strength in a terrible tape. But obviously I am not doing that here, and even on this 7% pop in Nordstrom I took it out of the fund (my goal was mid $30s+), and pushed the money into positions I feel comfortable holding for months/quarters. So it is a different mind set and time frame. There are quite a few things I see each week that I cannot take advantage of. For example, on the short side I mentioned Coach (COH) and Polo Ralph Lauren (RL) back in August as shorts, I mentioned restaurants ex Chipotle (CMG), in the recent mania I mentioned Macau flavored casinos as looking rich, dry bulk shippers overextended (Dryships is down 40% from peak), and last week solar stocks as in full mania. So these are all very good offsets to long positions that would of led to a lot of outperformance but 99% of funds cannot short and Marketocracy.com funds can only be 'long only' or 'short only' - thankfully we have UltraShort ETFs but they are more blunt tools, rather than fine instruments.

So overall, timelines have to be longer with a mutual fund, and precision is lacking to some degree, especially on the short side. Many opportunities are just not available since you are essentially long only or at least long 'mostly'. With that said, as I wrote late last week and this weekend, retailers and financials are overdone - there will be a time to be negative again but for now some of the leaders? Try Coach and Polo Ralph Lauren :) There will even be a time to buy these sort of stocks for a fund like this where the time frame is longer than a week or two; just not yet. In all my missives about Coach I have tried to end it with "I really do like Coach in the long run" etc. But in general, other than my UltraShort hedging, I am trying to avoid any holding periods that are quite that short (a few weeks or less) with the vast majority of the fund.

Again my mission here is to see if I can beat what the vast majority of funds are doing, by playing by 'their rules'. So while I might see some great short term opportunities I usually will only blog about them in a general sense i.e. 'this mania is getting long in the tooth in ABC sector' or 'retail stocks sure look washed out'- since taking advantage of the very short term dislocations in the market is not playing along with the theme of what a typical mutual fund can or will do. Does that hurt performance? Yes. But that's a function of the system, so I am trying to stay within that framework.

'Tried and True' turn into 'Heartbreakers'

Talk about timing! Yesterday's post was a comparison of two baskets - stocks that have held up from the past week and a half storm versus those that did not. Good thing I did that post last night or else today all I'd have left are 'Heartbreakers'

Now in retrospect on a day like today you can get the best relative strength stocks on short term heavy dips. Best of both worlds. If you have cash and patience - something we all could always use more of...

I think from Friday's prices both portfolios would probably have similar results in 90 days; but on today's prices where many of these stalwarts were walked off the plank, I think the Tried and True portfolio will really outperform. It will be interesting to check back and review in a quarter.

As an aside I checked my favorite fund manager Mr Heebner, and in his one fund he runs most like a hedge fund CGM Focus, he cannot be having too good of a day either :) We have a lot of similar holdings, if not the same names - the same sectors. If his portfolio looks anything like mine today, I am sure he is not in the best mood hah. That said, his long term performance is outstanding so I am going with the same tact - the best stocks will get hit every so often. I was just off (applying all that cash Friday) by 24 hours, or I could of really set up the portfolio even better going forward. But on the bright side I love the composition of the fund now in terms of holdings and weight of each holding, now it's just a matter of the dark clouds to pass. Unfortunately, until we clear this S&P 1490 level the bias is still to the downside and bounces like this are more for selling than buying.

Solar Sinking and Other Transactions

To raise cash to take advantage of these bargains I had to sell something - I decided to close a minor position (less than $5K) in Intercontinental Exchange (ICE) - the position was not large enough to have any material impact on the fund so I wanted to use that cash to add to other positions.

I also reduced my Garmin (GRMN) stake - the reasoning here is mostly because I need cash but also because Garmin looks to be locked into a bidding war for Tele Atlas - until this is resolved the stock could have some overhang. Further, if they do win, while it would be good for the long run, it would hurt 2008 estimates by a pretty significant magnitude.

With this cash I added to Mechel (MTL) the Russian/iron ore/steel play which until today had held up incredibly well, more Mosiac (MOS) [I was debating Potash or Mosaic], and Shaw Group (SGR) - the trio of Foster Wheeler (FWLT), Shaw Group (SGR) and Chicago Bridge & Iron (CBI) had the most impressive earnings results in this last quarter so they should face the least headwind going forward over the next 90 days. Hence when they are marked off on sale like this I get more interested. I already have a 4% stake in Foster Wheeler, but if I had more cash I'd be a buyer there too. Despite some damage today all these charts are still technically in decent shape with the stocks holding their 50 day moving averages. That said, if we get a 'waterfall' type of climax selling event, it won't matter much what the charts are doing or saying.

One might ask, why not solar as those stocks are down very heavy today as well. I just think the valuations in that sector are STILL stretched (aside from Trina Solar (TSL)). It is interesting to watch Yingli Green Energy (YGE) sell off the hardest since its earnings. My thesis back in August was once this company reported a full quarter in public life, while its operations are very good, it has a very large share count for its size and its earnings PER share would suffer. So despite a strong quarter, it was only able to book $.18 EPS, which in no way should support an upper $30s type of stock price it had last week - it is now in the upper $20s. My call was much too early, but it is nice to see reality hit some of these stocks. The other issue is the continued pressure on margins from polysilicon shortages. This is part of the reason JA Solar (JASO) is seeing pressure despite outstanding results. And with some of the weaker names in the group set to report I don't want to be very exposed to this sector until more info is available. Last, the 'type' of investors piling into these stocks of late do not lend to stability. Hence, I'd rather focus on my 2 favorite groups, agriculture and infrastructure - all the companies hav reported - we have seen who is doing good and who is doing great and now we have a chance to buy those doing great at lower prices. Could they go lower? Certainly - we are in baby out with bathwater time. But despite the hit being taken short term, these are the 2 groups with the best fundamentals (to me) in the go forward 1 year period. And unlike solar I don't see any margin pressures. Hence why I am not stepping up any buying of the solar stocks at this moment.

All that said, with my overweight in these areas the fund is going to take a serious hit today.

Long all names but Yingli Green Energy and Intercontinental Exchange in fund; no personal positions

Rolling Correction Runs Through Agriculture/Infrastructure/Oil Services

With a pretty benign market overall it is interesting to watch the selective smashing of the last strong sectors - numerous names in agriculture/infrastructure/and oil services are being dismembered for 6-9% haircuts - only the latter has any 'justification' (a bit lower oil prices). I guess everyone gets their turn in this environment; even those with solid fundamentals.

Who imagined Nordstrom (JWN) would be the best performing stock, up near 7%. As I mentioned late last week - the really bad sectors look really washed out so now its time to raid the strongest sectors it appears.

And on that note I am selling my Nordstrom position (which was more of a short term trade) and funneling the money into agriculture/infrastructure

I bought 100 more shares of Mosaic (MOS) and I started a new position in Chicago Bridge & Iron (CBI) which aside from Foster Wheeler (FWLT) had one of the best earnings reports in the group, and I was patiently awaiting a pullback - well finally today we got one so I started this new infrastructure name today. As I've stated these are 2 groups I want to be overweight going into 2008.

Long Mosaic and Chicago Bridge & Iron in fund

Two Valentine's Day Portfolios: Heartbreakers or Tried & True?

I am having a running discussion with an investor interested in the future "real" mutual fund via email, on the merits of buying stocks with relative strength versus those who have been taken out behind the barn and shot. It is an interesting thought process, and I am wondering what a basket of each type of stocks would show in terms of performance after 1 quarter. So, in the spirit of the ever popular post "12 Stocks to Buy on the Next Pullback", I decided to make two baskets of stocks that look interesting now, and we can check back to see how they are doing in 90 days - right around Valentine's Day. With the market down of late, we can clearly see a distinction between those stocks that have crashed and those holding up well. So it's a good time to test this, and in the spirit of the holiday, I am going to call the relative strength basket "Tried & True" (TT) and the smashed stocks "The Heartbreakers" (HB)

I will try to break these stocks down by sectors, although there will be some wildcards - each portfolio will have 10 names - I own all but 1 of these; I will use Friday's closing price.

First you always need an agriculture stock - it is hard to find a true Heartbreaker in this group since it has held up well, but agricultural equipment maker CNH Global (CNH) is down 10% from last week's highs, so it will qualify. Tried & True? Any of the 3 major fertilizer stocks I vouch for on a nearly daily basis.

HB: CNH Global (CNH) $60.81
TT: Mosaic (MOS) $71.04

My other favorite sector is the infrastructure group - again very hard to find a true Heartbreaker but Fluor (FLR) has crumbled from the $170s to $140s and now is below a key technical support level, the 50 day moving average. Tried & True candidates would be Foster Wheeler (FWLT), Chicago Bridge & Iron (CBI) or Shaw Group (SGR)

HB: Fluor (FLR) $140.43
TT: Foster Wheeler (FWLT) $150.77

Next we go to big cap tech, what I like to call the teflon stocks, which until this week was full of Tried & True's. Golden child VMWare (VMW) has tanked on the typical "the end is near" talk now that some other companies have tried to buy smaller companies somehow related to virtualization and of course they will be eating VMWare's lunch - of course (sheesh can't we let companies thrive for more than 1 quarter before we start talking about the end of their competitive advantage?). With the stock breaking its near term support of the 50 day moving average it has Heartbreaker written all over it. In the other camp, we have the 'horseman': Apple (AAPL), Google (GOOG), Baidu.com (BIDU), and Research in Motion (RIMM) - all in nearly identical spots - pulled back some here in the past few days but up until Tuesday showing no weakness. Any could be chosen, but I chose Google since it is still the farthest from its major support (50 day moving average)

HB: VMWware (VMW) $87.74
TT: Google (GOOG) $663.97

Next we need a networking stock - oh how the mighty Cisco (CSCO) felled many trees - many candidates in the heart breaker category but I am going to go with the fallen Blue Coat Systems (BCSI) - this poor company has not even reported its earnings but has been shellacked by the "perceived" bad news from competitors Riverbed Technology (RVBD), F5 Networks (FFIV), and Cisco. On the plus side is Ciena (CIEN) which has held up reasonably well, and since they sell into telecom customers instead of enterprise, this seems to have allowed the stock to hold up reasonably well.

HB: Blue Coat Systems (BCSI) $31.36
TT: Ciena (CIEN) $44.36

We need a sexy solar stock, certainly the hottest part of the market the past month. Very easy to pick our darlings in this sector - the hottest stock on the planet vs the one dogged by accounting issues.

HB: LDK Solar (LDK) $40.42
TT: First Solar (FSLR) $206.85

We need a (non solar) energy type of play as well - a couple of great candidates for Tried and True such as Core Laboratories (CLB) or CGG Veritas (CGV), but I am going with a refiner of all sectors - Frontier Oil (FTO) a company which amazingly was able to increase profits in an incredibly harsh environment for refining last quarter - how reliable is she? As for heart breakers we have a few candidates as well but I am going to go with National Oilwell Varco (NOV) which has peeled off 13% despite a heck of an earnings report.

HB: National Oilwell Varco (NOV) $71.13
TT: Frontier Oil (FTO) $46.22

Next we need a financial. Wait, did I just say that. Gulp. I do have 2 great Tried and Trues in Mastercard (MA) and Blackrock Financial (BLK) - but with the former possibly enjoying the extra benefit of the hype around a VISA IPO and the latter potentially losing its CEO to Merrill Lynch, this is an easy choice. As for Heartbreakers? Umm, I have a list of about 100. The easy choice would be Goldman Sachs (GS) but I am going to go out on a limb and pull out of the dark (drumroll) Morgan Stanley (MS). Why? Goldman has yet to admit any write downs - granted they could of pulled off the best financial gyrations of all time, but somehow I don't think so [Goldman's Blowout Quarter?] So perhaps some of their teflon comes off in the coming quarter. Now, with Morgan Stanley making a 3 month call in this sector is a tough one. If it were 4 weeks I'd feel more comfortable as financials seem very oversold, but I do believe after a rebound, more bad news will be out by early next year. Hence any heartbreaker will probably just continue to break your heart - but gun to head, with (in theory) only $6 billion more that could go wrong, and a CEO that actually has some respect - MS it is.

HB: Morgan Stanley (MS) $54.20
TT: Mastercard (MA) $193.00

So that gives us 7 sectors in which we have ying and yang, direct comparables to put into each basket. For the last 3 names in each group - it won't be so clean a comparison

The remaining 3 Heartbreakers will be a retail stock (a sector breaking many hearts on the street lately), a dry bulk shipper (breaking many a heart the past 2 weeks), and a smaller Chinese stock (also breaking hearts the past 2 weeks).

HBs: Crocs (CROX) $38.49, Excel Maritime Carriers (EXM) $51.47, WuXi PharmaTech (WX) $28.51

The remaining 3 Tried & True? Let's go with some US coal, some Russian coal/iron, and some Indian copper. So a bit commodity play - of course at risk in all names if the global growth story slows down over the next few months... but thus far all have held up very well.

TTs: Consol Energy (CNX) $55.96, Mechel (MTL) $85.02, Sterlite Industries (SLT) $23.61

So there you have it; two portfolios of 10 names each - we'll check back in 90 days to see who is giving us some loving and who left us at the curb. Do we want to buy the fallen angels or those who never waver? Keep in mind for those technicians out there, almost none of these Heartbreakers would be 'technical' buys until they fall quite a bit more... so we might be early on buying any of these.

Enjoy!

Corn, Wheat, Soybeans, now Cotton? A World of Shortages

I have written many pieces on 'shortages' [Shortages Here, Shortages There] - especially those of the agricultural type. This planet was not built for so many people moving into the consumer stage and a world of shortages is developing - while there will be ebbs and flows, I think the next 20 years will show persistent and rampant inflation, and perhaps some serious unrest over natural resources.

Even something as benign as cotton is now going to be at risk. Why? Why bother to plant something when you can plant something else for so much more money? It's a vicious cycle - when one thing is not planted, it's price goes up - then when farmers switch back to the crop whose price is going up, another shortage appears. And it continues - on and on... as the world's population grows and modernizes. Everyone talks about the very real risks in crude, but I'd argue an even more serious long term issue will arise from the most basic element - water. But I'll leave that subject to another day. I keep coming back to this agriculture trade as one of the most immune to a global slowdown - while (base) metals have some risk from a slowdown in global GDP, the forces at work behind urbanization and more progressive diets (along with more droughts, less farm land, less farmers) won't cease whether China GDP is 12% or 4%.

Keep all this in mind when the CNBC talking heads crow about CPI at 1.9% and how "everyone is over reacting to inflation." Also the story below speaks to the growing protectionism I see only growing over time across many countries as they all experience higher prices, and strains on resources.... keep in mind our wonderful politicos are still subsidizing energy companies (with crude at all time highs), and corn (at all time highs) - there is no subsidy that once given, will ever be taken back - that loses votes. And no one wants to lose votes.

Cotton Subsidies Prompt Trade Concerns

• Growing cotton has rarely been a more risky proposition than it is now, which is precisely why cotton farmer Frank Williams is planning to sow his fields with wheat. From Williams' California fields to the Texas plains, farmers are plowing under cotton -- once the king of U.S. agriculture -- to seed crops that make more money.
• Cotton also has lost ground for another reason that became apparent this week as the Senate debated the 2007 farm bill: The United States' cotton subsidy program is enmeshed in a global trade battle. Last month, the World Trade Organization ruled subsidies handed out to American cotton farmers broke international trade laws, opening the door for foreign countries to levy billions of dollars in penalties against the U.S.
• The current bill on the Senate floor leaves those programs virtually intact, despite the threat of further legal complaints and concerns that international sanctions ultimately could cause layoffs and patchy unemployment.
• For Williams, that risk, coupled with predicted water shortages, is too much to bear. "We can probably do just as well growing grain with just the same amount of water or less," said Williams, 56, who plans uproot the downy Upland cotton he grows in Firebaugh, about 160 miles southeast of San Francisco, and leave in only a lucrative, organic variety of the crop. "It's just not worth it."
• This year, cotton acreage nationwide dropped 28 percent, hitting an 18-year low at 11.1 million acres, according to the U.S. Department of Agriculture. Acreage dropped by about 22 percent in Texas, the national leader, and by nearly 20 percent in California, which ranks seventh in domestic production. The sharpest declines were in the Southeast and Mississippi Delta regions, where drought has parched fields that grew the crop since before the Civil War.
• In 2003, the Brazilian government took its case against American cotton to global trade court, claiming U.S. farm subsidies were driving down the worldwide price of cotton and harming Brazilian farmers. Two years later, the WTO sided with Brazil, an emerging cotton heavyweight, and forced the U.S. to eliminate a particular cotton payment.
• "We're telling farmers to go ahead and grow conventional cotton for a market that has come under a WTO cloud," said Ken Cook, president of the Environmental Working Group, a nonprofit organization that advocates for farm policy reform. "All that does is get us into trouble with our trading partners."
• "U.S. cotton production and U.S. acres are all down, and world cotton prices are at some of the highest levels they've been at in the last five years," said Gary Adams, chief economist with the National Cotton Council. "I question how they could make a claim as to the U.S. program having any detrimental impact on any other producers."
• Still, the threat of billions of dollars in sanctions helped motivate Sens. Richard Lugar, R-Ind., and Frank Lautenberg, D-N.J., to write an amendment they plan to introduce on the Senate floor next week to eliminate subsidies for cotton and all other commodities and replace them with an insurance-type program that all farmers could participate in.
• Brazilian diplomats said they weren't optimistic that would be enough to satisfy their farmers. "This farm bill will continue the practice of giving subsidies to U.S. producers," said Emerson Kloss, second secretary for agriculture and biofuels at the Brazilian Embassy in Washington. "I can tell you that will be a problem for us."

Long inflation; no matter what the government tells us.

Foster Wheeler (FWLT) CEO on Cramer

Looks like more bullish news from one of my favorites, Foster Wheeler (FWLT) - this stock has held up incredibly well this week; its stock was weak ahead of earnings but it had one of the best reports of the quarter (and probably the best outside of the fertilizer stocks) and looks like an easy candidate for $200+ in the months ahead. In fact in a calm market I think this stock would be north of $180 right now. It is still one of the cheaper valuation plays in the infrastructure sector... and remember as I continue to say, go where the money is - countries with hordes of cash made from petrodollars and countries with hordes of cash from trade surpluses. Foster Wheeler covers both.

Citigroup seems to agree with me

Foster Wheeler, which engages in large-scale construction projects like oil pipelines and natural gas plants, shot up as much as 8.2% Thursday after Citigroup raised its ratings on the stock to buy from hold. The stock move follows a similar rise on Wednesday, the same day Foster Wheeler reported third-quarter net income jumped 70% and declared a 2-for-1 stock split. Citigroup analyst Brian Chin also increased his target price to $197 from $180.50 a share on strong third-quarter results "bolstered by potential Middle Eastern project wins." Chin said Foster Wheeler stands a good chance of benefiting from Saudi Aramco's recently announced five-year, $90 billion energy infrastructure program

From Mad Money

Cramer welcomed Ray Milchovich, CEO of Foster Wheeler (FWLT ), a "Mad Money" favorite.

Cramer noted that the stock had performed exceptionally, but lately there had been speculation that Foster Wheeler's market had been saturated. "Is there any more ahead?" he asked Milchovich.

"Every time we released a quarter, the markets that support these businesses continue to be extremely strong," Milchovich replied. He added that "Saudi Aramco ... just announced their intent to spend ninety billion on oil projects," so there are healthy prospects for the company.

Milchovich recognized the need for Foster Wheeler to show leadership in the clean-energy domain. He said the company is working on carbon-capture technology to help develop clean coal power and has made a $30 million equity investment in wind farms in Italy.

Asked about the company's balance sheet, Milchovich said that Foster Wheeler's leverage ratios are competitive with others in the industry.

Cramer asked about Foster Wheeler's global reach. Milchovich said that "75% to 80% of our business is outside of North America. ... We are truly a global company." With strong performance in the Asia-Pacific region, the company is not exclusively dependent on the Middle East.

Long Foster Wheeler in fund; no personal position

Bookkeping: Weekly Changes to Fund Positions Week 14

Week 14 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: 0.2% (vs 10.9% last week)
56 long bias: 98.7% (vs 81.3% last week)
3 short bias: 1.1% (vs 7.8% last week)

59 positions (vs 54 last week)
Additions: Tesoro (TSO), iShares Brazil (EWZ), Mechel (MTL), WuXi PharmaTech (WX), Excel Maritime Carriers (EXM), Millicom International Cellular (MICC), Baidu.com (BIDU), Google (GOOG), VMWare (VMW), Research in Motion (RIMM), JA Solar (JASO)
Removals: Pride International (PDE), Suntech Power (STP), Yahoo (YHOO), LDK Solar (LDK), Diamond Offshore (DO), Gmarket (GMKT), UltraShort Oil & Gas (DUG)

Top 10 positions = 35.2% of fund (vs 34.9% last week)
45 of the 59 positions are at least 1% of the fund's overall holdings (76.2%)

Major changes and weekly thoughts
Obviously the markets had a tough week - the velocity of moves downward have been obviously much more aggressive than moves upward since the fund was launched in early August. The NASDAQ which had been the leader among the major indexes gave back much of that lead and fell 7% in just a few sessions this week. The fund only holds about 25% NASDAQ stocks (probably higher Friday after I added some new positions in the 'teflon' high tech stocks to the portfolio after they took some major hits late in the week); but there was nowhere to hide this week, although agriculture and infrastructure (my 2 major sector weightings for the now and near term future) held up the best.

As I mentioned throughout the week S&P500 level of 1490 was a key technical point. Once it was broken the next move down was to 1440s-1450. This proved to be accurate. And as I mentioned earlier in the week while an index move down from 1490 to 1450 doesn't sound too bad and is not terrible percentage wise, that doesn't mean the drop in individual equities would not be far greater. Which also (unfortunately) proved to be true. I would say if we go through a traditional "10%" type correction, we are now about 75% of the way there, and it came in a very rapid fashion. The next 2 'stops' for the S&P500 is a minor support level at 1430 and more meaningful support in the 1405-1410 are which is where the August lows were (again I am excluding the 1 afternoon of total panic selling which actually took us down to 1370 on August 16th). So if we continue down these areas would be likely areas of support. In fact a 10% move down from the recent high of 1550 would take the S&P500 down to 1395. The amazing thing is that 1550 level was 8 sessions ago. So this move down has been quite violent with multiple 300+ down days in the Dow just this week. I remember typing that right after the last Fed cut (8 sessions ago!), we were only 1.2% away from all time highs on the S&P500. (and I mentioned it did not make any sense, but this was the logic of the market at the time).

Sentiment is quite bad out there, and until the last hour Friday, which was disheartening in how badly the market weakened, it looked like the truly washed out sectors like retail and financials were stabilizing. While I think we have a lot more pain ahead in the financials, this round of 'kitchen sink' disclosures should pretty much be out there - and the news was finally getting priced into these stocks. While I think we will continue to see more bad news for months and quarters from this sector - we seem to be near an overdone area in this move down. They are almost universally hated at this point. So I'd expect some oversold bounce soon (which should just be shorted since we have many more layers of the onion in financials to peel back and the stink is immense). As I wrote about 2 months ago when the first round of "kitchen sink" quarters were disclosed from these financial companies, and the market cheered and everyone from Fed governors to politicians to Treasure officials to the TV pundits told us "everything was contained"; we still have a whole house full of "sinks" to get through. If not, we would not be creating "self funded" bailout products. Hence, other than for very apt traders with short time horizons, this is not a sector you want to be playing with for more than 1-2 week counter trend rallies. Very similar to the home builders over the past year. Unfortunately this sector is a lot more important than home builders as it "was" >20% of the S&P500 but with the recent carnage it's already fallen to 18%. By the time this is all said and done I think sub 15% will be easily achievable.

As for retailers, aside from adding to Crocs (CROX) on its major emotional selling I did add my first (traditional) retail stock to the portfolio in months, Nordstrom (JWN) - again this is more of a near term trade on a very oversold sector/stock. Americans will still spend this Christmas, but just at a slower pace than year's past. Unlike home builders which are facing headwinds for many years, and financials which suffer from opaqueness and not being open about their downside credit exposure (along with a loss of revenue streams in the future), retailers will still sell things - Americans still love to consume - its simply a matter of ratcheting down expectations. In the near term, I think we are reaching the point where it is getting priced into these stocks, but again, not an area you want to be overexposed to as I believe the US is heading into (if not recession) a prolonged slowdown.

Timing the market overall is a fools game, but at this point the sentiment is quite bad out there, and it is certainly possible these indexes could fall further before we bounce - usually the last part of a move down is the truly 'emotional' part, and panic selling could ensue in the last leg. That said, we should be near to some sort of stabilization relatively soon, even if it's only for a few sessions. Again I don't have access to my portfolio this weekend, but in a general sense what I have been doing is positioning in areas that will be least affected by US recession and worldwide (eventual slowdown) - although the pundits still say global growth will continue unabated I just don't buy when 25% of the worlds GDP (USA) and another large chunk (Western Europe/Japan) slowing down that the emerging markets will continue to run unabated. While they do have an emerging middle class in these countries to help buffer their slowdowns, they still rely heavily on trade - and healthy trade partners. China still has food inflation and this past week actually uncapped (by 10%) their energy costs so their consumers are paying more on that end too. A world with China and India GDP at 5-8% range will be very different than a world with 10-12% GDP growth from those countries. It is just a matter of when. Base metals such as copper are weakening the past month +, so we might already be seeing the first signs of this slowing.

There are some extremely crowded trades (meaning a lot of people are *in* them), such as short US dollar, short financials, short retailers, long oil, long gold, etc. I am seeing tons of articles on Seeking Alpha with these positions (shorting financials? Now? Where were they 2 months ago when I was shorting them - oh yeh they were convinced last quarter was the kitchen sink quarter) but anyhow, these positions are now pervasive and what the masses are doing. While Big Ben is painted into a corner and must continue to cut rates in my opinion (watch what they do, not what they say) due to our over leveraged financial society, and this will only serve to weaken our dollar further, you'd expect some counter trend rally in these areas soon. When everyone is doing a trade 1 way, usually something snaps and you have a counter rally (however brief). But I still think these trades work for a long time to come because as we continue to cut interest rates, other countries such as Australia are actually raising rates (just last week) to fight inflation so capital will flow to those currencies - the world realizes inflation is real and rising. Only in the US do our gov't reports try to tell us, no it is not, it's all a figment of your imagination - just ignore those small items in your budget like food and energy. But average people living real lives in the US know the reality. Hence we have some serious trouble brewing, since we are the 1 country whose financial system is in such serious trouble we have to go against world trend of rising rates (or at minimum holding steady) to combat inflation. So Ben is between a rock and a hard place. And we have to bail out the financial system and worry about things that affect the 'common folk' (inflation) at a later date. So we will all suffer from that.

Remember, as recently as July the Fed was signaling increasing interest rates .... last, crude finally seems to be reaching a point where small signs of demand destruction are finally happening. Due to price controls in China we have not seen it there (but again, those limits were lifted by 10% this past week), and due to gasoline prices not rising along with crude (until this past week) we have not seen it here in the US. But it appears to beginning to happen. If crude were priced in a stable currency and not the peso... err, dollar - I'd expect to see a sharp drop coming soon enough, as this has turned into a speculation trade (all that liquidity the Fed is creating has to go somewhere). But if we get this counter trend rally (everyone hates the dollar), even for just a few weeks, we can see crude prices drop significantly (which would be great for the refiners I have been building positions in).

In a general sense if we do get this truly emotional selling next week, I do expect even the stalwart positions in the portfolio that have held up (agriculture/infrastructure) to take a hit, albeit it a short one in terms of duration, although they could be sold down hard. I also began (or added to) small positions in some of the high beta tech stocks late in the week, along with stocks that either have been hit severely or held up the best in this carnage - with the assumption that by showing the best relative strength that these will be the areas investors flock back into once the coast is (relatively clear). So, like everyone else, I don't know the near term for the market, but I am overweight in areas with great pricing power, and/or heavy backlogs - at the top of the portfolio. Once emotion subsides I expect these areas to provide the best return. I did drop most of my hedges (cash/UltraShorts) this Friday and went to nearly 100% long - probably a bit early, but unlike in mid August when I was 100% long much too early - this time around I was much more patient and got some nice prices in equities on deep sales.

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. On Monday, based on refining margins starting to improve and the tender offer in the sector I added to my 1 refiner, Frontier Oil (FTO) and started a new position in Tesoro (TSO). Later in the week, after some stellar earnings from Frontier Oil, I added even more of this position. If the company can make earnings in an environment where crude (their input) is so high, they should be able to really print money if crude shows any signs of weakening. And if not? Well they are the one refiner which was able to INCREASE profits in the face of a huge move up in crude this past quarter.
2. There had been some pullback in the previous week as well as Monday in the foreign indexes so I added to my basket of foreign ETFs. I added to 3 current positions - iShares Malaysia (EWM), iShares Singapore (EWS), and iShares Hong Kong (EWH). I also wanted to start 2 new position, iShares Brazil (EWZ) and iShares Australia (EWA) - unfortunately due to an error in Marketocracy.com process, the iShares Australia purchase did not go through.
3. I started 2 small stakes in new foreign positions on Monday, Mechel (MTL), a Russian coal/iron/steel play - this is my first foray into Russia and probably my only as it is the one 'BRIC' country I do not favor, and I also began a position in Wuxi PharmaTech (WX), a Chinese pharma outsource company - I added to both positions as the week progressed - the former held up incredibly well all week (relative strength) while the latter weakened considerably through the week so I was able to buy more at far cheaper prices at the end of the week.
4. I initiated a stake in my first dry bulk shipper, Excel Maritime Carriers (EXM) after a very severe pullback; the stock pulled back throughout the week so I bought in increments later in the week as well.
5. On Tuesday, I was worried with how Foster Wheeler (FWLT) was reacting ahead of earnings, so I cut back the position by half in a 'better safe than sorry' scenario; obviously the company nailed the quarter, and I was very fortunate that the market was down so heavily so I could get back into the position the next day at only a 4% premium from where I sold. The stock tacked on $10+ the very next day.
   
6. I closed the last of my Suntech Power (STP) position as solar had been extremely frothy for the past few weeks - I was a few days early (as always).
7. On Wednesday as the market continued to tank I added to 3 existing positions in sectors I am overweight, McDermott (MDR) in global infrastructure, CNH Global (CNH) in agriculture, and National Oilwell Varco (NOV) in oil services. I also began a brand new position in a retailer as the sector appears close to being washed out. Not a typical buy for the fund, and more of a near term trading opportunity - I added Nordstrom (JWN)
8. I started a beginning stake in Millicom International Cellular (MICC), a cellular company that does business in Africa and more remote countries in South America (I added more later in the week)- to raise cash I had to sacrifice something so out the door went deep sea driller Pride International (PDE).
   
9. On Thursday I wanted to raise cash and buy some more UltraShort exposure so I closed a short term trade on Yahoo (YHOO) that turned awry, I closed a position in LDK Solar (LDK) on the solar mania tact (again, a 'better to be safe than sorry' trade), and I closed another deep sea oil driller Diamond Offshore (DO) - some bargains were being created on the long side as well, so I needed cash.
10. With some of this money I began a position in high flying tech stock VMWare (VMW) which had fallen quite severely in the past week - I added to this position later in the week.
    
11. Late Thursday I actually had some pretty heavy short exposure but the market turned up in the last 2 hours (ex-Nasdaq) so I decided to lighten up a bit going into the close as we appeared to be very oversold after a week of heavy selling... of course this proved to be a bad move short term as once again Friday morning... we commenced selling.
12. On Friday I started back up positions in Google (GOOG) and Baidu.com (BIDU) - the twin powers of search, along with the fund's first ever exposure to Research in Motion (RIMM). I also added a bit to my Apple (AAPL) as tech stocks were smashed for the 3rd straight day. None of these are huge positions, but now I've built a basket of the high tech stocks that (once the market calms down) will be where institutions run right back to, to get performance.... to raise some of this cash I had to close out my position in UltraShort Oil & Gas (DUG)
    
13. I closed Gmarket (GMKT), the S. Korean e-retailer which had pretty uninspiring earnings.
14. After being completely out of solar for oh... 24 hours... I did get back in, starting a new position in JA Solar (JASO) Friday after stellar earnings, but the stock had run up so quickly with fast money chasing the solar sector, that the stock tanked Friday - especially late in the day. While the earnings were stellar and the guidance was "good", people are already worrying about if they can keep up the pace (which should moderate), and if margins can keep up. Always something to worry people.

So this was a VERY atypical week since so many positions were either completely EXITED or ENTERED. I had substantially reduced my tech stock exposure in the past few weeks (sold off Baidu.com and Google last week in fact as they had just run too much, too quickly), so this week was an opportunity to begin positions in stocks that had been hit very hard. I also had to find some cash to take advantage of new opportunities that are now popping up in the market so I had to find some positions to sell to keep my concentrated approach of 55-60 positions maximum. Hence the very large turnover of positions this week.