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