Apple (AAPL) the Cultural Icon

I did a series of Apple (AAPL) articles last quarter mentioning how the company is turning from an electronics manufacturer, to more of a cultural 'cache' standard. I was watching 'Cavuto' a few weeks ago on the new Fox Business Channel, and one of the icons of 'cool' Diddy was hawking his new line of vodka, and the host asked him where he wanted to position the brand - the answer was "I want my brand to be thought of like Apple" - just anecdotal commentary but much like Nike (NKE) in the Jordan years, when sneakers were the be all and end all, Apple is turning into far more than just a seller of product. I have been thinking myself very lucky to be able to buy this stock of late around $160, and have taken the position up to 2%+ of the portfolio. If there were not so many other names on sale I would have an even higher concentration in this name. While everyone likes the Google (GOOG) I still think there is potentially some risk from advertising slowdowns in the coming year, whereas Apple is simply a freight train. In fact during last quarter's report, the company actually guided above analysts expectations, which for this company which usually always lowballs the guidance, tells you all you need to know. I just came upon this article regarding the Apple shopping experience and just reading it makes you want to get out to a store to experience it - they are as we say a game changer.

• Not a cash register is in sight. The electronics on display are all powered up and ready for use. Personal trainers, specialists and newly minted concierges in aqua blue shirts make the Apple Store feel part salon, part Internet cafe -- just without the espresso.
• Over the past year, Apple Inc. has revamped its 201 stores, changing the layout, adding services and increasing its staffing. The "concierge" service that Apple launched last week is only the latest initiative designed to draw more visitors and bolster already record-breaking sales.
• Clipboard-carrying concierges greet customers at the door to direct them to the right section of the store or to the personal shopper or trainer with whom they had made an appointment.
• With cash registers removed, a common question nowadays is, "Where do I pay?" The store employee would instantly reply, "Right here," and whip out a portable scanner from a hip holster. Receipts are e-mailed on the spot or, if the customer prefers, a paper version emerges from printers hidden underneath display tables.
• It's not uncommon to find people dropping in to hang out, use the Internet or let their children play on the Macs on low-legged tables. Personal blog entries, complete with snapshots of the authors in the store, are sometimes written on the spot. "We try to pattern the feeling to a 5-star hotel," said Apple's retail chief, Ron Johnson. "It's not about selling. It's about creating a place where you belong."
• The retail stores hosted more than 100 million visitors and produced about $4.2 billion in revenue in Apple's fiscal year that ended in September, up nearly 24 percent from $3.4 billion the previous year -- in line with the Cupertino-based company's overall sales growth.
• And Apple says that more than half of the computers sold at Apple stores are to people new to the Macintosh platform. After hovering for years with a 2 percent to 3 percent share of the PC market in the United States, Apple's slice has now grown to 8 percent, according to market researcher Gartner Inc.

Not exactly like your recent Target or Sears experience, eh?

I do believe both Google and Apple to be the de facto "entertainment" twins in the coming years, intertwining themselves in all pieces of the digital convergence. While I do hold a position in Google and thus far its been immune from any slowdown (along with simply dominating it's competitors and taking more market share by the month), it's a bit more tied the corporate sector (i.e. advertising) whereas Apple is tied to the consumer (until enterprise starts buying Macs en masse - one day). While the consumer is slowing one area they will voraciously eat up is gadgets - we saw this last Christmas. So in many ways I see less near term (6 mo to 18 mo) risk from the economy with Apple than I do with Google. Strange I know.

Technically, Apple has held the 50 day moving average ($163-$164), a key technical support level, throughout this sell off. Granted, if we have utter giving up in the market, Apple will not be immune but thus far in the face of a serious correction, the stock has held its ground. But any sell off will not be due to fundamentals, as this company continues to hit on all cylinders. Much like Nike, we have a brand that due to design prowess and cool cache, can sell very similar product for very large premiums compared to competitors. This leads to margin expansion and profits, profits, profits. If we could get some benign market action over the next 6 weeks, I think we see Apple north of $200 as we enter the New Year. As a matter of fact, I am so confident in the gadget play thesis for Christmas, I am going to beginning a position in Best Buy (BBY) early next week as well.

Long Apple, Google in fund; no personal position

Bookkeeping: Weekly Changes to Fund Positions Week 16

Week 16 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. I cannot short individual equities.

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

Cash: 2.7% (vs 0.0% last week)
51 long bias: 91.3% (vs 93.0% last week)
5 short bias: 6.0% (vs 7.0% last week)

56 positions (vs 56 last week)
Additions: Gafisa (GFA), Ultrashort Xinghau 25 China (FXP), LDK Solar (LDK)
Removals: GlobalSantaFe (GSF), Fluor (FLR), iShares Singapore (EWS)

Top 10 positions = 36.2% of fund (vs 34.9% last week)
46 of the 56 positions are at least 1% of the fund's overall holdings (82.1%)

Major changes and weekly thoughts
Not much to add this week from previous week's thoughts; we continue to go down on the same news each day. The indexes have now all hit 'correction' phase of 10% levels. From here things can either devolve into a very dark hole or some stand can be made. S&P 1440 continues to be a critical level, in fact we ended there Friday. Go forward, until the technical picture improves and S&P clears back over 1490 the battle plan is to remain cautious and taking (some profits) on swings up, and increasing hedges on upswings - and doing the reverse at the lower end of the range. Unfortunately the lower end of the range keeps dropping, and this pattern of lower lows is troubling. Until that changes it is hard to signal a new trend. On the mildly good news front news channels and finance websites have gone from giddy outlook a month ago to talking about nothing but troubled home owner, and credit crunch - issues I was bringing up in August/September but the market could care less about since Fed was all powerful and would save us. That is the tricky part of the market - you can be correct intellectually but wrong "stock price" wise - as the market continued to rise week after week in the face of ALL the same issues it is now suffering from. As I always say - it does not matter, until it does.

If we can break through this 1440 level and put in some sort of oversold rally I'd love to see a move to 1490 on the S&P. We did that on that huge rally a week ago Tuesday but the entire move came in 1 and a half days so aside from active trading it is very hard to take advantage of those type of moves. For now I will continue to raise cash (I try to limit myself to maximum 20% cash and 15% short ETF to respect the 'rules' of a typical mutual fund) - but this is an area I will probably try to go to. And from there (until proven otherwise) we should assume downward movement. Eventually this assumption will be wrong, but until the trend breaks, one simply follows it. Again from a contrary point of view, it seems most people are now giving up so at times the best rallies are made from those type of conditions, but one must still brace for potential of retest of August lows. If *those* lows are indeed broken than it will be an ugly time indeed. This has been an awful month and one would expect some bounce though even if we are in longer term downtrend. Perhaps some nice retail sales (or "not as bad" as everyone expects) will provide some near term sentiment change. We do have the prospect of Dec 11th Fed meeting coming soon, and as I have been stating despite the jawboning of "we care about inflation" - the risks to the financial system are too great and greasing the financial engine of the US is the Fed's main concern. Unfortunately a complete and utter lack of trust in what the financial companies are telling us is the mood of the day and will be a problem for many more quarters. But that does not mean you cannot have counter rallies.

We did finally begin to see some worries about international growth slowdown for the first time this week - still whispers though. I did add some short ETF positions of late to begin taking advantage of a theme I see playing out in first half 2008, and I also sold 2 countries out of the portfolio - Hong Kong and Singapore. While these markets are also near term oversold, I am hoping for some nice bounce to build these short ETF positions into more significant parts of the portfolio heading into next year.

In terms of the fund I continue to build on those stocks with the best combination of fundamentals and strong(er) technicals - it is all relative at this point. Those stocks lose "less" than others. For a mostly long portfolio - that's unfortunately the 'winning' strategy. Since the fund began it's been a weird era - two periods where EVERYTHING was sold down heavily, one period (late August/mid September) where EVERYTHING went up, and then a nice 5 week period in later September through mid October where stocks actually went up based on fundamentals. This is the time the fund really outperformed, when stock selection mattered. But of the 16 weeks of fund life, 11 weeks have been marked by either indiscriminate selling or buying - neither of which is easy for a stock picker to outperform. I hope we soon return to an era where the companies performing are rewarded and those not, punished. Instead of everyone up or everyone down.

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. Monday I did not do many large transactions, just some smaller ones adjusting allocations - selling down some short ETFs and adding in small splashes into existing positions - such as the fertilizer names as they pulled back to support. I did add a starter position in one new name, Brazilian home builder Gafisa (GFA) near $36 which was its 20 day moving average and noted $33 was the next level of support (50 day moving average), and a logical place for the stock to fall through, which it indeed did by Friday.
2. Tuesday, after a great earnings report from Blue Coat Systems (BCSI), I cut back the position a bit (200 shares) simply because the market is so weak, and 18% stock appreciation is not to be ignored in this sort of market. I am very bullish on this name and await the technical position to improve, at which time I will happily add more.
3. I locked in some shorter term gains on both Research in Motion (RIMM) and Google (GOOG) - Google actually looked very strong the rest of the weak. These are not major positions, and the trades are shorter term in nature since these names have been punished so heavily of late, this created some nice buying opportunities. So I took the opportunity to lock in profits but in general these names held up quite well all week, and I still believe when the market finds its feet they will be a group to lead it up.
4. I started a new smaller position in the very volatile UltraShort Xinghau 25 China (FXP) - with a few hours I was down 5%, but the next morning I was up 10% on this hedge. I plan to hold this hedge in varying amounts going forward, but it will probably be more of a 2008 play than 2007 in my opinion.
5. I closed my position in iShares Singapore (EWS) - this is simply a play on the weakening of emerging markets in 2008 finally coming to fruition. I continue to like Singapore for the long run as it is emerging as the financial capital of emerging Asia, but it could face some headwinds in the year to come. The index is probably due for a near term bounce as its very oversold but this move was made with the longer term in mind.
6. I added to my smaller position in Suntech Power (STP) in the lower $60s and to Foster Wheeler (FWLT) late on Tuesday as the stock was dropped to $130; I am finding some of these prices on the back of tremendous earnings momentum quite overdone but it's hard to argue with Mr. Market. A year from now these prices will seem like steals.
7. Wednesday, I added to my smaller Agco (AG) position in the face of tremendous earnings from Deere (DE). Agco has held up very well in the face of this market selloff.
8. After Trina Solar (TSL) imploded post earnings, I added shares in the 2 emerging leaders in the sector, Suntech Power (STP) and First Solar (FSLR) - although I am overweight in the former. I also added as a more speculative play the seemingly washed out LDK Solar (LDK) which has its own set of issues, but should be clearing out any skeletons in the closet by early/mid December. I had sold LDK Solar last around $40, so an opportunity buy back 25% lower near $30 was now available. I also added to 2 Indian positions which I had sold down quite a bit in their rallies a few weeks ago, ICICI Bank (IBN) and Sterlite Industries (SLT); my Indian exposure was quite low of late as I sold down my positions into the last explosive rally - last I added more CF Industries (CF) one of my three fertilizer stocks, trading at about 12x 2008 estimates!
9. Friday, for 'bookkeeping' purposes due to a merger expected to close next week I closed out deep sea driller GlobalSantaFe (GSF), and also closed infrastructure name Fluor (FLR) - I've added a lot of infrastructure exposure in this selloff, but in this environment are going to stick with those that reported the most steller recent earnings since this is where the bulls seem to flock to each quarter.
10. Throughout the week I did lower some of my energy services exposure - the charts all look very similar - stocks that broke down below their 50 day moving averages and now are drifting back up to reach those levels, but have yet to break through. From a short term perspective the way I approach this is to sell down these positions until they prove themselves able to rise above these 'resistance' levels and hold them. This doesn't mean I have any change in their fundamentals but if in the near term the market finds a group in disfavor I don't want a large amount of money sitting in these names, simply idle or worse falling. Most of my cutting was in National Oilwell Varco (NOV) and FMC Technologies (FTI). I find both undervalued and once the market warms up to them I will return to larger allocations to these names.

The above do not include the trades in my Ultrashorts which I am trading quite often as the market ebbs and flows - I continue to focus on Russell 2000, Financials, and Retailers; although I continue to believe these are overdue for a rally. I also have added some emerging market exposure of late.

Interesting Survey from Chinese Solar Companies - Price Concerns Already an Issue

Thanks to reader AJ for highlighting an interesting survey from the Chinese solar makers [88% of Greater China Solar Panel Suppliers Set to Lower or Stabilize Prices]

• Despite higher polysilicon prices, most Greater China solar panel manufacturers say they plan to lower or keep prices steady to win market share.
• The Report shows 88 percent of suppliers plan to decrease or keep prices stable, while only 12 percent plan to increase prices.
• "With the polysilicon shortage expected to continue until 2009, most manufacturers are implementing measures to streamline production," said Report publisher, Spenser Au. "These include expanding to gain economies of scale, backward integration and R&D to produce thinner solar cells that require less polysilicon."
• Au said: "Manufacturers are generally optimistic, with 97 percent expecting exports to increase over the next 12 months. However, with excess capacity in the high double-digits, a larger number of suppliers are reducing prices to gain orders."
• What are the major concerns over next 12 months? Investors would think polysilicon pricing but in fact that is #2 (25%), #1 is price competition (60%)

I outlined my longer term theory earlier this week [Motley Fool on China Sunergy]

While this will take a long time (years) to play out, my vision is eventually the leaders with scale will get their cost structure down to a point where they can lower average selling prices (ASPs) to a point where it will cripple the small fry in the pond. Some of these smaller companies are having major trouble building their product above cost (gross margins very low), and while the drop in polysilicon prices (65-75% of costs for many Chinese solar companies) will help these smaller companies, it will also be helping the larger companies. So right when these small fry get to the point where their margins reach levels the leaders are enjoying now (1-2 years from now), the leaders will already be onto the next step - expanding volume by dropping prices. And this will mean another crippling era for the smaller players. Even if the overall pie of solar is growing. Again, just a theory but this is how all commodity businesses work, and solar should be no different in the 'long run'.

The counter argument has been, well the pie is growing so quickly everyone can win. I find that amusing at best; dangerous at worst. While the pie will be growing, and should be growing for decades there can be periods of time (2-3-4 years) where manufacturing capacity far outweighs demand. What happens in those time frames? Basic economics suggest, prices will drop. In fact, I think this would already be happening if not for the shortages in polysilicon - what is perceived as a bad thing (due to the high costs solar panel makers have to pay for their main cost input) is in fact limiting the supply of product. Once these supply shortages are taken care of in the next 18-36 months, the world will be awash in panels. And yes, demand will be increasing for solar products as well, but all you need is an 18 month period where world demand is lagging supply to seriously impair business operations for those without size/scale/cash hordes. We could be entering (soon enough) an era where we have enough supply of panels (in say 2009/2010) to satisfy a level of demand that will be seen in 2013/2014. Don't think this is possible? I liken this to the global glut of fiber we had in the world in the late 90s/early 00's. In the rush to build out the internet, billions upon billions (financed by cheap money and over eager capitalists) of fiber cable was laid out across the world, by land and by sea. The idea was eventually all this cable would be needed as the internet exploded. They were right, it was needed - but they were about a half decade too early. And most companies building these networks either shrunk dramatically or went out of business completely. It is all about timing.

Again, I am a solar bull - but to read the simplistic analysis of "we need alternative energy, every solar company will be a winner" is frightening. There will be winners and losers. This happens in every industry. There will be times when every stock in the sector rises up, as people forget fundamentals and buy any company even loosely affiliated with the sector. That's fine for speculation but for an investing thesis, it will be dangerous to your portfolio. Over time winners will emerge and those jostling at the lower end will be fighting amongst each other for scraps. Think Intel vs AMD but think of 30-50 AMDs coming down the pike. Will all these capacity eventually be needed? Surely! Solar is only a fraction of a fraction of worldwide energy use. But will over eager capitalists (even in China) overbuild (too early) in the quest for riches? I am sure of that as well. And at some points over the coming decade, supply will outstrip demand for shorter periods of times (by shorter I mean quarters or 1-2 years) and in those times the smaller companies will be seeing serious pain. Some will probably weaken to a point they falter completely or get bought out at a serious discount by stronger players.

I wrote in last week's piece on Suntech Power (STP) [Suntech Power Reports Outstanding Results] that in fact, if I were a larger player I would inflict some of this pain myself - the more smaller players you drive out the larger market share you will eventually have to yourself for the "really long" term.

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.

So how do you best increase your odds of finding the eventual winners? Look at size / scale / leadership / research & development / gross margins "today" - some of the companies I have written about in the blog are making their number by 'accounting' mechanisms - i.e. currency gains or by not spending much at all on R&D. While this appeases a very short sighted investor base who only cares about your next 90 days (the only thing that matters is the next quarter type of thinking), in the long run this is a commodity business and those not spending real money to continue to find efficiencies and improve their manufacturing process will end up being the long term losers. Even as giddy speculators are happy they "beat the numbers" this quarter and never read past the headline number.

Again, my theories on what will happen in this industry won't be proven correct or incorrect for a few years - but these are the realities that have occurred in every commodity business, regardless of the size of the overall pie. To think solar is somehow immune is simply putting your head in the sand. Remember... the hordes of Chinese/Taiwanese are coming... more competition = more pressure on prices.

This year alone, the number of solar companies in Taiwan has tripled, to more than 20. "It's incredible," says Tsai. "Even some companies, I cannot remember the names. It's really very hot."

Long Suntech Power in fund and in personal account

Bookkeeping: 'Rising Tide' Performance Week 16

Week 16 performance of the mutual fund

Comments: While the market had a decent oversold type of rally Friday, the first 3 days of the week were again quite awful, with a series of lower lows in the major indexes each day. No particular sector was much weaker than the rest, it is just a general malaise at this point with little buying interest. In short to make money on the long side the past month, it's been necessary to be a very short term and nimble trader as upside moves have been very short in duration while the selling has been relentless. Not a great environment for buying and holding or a fake mutual fund. Or a real one!

For the fund, I have simply been lightening up a bit here or there on the short term upswings and trying to funnel money into (mostly) the strongest stocks on a technical basis. Many stocks with great fundamentals are being pummeled and I don't see a lot of difference in terms of fundamentals of some stocks getting trashed versus those holding up "relatively" well (by relative I mean not falling 10% each week), but the market has its favorites so as long as they coincide with sectors/stocks I like fundamentally I will focus on those market favorites. But it's simply a 'relative' game of late - trying to stay in stocks losing relatively less than others. The median drop of stocks in the S&P 1500 is close to 25% from their peaks in October so the damage in individual names has been a lot worse than the weighted average indexes are telling.

The S&P 500 was down 1.2% and Russell 1000 was down 1.4% his week. Rising Tide Growth Fund did a bit better than the averages but nothing to celebrate, down 1.1%, and that took some pretty active shifting around to manage. So a slight outperformace in the fund this week after two weeks of lagging the market.

This was a pretty quiet week overall in terms of individual names - I was more focused on 'allocations' between cash/ETFs on the short side/long positions. I am very happy with the stocks at the top of the portfolio but until the market returns to a buying mood, it really won't matter as just about any non 'recession proof' (i.e. Altria or Coke) long position is a loser. As I mentioned Wednesday it has been like Groundhog Day, and anyone venturing on the long side is simply getting their head handed to them the past 3 weeks. Unfortunately we seem to be going down on the same set of news every day, and this stream of news will probably be continuing for quarters on end from here. None of it mattered in September through mid October - now it seems to matter and not only matter but will continue for the next decade the way the market is acting. But at some point, at least for the near term, it will get priced into the market, and stocks will actually rebound to some degree. When that happens is always unclear, but we are officially in a 10% correction now. At this point the market that will either degrade seriously from here as the technical picture is putrid and declining by the day, or some sort of stand will will be put in. S&P 1440 and 1490 remain key points. I read that this month has been the worst since 2002, which was a year that could take the heart out of any bull (we had many months like this!). The S&P500 was actually down for the year as of Wednesday, before rebounding today, following the Russell 2000 which was down for the year as of last week, and only got worst this week...

Price of Rising Tide Growth: $11.117
Lifetime Performance to date (vs Aug 3, 2007): +11.17%

Comparable S&P 500: 1,440.7 (-1.23%)
Comparable Russell 1000: 783.4 (-1.37%)

Fund return vs S&P 500: +12.84%
Fund return vs Russell 1000: +12.77%

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

Bookkeeping: Closing Fluor (FLR)

I am closing out my smallish position in Fluor (FLR) late in the abbreviated session today. The price I sold at was $135 and this was a 1.1% stake ($12.2K). Fluor was part of my basket of infrastructure names, but this was a recent addition, added very early this month and due to the technical breakdown in this name, along with the fact it is the most expensive in the group I am going to close it out for now and stick to stronger names in the group. (not that many left are strong)

Fluor had dropped from $176 (in late October) to $146 which was its 50 day moving average, so I bought at the time (early November) with the intention of seeing the 50 day moving average hold. This is always the risk on buying stocks on pullbacks - sometimes they bounce sometimes they falter and continue downward. In Fluor's case it was the latter, and while the stock has been stable trading in the $132-$136 range for the better part of the last week, despite a lot of weakness in the market, I am simply going to focus on stocks with better charts in the near term in this group. While it sounds like a fancy term, one negative situation that has just occurred in the Fluor chart is a death cross, which is simply when a shorter term moving average crosses below a long term - in this case the 20 day has moved below the 50 day, which is a sign of near term weakness. While the stock has held up quite well, if the market further weakens, the stock might not be holding up going forward.

The 200 day moving average is $116 and thats where August lows were as well, so *if* the market continues its downward trend, this could be an area where Fluor weakens to. Conversely a quick move back above $142 (50 day moving average) would be bullish, but right now the stock could go either way - so I am taking the cautious road. I will book this 9% loss with hopes it saves me from a potentially larger loss. Again, for those who do not use technical analysis it might seem strange to prefer to buy something at $142 rather than $135, but a move above a trend line would be a show of strength so paying up a bit for this insurance is worth it. Most of the major positions (>2%) in the fund are still above their 50 day moving average trend line, even in this extremely poor market.

I still like this group as a whole, but the multi year backlogs and international exposure to governments and companies flush with cash is being ignored at this time.

I did buy some more UltraShort positions going into the close with this cash since I had lightened up a lot Wednesday; as the S&P500 once again jumped back to 1440 (the magic number)...

No position

Bookkeeping: Temporarily Closing out GlobalSantaFe (GSF) Position

It appears the pending merger of Transocean (RIG) and GlobalSantaFe (GSF) is set to officially happen next Tuesday. I am going to close the last of my GlobalSantaFe position simply due to 'book keeping' issues with the Marketocracy.com account. Since there is a cash payout involved and some not so usual merger mechanisms in this transaction I am just going to step aside for now, and will rebuy the combined company which will simply be the new Transocean, in the future. The deep sea oil drillers have been a mixed bag for the fund so far, and I've held GlobalSantaFe since Sept 4, 2007 - only booking about a 4% gain in the name. I still like the group but if we do get this global slowdown we could have a perception is reality drop in crude prices which would (unfairly) hit the energy stocks - again, crude at $60, $80 or $100 won't change the need for the deep sea oil drillers - Petrobras' (PBR) recent major discovery was in water 4.5 miles deep in which there are only 40 rigs in the world that could perform such a service. So I continue to like this group for the long run as new discoveries are going to be needed in harder and harder to reach areas.

Again this move has nothing to do with fundamentals (which I like) or technicals (which actually look very good for both these names) - simply to avoid any headache with the tracking mechanism of the fund with this merger. The combined company is going to be a huge gorilla in this space.

No positions

Is Copper Signaling a Slowing Global Economy?

About a week and a half I sold the last of my Freeport-McMoran Copper & Gold (FCX); partially for fundamental reasons and partially for technical reasons. On the fundamental side, I wrote

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). ....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.

On the technical side, which I contend, many times gives the small investor a precursor of improving or deterioriating fundamentals that the large investor, many times with greater access to information, sees first - started to break down at that time. While many stocks had broken their 50 day moving average at the time, a week ago Tuesday was a huge rally day for the market and Freeport did not participate to enthusiastically.

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.

In a declining market, its all about relative poison I suppose. Not much has been working but as I have been writing for a few months now, I have been cautious on the mining stocks simply because, while I do believe there is a long term global growth story happening, it will have ebbs and flows. And contrary to popular opinion, emerging markets will not be completely shielded from the US and Western European slowdowns - yes they have middle classes forming but the consumption power is nowhere near what 1st world Western economies bring to the table. So if those economies slow significantly, there will be impact. And this would hit base metals directly. Copper is essentially a proxy for growth as it is a building block in many industrial and residential offshoots. While China is very hard to "gauge" simply because many of their economic drivers have little to do with demand/supply but more governmental decisions to try to slow or accelerate the economy, recent comments/actions from the government indicate concern from officials about an overheated economy.

So with Freeport-McMoran breaking down from where I sold it (to the upper $80s) and the weakness in the copper market of late, is this signaling a pending global slowdown? Or just nervous investors? In a way it does not matter - because you can lose money either way. Perception "is" reality - especially in the stock market. We can see this in the treatment of Blue Coat Systems (BCSI) the past 40 days. Either way, I continue to be overweight areas I feel will be shielded from global slowdown of any sort - i.e. notice the agriculture stocks, while falling significantly as well, still sitting above key technical support - the 50 day moving average. At this point, unfortunately, on the long side a loss of 4% is considered a victory versus a loss of 10%. It's all relative! Below is a story from Forbes Wednesday about the copper market.

• Shares of copper-mining companies tumbled on Wednesday after investors already jittery about a slowing United States economy got some more bad news in the form of weak consumer confidence data, following on the heels of Tuesday’s disappointing housing-start numbers.
• Copper has been hit hard over the last few months as sagging real estate construction cut into consumption of the metal, sending prices down. Copper consumption in the U.S. is down 6% to 7% this year from last, said John Mothersole, metals analyst at Global Insight. Copper futures dropped 4.1%, to $2.94, on Wednesday afternoon.
• Charl Malan, metals and mining analyst for Van Eck Global Hard Assets Fund, said the downturn in copper prices is a continuation of the pattern over the last week where in the near-term prices for the metal are falling but the long-term outlook isn't so bad.
• Mothersole said there’s a negative sentiment sweeping through the copper market because of the accumulation of bad news. He said investors were optimistic after the Federal Reserve cut interest rates in September. The idea was the easing monetary policy would not only prevent the U.S. economy from slowing but stimulate growth and guarantee healthy construction activity and demand for copper in electronics through 2008.
• Mothersole said weak growth in the first half of 2008 will cause the U.S. residential construction rate to deteriorate, which in turn will hurt the copper market. At the same time, Mothersole said, Europe’s housing market troubles will slow growth there, cutting further into the copper market.
• The United States currently accounts for about 13% of global copper consumption, while China uses 20% to 30%. With the Chinese government concerned that its economic growth is dangerously strong -- it is running at about an 11.5% rate this year -- Beijing is looking for ways to manage a slowdown to prevent a boom- bust scenario, Mothersole said. Restricting real estate loans, increasing policy interest rates, increasing bank reserve requirements, and cancelling export tax rebates on a wide range of industries, which slows the growth of exports, are all ways the Chinese government is trying to down shift the economy from its extremely strong rates of growth. If the Chinese economy slows, the consumption rate of copper can be expected to slow with it.

Long Blue Coat Systems in fund

Market Erosion

Seems to be an interesting situation now with the market as a whole... we have moved from the panic type of selling to simply a state of erosion and "giving up" - grinding down day after day - Chinese water torture if you will.

Wait, Chinese water torture is up 150% this year... too expensive. More like Indian water torture... wait that's up 120% this year... gosh, can't a guy find a reasonably priced water torture around here anymore? Ok let's go with death by a thousand cuts - I believe that still offered free!

Anyhow, this is more of a type of market that just grinds on you and takes out all hope slowly but surely. I can just imagine the slumped shoulders all over New York City. I keep referring to it as Ground Hog day because every day is about the same. But once we broke that S&P 1440 and did not recapture it quickly, the trend down just reinforced itself.

Eventually it will turn... believe it. Times like this grow hair on your chest (well I suppose that is a net negative for female readers but....) Just remember times like this when your investments are golden and you are making out like a Fed printing press, and remember times like that (the good times) in times like this. As bearish as I am on the US economy, nothing goes straight down and these counter rallies that should come should be good times to lighten up if you feel sick to your stomach. Some stocks are actually good values now (just need some buyers) and expectations are getting ratcheted down by the day; which is also good. While I think 2008 expectations are still too high, they are now a lot more negative than they were even 1 month ago. I continue to be a bit bemused by seeing stocks that create wonderful earnings and provide bullish guidance get hammered nearly as bad as the financials and retailers but this is where we are now, where good, bad, and indifferent get punished.

The good (?) news is we are now approaching mid August lows, but its in a more orderly fashion than that time frame. While it is not a fun time from the long side, in mid August the declines in individual names were even more harsh as hedge funds were liquidating their strong positions to provide liquidity for redemptions. I don't know if that is a good or bad things that we have not reached that stage - one could say its good because things are not so desperate - or one could say its bad because we have not reached that point of desperation.

There are still plenty of stocks trading stubbornly above their 50 day moving average and I am trying to populate the fund with those names. Eventually when people want to buy stocks again, these are the names with the fundamentals, and should be the names people are drawn to.

Either way, have a good Thanksgiving!

The Plan with Blue Coat Systems (BCSI)

As I mentioned yesterday on Blue Coat Systems (BCSI) tremendous earnings report, I did sell down my position a bit - more a function of a terrible market, and taking profits when offered. The plan going forward on a name like this that is simply executing great, despite being surrounded by despised peers is to let the chart do the talking. The stock is still below its 50 day moving average, which is just a tad above $38. The stock actually got as high as $40 yesterday, but fell back during the day. What we want to see here now that the fundamentals have reassured investors that the sky is not falling is a close back above its 50 day moving average. Preferably a few days in fact to confirm this trend. When that day comes, it should signal a coast is clear signal (barring further market meltdown in which no move is safe of course)

I am currently very low on cash since so many bargains have appeared in the market so I can't really increase my stake in Blue Coat at this time, but as we go forward this is the type of technical price action one would want to see. This is perhaps counterintuitive - i.e. why would you not want to buy at a lower price ($36s, $37s) instead of a higher price (above $38). Well this just goes back to the fact that many stocks below a trend line tend to stay there, and it can last for a long time, or worse - lead to further weakness. And we want money working for us, not degrading in value. So while the fundamentals look great, conviction in this name is solid, we want to see the market get behind the name and push it to a better technical position. So going forward I'd like to see that break above $38 on a nice volume and we should be in good shape on this name. I had mentioned earlier this week that the stock seemed to have bottomed out around $32 where it kept falling too during all the market sell offs; the good news is the stock is now making higher lows, and even in the current sell offs, $35-$36 seems to be a new floor. (again barring a market meltdown) So this is a bullish sign. Again, this is purely a technical call on a stock I like, have liked, and will continue to like from a fundamental basis (even if the market trashed it for no good reason)

Also it is good to see the teflon tech stocks holding up very well today. We have pockets of strength, tiny pockets in an otherwise ugly market. Once again it feels like Ground Hog day - every day is the same darn thing. When we get even minor rallies you see the favored stocks lift, but these rallies are literally 30 minutes to 2 hours at a time and other than for very short term traders this is an impossible market to make money on from the long side.

Long Blue Coat Systems in fund; no personal position

Deere (DE) Beats by $.34 - the Agricultural Beat Goes On

In this atmosphere fundamentals are being ignored, but Deere (DE) shows us once again that agriculture is the place to be. The company reported stellar earnings - and continues the trend by CNH Global (CNH) and Agco (AG). Deere, like European peer CNH Global is a mix of agriculture and construction but the agriculture business was so strong, it more than offset any weakness in other parts of the business. Deere also benefits from the lagging dollar as I outlined in my piece in early October 'Still Not Enough Agriculture Exposure - Adding CNH Global'.

The great news from CNH Global [CNH Global +12% on Great Earnings] and Agco [Agco Reports a Great Quarter and Agriculture Bull Just Keeps Rolling] has long been forgotten in the current panic, but these are the names with true growth. I continue to look at agriculture as a seismic demographic shift regardless of US recession, or global slowdown. All these companies do is continue to execute, and raise guidance and say great things. It has not mattered of late, but it does not change the fact they are having incredible results.

Who is getting richer in this world? Farmers and producers of oil. Find those dollars, and then find their customers. The market could care less about such logic now but these are fundamental truths, regardless of terrible decisions by our financial institutions. I know I sound like a broken record in this sector, but the results of these companies speak for themselves. I expect the mutual fund industry to start jumping into this sector like they did energy about 3 years ago.

I'm actually selling more ultrashorts to raise cash and I bought more Agco which has held up better than CNH Global. I initiated Agco last week, and am now taking it up to a 1.7% position. It would be higher but I am out of cash... the weakness in CNH Global is strange considering the results of the company and the outlook.

• Deere & Co. (DE) reported better-than-expected earnings on Wednesday, and provided an upbeat outlook for the coming year, as strong sales to farmers worldwide offset a downturn in construction sales, especially in the United States.
• Much of the gain came from international sales, which were lifted by increased demand for farm equipment in markets outside of North America -- but benefited as well from the decline of the U.S. dollar. Deere said more than a third of its 2007 sales came from outside the United States and Canada.
• Markets where Deere experienced especially large gains in 2007 were in Central and South America, up 60 percent year over year, and Central Europe and CIS, up 52 percent.
• Robert McCarthy, an analyst at R.W. Baird, called the results a "blowout," and the company's shares rose in early trading even as the broader market fell.
• Deere, the world's largest maker of agricultural machinery, said it earned $422.1 million, or $1.88 a share, in the fourth quarter, compared with $277.3 million, or $1.20 a share, last year. Net revenue rose 20 percent to $6.14 billion. Analysts on average expected the Moline, Illinois-based company, which also makes earth-moving and forestry equipment, to report earnings of $1.54 a share on sales of $5.23 billion, according to Reuters Estimates.
• Deere said sales in its agricultural and commercial and consumer divisions both jumped 35 percent during the quarter, while sales to the construction and forestry industries fell 11 percent.
• "Overall a very strong performance," Terry Darling, an analyst at Goldman Sachs, wrote in a note to investors.
• The company said it expects first-quarter equipment sales to rise about 25 percent. It forecast that full-year 2008 profit would rise to $2.1 billion -- up more than 15 percent from the $1.8 billion it reported this year. It said the improved results would be a function of what it characterized as "a substantial jump" in farm cash receipts.
• Farmers around the globe are enjoying high prices for many of their crops thanks, in part, to the surge in interest in biofuels. As their incomes have risen, they have rushed to buy newer, more powerful tractors and combines, lifting the earnings of Deere as well as rivals Agco Corp (AG) and CNH Global NV (CNH).
• Deere said it benefited from the weakness of the U.S. dollar, adding 9 percentage points to sales outside the United States and Canada for the quarter and 7 points for the year.
• Morgan Stanley analyst Robert Wertheimer said the ramp-up in farm machinery profit has not fully developed, meaning Deere has plenty of room to grow. "Deere is still in the early stages of a multi-year boom in farm equipment, led by rising ethanol demand," he said in a note to investors.

Long CNH Global, Agco (and a whole slew of fertilizer companies) in fund; no personal position

What a Thanksgiving Week Rally! Some transactions

If this is a holiday rally, please don't show me a holiday sell off

I sold down some of my ultrashort hedges and added to positions this morning

1. 2 Indian stocks: ICICI Bank (HDB) down 7%, and Sterlite Industries (SLT) down 9% - both these positions I had cut quite severely in my "layer in, layer out" philosophy so now I am getting a chance to buy them and re-up the positions. Sterlite fell to its 50 day moving average around $21.40, and ICICI Bank did the same, falling to $56.50 or so. The risk in such a strategy is always the same; the stocks break support and continue downward, but I sold large parts of these positions much higher.
2. I re-initiated a starter position in LDK Solar (LDK) off the bad Trina Solar (TSL) result (more on Trina in a separate entry). LDK Solar has its own issues but in early December should be reporting its audit results and "bad news is better than uncertainty" so I am restarting a small position here with the stock down 9% in sympathy with Trina Solar. It is near $30 which has been the floor of late. I sold the last of my LDK Solar 25% higher from here 2 weeks ago around $40, so this is a nice discount from where I exited the name. With the article I cited yesterday about all the new competition coming online in the solar space, I am now more bullish on arms merchants such as JA Solar (JASO) and LDK Solar (LDK). My LDK Solar position is just a beginning position of 0.8% ($9100) of the fund; I wanted to spread my buys around today to a lot of names, and am low on cash.
   
3. I am adding to Suntech Power (STP) and First Solar (FSLR) - and keeping in my theme of sticking with leaders for the most part in solar.
   
4. I bought more of fertilizer play CF Industries (CF) - the stock has fallen repeatedly to upper $70s on repeated selloffs and this seems to mark the bottom unless the market implodes (further)

As I wrote with the solar names, most of the quality companies reported in the front end of the earnings season and in the back half are the companies who are struggling so that could weigh on sentiment. I am personally hoping Suntech Power and First Solar get sold off even more but thus far only down 2-3%.

Long all names above in fund; long Suntech Power and Sterlite Industries in personal account

What a Topsy Turvy Day - Adding to 2 positions

Can't make heads or tails out of this day - I am hoping my purchase of the Ultrashort China position will mark the bottom for now; meaning once I caved in and went against China officially the markets will rally hard to the upside ;)

Anyhow, Wed and Fri of Thanksgiving week is the turf of the retail investor - most institutional trading is already going on vacation - so we could get some volatile markets... and I hope that volatility is up. And guess where we are in the S&P 500... (ring ring) 1440. Amazing - what a magical number, eh? Like a magnet we keep getting pulled to it.

I did add to two positions here late in the day - Foster Wheeler (FWLT) is ridiculous here at $130 so I added more there, and Suntech Power (STP) finally pulled back nicely to its 20 day moving average of $59 so I added (missed the bottom but got in, in the low $60s). I've quickly taken this position up from 0.5% to 2.2% of the fund and if I had more cash it would be higher still. Here is one example of don't let past mistakes cloud your future view. I bought a SLEW of STP in the $37s through $39s; sold most of it around low $40s (as I got impatient with the stock not following its peers in Sept/most of October), and other sales in mid $50s and low $60s. In retrospect, a mistake to sell even 1 share, but the company is carving itself as the de facto leader (or co-leader on the PV panel side of things) so I am rebuying a stake. The past is the past; time to look forward.

For those who like Vegas, Trina Solar (TSL) is available in the $47s as an option ahead of tomorrow's earnings, but I went with the tried and true. If you want to hear what is coming for the solar sector and why I favor the big boys over little squirts here is a blurb from a Business Week article I just found.

Trouble is, there's now a group of hungry Taiwanese and Chinese rivals, led by China's New York Stock Exchange-listed Suntech Power Holdings (STP), crowding into E-Ton's territory. "There are too many companies," complains Tsai Chin-yao, president of E-Ton. Barriers to entry are low, since there are plenty of talented engineers with experience in the semiconductor and liquid-crystal-display industries, which Tsai says are not that different from the solar-panel field, so finding capable staff is no problem. This year alone, the number of solar companies in Taiwan has tripled, to more than 20. "It's incredible," says Tsai. "Even some companies, I cannot remember the names. It's really very hot."

So for all the focus on the publicly traded solar names, keep in mind there are probably 3-5 private for every 1 public waiting in the wings. As I wrote this morning, if you are not making money now in this environment - you are going to be in a world of hurt down the road as "profits" attract "new players" and "new players" bring down profits for everyone. Hence size/scale/R&D/technological lead is important. All these "me too" players are going to cancel each other out on the low end in my opinion. Where companies like Solarfun (SOLF) and Trina Solar (TSL) fit into this puzzle is still to be determined, but it's going to be intense down there at the bottom of the pie. On the flipside, stories like that make me more interested in JA Solar (JASO) and LDK Solar (LDK) as arms merchants in this industry...

Long Foster Wheeler, Suntech Power, JA Solar in fund; long Foster Wheeler, Suntech Power in personal account

Bookkeeping: Closing iShares Signapore (EWS)

I closed my position in iShares Hong Kong (EWH) last week, and am now closing iShares Singapore (EWS). While I like Singapore for the long run, its a finance based economy so could be open to some slowdown if we get a global/Asian slowdown. Contrast this to Malaysia (I still am keeping my iShares Malaysia (EWM)) which is more of an export country with natural resources - sort of a mini Brazil.

This was a 1% position ($11k) which I failed to take any off the table (layer out in smaller sales) in the $15+ range, so essentially I made zilch on this position which I started the very first day of the fund. Technically the index is sitting at its 200 day moving average and is poised for a bounce back, but with other opportunities opening up, and heightened risk in Asia (in my opinion), I will use this cash in other places.

While Asia markets have corrected along with US markets, the full effect of the US slowdown on their growth probably won't be recognized until 2008. So this is not a short term call, as this index is at a good support area and probably will bounce, but this is more of a long term outlook.

Long iShares Malaysia in fund; no personal position

Freddie Mac (FRE) and Fannie Mae (FNM) Trading Like Chinese Small Caps

This is some scary stuff - these charts look like some no name, small cap chinese small caps. Fannie Mae (FNM) and Freddie Mac (FRE) are two quasi gov't entities and in theory will help us get through this mortgage mess. Not the way they are going... I get a kick out of all these politicians saying we need to raise the cap on mortgages from $417K that these entities will insure. What? Those are all overpriced homes which need to come down in value so normal people can afford a real mortgage. Why would you lift the cap? So we can all bail out these institutions with federal money next spring? Dumb.

I can only imagine what is going on in the Federal Reserve right now. I insisted from the minute the last Fed cut came that we will have another Dec 11th no matter what they are saying. The way things are going we might be getting an emergency intervention before that time. (bears on notice?) Credit markets are really seizing up ... this has nothing to do with bailing out equities... this is serious stuff behind the surface and without trust you do not have lending. No one trusts anything coming out the mouths of any of our lending institutions - I don't know how you fix it, but its a bad situation. Who is going to lend money to these fellows? Trust me, it's going to take you and I the way things are going - goodbye tax revenue, hello bailout...

Keep in mind, we are in the EARLY innings of the housing correction no matter what Mr Yun of NAR thinks [Housing will be flat next year! Whew!]. So this will feed on itself as more and more houses fall in value and this is not a 6 month issue, we are talking years. This is a very direct reversal of years of excess in lending - gosh why do we always have to have these seismic events happen simply because the word "regulation" is so hated in the country. It always takes major events and everyone having to pay, one way or the other, before anyone sees that companies left to their own devices will simply maximize short term profit at all other costs or long term stability. I can see a whole parallel to Sarbanes Oxley hitting the financial firms over the next few years as this all plays out .... but those who profited most will be off in the Hamptons enjoying the good life - "retired".

Check out these 2 charts... today down 25-31% off Freddie's ugly numbers.

• Shares of mortgage giants Freddie Mac (FRE) and Fannie Mae (FNM) are getting spanked in trading, after the former posted a $2 billion third-quarter loss Tuesday morning.
• Freddie shares were plummeting almost 29% after announcing before the opening bell that it may need to cut its dividend by 50% and seek out additional sources of capital. The so-called government-sponsored entities, which purchase residential mortgages and mortgage related securities, hired Goldman Sachs (GS) and Lehman Brothers (LEH) to help it hit the Street for fresh funds.
• "We do not believe it would be wise to be sanguine about the intermediate-term housing market," said CEO Richard Syron during Freddie's third-quarter earnings call.
• McLean, Va.-based Freddie said it would need to set aside $1.2 billion in the third quarter to account for bad home loans, prompting the nation's second-largest guarantor of home mortgages to seek additional sources of capital.
• Fannie and Freddie are facing increasing defaults and significant shrinking of the values of U.S. homes. As a result, the quasi-governmental agencies are beginning to be forced to ratchet down the prices of mortgage assets they hold on their books. Freddie's asset values fell by about $8.1 billion in the third quarter. Also, total mark-to-market losses amounted to $3.6 billion.
• Although an unlikely prospect, given their implicit government backing, the shaky markets have Fannie and Freddie trading as if they might falter in the face of the market dislocation -- a prospect that Syron attempted to address.

No trust = no lending. Remember the "quote of the century"

Emerging markets are being favored in part because "financial innovations are less common in developing countries," said Heidemarie Wieczorek-Zeul, German economics minister, in remarks to the IMF/World Bank Development Committee.





Position: Utter disgust

Bookeeping: Initiating Ultrashort Xinghau China 25 (FXP)

Well I might be late to this game, but despite its crazy gyrations I am going to initiate a new position in Ultrashort Xinghau China 25 (FXP) - this is simply double the inverse of the iShares Xinhau China 25 (FXI). I considered this name a few days ago but instead went with Ultrashort MSCI Emerging Markets (EEV)

I am using this as a hedge, like my other ultrashorts. I don't have much cash as I took what I sold this morning and bought other ultrashorts but I bought $11.2K worth (1% position) with the last of my cash. The stocks in this index already were extremely oversold, but after a bounce this morning many are retreating... these are many of the large cap Chinese names you know (and love?) Full list here.

I have to say that intraday reversal is pretty scary, especially since 1430 was broken on the S&P 500. Looks like we are heading to S&P 1400-1410. Where this ends - anyone's guess, but the market continues to punish bounce buying, so I have to respect that. Still will get punished being predominantly long only, but not much to do here but hold on. Very concerning action as far as I am concerned, this type of reversals - considering we were already very oversold is not good.

Long Ultrashort Xinghau China 25, Ultrashort MSCI Emerging Markets in fund; long Ultrashort MSCI Emerging Markets in personal account

Bookkeeping: Cutting Research in Motion (RIMM) by half, Google (GOOG) by a quarter

Just took off half my Research in Motion (RIMM) position, 125 shares of the 250. I was able to buy these around $100 so around $111 I am exiting to lock in the quick gain, and raise some cash.

Google (GOOG) same idea, selling 8 of 30 shares as it bounced up today into the mid $650s (position bought in mid $610s)

Most of the teflon stocks bounced from their 50 day moving average up to their 20 days and are starting to retreat. Too early to tell if its a full retreat or just a head fake, but I have some quick gains in these names, and if they retreat all the way back to their 50 day moving average I can rebuy these positions there. Unfortunately, this is just about the only way to make any money on the long side of late - holding positions is not doing any good. Essentially it feels like treading water and churning, just to limit losses. Not a fun environment.

So until that changes I'll try to buy the strongest when they pull back, and sell part of the positions when they spike. Eventually they will either crater through their support levels or push past any resistance and continue an upward move. Until that point though, this is the status quo. The major negative is these stocks continue to make lower highs on each rebound, so this does not portend a lot of good vibes. Until that changes its extreme caution time.

Long Research in Motion, Google in fund; no personal positions

Motley Fool on China Sunergy (CSUN)

Motley Fool has an article I just have to agree with regarding the state of the solar industry. I wrote a piece 2 weeks ago regarding the mania it was in, and why I was taking leave of the industry (right before most names imploded in the correction). Over the years what I have seen as a sign of a near term top is when every name in an industry goes up, regardless of business, strength, scale, acumen, or leadership. This was happening with the chinese small caps about 6 weeks ago, this was happening in dry bulk about 4 weeks ago, this was happening in solar 2-3 weeks ago. For a while there, EVERYTHING went up. Sometimes I am early when I head to the sidelines, but when you see every stock in a sector run up, regardless of its fundamentals, I get "fearful". Sometimes I miss the last part of a move up, which many times is the most violent upward, but it also protects against losses. With my sales of LDK Solar (LDK) and Suntech Power (STP) two weeks ago I completely exited the solar sector, a sector I have personally been investing in since late 2006. Now in retrospect with the stellar results from Suntech Power, it was a mistake to sell even 1 share of this leader, but with that said you don't know in a correction if they will take the 'leaders' to the back of the shed to shoot them, so it was a better safe than sorry strategy. Same with my exit of Trina Solar (TSL) the week before that, which I am itching to buy ahead of this earnings report tomorrow.

So anyhow a few companies which either had disappointed the street repeatedly, changed leadership (CEOs, CFOs), or shown no ability to make a profit in one of the hottest sectors in the market bar none were making huge gains the past month - such stalwarts as Evergreen Solar (ESLR), China Sunergy (CSUN), Solarfun Power (SOLF), and Canadian Solar (CSIQ). ESLR has been public the longest and breathlessly tells us quarter after quarter it will soon be profitable. I think this has been the case for nearly 2 years running - I don't even follow the stock closely anymore as its been a proverbial loser since being public - that said, they once again are stating they are turning the corner so maybe "this time" it is for real... who knows.

At that point when everything goes up, regardless of their individual stories, you know its frothy. In retrospect I was a few days early - full blown manias are hard to time... this is part of what the article speaks to. In my view scale, size, leadership will matter in this industry as in its core its a commodity business. There will be times when lemmings errr investors don't care about these things and run up the lowest priced stocks - in fact this is a strategy of many momentum players... when a sector is sexy move into the worst stocks (which are the lowest priced) and try to generate a lot more gain. This can work from a 'trading' perspective. But as an investor its a high priced game of chicken in my opinion.

While this will take a long time (years) to play out, my vision is eventually the leaders with scale will get their cost structure down to a point where they can lower average selling prices (ASPs) to a point where it will cripple the small fry in the pond. Some of these smaller companies are having major trouble building their product above cost (gross margins very low), and while the drop in polysilicon prices (65-75% of costs for many Chinese solar companies) will help these smaller companies, it will also be helping the larger companies. So right when these small fry get to the point where their margins reach levels the leaders are enjoying now (1-2 years from now), the leaders will already be onto the next step - expanding volume by dropping prices. And this will mean another crippling era for the smaller players. Even if the overall pie of solar is growing. Again, just a theory but this is how all commodity businesses work, and solar should be no different in the 'long run'. In the short run? Feel free to speculate on any name, because even those that cannot produce profits seem to be run up by speculators simply on the hope that the future will be 'brighter'. (oh, I love puns)

• In a previous stage of solarmania, the shares of companies up and down the value chain seemed to press upward in unison. Now this borderline-bubbly market has seen a bit of bifurcation. While the clearest leaders bound higher, the wheels have begun to come off some of the shakier outfits.
• China Sunergy (Nasdaq: CSUN) was actually the vanguard in this regard. Storm clouds surrounded the company in July, when polysilicon supplies proved elusive. The squeeze prompted a second-quarter flameout and a management shakeup.
• I scoffed at Sunergy's 5% gross margin back then (me too), but that figure's looking downright dreamy compared to the latest number. Yesterday, the firm reported a 2.1% gross margin across its product mix. Had Sunergy not sold some precious polysilicon on the side of its core solar cell business, margins would have been even slimmer.
• The company naturally reported a loss for the quarter, but here's a perverse little tidbit. If the share count hadn't ballooned by 47% sequentially, its per-share loss would have been quite a bit uglier. (sad)
• China Sunergy is targeting doubled output in 2008, which could possibly bode well for the bottom line. Of course, that's assuming both that the firm will sign sufficient supply contracts with silicon slingers, and that these suppliers will be able to deliver in quantity and quality alike. On the call, management noted that a good deal of anticipated supply is coming from two start-ups. Contrast that with Suntech Power (NYSE: STP), which pegged "new entrant" supply at around 5%-10% of its 2008 polysilicon pile.
• The company's base case, which assumes that the polysilicon pours in as expected, pegs gross margin at 4%-5% next year. That's about good enough to hit operating breakeven, in its estimation. Beating this forecast could prove difficult, given that long-term supply deals can require significant up-front deposits. This would likely force the company to issue more shares or debt at a time when cash is pretty tight.
• China Sunergy doesn't have the cell efficiency of SunPower (Nasdaq: SPWR), the scale of Suntech, or the integration benefits of Trina Solar (NYSE: TSL) or Yingli Green Energy (NYSE: YGE). Though I hate to kick a company while it's down (except, of course, when it's totally justified), I see no reason to come within 500 feet of this stock.

I just have to agree 100% with this fellow. While I have absolutley NO DOUBT that speculators will run this name up the next time risk comes back to the market, and people are looking for anything with the words "Solar" or "China" in a company name (remember that was the whole basis of 200-400% moves in certain names 6 weeks ago) - you might as well go to Vegas if this is your game. There is a big difference between pure speculation and investing, and in the solar sector the haves versus the have nots are already appearing. To boot on Aug 24th I penned a piece on the sorry state of affairs of China Sunergy [Pain for Smaller Solar Players - China Sunergy (CSUN)]; the stock was in the $5s at the time - it proceeded to ramp to mid teens in the mania of anything "Chinese" (in 1 day it went from $7 to $10), and now has almost made an entire round trip to $7s. So my thesis on this company has been correct the whole time, but the stock price has devolved from fundamentals most of the quarter. So for anyone who thinks fundamentals have anything to do with stock movements in the near term (weeks/months), I present to you this classic example that it does not - sentiment, emotion, greed, fear rules in the near term....

Long Suntech Power in fund and in personal account; looking for an entry point in Trina Solar and LDK Solar

A Damn Shame - Blue Coat Systems (BCSI)

Blue Coat Systems (BCSI) as I noted I expected yesterday reported superior results this morning. It truly is a damn shame what they have done to this stock on "fears"; first Riverbed Technology reported great earnings but was extremely highly valued so they destroyed that stock; next a company that "barely" competes with Blue Coat, F5 Networks (FFIV) had a ho hum quarter and they chose to smash Blue Coat Systems further on that news, although there is almost no connection; finally on words that Cisco (CSCO) is seeing some weakness from financial and automotive companies (duh! talk about 2 sectors you don't want to be in), Blue Coat was taken down yet again. Losing nearly 40% of its value, all the while itself doing nothing wrong.

While I had some massive booked gains in this name since my strategy is to buy (and sell) in layers and I had sold a lot of my very large position in the upper $40s and lower $50s; my unrealized losses against my booked gains actually had me at a net loss on this name going into today. Which is quite amazing since Blue Coat Systems 30 days ago was the largest winner in the fund. With that said, I am glad to see this company continue to execute and hopefully this will put the fears aside. I am sure at some point naysayers will say 'the credit contagion will somehow hit Blue Coat, but much like Riverbed these 2 companies continue to execute - in Riverbed's situations it was simply a case of a stock too highly valued and full of momentum lemmings; nothing to do with bad earnings or guidance. So here is a case of being 100% correct on the company, but the stock market missing the entire point - and you lose money in the process. Those are, frankly, the most frustrating times... there are many times you will be wrong on a stock, and you take your ball and go home on that name, but when you are right but still "lose" it is tougher to rationalize.

• Internet monitoring equipment maker Blue Coat Systems Inc (BCSI) posted a quarterly profit that topped the Wall Street view, helped by a surge in revenue, and forecast third-quarter results above analysts' expectations, sending its shares up 18 percent in pre-market trade.
• The Sunnyvale, California-based company posted second-quarter earnings of $7 million, or 17 cents a share, compared with a loss of $3.3 million, 12 cents a share, a year ago. Excluding items, the company earned 30 cents a share for the latest quarter.
• Net revenue for the quarter rose 85 percent to $73.4 million.
• Analysts had expected the company to earn 24 cents a share for the quarter, excluding items, on revenue of $69 million, according to Reuters Estimates.
• The company said it expects third-quarter earnings of 31 cents to 35 cents a share, excluding items, on revenue of between $78 million to $81 million. Analysts were expecting earnings of 26 cents a share, excluding items, on revenue of $74.2 million.

I did sell down a bit of my Blue Coat Systems today to raise cash, on this 18% rise. (only 200 shares) - simply to raise cash. In a more stable market, with more cash in my fund, I'd probably actually be adding to the position.... Blue Coat Systems remains my favorite name in the space, but with the spectacular fall in Riverbed Technology I also believe it is now a good value as well, consistent with it's strong growth rates. This morning's spike in the name, has moved the stock back over its 50 day moving average which is a net positive. Let's see if it holds over the ensuing days.

Long both names in fund; just sold Blue Coat Systems in personal account

Earnings on Tap pre Thanksgiving

As we close out the earnings season we have some interesting reports coming down the pike

Tomorrow, long suffering Blue Coat Systems (BCSI) reports before the market opens. Blue Coat has been battered by over the top expectations in Riverbed Technology (RVBD) and Cisco (CSCO) indicating there are slowdowns in the enterprise spending in sectors such as financial. All the time Blue Coat Systems has not said one negative thing but its stock has lost nearly 40% of its value just by association. The stock has stabilized with $32 as a floor; I expect good results but guidance is key. Any whisper of slowdown due to US economy blah blah will make scared investors flee. An over reaction but its hard to argue with emotional people. I still like Blue Coat and at these levels Riverbed Technology is also finally a good value for its growth rate. These names should be reaching 'washed out' levels.

Also tomorrow are 2 favored retailers, Gamespot (GME) on the video game side and Dicks Sporting Goods (DKS). Considering they are retailers, both stocks have held up reasonably well. I think Gamespot is the safer stock as video games seem to be in a "no way to it slow it down" niche, whereas I could see some slowdown in sporting goods, along with the economy.

Target (TGT), Whole Foods (WFMI), and Office Depot (ODP) also report tomorrow - can't expect much good from these, but if the stocks bounce we might finally have a near term bottom. Nordstrom (JWN) reported "ok" numbers and "ok" guidance tonight and is up 10% afterhours; so it doesn't take much. Again, I think the consumer has weakened, and will continue to weaken but these stocks have gone from pricing no ill effect to the consumer a few quarters ago to "the end of days is near" scenario. We will still spend this Christmas... just not quite at heady rates of the past.

A couple of interesting smaller Chinese stocks also report tomorrow - will be interested to see how they do and more importantly if the market is ready to buy back the smaller Chinese fare that it's been regurgitating out at an alarming rate - Focus Media (FMCN), China Medical (CMED), and Home Inns and Hotel (HMIN) [Edit: FMCN reported tonight in fact]

Oh yeh, homebuilder DR Horton (DHI) also reports tomorrow. Prediction? hah - too easy.

Wednesday all that looks interesting is Trina Solar (TSL) and Abercrombie & Fitch (ANF) on the speciality retailer side. ANF actually has held up well; as long as $140 jeans and $45 shirts are cool this stock continues to do well.... year after year.

Initiated a new position in Gafisa (GFA) - Brazilian Homebuilder

Another tough day to be on the long side - what did I do? I bought a home builder! No, not one of those US kind... blah. I took some of the cash from what I sold off in my Ultrashorts and applied it to a new position outside the US. Gafisa (GFA) is a Brazilian homebuilder. I liken this position to Homex (HXM) which is a Mexican homebuilder that enjoyed a great 3 year run up to this spring. I am not sure why it is so weak of late (I held it in the fund early in quarter 1), but apparently the Mexican economy is much more tied to the US economy, and thus the coming US recession must be weighing on Homex. I look at Gafisa as where Homex was a few years ago; Homex has now "slowed" down to a 20% type of grower, which for a home builder is still great; Gafisa is approaching internet stock type growth, at 90-100% last year, and 30-35% going forward next year. Both countries (along with India/China) are learning the ropes about credit... previously cash based societies, now following the western path of "easy credit!" (careful what you wish for). So as mortgages become more common place, and credit markets more developed, home buying and real estate transactions should only grow in these countries.

I have bemoaned the lack of direct investment opportunities in Brazil compared to China (Gafisa is the only Brazilian IPO to list as an ADR in the US in 2007), but here is a nice way to diversify away from mining, banks, or oil which are the main avenues US investors can invest in Brazil. Now all the boiler plate issues about slowing global growth of course apply to Gafisa but with my vision of a very long term global commodity boom (with ebbs and flows of course as world economy strengthens and weakens), Brazil has a lot of opportunity in its emerging middle class.

Gafisa IPO'd last March in the $25 range, then quickly sprang to mid $30s. In this summer's credit crunch correction the stock lost all that gain, falling back to $23. Ouch. Since then it has had an epic run, rising to nearly $41. The stock has held up very well in the past few weeks, and I have been waiting for some weakness to begin a position - today it finally fell back to its 20 day moving average above $36 where I am beginning a starter position of 250 shares of $9.2K (0.8%) position. The next support level is down at $33, the 50 day moving average - so if the market continues to melt, this would be a logical next buying level.

The company is not cheap here, but has some serious growth engines as shown by its most recent earnings report on Nov 7, found here. Another company with great growth, sizable backlog, and pricing power. The market does not care about these things today, but eventually these type of things will matter again.

• Net operating revenue for the third quarter, recognized by the Percentage of Completion ("PoC") method, increased 91% to R$309 million from R$162 million in the prior year period.
• Backlog of Results to be recognized under the PoC method at the end of the third quarter reached R$465 million (Backlog margin of 38.5%), an increase of 60% from the previous year's quarter.
• Project launches during the quarter totaled R$426 million, an increase of 119% over the same period in 2006. Pre-sales reached R$366.9 million, an increase of 56% over the 3Q06 pre-sales of R$235.3 million.

And again, the mortgage/credit industry is just in its infancy in many other countries so we get a chance to buy some companies akin to buying them here in the US in the 50s/60s/70s. With the dearth of ways to play the Brazilian market this is an attractive opportunity which has held up very well in the sell off (relative strength) and at market cap of just under $5 billion fits right in with the typical size holding in the fund.

I continue to position the fund into names holding up above their 50 day moving averages [Separating Chaffe from Wheat - the Selloff Identifies Future Winners], with the belief that if companies can hold important support levels in this mess of a market, one day when things return to somewhat normal, they should be the leaders on the way up.

Gafisa S.A. operates as a homebuilder in Brazil. The company also engages in the development of land subdivisions, commercial buildings, and entry-level housing. In addition, it provides construction services to third parties. Gafisa primarily develops residential buildings targeted at middle- and upper-income customers. As of October 26, 2007, it sold approximately 900 developments and constructed 37 million square meters. The company was founded in 1954 and is headquartered in Sao Paulo, Brazil.

Long Gafisa in fund; no personal position

On a Positive Note....

It appears the 4 teflon stocks all held the 50 day moving average, Apple (AAPL), Google (GOOG), Research in Motion (RIMM), and Baidu.com (BIDU) - all stubbornly sit just above that support. Most surprising is Baidu.com simply because its Chinese brothers are being taken to the woodshed

Outside of some oil service names, its still quite nasty today but I did lighten up some on the ultrashort ETFs and bought more of the 3 fertilizer stocks as they pulled back to the same place they pulled back over and over to (right above 50 day moving average), and Suntech Power (STP) on the pullback. Otherwise very quiet day and just watching the walls crumble slowly in the market. China Sunergy (CSUN) reported a gosh awful quarter (and not good guidance) and after being down 8% is now nearly flat... strange market. With Trina Solar (TSL) which reports Wednesday and LDK Solar (LDK) in December, if they can say anything even mildly positive it seems the market will reward them. Even with China Sunergy, bad news is better than uncertainty and this company is in the worst shape of the lot. Someone with more risk tolerance and a gambling streak will probably get more upside in Trina or LDK Solar but if they check out and nothing is hiding under the covers I'd rather buy them after more information is out, and for now will stick with leaders.

Unfortunately that is about all we have on the good news front.... strong stocks holding their 50 day moving averages. For the past 3 weeks this qualifies as 'victory' I suppose! If we don't regain this S&P 1440 level quickly though (i.e. by tomorrow), it just looks like continued downside.... so much for 'washed out' financials and retailers! Too bad even more retailers report tomorrow... outside of Gamestop (GME) and Costco (COST) there is no salve for retail.

Another Retest of S&P 500 @ 1440

Feels like groundhog day. Most stocks are back to their support levels they have tested on each major downturn the past week and a half, and S&P 500 is again at 1440. Let's see how it reacts - if we slice through could be some trouble...

We've now been here (1440), four of the past five sessions - hence why imperative to hold the line.

Chinese stocks are truly abysmal this morning outside of solar.

How Much of China's "Earnings" are from Operations?

I wrote over the past few months a few entries about how some? (much?) of earnings that are rising in Shanghai are not based on actual operations but instead investment gains. So while a 50 PE ratio can be explained away as "the price for such high growth" (which is nonsense), it is even more nonsense when you understand that some portion of these profits are not from operations but simply stock investing/speculation. This works great, until the trend reverses - and then (as this article from BusinessWeek points out), you have to book those losses, which generally will drive your stock down, which eventually causes a cascading effect....

While hard to quantify the exact amount, here are some figures:

• Companies big and small are now playing the markets with abandon, using corporate funds to invest in each other's initial public offerings and bolster their bottom lines. Although figures are hard to pin down, Morgan Stanley figures a third of reported corporate earnings in China stem from investments outside companies' core businesses—which in almost all cases means plowing money into stocks.
• "It's quite dangerous for these Chinese companies because these gains have no cash basis," says Ding Yuan, a professor of accounting at China Europe International Business School in Shanghai. "It's really frightening."
• If and when stock prices start to fall in earnest, companies will have to report these portfolio losses on their income statements, depressing their earnings. That, in turn, could hurt their own stock prices, pushing the market down both further and faster.
• "It's a replay of what happened in Japan during their bubble," says David Webb, a Hong Kong-based corporate governance expert and non-executive director of Hong Kong Exchanges & Clearing. Japan Inc. gorged on stock and real estate, only to tumble into the red when those markets collapsed.

Now, I love the following example in which the company says investment gains are just a 'supplement'.... a supplement to the tune of 98.5% of earnings? Ahhhh...

• To see how big an impact investment income can have on earnings, consider the Youngor Group, which has some $800 million in annual sales. Since the garment maker was founded in 1979, Ningbo-based Youngor has grown into one of China's top-selling apparel brands.
• But these days those operations pale in significance beside its stock portfolio. Youngor's holdings include shares in China Life (LFC), Bank of Ningbo, and Citic Securities, the country's largest broker and a red-hot stock in its own right. Gains on these shares helped Youngor book $223.6 million in investment income for the first nine months of the year, accounting for 98.5% of overall earnings.
• A member of Youngor's investment department, who requested anonymity, downplays the investments as "just a supplement."

That's just one random company, now for the aggregrate estimates

• Wind Info of Shanghai, which provides financial data on listed companies in China, estimates that as of June 30, 494 listed companies had stock market holdings worth $45.6 billion, vs. $2.3 billion held by 163 companies a year earlier. Morgan Stanley figures "noncore" earnings from stock, real estate, and other ventures accounted for 54.1% of profits in China's health-care sector and 64.6% in the consumer goods sector.
• In China, few investors possess the ability to comb through financial statements and distinguish a company's operating earnings from its stock plays. "People overestimate Chinese investors' sophistication," says Jerry Lou, head of China research at Morgan Stanley (MS). "Somebody needs to point out that the emperor has no clothes."
• Professor Ding cites the case of Black Peony, a textile company, as an example of what happens in a hot market. In the first half of this year, Black Peony recorded profits of $5.8 million, almost all of it from gains in shares like Air China, dividends from other stocks, and payouts from affiliates. Meanwhile, its core textile business is struggling. "They're not controlling any costs because life is easy," says Ding.

Anyhow, this is but just flashing warning signal. Aside from stories like this, basic 'greed' which is a human trait, outside of any nationality or race is going to be another downfall, once it is revealed. When you see new found riches all around you so easily 'created' out of thin air, this can only tempt many others to do whatever they can to also reach for this pot of gold. We saw this gold rush mentality in the Japanese market in the 80s, tech stocks late 90s, and most recently our astute and conservative (and full of great financial innovation) financial institutions, which we will all pay for this time around, not just the 'investor class'. Be sure it is happening in China as we speak - it's just a matter of when the proverbial fertilizer hits the fan... as I stated many times it is far too easy to say "invest until the Olympics, everything is safe until then". When everyone believes something it is never the end result; either the market has a major shakeout well before the torch lights up next summer or the bubble will continue far past the closing ceremonies. The thing that makes it so hard to call is the enormous liquidity running through the system... sort of like another country I know of, but for totally different reasons (i.e. printing money here, versus huge trade surplus there)

Revisiting "Analysts Still Doubting the Fertilizer Stocks"

About 1 month ago, I wrote a piece entitled 'Analysts Still Doubting the Fertilizer Stocks'

At the time, one of my trio of fertilizer stocks, Mosaic (MOS) had just reported, with Potash (POT) set to report 2 days after the article, and then CF Industries (CF) shortly after. The theme of my article was, while these stocks had already had tremendous runs this year, analysts were still severely underestimating their future earnings potential.

However, Potash has a premium valuation for a reason; it has the most ability to expand mining production of potash - a large advantage. And with that said, after looking at how wrong the analysts have been on this sector, and how conservative they are on 2008 estimates, I think this is going to be like Apple (AAPL), where an expensive stock becomes a bit less so once we see new earnings and guidance.

Here is how far "off" the analysts were on each name (recall at the time Mosaic had reported, so analysts had pushed up their 2008 estimates significantly, whereas the other 2 names still had not reported)

Mosaic
$2.04 (90 days earlier) up to $2.94 (30 days earlier) up to $3.61 (at time of article post earnings), which is about where the estimate is now @ $3.64.

CF Industries
$3.27 (90 days earlier) up to $4.19 (30 days earlier) up to $4.93 (at time of article pre earnings), and now up to (get this) $6.66

Potash
$3.51 (90 days earlier) up to $4.02 (30 days earlier) up to $4.30 (at time of article pre earnings), and now up to $4.72

**************
With this pullback in the market, if you pull up a 1 month price chart you can see all 3 stocks trade at roughly the same price they did a month ago, despite a boatload more of earnings power coming down the pike. So all become 'cheaper' on price earnings multiple even though the stock prices are the same.

How much have 2008 estimates increased in the past 120 days?
Mosaic 78%
CF Industries 104%
Potash 35%

So while one can ask how can you continue to buy stocks that have run up so much, the data above shows the theme I keep coming back to - "pricing power" (which is another way to say "shortages"). It's a struggle for many companies now to maintain margins because they have a hard time passing along costs - ask Starbucks (SBUX). But here we have a relatively fixed cost industry, with pricing power to the extreme which means margins, margins, margins. Each incremental dollar of revenue begins to avalanche right down to the bottom line. And unlike some other industries which are a play on "global growth", I don't think there will be a huge hit to demand in this industry even if the world GDP slows significantly, especially in developing emerging markets because of the (a) urbanization trends in those countries - move 50-75M people worldwide every few years from farms to cities and you have a whole new demand dynamic (b) increased demand for more "western" foods with emphasis on "meat" which takes a lot more foodstuffs to feed and (c) global push for alternative energy sources incl. biofuels.

Now eventually new nitrogen and phosphate production will come online (most likely from, where else, China) so at "some point" in the future you will have a lot of supply online, but I keep coming back to the 1 nutrient of the bunch that a company like China cannot build 400 factories to produce, and that's potash. Much like gold or copper, you need to have a mine that has it - you can't just (over) build factories to produce it. While I am fully confidant that anything that 'can' be produced, will be 'overproduced' by the Chinese (driving down prices) in the coming years - think polysilicon in the solar space; certain things such as oil and "things that must be mined" just can't be put on the drawing board and overproduced within 2 years.

So we talk about a "wide moat" in business; what protects your competitive advantage. The 2 fertilizer producers that have emphasis on potash have the richest valuations... as they should; their moat is the strongest. As Potash just announced; it's going to take about $2 billion dollars simply to increase potash production by 15%... and they are one of the few companies in the world who actually has spare capacity. Why do they need to increase production? Well if the inventory trends are any indication... (current supply is 29% below the 5 year average). So while we hand wring as the stock prices gyrate on a daily or weekly basis, as one thinks out to what is going to survive and in fact thrive in a slower growth world economy full of new consumers with more middle class tastes - I keep coming back to this group. And this holds true if emerging markets GDP growth is 12%, 8%, 4% or 0%.

Long all 3 names in fund

Bookkeeping: Weekly Changes to Fund Positions Week 15

Week 15 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. I cannot short individual equities.

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

Cash: 0.0% (vs 0.2% last week)
52 long bias: 93.0% (vs 98.7% last week)
4 short bias: 7.0% (vs 1.1% last week)

56 positions (vs 59 last week)
Additions: Chicago Bridge & Iron (CBI), Ultrashort MSCI Emerging Markets (EEV), Agco (AG), Massey Energy (MEE), Suntech Power (STP), First Solar (FSLR), Silver Wheaton (SLW), Canadian Dollar ETF (FXC)
Removals: Nordstrom (JWN), Intercontinental Exchange (ICE), iShares Hong Kong (EWH), Blackrock (BLK), Perini (PCR), Atwood Oceanics (ATW), Freeport-McMoran Copper & Gold (FCX), Cummins Engine (CMI), Excel Maritime Carriers (EXM), VMWare (VMW), Garmin (GRMN)

Top 10 positions = 34.9% of fund (vs 35.2% last week)
46 of the 56 positions are at least 1% of the fund's overall holdings (82.1%)

Major changes and weekly thoughts
While the indexes this week were much more stable than last week, there is a lot of downturn movement and churning below the surface. Beaten down sectors such as financial and retailers enjoyed some stability and even a pop in the first half of the week, only to sell off late in the week. Outside of very flexible traders, those areas remain hard to trade as of yet. But areas I have been hiding in took major hits especially Monday and then again Thursday. I did write last week in my review:

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.

(there are times I hate being correct)

The median stock is down 20-25% range from peak so it's a much tougher environment than even the indexes showcase, and more in tune with traders. The fund is down about 6-6.5% from its peak so all in all, not bad considering it was able to make a lot of hay during the "good times" of September and first half of October.

To wit, the S&P 500 is currently in a trading range of 1440 to 1490. This is down from 1490+ previous to that. So the obvious move is to buy when the index reaches the lower end of this range, and sell (or re-short) when it gets to 1490. I've done this aggressively in my personal account this week, but obviously running a fund, you can't really do those type of sales wholesale. I did lighten up to get to about 20% cash by end of day Wednesday when the market spiked up so severely Tuesday and mid day Wednesday, but in keeping with the spirit of running a mutual fund, I never try to go over 25% cash. So I reached my "limit" very quickly.

At this point either the market will break down below 1440 or break above 1490. Anything in between, to me, is simply white noise. So the obvious move is to lighten when we get to the top of the range, and get more aggressive buying at the lower end of the range; so with the index at its lower end of the range Friday I am more aggressively long than I was mid week. This is simply playing the odds - eventually either buying at the low end of this range will be incorrect (as the market falls through that support and plunges), or selling down positions somewhat at the top end of the range will be incorrect (as the market finally puts in a real rebound). But until then, I will continue with this obvious strategy and try to lock in some 'shorter term' gains.

I do believe sentiment is pretty bad, and this week upcoming is generally a positive one, and this "round" of write downs from the financials should be close to done. As I stated in September, when the first round of kitchen sink quarters happened, this would not be the only one, and expect a lot more sinks - well we just went through our second round and I expect more down the road, but we should be through this round of sinks and probably can wait a month for the next round. At some point this continued uncertainty about financials will either have less and less effect as each round of "sinks" is announced OR will cause a panic that this is an unending abyss. I think this week also was one where it began dawning on investors that the economy is truly slowing down, so expectations going forward are beginning to get adjusted. Unfortunately a lot of items I stated in late August in my "Et tu, September?" piece are coming to fruition, they just came on a delayed basis while investors basked in the Kool Aid that "Fed Cuts would make this all go away". I do expect to hear a lot more revised guidance downward in the January earnings season, so when we get there it will be a time to be very cautious in my opinion. But hopefully an oversold rally first....

My main worry is the international markets at this point. They will slow, but we are still in the perception that "US markets might slow but emerging markets will be unaffected". At some point, probably in 2008, this scenario will be shown to be false and a lot of stocks in my portfolio could get haircuts, even if they are will do just fine at 3-7% GDP growth in those emerging markets. But it won't matter as hysterical lemming investors panic and dump everything. Hence I am keeping that in mind - we are still getting GDP growth numbers >11% from China. I could see some sort of panic ensue if they "drop" to something "terrible" like 8%. I think the market is still pricing 11-12% Chindia growth from here to 2050. Not realistic, and when that adjustment happens it will get ugly - but the timetable for this change in opinion is unknowable, and knowing what triggers it also is - so until then, one just must take it week by week and let the individual stocks tell the story.

Marketocracy.com is again down today so I cannot load individual position trades - in a general sense I just held on with revolt Monday watching my favored positions get whacked - I did do some selling of things holding on strong that day and bought into my favored sectors in the teeh of massive selling. On the rebound Wednesday, as the S&P 500 hit my upside target of 1490 I lightened those positions which turned out to be the right short term call; so I saved some downside exposure. I have seen in many names repeated tests of the same levels on the downside, i.e. Mosaic at $60 so short of more panic/emotion selling or forced liquidations by institutions these levels seem to relay good support levels. I entered the week light on cash as I sold down my short ETFs into the emotional selling Friday, and while those sectors actually rallied in the first half of the week (meaning the ETFs lost value), most of the rest of the sectors I was in also fell Monday. Since I was so low on cash and short exposure, I lightened up mid week in the rally, and thus was able to rebuy back some of those positions at much lower values late Thu/Friday. Unfortunately short of this type of 'trading' for short term swing trades it has been nearly impossible to make money on the long side. Buying and just holding has not been rewarded the past few weeks....

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. Closed short term position in Nordstrom (JWN) as the retailers bounced a bit after being oversold and I wanted cash to buy stocks in favored sectors that were being trounced on Monday.
2. I bought Mosaic (MOS) on it's pullback and started a new position in infrastructure name Chicago Bridge & Iron (CBI) - this was a handful of the infrastructure names with exceptional earnings and after a gap up post earnings this was the first time it had shown any weakness.
3. Needing more cash, I closed a minor position in Intercontinental Exchange (ICE), and I sold down my Garmin (GRMN) position because (at the time), it was locked in a bidding war for Tele Atlas which would limit upside - of course late in the week they called off the acquisition effort and Garmin spiked, so I closed the position into the spike. With the money from the reduction in Garmin on Monday, I added to Russian coal/iron play Mechel (MTL), more Mosaic (MOS), and Shaw Group (SGR), another infrastructure name - agriculture and infrastructure had a terrible Monday so with such bargains I wanted to add exposure there - although it is never easy buying into a flurry of selling.
4. Late Monday, I continued to "sell strength", and "buy weakness" - closing 2 more positions, (reluctantly) selling Blackrock (BLK) - only because it was holding so well and other stocks I like as much were being sold off at such low prices, and iShares Hong Kong (EWH), a position held since August. I also reduced Ciena (CIEN), one of the few tech names to hold up quite well in this selloff of NASDAQ names, to raise cash. With this cash I went to work trying to buy very late in the day Potash (POT), Baidu.com (BIDU), more Shaw Group (SGR), and CF Industries (CF) - only the Potash buy went off in time and the next day most of these names bounced pretty huge. It is easy to look back in retrospect at charts and say "nice buys", but at the time it looked like the world was about to end in the portfolio. :)
   
5. Since most of my buys did not trigger late Monday, I got to work applying the cash first thing Tuesday morning in two stocks that were down in an up market, Foster Wheeler (FWLT), and Apple (AAPL). I had been selling Apple down in the $180s and it was not a major part of the portfolio of late, so to be able to add exposure in the $160 area was something I was happy to do.
6. I cut 3 smaller positions Tuesday in the rally - these were 'technical' sells more than anything ; stocks that had not rebounded Tuesday and had broken their 50 day moving averages and not making a good effort back at regaining this important technical level. These names were Perini (PCR), Atwood Oceanics (ATW), and Freeport-McMoran Copper & Gold (FCX). While far too early to tell if these are good moves, as of Friday none had regained the 50 day moving average although ATW was making a good effort.
7. For the same reasons, I also closed out Cummins Engine (CMI), a company I really like but sentiment could turn in the near term against this name simply due to exposure to US economy. Still like this as a Chindia backdoor play but I don't want to fight the market. The stock is down another 4% from where I sold it.
8. Wednesday mid day I took a big knife to the portfolio - reducing 9 positions and closing 3 entirely - Excel Maritime Carriers (EXM), VMWare (VMW), and Baidu.com (BIDU). I sold a smallish Baidu.com position around $350 but as it weakened later in the week, I did rebuy Friday in the mid $310s. So it was just a temporary exit from the portfolio. Again, if this was more of a hedge fund environment I would of taken a much stronger stance on cutting positions but these sales raised 15-20% which is more appropriate for a mutual fund. Most of what I cut back on were positions in infrastructure and agriculture that I had bought 10-13% lower just the day before... others were stocks I had a larger position in, that I did not want to exit completely but whose technical picture had deteriorated in the near term so I wanted to lighten up in those positions and stick to stronger charts. For example, reducing McDermott (MDR) and redistributing cash into Chicago Bridge & Iron (CBI) or Foster Wheeler (FWLT) - so I am buying the same sector, just names in better technical position and relative strength which "should" outperform this quarter. This manuveur is more about respecting the whims of the market; I like all the names but if the market favors 2-3 names over the other, my job is to maximize gain and follow the market into the names it prefers for the next 90 days. (until the NEXT earnings period when it can bash new names, and create new favorites). I did end up buying back some of the names I had culled Wednesday mid day by end of day Thursday, as the same groups (agriculture/infrastructure) were taken out to be shot again after a 2 day respite. Incredible volatility, and again its a traders market - not an investors.
   
9. Thursday, I did initiate a new short position in UltraShort MSCI Emerging Markets (EEV) - my thinking was dead on, I just bought the wrong instrument as a hedge as the Emerging Markets actually held up, but China specifically tanked so if I had bought UltraShort China (FXP) it would of provided a great hedge on Friday as the instrument gained over 10% Friday. These are very volatile instruments, so I am simply using them as hedges and with the market seemed poised to (maybe) rally next week I cut back my EEV exposure heavily late Friday.
10. I also initiated two new names in the fund Thursday, Agco (AG) in the agricultural space, and Massey Energy (MEE) in the coal space. I only started initial stakes, but added a bit to each on Friday. Both were bought because I like the fundamentals of their sector, and these names had among the best relative strength in this sell off.
11. I continued adding more layers to the potash related names, Mosaic (MOS) and Potash (POT) on weakness Friday.
12. I restarted a position in Suntech Power (STP) Friday, as well as beginning First Solar (FSLR) as these two names emerge as the leaders in their respective spaces (PV vs thin film), and had tremendous relative strength Friday - not selling off an inch despite a market on edge... these were just starter (small) positions but even when the market rallied a tiny bit Friday these 2 positions took off in the last hour of the day.
13. I did add quite a bit of Research in Motion (RIMM) late in the week as the stock was very weak....it briefly broke below its 50 day moving average, and is in precarious position technically, just poking its head above. If it weakens further from here, it might need to be culled until it forms a bottom but with such tremendous fundamentals its hard to see it down if the overall tape improves.
14. I got back some of the Mastercard (MA) I sold around $200 last week ago, near $180. Another stock with incredible relative strength.
15. Late Friday I added 2 weak dollar plays, that will also act as hedges for the fund - Silver Wheaton (SLW), and the Canadian dollar (FXC) - while it might be early to jump into these, they are not typical 'long' positions for the fund and fall into the 10% of the fund I use either as hedges or strategic shorter term positions.

The above do not include the trades in my Ultrashorts which I am trading quite often as the market ebbs and flows - I continue to focus on Russell 2000, Financials, and Retailers; although I continue to believe these are overdue for a rally.