Friday, November 30, 2007

Bookkeeping: 'Rising Tide' Performance Week 17

Week 17 performance of the mutual fund

Comments: An interesting week to say the least (aren't they all?). After a terrible open Monday after a post Turkey day rally last Friday, every index was officially in correction mode. The mood was horrible and talk of bear markets approaching were everywhere. You'd think that was a month or 2 months ago - it was just 3 days ago. After a spike down Tuesday that had us test the August lows - it looked like the bull case was lost. Then out of the air as we touched 10% correction, the helicopters and unicorns united in a magical symphony and we had a reversal and a great day for the 'indexes', but paltry volume and weak breadth (many stocks were still down Tuesday). Strange how every time we are on the precipice the indexes (which take far less buying power) reverse - when many stocks stay in bad shape. Well that index reversal was enough to bring the bulls back and Wednesday we had a full bore rally from top to bottom, followed by a quiet Thursday (unless you were in solar or dry bulk stocks). Thursday night investors were treated to the treat that is a Ben Bernanke signal of future rate cuts (insert needle here), following by a uppercut to the jaw of the bears to news Friday morning that legal debts would no longer matter (for potentially 7 years) for those silly subprime borrowers. We are well on the way to bailouts - and I can only assume this is the beginning. Bulls rejoiced, free market disciples were aghast, and we partied like it was 1999. Late Friday we had a dip and confusion reigned momentarily but 'market forces' got back to work in the last few minutes of the session to make sure the week ended with a bang! Magic!

For the fund, I did, as promised selling into the rally to get more 'neutral' from a very long exposure last week. And I did more buying of short exposure as the week passed - while this held back the fund quite a bit (to the tune of over 1% of return) it's a disciplined conviction until the overall index charts show more staying power. In the future I will just have to remember that at every 10% correction the full faith and power of the federal government will come riding on their white horses (along with those pesky computers who run Wall Street) and every 10% correction must be bought. We will apparently never be allowed to have a (gasp) 15% downturn or (horror) 20%.... ever.... now that I know the playbook (which has obviously changed since 2002), I will learn and adapt. But for now we've put a quick 5.5%-6.0% rally and one would think... wait, thinking is wrong. Conventional wisdom would say... wait, conventional wisdom is moot in a government supported market.... well the truth is who knows. We could be at all time highs by middle of next week with all the kool aid running through our veins now. Or down 5%. Just take it day by day. Old playbooks have been burnt - when market forces are not allowed to play out, you cannot even fathom to guess what will happen. I will see what the government wants us to do, and then follow along. "Take me to your leader"..... Wheeee....

The S&P 500 was up 2.8% and Russell 1000 was up 2.9% his week. I know you'd think they would be up much more but remember, we had a terrible Monday (I know, that feels like eons ago). Rising Tide Growth Fund pulled through like a champ with a up 4.1% week only held back by large short exposure in the back half of the week (without which the fund would of been up roughly 5.5%). But that's ok, I like insurance in this market where 300 point Dow moves are now 'expected'. So a nice 1.16 to 1.3% type of outperformance this week and it was great to see the vast majority of fund holdings outperform the indexes by a mile once the veil of darkness over the markets was lifted. When we go through such severe downturns so quickly, one begins to doubt the stocks but these holdings really put on a heck of a show once we left the domain of "every stock stinks, they all go to $0" type thinking. So the fund is nearly back to the +15% over indexes I want to achieve every year...

I can't even hazard to guess where we go from here. The market is under the influence of pressures that are not 'measurable', so I am simply going to rely on technicals at this point. We are still below S&P 1490, when we eventually get the government to push us through that level, I will drop these short positions and join the party with toga in hand. It's as simple as that. Feels 'great' to have so many people looking over our shoulders to make sure nothing gets out of hand to the downside. If we dare go down, I am sure that will be 'fixed' too, soon enough. I'm sure someone from Omar or Bahrain is itching to buy some Etrade or Washington Mutual or (insert troubled institution of your choice here)! And another problem disappears just like that. Magic!

Price of Rising Tide Growth: $11.573
Lifetime Performance to date (vs Aug 3, 2007): +15.73%

Comparable S&P 500: 1,481.1 (+1.09%)
Comparable Russell 1000: 806.5 (+1.29%)

Fund return vs S&P 500: +14.64%
Fund return vs Russell 1000: +14.44%

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

3 Similar Charts - Making Some Buys

With my newfound (ahem) optimism, and oodles of cash I am making some small purchases today since most of this week has been sales. I am not making huge buys... just toes in water additions. Totally unrelated to the rest of this post I added to my Research in Motion (RIMM) which is down 6% on "channel checks" blah blah downgrade.

For illustrative purposes on how I am allowing technical signs to guide the positions near term - I offer 3 stocks: CNH Global (CNH), McDermott (MDR), and National Oilwell Varco (NOV).

1) I mentioned McDermott (MDR) yesterday as a stock that was rising from below the 50 day moving average and was reaching important resistance (so I cut back since it had a pretty nice bounce from lows). Well it did break through later in the day, jumped up today, and now has fallen right back to resistance (from above instead of below). While still in (to me) a precarious position (it could go either way) just to make reader msb happy I did offer a small buy (see now that's an interactive mutual fund). Please note the word "small" (it is still a sub 1% position). I am not going to commit further until it either makes a more strong move upward and/or S&P 500 makes a push above 1490. Yesterday's close was the first time over the 50 day moving average and if it holds $53 today that would be a second day - if the market improves this is the type of position I'd then add to as it would be without any near term resistance to impede a run upward. But it could just as easily break down and bring reader msb to tears... So this is chart #1

2) CNH Global (CNH) an agriculture equipment play has been strangely week despite great news from competitor Deere (DE) and great earnings. Most likely the culprit is the strong euro which hurts exports and exposure to construction (just like Deere) in part of its business. But the chart improved tremendously the past week, and it also broke back above its 50 day moving average, and after spiking this AM has pulled back very nicely to its 50 day this afternoon (down 2%)... I actually like this chart more than McDermott since this is the 3rd day its held its 50 day moving average of $57. So I am adding here. So this is chart #2

3) National Oilwell Varco (NOV) an oil services stock is not faring as well. It was in a very similar setup to McDermott (MDR) yesterday but has failed to push through its 50 day moving average of $69 today. It is sort of just hanging around right at resistance. Really up to 4 PM yesterday the chart of McDermott and National Oilwell Varco were identical. Only difference is McDermott looks far stronger today. Again I like all these names fundamentally but I want to see technicals that confirm. National Oilwell Varco with a strong day or two should join the other two but for now I am holding off adding any. So this is chart #3.

So 3 charts, on 3 stocks I like, 1 strong buy (CNH Global), 1 touchy buy (McDermott) and 1 still waiting on (National Oilwell Varco). Love the long term fundamentals on each, I am just wanting the market to tell me they also love the fundamentals and are ready to put their money where their mouth is....

And away we go... I finally put some money to work on the long side. Thanks Ben!

Long all 4 names in fund; long none in personal account

Less Dogma, More Money

Ok, after a morning of intellectual puking, have to get back to the market.

Rev Shark over at - one of my favorite web authors said it best today; so I will just follow this credo and ignore the revulsion at what is going on

In addition to the very dovish Federal Reserve, the Treasury Secretary is strong arming banks into foregoing any action to deal with defaulting sub-prime mortgages. Even if you aren't appalled by this gross governmental meddling in the free enterprise system you have to wonder if we are simply delaying the Day of Reckoning and making the eventual pain even worse.

Even though there are some serious doubts about whether this government intrusion into the mortgage mess makes business sense, the market's immediate reaction is positive. With the Fed cutting rates and people being allowed to not pay their legal debts, we have an increase in liquidity and that is enough of a band-aid to hold us up and even bring in buyers who want to ride the wave of short-term optimism.

I find the whole idea of the government (and a Republican administration nonetheless!) telling banks how to deal with sub-prime loans sickening, short-sighted and a bad precedent, but our job here isn't to discuss political philosophy. Our job is to try to make some money and the market is having a positive reason to the news this morning. The question we have to ponder is whether this news is going to give us some legs into the Fed meeting that is scheduled for Dec. 11.

Back in August we ran hot and heavy into, and out of, the Fed meeting as the market seized on the belief that the Fed cut was the salve the market needed. For a while the market seemed to have lost confidence that the Fed could solve all our problems, but in the last few days belief in the Fed as our savior seems to have been restored.

So let's revisit all the 'good things' in a purely market standpoint
  1. All branches of government (save judicial?) will do whatever it takes going into an election year to keep any slowdown contained to a bare minimum
  2. We have a literal printing press shoveling an avalanche of money into the lending system. This is helping the banks prop up balance sheets, and one day they might even lend this money out to people but for now all that matters is they prop up their balance sheets.
  3. What we cannot print, foreigners who we have been sending trillions of dollars to the past decade, will buy from us and place a floor below all major assets (aside from homebuilders I believe)
  4. Speculation is now officially back judging by the stocks popping the past 48 hours - worst of breed is rising tremendously which means risk appetites are already back (it only took 1 day of rallying off Monday's low to bring them back) Amazing resiliency.
  5. Every time we drop 10% (Feb 2007, August 2007, November 2007) we pop up magnificently like clockwork. 10% correction seems to be the number that the computers that run 70% of trading on the Street go off historic models and funnel oodles of cash back into the market.
  6. The Fed will be meeting Dec 11th and a chorus will now raise for 50 basis point cuts
  7. Santa Claus rally is always in the cards
  8. Despite all the problems in the world we are 4% away from all time highs on some indexes
  9. Where else are you going to put your money? Treasury rates have fallen off a cliff and real estate is non starter.
There, I found 9 great things that if I only focus on, you have to be an unabashed bull. Now I just have to stare at those and ignore everything else....

Short all political parties at this point

US Banks in Plans to Freeze Suprime Rates

Wow. I totally missed this news. How bad can things be when the kings of free markets are involved in stopping the process.... amazing times we live in. They fight regulation at every turn, but when the market has to cleanse itself they step in and stop the process. True hypocrisy. And in return what will these banks get? Let me guess, an implicit promise to be bailed out by the Fed. Everyone is a winner... lovely.

Sadly its not subprime that is the main issue folks - but I suppose this will help people making $45K live in $500K homes for $1200 a month continue the charade. This is simply going to drag on the process. Subprime is just the tip of the iceberg - many (most) of those people should not be in homes because they cannot afford it, period. And when their houses drop in value they will still be upside down.

US Banks in Plans to Free Suprime Rates - WSJ
  • The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations.
  • An accord could reassure investors and strapped homeowners, both of whom are anxious as interest rates on more than two million adjustable mortgages are scheduled to jump over the next two years. It could also give a boost to the Bush administration, which is facing criticism for inaction amid the recent housing turmoil.
  • The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. People familiar with the talks say the individual members have agreed to follow any agreement reached by the coalition, which is called the Hope Now Alliance.
  • In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.
  • Under one scenario, the freeze could run as long as seven years. The parties are developing standard criteria that would determine eligibility. The criteria should be finalized by the end of year.
  • While the government can't force the industry to modify loans, Mr. Paulson and other administration officials have been using moral suasion to push for workouts, telling the companies it is in their interest to avoid foreclosure since most parties can lose money when that happens. A similar plan to freeze interest rates temporarily was recently announced by California Gov. Arnold Schwarzenegger and four major loan servicers, including Countrywide.
  • Among the holdouts have been investors, who typically hold securities backed by mortgages. If interest rates are frozen, they would lose the potential benefit of higher payments. But investors have cautiously moved toward cooperation, likely on the grounds that it's better to get some interest than none at all.
  • Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups: those who can continue to make their payments even if rates rise, those who can't afford their mortgages even if rates stay steady, and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates. Only the third group would be eligible for help. (I'd love to see how they determine who belongs in each group) The creditors are likely to look at whether the borrowers have equity in their homes, despite falling house prices, and whether their incomes are holding steady.
  • Mr. Paulson, who is philosophically opposed to federal meddling in markets, at first rejected a sweeping approach to loan modifications when the idea was floated by Federal Deposit Insurance Corp. Chairwoman Sheila Bair. But he shifted his position recently. He told The Wall Street Journal last week that it would be impossible to "process the number of workouts and modifications that are going to be necessary doing it just sort of one-off."
As says - this is the same Paulson who said in April ""All the signs I look at [show] the housing market is at or near the bottom.""

Oh well I give up. Next time houses are rising 25% a year, I am going all in with 0% down, no doc loans and amassing 50-100 properties. As long as I provide I have an income I should be cool since they will lock me into my 1% ARM rate for 7 years. I'm in (next time). How stupid were we who sat by watching the speculation go on, and not partaking knowing the house of cards would fall. Dumb dumb dumb. Risk aversion is for the uncool kids!

Back to S&P 1490

Well here we are again. Back to our old stomping grounds in just 4 sessions. What a rally.

Today, as I look around, it appears the speculative juices are back - or are they? What is going up the most. The beaten down speculative type of stocks... but is is buying or simply short covering. I am using as bellweathers the solar sector and the 'teflon stocks' in tech - the more speculative names are up in solar whereas the leaders are just up a bit. And the teflon stocks are ranging from down (Research in Motion) to barely up (Apple, Google)

So to get behind a rally from this point of view, I'd like to see those leaders move up... not the 'speculation' stocks. Leadership areas like coal are also weak.

Very strange to see silver and gold so weak today... hmm.... can't figure that one out - you'd think interest rate cuts would be helping those names - that was why I bought Silver Wheaton (SLW) - that theory does not seem to be working out.

I am continuing to sell (trims, not major selloffs) and raise cash - positions lightened: Ciena (CIEN), Chicago Bridge & Iron (CBI), Sterlite Industries (SLT) [again! what a day, up +15%], New Oriental Education (EDU), Foster Wheeler (FWLT), Jacobs Engineering (JEC)

The stuff at the top end of my fund, what I would consider more stable names are just up slightly, whereas the stocks I have much lower exposure to which are more of the high risk/high reward types are flying. Interesting dichotomy and again, appears to me at this point to be a short covering situation. It does not mean performance anxiety won't lead people back into this market as we go to a Santa Claus phase but I'd like to see confirmation before I go there.

All in all, I've liquidated about 5%+ in equities, so cash is up to 19% and I've added to some UltraShorts. As I stated in the plan yesterday, if we break out in the S&P 500, past those resistance levels, than I get more constructive and ignore all macro economic issues and return to punch bowl drunken orgy like everyone else. Until then, staying neutral.

Long all names above in fund; long Foster Wheeler in personal account

Florida Freezes $15 Billion Fund as Subprime Crisis Hits

Well while the folks in New York City high five the bailout of multi millionaires by our tax dollars, here is what is happening on Main Street. Folks, think of the credit system as a huge spider web. The strings are only just beginning to snap in the middle - these nasty SIVs and CDOs are widespread and in places you'd never think of. We won't know about them, until they become clear one by one. For those of you who remember Orange County going bankrupt in the 90s - let's see what 2008 brings us at the county/state/city level.

Here is another string in the web per CBSMarketwatch:
  • Florida halted withdrawals from a $15 billion local-government fund Thursday after concerns over losses related to subprime mortgages prompted investors to pull roughly $10 billion out of the fund in recent weeks.
  • The State Board of Administration met earlier Thursday and voted to immediately freeze withdrawals, spokesman Michael McCauley said.
  • The decision shows how far this year's subprime-fueled credit crisis has spread. Florida's Local Government Investment Pool, which had more than $27 billion in assets at the end of September, is like a money-market fund that's supposed to invest in ultrasafe assets to provide participants with a secure place to stash spare cash. But even these types of funds have been hit by the widening crunch.
  • "It's spreading into areas that people didn't expect and this is a good example," Richard Larkin, a municipal bond expert at JB Hanauer & Co., said. There will likely be more state funds in similar predicaments because they use similar investment guidelines, Larkin and others said.
  • "Investors will now be looking at other investment pools around the country, and we can be sure that Florida wasn't the only state to be lulled into taking on riskier debt in order to boost money market returns," Win Thin, senior currency strategist at Brown Brothers Harriman & Co., said. "This is bad news, no matter how you look at it."
  • Still, the interest payments on some of these securities are now being delayed. Rating agencies and other experts have traditionally consider a default occurring when investors don't get paid in full and on time, Larkin said.
  • Florida's Local Government Investment Pool, has $400 million in Axon Financial, a SIV run by Dinakar Singh's TPG-Axon hedge fund firm, according to the state board's Nov. 9 update. It also has almost $850 million invested in similar two vehicles sponsored by KKR Financial Holdings. Another $577 million is in OTTIMO Funding Ltd., sponsored by Aladdin Capital Management, another hedge fund firm.
  • These four vehicles have been downgraded and forced to restructure because they had trouble refinancing themselves in the asset-backed commercial paper market, the state board said on Nov. 9
Now remember, hedge funds argue they should be unregulated and for people to mind their own business and leave them alone because they provide liquidity to the system and absorb risks, and keep risk levels down in our economy. Right? Right! Just so we're straight on that. Remember, regulation is evil. Let everyone self regulate because humans never succumb to greed or anything like that, left to their own devices... no, of course not. ;)

Meanwhile your tax dollars are hard at work bailing out this liquid and safe system, full of "regulated" banks, exotic overleverged hedge funds, private equity which pays taxes at a 15% tax rate (while you are paying 28, 30, 35%) etc. And when things go awry, your tax dollars will help bail them out. This is why we are having a great day on Wall Street. The systems works! (for them) Keep smiling, and enjoy your +$3200 in your Ameritrade account today, because somewhere people are making multi millions/billions and patting Ben on the back in thanks. Remember, free markets rule. Until we need bailouts. Oh yeh, all this money we are feeding into the financial system? That is supposed to be going back out to the financial system for loans? Banks are hording it to shore up their balance sheets because they are so undercapitalized. Instead of delivering it to people who need it... after all bonus season is right around the corner and we need to keep up appearances until Dec 31st - these bonuses are near and dear to our economy so that Tiffany's, Ferrari, yacht companies, et al can have another great year.

Ahhh, capitalism.

I am buying more Ultrashorts into this facade and sham of a system.

Bookkeeping: Trimming Positions

Well I could be wrong since apparently we are entering a new bull market but I am trimming the following
Sterlite Industries (SLT), Mechel (MTL), WuXi PharmaTech (WX), CF Industries (CF), LDK Solar (LDK), Frontier Oil (FTO)

Most of these are more "high beta" (i.e. smaller cap, higher risk) names that fly when speculation is back on the table - as apparently it is now that the crack dealer is back on the corner.

While my long positions are happy, my intellectual thinking cap is disgusted.

In a Complete and Utter Shock the Market Rallies on Fed Ready to Cut Rates

What a shocker. In speech last night, Uncle Ben signals / hints more interest rate cuts are coming down the pike. After jawboning about inflation risks and weak dollar risks. Who would ever of guessed such a thing? (well I was about 2:31 PM on October 31st) So let's party again, because obviously the last two cuts have really fixed the problem. But not to worry, don't ask "why" the Fed is being forced to cut - all the bad news in the macro environment and major instability in credit markets - the reason why does not matter - just the actual crack delivered to the drug addict is all that matters. Didn't we just play this game? Is this simply the same game we are going to play every 6 weeks? Every time we get the "all clear" signal that the drug dealer is ready to deliver we party? Despite the reasons?

Let me give you a preview of Dec 11th - we stand neutral blah blah blah. 6 weeks later, another cut. After the late January meeting let me tell you what will be said - we stand neutral blah blah. 6 weeks later, another cut. And so on and so forth.

Really, Uncle Ben is no different from Uncle Al. Maybe if we can pull rates down to 1% again, we can get that stock market up to 16,000! Yeh! Awesome dude!

Up, up we go - don't ask why the Fed is forced to cut when in theory it doesn't want to - just enjoy the fact that Fed cuts = great times and all ills washed away. Until they don't. Which is usually 3 weeks later when reality hits. It is amazing how simplistic the thinking is. Talk about Groundhog Day. I guess I am always just 'shocked' when things that are plainly obvious are "news" to the investing public. The 'experts'. Unfortunately to be a good stock investor nowadays you need to be more aware of when Ben has speeches, rather than fundamentals of stocks.

Thursday, November 29, 2007

The Latest Home Sales Data - Builders Slashing Prices

The beat goes on; as I've written many times (housing bust blog entries) this housing bust that "will all be fine within 2 quarters" as public officials assure us, is just getting started. At the heart of it all (and lost in the subprime mess) is simple unaffordability. Average Americans with average jobs cannot buy homes with reasonable mortgages (read: not exotic) in major urban areas of this country. Mortgage costs have gotten out of whack in relation to rents. This is the main problem, not what mortgages should of been given out to people who never could afford a home in the first place. When an accountant/teacher/police officer type, married couple has to make a $4500 home mortgage payment its just not reasonable. Not for most of us anyhow. So prices need to come down to a point where if you put even 5% down you can afford a reasonable payment, meaning $1500-$2500 type for "most" people.

As CBSMarketwatch reports the first stages of what needs to happen are finally being forced onto the marketplace - that is builders slashing prices to move inventory. Median prices are staying stubbornly high because (as yet) most people are unwilling to face market realities. Hence inventory is building as people think they should at least get what they paid for in an overheated market of 2005/2006. Unlike liquid markets such as equities, the housing market is quite illiquid so this dislocation in pricing can remain for a long time. But what will instigate the eventual correction in pricing will not be homeowners but builders. Why would someone buy a pre-owned home for $100K more than the home a neighborhood over brand new (assuming homes are similar of course). Answer - they won't - and that's what's going to get these prices down, and inventory eventually moving. But it's going to take time for us to get through the 'denial' stage.
  • Builders slashed prices at the fastest pace in 26 years in October, boosting sales of new homes from a much lower level of September sales than was originally reported, according to Commerce Department data released Thursday.
  • Sales rose 1.7% to a seasonally adjusted annual rate of 728,000 (until it's revised next month) last month from a revised 716,000 in September, which was a 11-year low.
  • September's sales pace had originally been reported as 770,000. August's sales were also revised sharply lower to 717,000, down from 735,000 estimated a month ago and from 795,000 estimated in the first release. (oops did we misreport September by a factor of 54,000 homes? Oopsie! Hate when that happens) (with that sort of accuracy I am sure October's numbers are rock solid!)
  • "The outlook for sales looks bleak, to put it mildly," wrote Richard Moody, chief economist for Mission Residential. The figures do not include cancellations, and some national builders have reported cancellation rates of around 50%. (oops, those darn cancellations... always accurate to report sales numbers without cancellations)
  • "With tightening in credit conditions and substantial inventory levels, we are farther away from a recovery rather than closer," wrote Young Kim, an analyst for Stone & McCarthy Research. (that's not what the National Association of Realtors chief economist said, and really who knows better than him?)
  • The large revisions highlight the low confidence that government statisticians have in the monthly report. The standard error in October was plus or minus 11%. (hold on while I clean up the water that just spit out of my nose - maybe these guys should go work for the Bureau of Labor Statistics, which is prone to the same 'accuracy' and 'truth in reporting')
  • Sales are down 23.5% in the past year -- a vivid reflection of the carnage in the home-building industry.
  • Meanwhile, the September-to-October median sales price fell 8.6% to $217,800 -- the biggest monthly price drop in 26 years. Median sales prices are down 13% in the past year, marking the biggest year-over-year decline in 37 years. (finally, we begin the process) The average sales price, by contrast, is down just 0.3% in the past year, illustrating how sales of homes with higher price points have held up. (ahh, 2 Americas)
  • Indeed, the number of homes selling for $200,000 to $300,000 dropped by 37% last month, while the number of homes selling for less than $200,000 rose by 37%. The number of homes selling for more than $300,000 rose by 10%. (go figure, affordable housing actually drives sales - interesting concept)
  • The Commerce Department said the inventory of unsold homes fell 6.7% to 516,000, representing an 8.5-month supply. The inventory peaked at 9.3 months in August. (good sign!)
  • Builders have cut back production of new homes by 23% from a year ago, but the number of completed homes that have yet to be sold rose again in October to 191,000, more than twice as many as in 2004 when sales were booming.
  • On Wednesday, the National Association of Realtors said the inventory of existing homes for sale rose to 22-year high, despite a record decline in the median sales price. (not so good sign!)
  • In another report released Thursday, the Labor Department said continuing claims for unemployment benefits rose to two-year high, while first-time claims climbed to the highest level since February, further indications of a weakening labor market. (rut roh! Well at least the market is rallying!)
Well seeing that the median price in America is finally falling, I will move this correction up from top of the first inning to the bottom of the first. The problem is since we choose to regulate only after carnage (free markets rule, until we need to bail people out) - the free market will overshoot from one end (have a heartbeat? get a loan!) to the other extreme. So what do we have to look forward to?
  • credit being harder to get than it should as lenders get even more risk averse than they should be (gun shy)
  • slowing US economy due to potential recession
  • unemployment rising
  • still unaffordable housing in most major urban centers
  • many owners of 2005/2006/2007 vintage being upside down on their homes (a bit tougher of a proposition than being upside down on a car)
  • inflation eating away at budget so even less discretionary income for small things like... mortgages
But once we work through this whole situation, by say 3-4 months from now according to public officials, we should be ready to go back to party mode right around... April Fools.

As an aside I've been reading a series of articles in the local friendly (Detroit News: The Foreclosure Factory), about the joke it is to become a mortgage lender in Michigan - do you realize you need a license to cut hair but not sell $500K mortgages? Anyone can put a shingle out. Anyone. Luckily free market forces will fix all this - by 2011. Because as you all know - all regulation is evil, it makes no sense to ever be proactive instead of reactive. Preventing a problem with simple, common sense agreed upon approaches by reasonable people would never work. Let's fix it after it impairs huge swaths of the economy and destroys many individuals. Party on....

It Could be Worse - You Could be an Estonian Investor

I had to make that clever title up due to a specific reader of the blog who has emailed me in the past, who is from Estonia of all places. :)

Below is a chart of all the world indexes returns year to date (courtesy TickerSense) - this was 2 days ago so the US index would be back in the green but overall its been a paltry year for US investors. The chart is sort of hard to read due to size so click on it and it will pop up in larger form in a new window. What is interesting is if memory serves me 2006 was the first year ever that every international index was up - talk about an amazing year. This year it is still a pretty good result worldwide, just no so much here in the US... or Estonia at @ -14.4%

Whose at the top? Shocker... China @ 135%
A lot of Eastern European countries make up the top 5; no surprise - they have been hot for years. Nigeria (oil) is also a big winner. A lot of nice winners in the middle east (petro dollars) - again nothing really surprising there either. The other 'BRIC' members were very solid - India @ 39.6%, Brazil @ 32.9% and Russia @ 13.3%. Personally I find Russia over hyped as they move away from capitalism, and over reliant on energy but hey that's working for parts of the Middle East I suppose.

Major losers? Surprisingly Ireland @ -29.9% - thats been a very hot market for a few years - good old Venezuela with more anti capitalist reforms @ -28%, and Japan @ -14.4%. This was supposed to be the year Japan finally recovered (then again it has supposedly going to be 'that year' for the past decade). The US and UK rank #64 and #66 out of 80, with essentially flat returns. For us. For foreigners who buy into our markets the returns have been gosh awful as their currency appreciates vs the dollar. In the meantime I'll get those "We're #66!" Tshirts ready.... woo hoo!

Overall the emerging markets in my opinion are the place to be for the coming decade(s), however they have had a huge run and are well overdue for a sizable correction. Perhaps this coming US recession will be the driver, and once the next serious correction is in, I think these will be some great buys for 2010+. iShares just introduced a new ETF a few weeks ago, as a matter of fact if you want all your 'BRIC' in 1 ETF... iShares MSCI Bric Index (BKF). There have been a few of these ETFs but most have concentrated too much on 1 country or another - this one has a pretty balanced approach
  1. China 36.5%
  2. Brazil 27.5%
  3. Russia 20.5%
  4. India 15.5%
While this ETF is too overdependent on energy for my liking it is a pretty simple & clean 1 stop approach. Personally I prefer BIC over BRIC (no Russia), but again... in time and at lower prices.

Now where is that iShares Estonia I've been hungering for.....

Where the Portfolio Stands

I've done a lot of small trimming on many positions, a snip there, a snip here

Going to a more neutral stance
Cash is up to 15%
Short exposure now up to 13.4% (which is as close to as high as I take it)

It is a very simple road map - we have come a huge way in a short time and now face the important technical resistance I mentioned yesterday. If we burst through that S&P 1480-1490 area that would be extremely bullish. If not, we retrace down. But we face a lot of resistance over head. I'd be very impressed if we just slice right through it....

Surprised? No never surprised - you never know what is going on behind the scenes ;) But it would be an impressive, counter intuitive move.

It seems way too convenient to have an exact 10% correction and then go up 10% from there to make all the bad go away just like that. We already have bounced nearly 5% in just 2 sessions. Maybe it continues, but again it seems JUST too convenient.

Further, yesterday some of the worst (or most beaten) stocks rose the most - I did not see great moves out of the true leaders like Apple or Google (as I mentioned yesterday). So how much was simply over eager shorts needing to cover versus real buying is the question. Remember, Tuesday we had a huge move in the indexes but many stocks were down, breadth stunk. Yesterday was a true rally day where a lot of stocks participated but nothing goes straight up, or down.

From a macro point of view the issues we have won't be going away anytime soon. I do believe the US is going to recession. I do believe earnings estimates are far too high for 2008 for most companies. I do believe we have future rife with homebuilders going bankrupt, and a few banks if not bankrupt going to need major bailouts or outside investors. A lot more bad news on the way. That does not mean the market can't make tremendous moves upward from time to time. Nothing has changed from Monday other than fear went to greed yesterday. The Fed's earlier cuts did nothing. The next cut will do nothing, other than make speculators giddy. The American consumer is still in major dire straits I am afraid to say.

But at times the economy and the market disassociate as we saw for about 6 weeks in mid August to late September. But the macro background (to me) is very poor. Until proven otherwise I will follow my game plan to draw down long positions into these rallies and increase shorts. Certainly I could be wrong, as calling market movements is 1000x harder than calling individual stock movements in my book. Perhaps the crack that is Fed cuts is enough to move the market to all time highs. It just seems difficult for one to grasp all time highs in the face of the very serious issues our country faces. The only offset to that is the huge amounts of money being created in this world needs to go somewhere, so in theory it could support the market at far higher levels than the economic outlook would deem reasonable. So as always, many cross currents.

I myself, remain cautious. And remain understanding that for weeks at a time all bad economic news can be ignored and the market can easily put a 10-15% move that makes no 'economic' sense. My (more) neutral stance, while potentially limiting gains to the upside, is the best course of action until we either drop back down to lower levels or move back to higher levels which would indicate a true return of market confidence. Will adjust as we go from here. If we do move back up, you will see a huge scramble of institutions rushing in as they face performance anxiety again so one must be nimble and open to anything.

While these huge swings up sound good, they are actually very hard to 'outperform'. Stock picking is generally favored in relatively calm environments, not when the indexes are swinging +300, and -300 day to day. Hence it is very difficult to outperform in such extreme conditions. Which since mid July has been the order of the day save for 5-6 weeks in early Sep - mid October. I wish we could have more of those 'calm' time frames where actual stock selection is rewarded rather than a decision of how much exposure to cash you should or should not have.... where everything goes up or nothing goes up, regardless of fundamentals.

Speculators fly back to Solars and Dry Bulk Shippers

Shows you how quickly emotions change - we were at the end of the world Monday at 4 PM. Now not 72 hours later it looks like early October all over again. Funny.

Fear and greed. As always, they rule the market.

Suntech Power (STP) has already passed my year end target of $80. I was buying heavily on this pullback to $59 just 5 sessions ago when it fell to its 20 day moving average. +35% return since. Nuts. I did sell some off but don't want to sell below a 1.75% exposure so will just let the rest run. Obviously I sold JA Solar (JASO) 1 day too early. The entire sector, regardless of fundamentals is back to ramping up massively across the board. Throw a dart, and get a 10% return today.

The rest of the market looks pretty benign but if you have a portfolio solely of dry bulk/solar stocks you are having a day to remember.

After the last 4 sessions which were up massive Friday, down massive Monday, up massive Tuesday (on the indexes if not individual stocks), and up massive yesterday, we have a normal day. Finally.

Bookkeeping: Cutting back McDermott (MDR) for Technical Reasons

This is purely a technical trade. I like McDermott (MDR) for the long run but prefer other names this quarter, so I am underweighting MDR for now. McDermott has been under the 50 day moving average for the past 2 weeks or so (under $53). In the past 3 day rally its moved from $47 to $52, or a nearly 11% move. This now takes it to an important test of the 50 day moving average. This is how I normally always treat stocks in this position. When they get close to this resistance I cut back - from there the stock can either
  1. fall back from resistance and sag
  2. break through resistance and move upward
From a technical point of view, if the former happens than you made a good sale and you look for either a lower area to re-enter or simply wait for the stock to push back through this resistance area before buying - and if the latter happens the stock is technically in good shape and you can buy back the position you just sold.

Again, it might not make sense to those new to the market to buy at a higher level but with so many investors in this world using technical levels to trade, you are simply riding the 'wave' if you will. If a stock clears an important hurdle such as the 50 day moving average, all these investors will latch back onto the story. If not, they won't buy. So you want to join when that buying power jumps into the stock. Otherwise you could be sitting on dead money for quite a while.

Compare this to a peer in the group with very similar fundamentals but far superior technicals, Foster Wheeler (FWLT). FWLT only very lately has even broached the 50 day moving average (fallen below it) and even then just barely, and only in the worst of the waterfall selloff. Then when we rebounded, the stock immediately surged back up over this level. So this is a stock the investment world favors right now, so this is a stock I want to be overweight in the near term.

The above thinking is an example of how I view most stocks - I want to own them when they are in good technical shape or very washed out (i.e. a Crocs in mid to upper 30s). The most dangerous place to own is right below a key technical level, because many times those stocks will fall or weaken further from level, costing you capital. There is your technical analysis 101. Again nothing is foolproof. If I am wrong on McDermott and the stock surges, I will be happy because I like the fundamentals in every stock I own in this fund - all I will need to do is buy above $53 - it costs me about 1.25% in return and commission costs if I am wrong. But if I am right it could save me much more by not being overweight if the stock just falls back. McDermott is now at $52.50 so it would not take much to get it back in good shape technically.

Another example of a stock exactly in the same place as McDermott is National Oilwell Varco (NOV) - great fundamentals, but technicals really broke down. The stock has since rebounded and is sitting right below its 50 day moving average - it could go either way from here (1) burst through upward or (2) sag back down. Probably the overall market health will determine this more than anything.

McDermott is now down to less than 1% of my portfolio.

Long McDermott and Foster Wheeler in fund; long Foster Wheeler in personal account

Deep Sea Driller Atwood Oceanics (ATW) Earnings Surge

Atwood Oceanics (ATW) is a company I have really liked and have held in the past, but truth be told the technicals of this stock broke down severely, as have many oil 'service' type of companies. Last night, we had quite the earnings report - very impressive numbers. 50% top line growth this quarter; 100% bottom line - yet the stock staggers.

I continue to love this deep sea drilling space but since fund inception in August, investors in this area have NOT been rewarded. Investors still seem to be of the mind that if crude drops to $65 business will falter, but once that mind set changes and people see this space is moving to a secular growth story versus cyclical these stocks should take off... I await that day. Atwood Oceanics is the smallest of the group of a very limited ways to get into this space, hence my surprise there has not been better price action.
  • Offshore oilfield service provider Atwood Oceanics Inc. said Wednesday its fourth-quarter and fiscal 2007 profit surged on higher revenue to beat Wall Street expectations. Net income for the three months ended Sept. 30 rose to $54.1 million, or $1.69 per share, compared with $23.2 million, or 74 cents per share, during the same period a year earlier.
  • Revenue increased to $121.6 million, from $81.8 million. Analysts polled by Thomson Financial forecast earnings of $1.43 per share on revenue of $116 million.
  • For the full fiscal year, the company said net income increased to $139 million, or $4.37 per share, compared with $86.1 million, or $2.74 per share, the previous year. Revenue rose to $403 million from $276.6 million the prior year.
  • Analysts predicted fiscal 2007 earnings of $4.19 per share on revenue of $393 million.
  • Separately, the company said its Atwood Southern Cross drilling rig received a contract from Italian energy company Eni SpA AGIP to drill two wells, with options for two more, at a daily rate of $406,000. (wow)
No current position but always interested in this space once the charts improve

Wednesday, November 28, 2007

China Life (LFC) Moving Away from Chinese Equities

A few weeks ago I did a piece on how a large proportion of "profits" at mainland Chinese companies were in fact due to speculation on stock prices [How Much of China's "Earnings" are from Operations]

Found this interesting Bloomberg piece about how China Life (LFC), one of the largest companies in the country, is getting frankly a bit sick with the rollercoaster that is Chinese equities. The funny thing is when stocks were going up 100% in a year it was not an issue but now after a recent 200% gain, a 20% drop makes them take the high road and away from those stinky stocks that dare to go down. (a new concept to investors in China apparently) On a more serious note, this could be an interesting foreshadow of things to come, and in the long run I have a feeling that this is going to save China Life a lot of pain down the road when the inevtible house of cards that is the Shanghai market collapses in on itself. (again note I am not saying the Chinese economy, just the domestic A share market)
  • China Life Insurance Co., with about $26 billion of assets under management, will trim share investments to reduce risk after the stock market tumbled 20 percent since tripling in the first 10 months of the year.
  • ``Other Chinese insurers may be happy living with rollercoaster ups and downs in their performance, but China Life will not be,'' President Wan Feng said at a presentation in Nanjing, a city on the Yangtze River northwest of Shanghai, today. ``For us, stability is key.''
  • The company will cut its investments in stocks and mutual funds, and aims for strategic equity stakes to make up 5 percent to 10 percent of its portfolio, Chief Investment Officer Liu Lefei said. China Life will look for infrastructure and financial acquisitions, he said.
  • The world's largest insurer by market value joined investor Warren Buffett and former Federal Reserve Chairman Alan Greenspan in casting doubt on the sustainability of China's stock market rally. The nation's stocks, on average, remain the most expensive among the world's largest markets even after the key CSI 300 Index slumped from October's peak.
  • ``China Life will still be earning money even if the stock market tanks to 2000 points,'' said Yang today. ``We bought into the stocks very early at cheap prices.''
  • China's insurance regulator wants firms to spread risk on their more than $300 billion of assets. In July, China allowed the nation's insurers to invest 15 percent of their assets in overseas stocks and bonds, up from 5 percent.
  • China Life has more than $1 billion in Hong Kong stocks among its 194 billion ($26 billion) of total assets under management.
  • The company is ``very interested'' in buying foreign banks, Board Secretary Liu Ting said at the presentation. ``Overseas banks are looking very attractive after the subprime crisis brought their share prices down,'' said Liu Ting on the sidelines of today's briefing. ``This provides great opportunities for China Life and is a very worthwhile option for us to consider.'' (rut roh Raggy)
Long valuing companies on actual operations, now how good they are at speculating on stocks

The Volatility in this Market is just Outrageous

This is an amazing time. 2-3% moves are now daily occurrences. We can go from oversold to overbought literally in 2 sessions. Remember two weeks ago, Tuesday, we had a massive move up and by Wednesday mid day the move was over.

We went from mid day yesterday (Tuesday) breaking 1410 on the S&P (in which I got spooked since we were losing our last support), to rallying later in the day, and now are approaching 1470! Thats 4.25% in just about 26 hours. Amazing volatility for an index. I truly think with the influence of computers and buy/sell programs, these trends are so exaggerated versus even 3 years ago.

I have been clinging to S&P 1490 as a resistance but in fact the trend lines are pushing down to 1480. So unfortunately we are already nearing major resistance - just like that. Maybe times have changed and the 'bottom' is in and we run into a Fed cut rally (again) - we've played this game before haven't we? But until we break through that level on a closing basis, I remain neutral and assume we will break down. If somehow we break 1480 and are off to the races with Helicopter Ben theory that all our problems are gone ahead, you have to take the lumps on the Ultrashorts and join the kool aid party. Until reality hits again. But for now I will assume that won't happen, because the greater probability is we hit resistance and sag.

Here is the chart

On another note do you realize we have not had 2 back to back days of increases in the indexes in 20 days? That was reaching historic proportions. Further, Bespoke Blog has an interesting entry on just how putrid November 2007 has been (or was up to 26 hours ago). Since 1980, this was the 7th worst month ... period... at -8.57%.

Now for those of you new to the market, I keep referring to the horror that was 2002. 2001 gets a lot of press for the bursting of the bubble (which it was) but 2002 was the year, our hearts were pulled out of us. Want to know how bad it was? (I sometimes forget myself as I have tried to extinguish that time frame from memory), but since 1980 (around 320 months), 5 of the worst 20 months came in 2002. So 5 of the 320 worst months, were in 1 year.

Just imagine this month (outside of last 26 hours) repeated for half the year. That was 2002.
September 2002: -11.0%
July 2002: -7.9%
June 2002: -7.3%
April 2002: -6.1%
December 2002: -6.0%

So live through this month, and try repeating it again and again and again and again - in fact those 5 months came in a 9 month period. That my friends... was hell. Talk about not wanting to log in and look at your account.

This is why, while these moves down "suck", they are nothing in retrospect. That said, there were great riches to be made in 99 and 00, to offset some of those losses whereas the S&P performance since 2003 is nothing special to write home about...

Short 2002 memories

Totally Off Topic: Shareholder Governance

I found this while going through New York Times online... it should make people angry.

First, upper management get massive compensation packages. Then they tell people, well if have an issue you can vote with your shares. In theory the board of directors is elected by the shareholders, but in truth its generally a bunch of associates (or worse friends) of the CEO. So the fox is watching the hen house. This is our system. Want to agitate for change? Get enough votes together to institute changes? Nice try. This is pathetic and angering news. America - for the corporation, by the corporation. Politicians bought and paid for by your sponsors....

SEC Allows Firms to Deny Investors Access to Ballots
  • Federal securities regulators on Wednesday gave companies the authority to deny shareholders access to board-election ballots, a move pension funds and governance advocates say could make corporations less responsive to investors' interests.
  • With the lone Democrat on the Securities and Exchange Commission dissenting, the panel voted 3-1 at a public meeting on the shareholder rights issue -- one of the most controversial to come before it in recent years, generating more than 34,000 comment letters to the agency.
  • "I am obviously disappointed," the Democratic commissioner, Annette Nazareth, said before the vote. She said the SEC's action "stands in the way of shareholders' rights to elect directors."
  • Democrat Roel Campos, who left in September, likely would have voted to adopt a proposal making it easier and cheaper for dissident shareholders to elect candidates they back to a company's board.
  • That proposal would allow shareholders who together own at least 5 percent of a company's stock to propose changes to the company's bylaws on elections for directors. Proposed bylaw changes could then be voted on by all shareholders, giving stock holders the right to get their board candidates on ballots that have been paid for and distributed by companies.
  • The commission was adopting Wednesday a competing proposal that is closer to the status quo, allowing companies to keep off their proxies shareholder proposals related to the election of board members.
  • Last week, a dozen big pension funds and a government employees' union made last-ditch efforts to persuade Cox, a Republican, not to proceed with the vote. Cox has said he wants new shareholder-rights rules in place before the corporate proxy season begins next spring.
  • The American Federation of State, County and Municipal Employees, or AFSCME, threatened to sue the SEC if the less expansive rule is adopted. The 12 pension funds -- including the nation's largest, the California Public Employees' Retirement System -- together own more than $300 billion worth of stock in U.S. companies.
  • "We think the SEC should go back to the drawing board," Amy Borrus, deputy director of the Council of Institutional Investors, a group representing public pension funds, said recently. "Electing directors is the main means shareholders have to ensure that a company is managed in their interest."
  • Under the current system, dissident investors seeking to get new directors on a company's board or to change its bylaws must wage costly proxy fights and appeal to company shareholders themselves.
Just so you know.... always interesting to hear what is going on behind the scenes. What a frustrating country.

Another example of who runs this country - Cable Industry Wins Compromise on FCC Plans
  • In the face of a lobbying blitzkrieg by the cable television industry, the Federal Communications Commission drastically scaled back Tuesday evening a proposal by the agency’s chairman to more tightly regulate the industry.
  • The compromise was a significant, though not total, victory for the cable industry, whose executives and lobbyists had worked to erode support on the commission for the agenda of the chairman, Kevin J. Martin. Among other things, the commission agreed to postpone for months the decision Mr. Martin had hoped would be made on Tuesday, over whether the cable television industry had grown so dominant that the agency’s regulatory authority over it should be expanded.
  • As part of the lobbying effort, top cable executives and lobbyists met last week with senior White House officials. Two lobbyists involved in those meetings said on Tuesday that they included Joshua B. Bolten, the chief of staff; Allan B. Hubbard, the president’s top economic adviser at the White House; and Joel D. Kaplan, the deputy chief of staff and a longtime friend of Mr. Martin’s.
What I love is how these people complain under the guise of "let the free market" rule, but when policies are being proposed to let the free market rule (i.e. let in more competition by phone companies) they run to momma (White House)

Classic. And pathetic.

The Next Step in the Crisis - Fed Buying Mortgages from Banks

Before I get into this story, I find it laughable of a market rallying on Fed cuts. The same Fed cuts it was rallying on in mid August through mid October. And what did that get us? We have massive write offs, mortgage rates holding steady, rising inflation, and a devalued dollar. Thats what the first 2 round of cuts have gotten us. But aha, this 3rd round will do the trick. It is silly thinking at best, but in the near term logic never dictates a thing in the markets.

Anyhow I digress - on to the next step of the emergency we face. Federal Reserve is making loans direct to banks much earlier in the year and for longer duration: 43 days. Not that it's a crisis or anything...
  • Seeking to reassure banks amid the continuing credit crisis, the U.S. Federal Reserve will provide $8 billion to ease concerns about lending during the holiday season. The $8 billion - essentially a low-interest loan to U.S. banks - will be issued Wednesday and repaid Jan. 10, the Fed said Monday. The 43-day loan period is the longest in three years for this type of year-end injection.
  • While it is not an unusual step for the Fed, the injection usually takes place later in the fourth quarter and involves a smaller amount. In 2005, the last time the Fed issued year-end funds, it issued 28-day repurchase agreements for $5 billion, starting Dec. 8.
  • Wall Street's reluctance to lend can be intensified during the holiday season, as consumers demand more money for spending and banks look to close out their yearly balance sheets with a generous amount of capital and investments in safe securities like U.S. Treasury notes.
  • "Many large institutions are reluctant to let money go, even for overnight lending purposes," said Bernard Baumohl, managing director at the Economic Outlook Group. "They prefer to hold onto the cash."
Various financial sites I am reading is that this is basically to buy up mortgages, but no official news story is saying this. Remember, all these "loans" keep getting longer in duration and more common in frequency. Printing press time. Now let's see if what is a normal end of the year situation happens "twice" this end of the year, since they did not even wait until December this year to pull it off.

Revisiting Core Laboratories (CLB)

As I wrote yesterday during my discussion of the sale in CGG Veritas (CGV) the action in the oil services area is quite putrid. I wrote:

Well I have to say the reaction in the oil services today to a measly $2 drop in oil is spooking me. This along with my thesis that oil could go meaningfully down has me thinking on how to reduce exposure there. While I still like the oil services names for the longer term the market is irrational right now and even the best stocks with great fundamentals and backlogs are getting punished so I am simply looking for a candidate to cull.

I've held 3 oil service names since inception, National Oilwell Varco (NOV), FMC Technologies (FTI), and Core Laboratories (CLB) - in good times I cut them back, and in weaker times I add. This is essentially how I try to run the overall fund. I believe my current holdings in this subsector is the lowest allocation I've had since August. These companies are far less secular than typical oil service names but right now seem to really be weakening. Even today in a nice rally, Core Laboratories for example is down 3%. Back in late October the company reported "solid" earnings (nothing spectacular) [Core Laboratories Earnings Solid] but the stock preceded to rally from $130 to $155. I wrote:

Solid if not spectacular earnings from Core Laboratories (CLB) - all they do is continue to execute, and this stock is so sleepy they don't even put out an official press release, just direct you to their SEC filing. In a word, a bit light on revenue $170 vs $173M analyst, a bit higher on earnings $1.29 vs $1.26 analysts, nice margin increases, solid guidance and we're probably looking at $6.00+ on 2008 estimates so I will target a $160-$170 price in 12 months. From these levels thats not a huge gain, but 30% in a year never hurt anyone.

Since my target for 2008 was around $160-$170, I was cutting quite heavily into that rally. I did not catch the top but sold quite a bit in the $140s, topping out at $148. I wrote:

Hopefully the market will push down this stock at some point (it gave us a nice entry at $120 just the other day) and get us a lower entry in the $100s or $110s to build the position. The stock has tacked on 30% since the August lows, so to ask for much more at this time is being greedy - it needs to rest up a bit.

So now it appears we are getting this type of action and with the stock of Core Laboratories around $114 its starting to get more interesting to me. Unfortunately it is in a bit of a free fall so catching a falling knife is not what one wants to do, but I added my first (small) buy today (25 whopping shares) in a long time here under $115. But since the price action is so poor I am in no rush to increase further until the stock stabilizes.

The 200 day moving average is around $107 so let's see how the stock reacts there; right now the chart is showing very sickly action. If it holds, this would be a very attractive entry point; if not and it slides through than this might be signaling some bigger issues. Again even with crude at $65 the services of companies like Core Laboratories will be in need. If I can get back shares I sold in the $140s here in the $100s to $110s that would indeed be a nice trade off (assuming the stock can hold its support levels of course!)

On 2008 estimates of $6.10 the stock was trading at nearly 25x forward estimates when it hit $150. Here at $115 area it is down to under 19x. Much more attractive of a valuation for this steady Eddie company.

Long Core Laboratories, National Oilwell Varco, and FMC Technologies in fund; no personal positions

Bookkeeping: Closing JA Solar (JASO)

I've changed my mind on JA Solar (JASO) for now, and have decided to close this position with a 6% loss. Not a big deal, it was a small(er) position, but with the news flow of late in the sector I'd rather stick with the strongest. While I like JA Solar as an arms merchant (solar cells), I just don't like it as much as some other names and I have enough confidence in the superior prospects and stability of a Suntech Power (STP) that I'd rather own much more of that sort of company than spreading my bets in a basket approach. Put another way I'd rather own a 5% allocation in Suntech Power, rather than 3% Suntech and 2% JA Solar.

When speculation returns to the market, it won't matter what solar stock you own and in fact the worst off will rally the most, but we have the makings of a gorilla in the space with Suntech Power and I'd rather be focusing on stocks who are leaders in this market. Comparing the charts of the two, we can see while JA Solar has held on by the skin of its nails to its 50 day moving average, Suntech Power is in a clear uptrend - so I don't see the reason to take the risk in spreading bets. If JA Solar establishes a better technical position I will revisit this decision ....

I sold the last 220 shares of JA Solar near $52 and netted $11.4K

Long Suntech Power in fund and in personal account

Today's Winners List

Always interested to see what is ramping the most in days like this (should portend to future winners)

Gafisa (GFA) - Brazilian homebuilder +10.5%
Mechel (MTL) - Russian coal/iron +8.9%
Millicom International Cellular (MICC) +6.6%
KBR (KBR) - infra +6.7%
Foster Wheeler (FWLT) -infra +6.0%
Mosiac (MOS) -fertilizer +5.4%
Potash (POT) -fertilizer +4.8%
Shaw Group (SGR) -infra +4.6%
Agco (AG) -agriculture +4.5%
JA Solar (JASO) -solar +5.9%
Suntech Power (STP) -solar +5.5%
Massey Energy (MEE) -coal +5.9%
Blue Coat Systems (BCSI) -networking +10.1%
Crocs (CROX) -retail +7.1%

All of the above outside of CROX, BCSI, GFA and some of the infrastructure names held their 50 day moving average in this entire sell off....

Other non portfolio major strength in VMWare (VMW), all the major dry bulk momentum stocks, Wynn Resorts (WYNN), Goldman Sachs (GS), Intuitive Surgical (ISRG), Sohu (SOHU) and any number of small cap no name Chinese stocks

The more things change....

If not for the major Ultrashort positions this could of been a very great day ;)

Bookkeeping: Morning Transactions

I am going on the continued thesis that bounces need to be sold, so I will be cutting back this AM on some of the largest positions in the fund, along with some of those moving the best.

Stocks with large weightings I cut back: Mosaic (MOS), CF Industries (CF), Potash (POT), Foster Wheeler (FWLT)

Stocks that have large moves this AM I am cutting back: Massey Energy (MEE), Consol Energy (CNX), Blue Coat Systems (BCSI), Suntech Power (STP)

Stocks I added to: Best Buy (BBY) as it broke above $49.50 which was the level I wanted to see it burst through to add more. [On the Buying List: Best Buy]

Note, the above names are among my favorites - none of the sells are huge amounts, simply trimming into strength. It is nice to see when the market actually goes up these stocks go up with some strength. I'll continue to monitor the S&P 1440 level. If we can hold and continue upward this would be a change in character near term in the market. Won't know until late in the day. Obviously if the market continues up from here (long overdue) these stocks will be not be ones you'd wish to be selling off any of the position but until the pattern breaks you have to assume it continues.

If you are playing at home, I'd expect the most washed out, speculative stuff to rise the most if we are indeed in a short term rally (finally). This is a good opportunity to see what sectors are moving and what will outperform once the market gets its footing... so when the next sell off happens, you redeploy into those sectors - it looks like coal and agriculture are doing very well.

On the good news front, Wells Fargo (WFC) announced losses, and Freddie Mac (FRE) announces a cut in divided and need to issue equity but the market is finally ignoring bad news. Reason? Fed members say Fed must nimble and hints to cutting rate. (shocker!) Been saying this since minutes after last Fed cut and I continue to believe we will be in mid 3% range by mid Spring as we bail out a suffering financial system. But I suppose this is a 'surprise' to the experts...

Long all above in fund; long Blue Coat Systems, Foster Wheeler, Mosaic, Suntech Power in personal account

Tuesday, November 27, 2007

Riverbed Technology (RVBD) Fortune Article

Ironic title - The Best Tech Company You've Never Heard Of

Sometimes I wish... but I continue to hold fast as these stocks in WAN optimization continue to get bludgeoned due to fear over Cisco comments about enterprise spending in the US slowing. No matter what the companies themselves say or show in their financial performance; it just doesn't matter.
  • So one of the hottest areas in networking technology is something called Wide Area Network (WAN) optimization - or making networks even faster.
  • Network World magazine tested a variety of WAN optimization products a few months ago. Riverbed's scored considerably higher than both established competitors like Cisco and smaller ones like Blue Coat Systems. Zeus Kerravala, who heads global enterprise research at the Yankee Group, calls Riverbed "one of the most interesting tech companies that has come along in quite a while."
  • Companies of all kinds are centralizing data and applications to reduce the number of servers they operate. But if you're on a PC in New York and have to get a file from a server in San Francisco, get used to twiddling your thumbs. For example, a 1-megabyte Excel file, which would display almost immediately if you called it up from your own hard drive, typically takes about 100 seconds to load cross-country. The problems can become more pronounced if you're doing heavy e-mail remotely. The reason, according to Kennelly, is that data has to travel back and forth to a hard drive 977 times in a row to get that Excel file to load. But each one of those little trips takes a tenth of a second when it's traveling all the way back and forth across the country.
  • So here's what Riverbed's technology does: fake out the software so it delivers its information payload in bundles. Rather than 977 trips, the data might be able to take only 10 or 20. That radically increases the perceived speed of the application.
  • To achieve this Riverbed's engineers had to dissect - or reverse engineer - Microsoft's software. "Thank God for Microsoft," says Kennelly, "because they created Windows, which is so inefficient. That helped create our company."
  • Riverbed has done the same for a range of other types of applications as well: e-mail, accounting, databases, customer relationship management programs, etc. It sells a box filled with fast processors and its own software. You buy at least two, and put them next to a network router or switch at both ends of the trip. Installing them is almost as simple as just plugging them in and turning them on. They range in price from $3500 to $125,000.
  • It's apparently worth it. Says Yankee's Keravalla: "Any company I've ever talked to that's done a technical bake-off says Riverbed performs best. Some users see the speed of their applications improve 60-70%."
  • Riverbed started shipping products just three years ago but it already has 3,000 customers. But Riverbed (Charts) stock is dramatically down - about 50% - in the past month. It's been a terrible few weeks for networking and enterprise technology stocks, especially high-fliers like this one with outsized price-to-earnings ratios.
  • But there seems little reason to think Riverbed won't continue leading in WAN optimization, even though heavies like Cisco (Charts, Fortune 500), Juniper, Citrix and others are fighting to push it aside. Security analyst Troy Jensen at Piper Jaffray has followed this industry for seven years, and says Riverbed's technology is "without a doubt superior." While he was neutral on the stock when it traded around $50 a share, at a recent price of $28 he calls it "a no-brainer."
  • Analyst Cobb Sadler at Deutsche Bank Securities, another fan of Riverbed, is enthusiastic about its new all-software optimization product, which can go into a laptop so workers out of the office can get high-speed access to corporate data. "They've got the only product that allows you to do that right now," he says.
  • And even in the midst of all the networking and tech stock carnage, Riverbed competitor Blue Coat (Charts) reported surprisingly good results on November 20th, suggesting to Jensen, among others, that the WAN optimization market may be resistant to the downturn in enterprise technology spending many now fear.
  • There are several reasons why this is an almost perfect technology. We're in an era of global business, so operations can be anywhere. Companies want to centralize computing resources. And nobody's willing to wait for anything.
Very bullish article eh? You'd think someone would care but nope - both these stocks have been bludgeoned to death. One is the clear technical leader, the other has the best combination of security and optimization rolled into 1. Blue Coat Systems *almost* made a technical breakout after reporting lights out earnings [A Damn Shame], but took a near 6% hit today. Typical. The fear of the boogeyman in the future trumps the reality of the here and now. If one company in a sector is bad, they must all be dying, etc. Instead people run to such high growers as ... Procter & Gamble. But this is why technical analysis is key for near term movements - until the 'coast is clear', undervalued stocks can remain so for a long time.

Oh well, enjoyable article that explains in layman's terms what they do, and any article that has a dig at Microsoft is fun to read. All I know is the stock performances of late have had me feeling "Blue". ;)

Long Riverbed Technology, Blue Coat Systems in fund and in personal account

Portfolio by Sector

I try to look at the portfolio from a 40,000 foot point of view graphically about once a month - my last view was back on October 23rd, and you can see the breakdown here.

Last month I wrote this

at this time I am trying to think ahead a year to a slowing global economy and which sectors will be the least affected by it. A case could be made that global infrastructure and agriculture will be the 2 stalwarts, the former due to enormous backlogs and the latter due to "once you let the genie out of the bottle of rural -> urban migration it's not going back". Oil is a toss up - while slowing economies will slow the demand, I still think finding new supply is getting tougher AND global urbanization is going to dwarf any economic slowdowns effect on oil in the mid to long term. With that said, you could see a lot more volatility in that sector. The same could be said for mining. At this time, the technology stocks I am in, feel quite 'isolated' from any major issues even in a global slowdown. I can see a future with the US in recession (or at best flat growth) and western Europe not too far off from it as they have major speculative housing booms as well (see Spain). So I am trying to position for the long run to match these macro views.

So far pretty much on target, although as we found out nothing is safe in a panic; its all just degrees of pain. Some sectors have more, some have less. My mid term outlook (i.e. 2008 or so) is no different than what I wrote above. And I've tried to move the portfolio in that direction

Major difference then vs now
Oil related (then) 17.9% (now) 7.2%
Agriculture (then) 12.4% (now) 15.9%
Short exposure is up quite a bit (4%) but that changes daily
India (then) 7.2% (now) 4.0%
Other Foreign (then) 4.5% (now) 8.5%
Retail (then) 1.2% (now) 4.6%

So I've reduced direct crude exposure, mostly through selling all my deep sea oil drillers (although I still like the group fundamentally), and after today's sale of CGG Veritas (CGV), I just own my 3 oil service stocks I've held since day 1 in the portfolio - CLB, NOV, FTI. In fact about half this 7.2% crude exposure is a bet against it, through refining stocks (who would benefit from lower crude pricing). Agriculture has gone up with the addition of Agco (AG), and heavier exposure to fertilizer which I contend has great winds at its back, and earnings prowess. India had spiked after I did the last analysis so I cut back that country. In "Other Foreign" I've added some new names like Mechel (MTL) in Russia coal/iron and Millicom International Cellular (MICC) - hence the increase. I've also added exposure to Brazil with homebuilder Gafisa (GFA) and an index, replacing some far East exposure such as Hong Kong and Singapore. Thus far although these markets are NOT supposed to be correlated they all essentially go up and down together as one 'BRIC' country is no different from another - apparently the same speculators are in all these countries.

In retail I added a lot of Crocs (CROX) exposure after its implosion and just added some Best Buy (BBY) yesterday. While the financial exposure is the same - back then it was mostly Mastercard (MA) and Blackrock (BLK) - now I've categorized the 2 consulting firms I added today - Huron (HURN) and FTI (FCN) as 'financial', so its a broader mix of companies. I've completely exited the small position in mining and cut back industrials with the sale of Cummins Engine (CMI). I also added 2 currency hedges with the Canadian dollar and a silver company - we shall see how that works out.

I am going to continue to run screens (when/if?) we rally such as [98 Stocks that Returned >5% in the past 30 days] and continue to look and focus on stocks holding their technical support levels. While these might not return as much as the stocks totally washed out, they should provide some stability in what I contend will be a tougher market in 2008.

Two notes:
(1) I break up foreign holdings into (a) China (b) Indian (c) Other and
(2) I did break up energy into (a) Crude related i.e. deep sea oil drilling, oil service, refining, seismic, etc (b) Coal and (c) Solar as the latter two are not directly related to crude oil.

Bookkeeping: Closing out CGGVeritas (CGV) Position

Well I have to say the reaction in the oil services today to a measly $2 drop in oil is spooking me. This along with my thesis that oil could go meaningfully down has me thinking on how to reduce exposure there. While I still like the oil services names for the longer term the market is irrational right now and even the best stocks with great fundamentals and backlogs are getting punished so I am simply looking for a candidate to cull. I decided on CGG Veritas (CGV) which is a seismic data provider that I am *still* bullish on, but will wait for the technical picture to improve before re-entering. Right now fundamentals don't matter in this market.

I bought in mid October and since then it had a so so earnings (slight miss), and the stock was punished severely with a quick drop to $52. The stock has rebounded now to about $57 so I am going to take my 10% loss and convert to cash. This stock is actually flat today so showing some strength, but the technical picture is still mixed. Like most of these oil service stocks, CGG Veritas is below the 50 day moving average but above the 200 day. If the market weakens there is no reason to believe the stock won't retest $52, so I don't want to give up another 10% here. I will be more bullish on the stock once it clears back over its 50 day moving average which is now in the mid $59s. If that last punch down to $52 was indeed a low and the stock is making a V shaped recovery, than one can buy the stock back about 4% higher from here when it clears resistance ... simple enough proposition.

I had cut back this position a bit in the past few weeks (sold a bit yesterday in the $57), but it remained a 0.9% position which I am exiting today in the upper $56s after about a month and a half. If the market would ever put in a 3-4 day stretch of rallying we could see where the new leadership is in the market - but at this point some of the themes that have been working the past 3-4 years seem at risk of faltering if the consensus turns to a slowing world economy in 2008. Too early to tell right now though.

No position

Rally Fading...

If we go red today, it would just be bad. As I mentioned earlier today this was a strange rally because I just saw very little strength out there, especially from previous leaders. It just seems like a market that wants to go down.

It's beginning to feel a lot like 2002 around here. The issue is we can rally here and there, but I believe corporate profits for 2008 are too high and will need to be revised down in many sectors, so it is not like earnings are going to save us.

These days of openings up and closing on the low are just extremely bearish - we used to do the opposite. Just can't get behind any rally and all spikes are to be sold.

I am trying to think like a contrarian since the mood has turned so bearish, but since I was bearish first its like thinking against myself to get bullish :) But at some point the rally for more than 1 day must come. No? Worst month since Sep 2002.

The Russell 2000 and S&P 500 are now just up 0.4% after some rallying earlier today... but again lots of individual issues are just being spanked so the indexes are not telling the story. I would surmise most of the gains remaining that are holding the indexes up are simply dead cat bounces in financials. It now gets to the point of a toddler touching a hot stove - once you get burnt so many times, some people are just going to stop reaching...

All infrastructure stocks now are looking bad technically, even the best of the best - today AECOM (ACM) - a Cramer hype stock is taking down the group off of "not good enough" earnings (I thought it was too expensive and too narrow of a focus). Solar dying on a vine. Energy ex-solar putrid. Apple/Google red. Etc.

All I see working are emerging markets as investors are still clinging to the dream that the US recession will not affect them. Dry bulk index by the way falling hard now (from extremely high levels though, still way above range it was in the summer) but the trend is not looking like a 'global boom' type of trend. Copper has been weak for 2 months. Yet somehow China is expected to exist in its own vacuum ;)

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