Do the Bottom 80% of Americans Stand a Chance?

While I could devote an entire blog to the long term direction of the country, I want to focus on some long term trends that I think are behind many of the issues facing the markets today. While at times "Wall Street" and "Main Street" disassociate, that cannot go on forever.

In a Minyanville.com article, touching on Friday's BS labor report... oops, I mean BLS labor report, we note

• Average hourly wages among production and nonsupervisory workers (which make up about four-fifths of the work force) rose 8 cents, to $17.63, but that put wage growth only slightly ahead of inflation.
• Adjusted for inflation, wages have fallen over the last year, from roughly $17.69 last November. And over the past four years, the inflation-adjusted hourly wage has risen by just a penny, from $17.62 in November 2003.
  

I did double check the facts and I see from the government's own website, wages for these people were $14.97 in 2002 and now are $17.63 or a 3.3% yearly increase... I went back 5 years instead of 4 to make it nice and clean (half a decade).

Why do you care? I personally think most of us active in the 'investor' class (if you will) tend to marginalize what is going on in the real world. Most in the 'investor' class tend to associate mostly with others in this class - and we miss out on the plight of the vast majority of Americans. I think this is especially true of Wall Street, which is full of the "upper 0.5%" types. Do you realize what $17.64 is on an annualized basis? $36,691. That's the 'average' guy on the street.... Main, not Wall. So let's focus on what is really happening on Main Street.

First, if you believe the inflation figures from the government, essentially for the past half decade people (by people I mean the lower 80% of Americans) are (after inflation) making no progress on their wages. They are treading water. That's if you believe the bunk in the inflation figures.

If however, you are like me and you believe reality [Bloomberg Finally Seeing the Truth on CPI], inflation is far higher than people are really falling behind.

• Since 2001, health premiums have risen 78%; Wages have gained 19% over the same period. CPI inflation measure? 17%.
• Housing is the single-largest expense for most Americans -- as much as a third of total cash outlays. During the housing boom, OFHEO had housing prices increasing 13% per year; Non-government foundations had real estate taxes increasing about 6%; Over the same period, BLS measured ‘housing cost increases’ at 4% -- about half of its actual price increases.
• Median real-estate taxes on owner-occupied housing went from $1,614 in 2005 to $1,742 in 2006, an increase of 7.93%. (That's more than double CPI inflation rate)

I am trying to think of a typical American's budget, from highest expenditure to lowest. The order would be something like (1) roof over head (2) taxes for roof over head if not a renter (3) grocery + restaurant (i.e. food expense) (4) insurances - health, home, car (5) car expense (payment + gas) (6) utilities - heating, electric, phone, internet, cable (7) clothing/discretionary

Those with kids would probably have a bit of a different expense weighting, but that in general should some it up. So if 80% of Americans can be classified as "production and non supervisory", and 60% of all Americans own a home (a very consistent figure for a long time), than many of these people are homeowners. The government tells us inflation is rising 2-3% (at worst) Any of you living in the real world know (going back to the list above)

1. Roof over head - if you are a homeowner in the most populous state, many homes have risen in value from 50-100% in the past 5 years, far higher than 2-3% a year. Those who are renters have faired better, but in general rents are going higher than 2-3% a year. So as prices were increased on homes to unsustainable levels people were forced (in the past half decade) to buy inflated assets that sucked up a huge amount of their monthly budget.
   
2. Taxes for roof - this applies only to homeowners but in general as go prices, so go home taxes
3. Food prices - while generally keeping up with inflation (or even below) earlier in the decade the past 2 years have seen sharp rises - we have outlined these in the blog, one example [Tyson Foods Continues to Point to Food Inflation]. While coming to an exact figure is difficult because this is a basket of goods and everyone buys a different basket, >10% increases in meats, poultry, dairy, etc are the 'norm' the past 24 months. A bit higher than 2-3% inflation.
4. Insurances - not only are insurance premium rising, a greater share is being pushed off from corporations to employees. If this is right or wrong is another debate, but if premiums rise 7% a year but this year an employer decides to only foot 45% of the bill instead of 52%, you get a much higher increase than 7%. And people in large population states will know home insurance has risen through the roof due to adverse weather of past half decade. So this is generally much higher than 2-3% a year.
   
5. Car prices in general have been slowly growing so I will concede new cars (due to extreme competition) are seeing price increase in line with overall 2-3% gov't inflation estimates. Gas? A whole different story. It seems like a different eon but even in 2003 gas was roughly $1.30. To reach the average $2.90-$3.00 today we are talking 100% + inflation over the past half decade.
6. Utilities - needless to say anyone heating their home not using natural gas are seeing tremendous increases in their heating/air conditioning bills. In general people are paying more (through choice) for internet service (broadband in general is double the cost of what dial up used to be), and anyone with a cable provider sees these prices increase more than 2-3% a year.

So those are the main components of life. Yes, many discretionary items such as electronics get cheaper every year and/or for the same amount of money you get a lot more powerful product - but those are items at the tail end of a budget - not the items you 'must have' (roof, food, transportation). Also please keep in mind in the "very long term", Americans are now being asked to save for themselves for retirement. Before corporations were more involved (rightly or wrongly) with pensions. Now, 401ks are the game of the day. So with all the items above, one must also devote to 'self saving' for retirement, since there will be little to nothing there from other sources (certainly for most of us under 40 years old). So some income needs to go to that area, whereas a decade ago, that was far less of a consideration. However if the average non production/non supervisory worker is making $37,000 how is he/she saving for retirement? Even those making $60,000 will be having difficulties in our 'consumption culture' where everyone must have a HDTV as an American right of birth. I am now reading how 401k withdrawels in the past 6 months are reaching the highest levels seen. Why? People will tap every source of income they can now that the house ATM is gone. You don't think this has terrible long term consequences?

One of my main arguments has been with the explosion of home equity withdrawals the past half decade, people who are otherwise struggling, have been able to maintain their living standards and mask their growing expenses (growing at far higher rate than government 'reports'). Most of America *is* falling behind. And with the first nationwide decrease (ever) in home values, the gig is up. If income inequality is good or bad can be debated for days, but facts are facts [NYT: Income Gap is Widening]

• Income inequality grew significantly in 2005, with the top 1 percent of Americans — those with incomes that year of more than $348,000 — receiving their largest share of national income since 1928, analysis of newly released tax data shows.
• The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.
• While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent. The gains went largely to the top 1 percent, whose incomes rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14 percent.
• The new data also shows that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.
• The top 1 percent received 21.8 percent of all reported income in 2005, up significantly from 19.8 percent the year before and more than double their share of income in 1980. The peak was in 1928, when the top 1 percent reported 23.9 percent of all income.

Again this is not meant to be a political debate. If one believes in trickle down economics than "eventually" gains seen in the top should 'trickle down' to everyone else. Evidence seems to be mounting against this. But I want to focus on the facts. The 'consumerism' in America relies on the majority - not the top 1%. If one believes having income distribution strata similar to seen right before the Great Depression is a healthy path, than America has not been this 'healthy' in close to 8 decades. I think this lack of wage growth speaks to a greater trend of income 'equality' for the 'working class' across the globe - this, I argue, means great things for 'human kind' as people across the globe move to more of a global mean income. [This is already happening in the 'upper class' as a [Global millionaire Boom] has started, so why would it not happen on the bottom end as well?] But it portends very bad things for those, in the working class, who have enjoyed well above average wages in the past, as reversion to the mean simply means those above the mean, get driven down to the global wage, and those below the mean, get drive up to the global wage. I don't think it is right to argue that globalization is 'bad' or 'good' - it has good and bad components for each participant. However, having no policies in place for the many Americans who are being 'dislocated' by this global force is a mistake. And to ignore their plight is quite a sad development.

These forces are why people sit and scratch their head and say, look US GDP growth is roaring, we are having great time in aggregate - I have no idea why the average American is feeling so uneasy the past half decade - if you look at the 'numbers' they should be feeling great. But to look at the 'macro' without looking at the 'micro' leads to incorrect assumptions. Much like erosion, these trends happen incrementally, and over long periods of time - you don't wake up one day and feel 9% poorer - hence it is not so noticeable. Until you step back and look at it over a 5 year, or 10 year period. And then the writing is on the wall. Unless wages start rising in a massive manner in the US for the lower 80%, I just don't see where the reversal is....

Again, I keep hearing 4.5% of GDP is due to housing... a very easy term to throw around. I'd argue a whole class of people have been keeping their head above water due to an asset (their homes) inflated to unsustainable levels - this allowed them to extract equity to live their lifestyle - as their costs increases at levels 2-3x their wage gains. Now that this game is over - what does 2008-2009 portend for the "80%"?

I think this 'bailout' is just step 1... much much more than 4.5% of GDP is reliant on home prices remaining at inflated prices. This will be an interesting time - watching politicos do everything in their power from stopping the free market from working, and keeping asset prices that much of our consumerism is reliant on from dropping much further.... all with a background of growing worldwide shortages [A World of Shortages]- and hence sustainable inflation, whatever the Fed does or not do. I know I sound like a dismal scientist, and quite the downer - but I just find it hard to see the US not seeing a major slowdown in the year ahead. The tech bubble, while painful for the investor class and pieces of the 'working class' who started buying tech mutual funds in their 401k was one thing. The equivalent of a tech bubble in the real estate market which impacts much more of the people is a whole different animal. Forget Iraq, the economy will BE the end all and be all issue for the 2008 presidential election.

Bookkeeping: 'Rising Tide' Performance Week 18

Week 18 performance of the mutual fund

Comments: After a slow start to the week Monday - Tuesday, the market put in 2 strong days Wednesday and Thursday on the heels of consensus forming for rate cuts, potentially strong ones coming next week; along with a bailo....errr, assistance plan from the government for a small sliver of the mortgage market. While not in reality things that will help the fundamentals of the credit market much, they did sway sentiment to the bull's side. From a technical perspective after Thursday's rally, major indexes finally broke through some key technical 'resistance levels', and now sit poised above. Friday the market sat on its hands and as per usual ahead of Fed meetings no one can do anything or make any decision until we see what the Feds on Mount Olympus do.

For the fund, kept a cautious outlook Monday and Tuesday which helped performance; on the large rallies Wednesday and Thursday many groups that have been shunned for months (retail/ financial/ homebuilders) caught a bid and were the apple of everyone's eyes since bailouts... err, government solutions apparently fix everything - so the fund lagged those days. Most of the week I was selling into the strength and lightening up position sizes; after we "turned" technically positive on Thursday afternoon, I have changed my very near term mood to "reluctantly a bull". I have been searching for things to buy but other than chasing stocks that already made large moves (not my preference) it is hard to find much.

Now we just sit on our hands and wait for Mount Olympus to decide what us peons in the netherlands should do - if Mount Olympus does not cut enough than attitudes could turn negative on a dime and back down we go. If Mount Olympus does enough to appease the peasants than away we go to new all time highs in the face of the some worst economic problems approaching that we've seen this generation. But a few snaps of a government finger, along with heavy doses of liquidity and the equity (not bond) market believes it is all 'contained'. So I remain intellectually bearish while allowing the fact happy animal spirits may reign in the near term; but not trusting those spirits one bit. (remember what happened in November after the happy spirits of September and early October disappeared)

This week, the S&P 500 was up 1.6% and Russell 1000 was up 1.7%. Despite a very heavy cash exposure this week and (until mid day Thursday) a very high short exposure Rising Tide Growth Fund outperformed again on the back of long positions the market rushed back to; the fund was able to return 3.4% despite sitting with nearly 30% cash. If the market roars forward I expect to only "peer perform" or possibly trail the market for a bit, but rallies in the market have very little underpinnings with reality in the economy so it is hard to throw money into long positions with a blind eye. The ones I do have are outperforming so I can remain cautious and still maintain pace. At this point the fund has pulled away from the indexes measured against, by the largest amount since inception.

Price of Rising Tide Growth: $11.967
Lifetime Performance to date (vs Aug 3, 2007): +19.67%

Comparable S&P 500: 1,504.7 (+2.69%)
Comparable Russell 1000: 820.2 (+3.01%)

Fund return vs S&P 500: +16.98%
Fund return vs Russell 1000: +16.66%

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

Infrastructure Group Continues to Impress

I mentioned Sunday night the Infrastructure Group recovery [Quite a Recovery for Infrastructure Group] - some of these charts are absolute things of beauty now that the market has simple bounced a bit. Coming into the week, all but McDermott had regained the 50 day moving average and looked poised for nice moves up, if the market would just be benign for a while.

I put these stocks into 3 groups right now based on technicals...

A) The following 3 charts look identical - and we've reached all time highs in all 3 names: Foster Wheeler (FWLT), Chicago Bridge & Iron (CBI), Jacobs Engineering (JEC)







B) KBR (KBR), Fluor (FLR) have cleared resistance very nicely and are making nice moves, but not at all time highs. Technically nice positions but can be expected to pull back to support if market weakens.

C) Bringing up the rear in the category of 'finally' pushing back through resistance are McDermott (MDR) and Shaw Group (SGR). These still stand a chance of falling through their main line of support (50 day moving average) if the market weakens.

I am a little perplexed with Shaw Group - they reported earnings October 10th, yet somehow reported earnings again yesterday which is less than 2 months later. Very strange; I must assume last quarter's (Oct 10th) report was filed very late. They did 'miss', but the backlog is just tremendous - $14.7B, up 57% year over year. I just have to go investigate how they reported 2 quarters so quickly.

As always the big boys "knew" ahead of "us"... Shaw Group, after a great earnings 2 months ago, rallied hard, corrected like the rest of the group but was much weaker on the recovery - which I kept mentioning was strange considering how good the last earnings report was. Well now we know why. Funny how price action normally telegraphs the news ahead of time, isn't it? Funny in a 'this game is sure not an even playing field' kind of way.

Long all names except Fluor in fund; long Foster Wheeler in personal account

New Poll! Please Vote

Every 6 weeks we check in to see how much our dollars will become devalued... once again we ask you blog readers to give us your predictions on how hard the printing presses will be working - I am making the task even harder - now that the discount rate is getting slashed every 6 weeks, you have to predict both the Fed funds rate and the Discount Rate

I've given every choice from a 'shock and awe' 50 Fed funds cut/75 basis point cut to a (fear it) increase in interest rates (which would drop the market probably 2000 pts)

Winners receive nothing other than prestige and an "I told you so" moment. So please, let us know what you think as we slowly but surely return to the 2001 era of free money for everyone. Just remember, please don't dare try to travel outside the country where your dollar means nothing (except in Mexico)

Our next poll will be "What's your favorite "it's (not a) bailout" plan coming in spring 2008" - feel free to post nominations in comments section. ;) I'm going to begin with my proposals of
(a) $10,000 free to every homeowner in America who took a subprime loan and is now upside down on their house - they deserve it! And it's not a bailout....
and
(b) freezing all home prices at where they are today , so NO one suffers the indignity of having their home price adjust to where the market deems fair (i.e. lower)

Next Prediction Coming True - Auto Loans Going Bad

Well my predictions from Tuesday's post [Et tu, 1st Half 2008? Predictions for the coming 6 months] are already coming true, in much quicker fashion than anticipated. First came central banks ignoring inflation to start cutting rates in unison to bail out the US (first Canada, then UK, more to come)

Now? Auto loans...

I wrote Tuesday:
Auto sales will see a horrid 2008 for all the same reasons mentioned above - negative wealth effect, lack of confidence, inability to finance via home, wage stagnation in the face of real inflation.

I should of added the thoughts about auto loans following same pattern as mortgages, but the knee bone is connected to the jaw bone is connected to the elbow... once you are late on mortgage, then comes car, then comes credit card - you get the picture. I guess if you can't keep up payments on your current car it is going to be tough to be out there for a new car next year. Here comes the auto loans per WSJ

• Now, signs of stress are creeping into another key consumer area: auto loans. Delinquencies in the auto-loan market are ticking up to their highest level in several years. Lenders are tightening terms in some cases, and interest rates have risen from the rock-bottom levels of a few years ago.
• About 4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9% the previous month, according to a Lehman Brothers survey of companies servicing these loans. That is the biggest one-month jump in at least eight years.
• Lehman says 12% of subprime borrowers, who have poorer credit records, were delinquent on their 2006 auto loans as of September. That is the highest level since 2002 and up from 11.1% the previous month.

• "The numbers will get worse for auto loans," says Dan Castro of GSC Group, a New York firm that runs debt-related investment funds. "We're starting to see signs of rising losses, and delinquencies are creeping up."

• The trouble signs in auto loans suggest that the credit woes could be spreading to the broader economy, a development that has been worrying investors and policy makers in Washington.
• The typical delinquent borrower in a car loan isn't a speculator but someone who became unable to make what previously seemed like a manageable payment. That is why car delinquencies are closely linked to the health of the economy.

• Many auto loans undergo the same Wall Street financial engineering as the mortgage loans that stand at the center of the credit crisis, making this a potential issue for investors. Auto loans often are bundled together into securities, sliced and diced into pieces with varying levels of risk and return, and sold to investors around the world.

• In 2006, $89 billion of auto loans were packaged into asset-backed securities and sold to investors, according to Standard & Poor's, making it the biggest asset class for such securities next to mortgages and credit cards.

• Borrower problems also could deal a blow to the already-struggling auto industry. Auto sales held up during the 2001 recession in part because lenders were able to offer easy borrowing terms. If lenders tighten terms in response to the delinquencies, it would make it harder for some people to buy cars.

• There are reasons to believe the problems in auto loans won't reach crisis levels. Auto lenders and credit counselors say many consumers see their cars as a necessity and would sooner hand back the keys to a home and look for a rental than default on a car loan.
  

• Still, auto loans, like home loans, saw credit standards loosen in 2005 and 2006. CarMax Inc., of Richmond, Va., the largest used-car retailer in the country, said at the end of 2005 it lowered lending standards. For example, it allowed consumers to put down less money to buy more expensive vehicles. Car Max made about 140,000 car loans last year.
  

  "We had been too strict and wanted to make more loans and maximize profitability. We expected our delinquencies and losses would go up, but they are up higher than we thought," said Katharine Kenny, head of investor relations at CarMax.

******
Takeaways:

1. Obviously car loans are not nearly as big of an issue but this is another sympton... of a disease. Instead of treating the root cause of disease we put band aids on the parts of the body that should be 'expunged' anyhow. For votes.
2. Notice the spread to prime grade borrowers. As I keep saying, its not a subprime issue - its basic lack of affordability, stress on every 'average family' to pay all these bills, in a relatively stagnant wage environment, with high inflation and inability to draw equity from their homes. This is the big issue. Not subprime loans to people who shouldn't of had loans in the first place.
3. Notice the securitization. The same bad habits. And trust me, its not car loans that will be the 'next big thing' - think credit cards. Think 2008. Think where all these CDOs chock full of credit cards (not secured by anything, not even a house) are sitting. Possibly in your state treasuries office. It's all tied together. And it's all coming no matter what Wall Street (equity market) believes. The bond market knows...
4. Again all this and we are coming of a supposed 5% GDP 3rd quarter (yeh right)? What happens in a normal quarter? Or below trend GDP quarter?
   
5. And I know no one cares about the auto industry anymore, but it does employ real people with real jobs and real spending. As the pool of new car sales contracts, it will hurt a lot of people - in both domestic and foreign plants... and their suppliers... and their supplier's suppliers. It's all connected. Virtuous on the way up. Not so much on the way down. No matter what bailouts we attempt.
   

This is why you have to listen to these companies, not these government report. Whatever comes out tomorrow by the BLS, is just that... without the L. BS. So let's enjoy our gains, take them where we can get them and realize 2008 will not be a good year for the economy. The market discounts 6 months out... this one is discounting out 2.5 years and ignoring everything between now and middle 2009. When the equity market chooses to acknowledge that the Fed is not bigger than the economy... well this is an open question. But these are the real trends and at some point Main Street and Wall Street must meet.

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Getting auto insurance is a mandatory measure before going for any kind of mortgage. This is important particularly for creditcard users, because people seldom read any of their free credit reports or they would realize the hazards that come with one. An online credit card instead can be a good way to start using one. At least that will spare one from payday loans.
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European Central Bank Holds Rates - Some Members Wanted an Increase

Fascinating....

Ok fascinating to me at least. Not only did the European Central Bank hold rates steady, some members wanted to see an increase due to rising inflation. How dare they. We could always send the US team on "inflation measurement" on a trip abroad to teach them how it's all how you measure. And just like that you can make your country's inflation disappear. Then you can cut rates to help bail the USA out, since your inflation problem is done with. Wait, we solved our credit problems this afternoon in Washington. All gone. So we don't need Fed cuts here either. Wait, no we do need cuts. Wait... ok I am just confused. Whose on first?

Look, even Argentina has figured out the US methodology of inflation measurement - it's simple - tell the people there is no inflation, and inflation will go poof! Magic! Except umm... apparently the people of Argentina are not believing it. Well who said we don't export things in the US - we export measurements of inflation.

• Argentine first lady and presidential candidate Cristina Fernandez de Kirchner defended the accuracy of the government's official inflation data on Monday, while shopkeepers and consumers boycott tomatoes over soaring prices.

• As Argentines prepare for presidential elections on October 28, analysts, consumer groups and opposition politicians contend that data reported by the INDEC national statistics agency is about half the actual inflation rate.

• "Under no circumstance is the inflation rate what the opposition says. It's the INDEC rate," Fernandez told Argentine business leaders at a lunch gathering, adding that inflation was "more than reasonable" for an economy growing more than 8 percent per year since 2003.

• The government expects consumer prices to rise less than 10 percent in 2007, similar to 2006, but critics say actual inflation is as high as 20 percent.

Hmmm... sounds vaguely familiar. People - get out there and boycott your fresh produce! We need to teach this government a lesson. We are not taking it anymore. Down with tangerines!

Anyhow back with that insurgent ECB (if you don't stand with our Fed, you stand against it!)

• The European Central Bank left interest rates unchanged as policy makers weigh the risks of accelerating inflation against signs of slowing economic growth. The ECB kept the benchmark refinancing rate at 4 percent today, as predicted by all 62 economists surveyed by Bloomberg News. ``Some'' members in the 19-member Governing Council voted for an increase, President Jean-Claude Trichet said.

• Soaring food and energy prices have pushed inflation to the highest in more than six years, just as an appreciating euro and higher credit costs threaten to slow economic growth in the 13- nation euro region. The ECB today raised its inflation forecast for next year and signaled concern that workers would ask for more pay to compensate higher costs. (I believe that's called stagflation; thankfully in the USA we do NOT have inflation - therefore we only have a recession)

• Trichet said today the ECB expects inflation to remain ``significantly'' above 2 percent in coming months before ``moderating somewhat in the course of 2008.'' In November, inflation accelerated to 3 percent, exceeding the ECB's limit for a third straight month.

• The ECB shelved a planned rate increase in September and has since kept rates on hold after the U.S. housing recession made banks reluctant to lend, driving up the cost of credit. While the ECB has offered banks extra cash to encourage lending, the cost of borrowing in euros for three months jumped to a seven-year high this week.

You'll cut soon enough my friends - expect a call from a man with a Texas drawl soon enough... remember, either with us, or against us! Resistance is futile. If we don't fight the inflation there, we will have to fight it on our own soil!

Not that we have inflation, but I am just saying in theory...

Long 'freedom fighters' such as ECB!

Adding Solar Exposure Today - Solarfun Power (SOLF) and Suntech Power (STP)

The two companies in the solar space I have the most personal investment experience with are Suntech Power (STP) and Solarfun Power (SOLF). Suntech Power is an established Chinese leader and up until last week Solarfun Power has been a wayward 2nd tier player with untapped potential. After a series of fumbling quarters, the company finally came through and "investors" (I use that word lightly) rewarded it with a >100% return in a week. While the quarter was good I believe Solarfun Power really benefited from a dearth of other 'speculative' sectors that hot money chases (dry bulk, chinese small cap, etc) working the day it reported - so seemingly all the hot money went into 1 stock (sector). So the move is a bit over done relative to what exactly it reported - again the results were good but I've seen better results in other names, not move those stocks nearly as much.

After spiking to over $30 yesterday, the stock has tumbled to $22s range today so I purchased the fund's first stake in this name. This stake is larger than I usually begin a position with simply because I have a long (and storied) history with this stock. Now with this said, there are a lot of speculators who are sitting in the stock so they still could be a near term issue as their impatience could cause more selling pressure; so the stock could fall farther from here. However, based on the ability to finally execute a quarter to Wall Street expectations and a host of other positives that this company always "had", but its lack of execution always clouded I am willing to include into the fund.

On the negative side (or positive depending on how you look at it) - Solarfun Power CEO sold half his stake to an outside investor - on the positive end this is a solid investor well versed in the alternative energy area, but on the negative you don't want to see insiders giving up such a large stake this early in the life cycle of a company. Hence I found this to be negative. Further, there is a lot of management turnover in this company - another negative. However I do believe the 'rising tide lifts all boats' situation will help Solarfun and until more info is presented at LDK Solar (LDK) i.e. audit/earnings and a better technical picture arises for Trina Solar (TSL), the choices are relatively limited. Some of the other players, I don't want to touch with your 10 foot pole.

Buying Solarfun ahead of earnings would of been obviously the preferred method but with its track record of earnings implosions you are entering a high(er) risk trade - and I try to limit risk when possible. This is very similar to holding a large stake in LDK Solar (LDK) ahead of audit results/earnings - you can game the system and believe the audit will work out, no issues and away we go to $60 but just as easily you could be down 25% within a few minutes. Hence I'd rather pay up for merchandise once I get more information (I hold a small stake of LDK Solar until more info is afforded to me). Now that Solarfun has (finally) executed to Street expectations, and has a clearer path to projections for 2008 - it should be looked at favorably the rest of the quarter. It does lag its peers with only a 16% gross margin but this should improve with time as well, and is far superior to some other 2nd tiers such as Canadian Solar (CSIQ) and China Sunergy (CSUN). Those might hold more upside potential as speculators love these latter stocks, but Solarfun has at this time proven to be better operationally.

So again, any of these companies mentioned in the preceding paragraph hold much more operational risk than a company such as Suntech Power (STP) but with risk comes some additional return potential.

Today most of the solar sector was down - not sure why; it could be partly due to huge runs needing to be digested or people hand wringing over US legislation for alternative energy initiatives - an issue that is way overblown one way or the other in the near term. While it might help sentiment it means very little for most of these companies who have little to no US exposure (save Sunpower (SPWR)). But this is horde mentality and if the bill passes all these companies (many of which have zero US exposure) should be worth 30% more, or vice versa. This is a bill, mind you, that needs to get through the Senate and an oil man sitting in the Oval Office. Hence the day to day hand wringing is pointless from this viewpoint.

I did take the opportunity to add more to Suntech Power as well here in the $73s range; I am hoping for a pullback to $70 to add more. As for Solarfun Power I started with a 900 share position or roughly a 1.7% position or $20.5K. If fortunate enough to see a pullback to upper (or mid teens) I would add in much larger scale. I do expect to see some panicked speculators to be frightened out of their shares in this name (soon), and this could provide an even better buying opportunity. But if not, we have some skin in the game and a positive result from LDK Solar (LDK) could reignite this sector and vault a company like Solarfun.

Long Suntech Power, Solarfun Power, LDK Solar in fund; long Suntech Power, Solarfun Power in personal account

S&P Breaks Free of Resistance

Obviously the market is very happy with the government plans and upcoming cuts. This is very similar to reactions back in August when we had the first round in rate cuts, and Bush's first plan to help subprime (which by the way, after causing the street to rally since it would help 'contain' the credit crunch, was never heard of again). Obviously Wall Street is not Main Street and many time, truth be told, knowing too much or thinking too much puts a damper on returns. One can be intellectually correct but lose money. The bottom line is at this point all the issues that dogged the market the past 4 months are now felt to be 'contained' by multiple actions by different arms of the government. While I believe, in time, that will be false, I am not going to argue with a market convinced otherwise. The main word is 'containment' - can these programs contain the issues... I argue no. The market says yes. But the proof will come later so until proof comes, you sit back and let things run upward. As I've stated many times of late, the problem is not really subprime - its a wider credit issue. Subprime is a great term to throw around but its the tip of the proverbial iceberg. Solutions touted in the media address a sliver of the overall problem. Much of the credit in this country is now based on a falling asset. When assets fall, lending contracts. So unless these solutions fix prices on actual homes (locking them where they are), the problems will continue. Or worsen in fact. But hey maybe that's a "solution" that will be proposed by next spring...

As I stated many times, if/when the market (in this case using S&P 500 as proxy) breaks above 1490 I will change my conviction from neutral to 'bullish' (reluctantly). This bullish stance might last 2 days, 2 weeks or 2 months. It all depends on how long the bull wants to run. It might simply be until next Wednesday for all I know.

I think there are many shoes to fall, from state governments, to auto loans, to credit cards, to commercial real estate. I went through and googled job cuts and job losses and am reading of many companies cutting jobs in pretty large numbers >1000, but apparently the reports being fed to the street say otherwise. Whatever the reason, in the near term the market wants to go up, so I'll change with it - for however long this mood lasts. Eventually it will present a great opportunity to latch back on heavy short positions since I believe the pattern we saw the past 3 months will return. Bullishness, followed by reality. I see reality hitting by January at the latest in the next earnings season.

I spent the past few hours cutting back the Ultrashort exposure by about 40%, but it is still sitting in cash. I am going to sit tight for now, although we certainly could put a big rally into the Fed meeting as we normally seem to be doing of late. And then we'll take it from there. When Main Street and Wall Street disassociate either all my presumptions are very wrong, or they will eventually meet again. The bond market is pricing in recession; the equity market is pricing in essentially no problems. We'll see how it plays out; but in the near term the mob always rules, and the mob wants to go up. (see home builders flying today)

I think I do see now the general game plan of the 'invisible hand' - buy time. Get fixed mortgage rates driven to all time lows. They fell this week to below 6%, and the lowest level since 2005. Let people refinance out of their old mortgages into the new. And most problems then disappear by end of 2008. This is the bullish case. I suppose one must be open to it. Unfortunately many who bought in 2004-2007 are now upside down on their homes. That tends to happen when you only need to put $1000 down for a $325,000 mortgage. So I am unclear how they will refinance. But I suppose the 'invisible hand' can come up with a solution to that too - perhaps government can lend each homeowner in America who is upside down on their home $10,000 which they can put down on their home as a down payment for a refi mortgage .... sounds outrageous? If I told you what we are doing now a year ago, you'd say outrageous .... desperation calls for all hands on deck...

If you take a step away, and said to someone in January 2007 these are all the things that will come up in 2007, and ask them where the market would be - I doubt they'd answer "up for the year, and near all time highs". Quite amazing when you think about it.

Analysis: What Should Median Housing Price Be Today?

I was reading a post on Toro's blog regarding Ben Stein v Goldman (fun stuff!), and I came across a very interesting chart which is simply the historical ratio of median housing value vs median household income.

As you can see from the mid/late 1970s to 2001/2002 the ratio was consistent in a tight range between 2.6x to 3.0x. Essentially this means the median home price in this country was 2.6x - 3.0x median household income. And it's been right around 2.8x for most of that time. That's 30 years....

Then in 2002+, we had innovation.... great innovation... and 1% interest rates. Easy money. No mortgage regulation. Happy times. And crazy housing prices that detached from reality. In 2006 at the height of 'innovation' (where were these politicians 1 year ago? seriously), the ratio went "off" the chart, it appears 4.0x. After the 'correction' we've had, that ratio has fallen all the way to.... 3.8x.

What bugs me most about the 'plans' the politicians are doing is this will only slow down (to some degree) the inevitable - prices coming to a point AVERAGE Americans can afford. Well I should not say that bugs me the most - all of these bailout plans "points" bug me the most. But this is one that the politicians don't get. Once again they sacrifice the long term, for short term. As with everything. (I will spare you the soap box for the 100th time)

But let's take a back of envelope analysis and see what housing prices REALLY need to fall to before they make sense with historical ratios.

In July 2006 at the height of insanity the median price of a home was $230,200
It has already fallen in less than a year (October 2006) to $207,800

Pain over, correction done - time to party. Right? Wrong.

What are median incomes nowadays? As of 2006 the median household income was $48,201.

$48,201 x 2.8 ratio (historical average for past 30 years) = $134,962

Folks that is still nearly $73K away.... or a drop of 35% from October 2007 levels. And a drop of 41% from peak levels in July 2006.

Correction over? Not by a long shot.

Now that's assuming we return to historical norms. I am fully confidant that by the time this is all said and done NEW financial innovations will be introduced (along with bailouts) which will keep prices elevated above where they 'should be' without the 'not so invisible hand' propping things up.

So let's assume household income rises 4% each year (I would argue this is generous considering wage pressure coming as corporations see profits drop)
And let's assume inflation is imaginery (I mean, it works for the government) and we are not paying 5-12% more for food, energy, et al and that does not stress people's budgets - so therefore all this 4% yearly gain in income will be diverted to buying homes and not paying for necessities of life.

Then in 2008 median incomes will have risen to $52,134
And let's assume instead of returning to the 2.8 ratio that is historically where median house values vs income falls, but instead we can now subsist at say 3.2x because of 'the invisible hand', this takes us to

2008: $52,134 x 3.2 ratio = $166,829

That's still a $40,971 drop in median pricing or just under 20% from today's levels.

And again the above assumes we don't return to historical norms.... and we have no inflation, and we have no pressure on household incomes from growing credit card debt, and we don't go into recession, and people don't start losing jobs, and ... and... and...

Well you get the picture. 20% drops SHOULD be expected at a minimum. 35% WOULD be expected if all was fair in love and war. But I truly think the plan is to get interest rates on mortgages back into the 5% world on fixed, and some ungoldy low number in adjustables so we can repeat this mess all over again in a few years. All these bailouts and freezes again miss the main point - homes in MAJOR URBAN AREAS are NOT AFFORDABLE under traditional mortgages to REAL PEOPLE with REAL JOBS and not in the upper 5%. Due to INFLATED pricing (that politicians want to protect) people are forced to pay 40%, 45%, 50% of their income just for a roof over their head. So by "helping them" you are "destroying them". Slowly but surely. But anyhow, that's small stuff - we have banks to bail out.... that's the important thing.

Welcome to the jungle.

Coal Stocks Quietely in a Bull Market

I hear almost no one talk about these names, but my basket of 4 coal stocks just continue to outperform. The charts are all mirrors of each other - if anything I do not have enough: Peabody Energy (BTU), Consol Energy (CNX), Massey Energy (MEE), and Mechel (MTL)

If you are new to the blog, a sampling of the series of articles I wrote on coal are below

1. Originally went bullish mid September [Crude at $80? What to Buy]
2. Another look a few days later
3. Consol Energy turning into an exporter - late October [Coal Continues to Amaze]
4. Bullish on Russian coal play Mechel early November [Two New Foreign Positions Added Today]
5. Jumped into Massey mid November [Initiating Massey Energy on Continued 'Shortage' Theme]

These are not sexy like solars, and won't fly 30% in a week but they are steady contributors and from time to time can put 20% moves on in two weeks time. In the carnage in November these all held above their 50 day moving averages showing wonderful strength - what more can you ask for, downside protection and solid upside. Any American producer is also a weak dollar play (exporters win), and the US is the "Saudi Arabia of coal". So you get an energy play, a China play, a weak dollar play, all rolled into one. Even the Chinese version, Yanzhou Coal (YZH) is performing very well in the overall weak (of late) market for Chinese shares. As I stated when I first went bullish on this group, earnings in the near term would be horrid but these were 2008 plays and the charts were perking up - people are ignoring the current bad news and looking to the future. That thesis certainly is playing out.

Long Peabody Energy, Massey Energy, Mechel, Massey Energy in fund; no personal positions

Bookkeeping: Closing the last of Aluminum Corp of China (ACH)

I am closing out the fund's position in Aluminum Corp of China (ACH) for multiple reasons. First, it is not my favorite name if I am going to play China - since adding it to the fund on August 14th, a few other Chinese stocks have gained a lot more favor in my eyes so when I increase exposure to this part of the world I'd rather be emphasizing those names. Second, earnings growth and pricing is not so visible in this company as in others. Third, the stock has had a nice run the past two weeks rallying from $50 to $60 and now is approaching some potential resistance as it climbs to near its 50 day moving average of upper $61s. Last, in a potentially slower growth China, the mood towards a metal/industrial stock could be negative.

As stated above, I started this position in mid August, and it was down to a 0.9% position as of the past month - just not enough conviction to hold this when there are so many other names with easier roadmaps. Overall I booked about a 11% gain in the name, but it has been a volatile name to say the least, rising to mid $80s (excluding 1 day when it spiked higher) and promptly falling to $50. I did manage to sell some of the position in the upper $60s to upper $80s. So I will take this opportunity to exit the last.

Sold 150 shares of Aluminum Corp of China (ACH), raising $8700.

As I stated earlier this week, I plan to be quite heavy into cash going into the Fed meeting - I don't like bipolar events where the market could be up or down 3-5% simply because of a few words said by 1 man.

No position

Blackrock (BLK) Swoops in to Help Florida

I do not currently hold Blackrock (BLK), but have in the past - when the rumor mill started that Merrill Lynch might swoop in and carry off their fantastic CEO I did end up selling the position, but now that this won't happen, this excellent company with top notch management is definitely of interest once more. It is hard to find 'safe' financials in this market but this, along with Mastercard (MA) are two I really am behind [Rock on Blackrock]. Charts for both are excellent.

An interesting article from MSN on the company below. Much like the consulting stocks I have added recently due to potential for a wave of 'restructurings' in 2008 [2 New Recession Plays], it appears Blackrock can also benefit from the turmoil.

• The U.S. credit market turmoil is battering the financial sector but is proving to be a bonanza for money manager BlackRock Inc , which, with its deep fixed income roots, has assumed the role of clean-up king.
• Florida officials accepted BlackRock's offer to keep a $14 billion investment pool for local governments afloat by isolating $2 billion of the fund's worrisome holdings and restrict withdrawals. BlackRock's appointment as an interim administrator to the Florida fund comes as it tries to become the lead manager for a roughly $75 billion fund being created by America's three biggest banks to support the asset-backed securities market.
• "They've got long-standing expertise in risk management and fixed income and in managing portfolios of complex structured products. People hire them for their expertise and experience in doing that," said Robert Lee, analyst at Keefe, Bruyette & Woods.
• Last week, BlackRock affiliated firms invested $100 million in notes of E*Trade Financial Corp and picked up a 1.14 percent equity stake in the discount broker as part of a $2.55 billion cash bailout of E*Trade by hedge fund firm Citadel Investment Group. Lee of Keefe, Bruyette & Woods saw the move as "opportunistic."
• BlackRock began as a bonds shop 19 years ago under co-founder Laurence Fink but has diversified over the years into equities and alternative investments. Fink began his career in 1976 as a bond trader in First Boston, where he was one of the earliest proponents of mortgage-backed securities.
• About 40 percent of the firm's assets are in fixed income, 35 percent is in equities and balanced products and 22 percent is in the money markets area. Merrill owns a 49 percent equity stake in BlackRock and is also its largest client. BlackRock has generally invested very conservatively, steering clear of subprime mortgages and riskier assets, but has been eager to benefit from opportunities. It raised $2.9 billion in a credit fund launched in August and plans more funds to benefit from the troubled markets.
• But a stern test for the firm awaits in the form of the bank-sponsored fund, details of which are expected to be announced soon. BlackRock declined to comment on its role in the fund but some analysts felt it was a logical choice to lead-manage it given its large money markets presence. Wachovia Capital Markets wrote in a note last week that mandate could bring in $150 million in revenue for BlackRock in 2008 and add 3 percent to 4 percent to earnings.

So obviously Blackrock has their hands in everything... and this could only grow as things worsen (despite 'interventions' the mess is bigger than what can be 'saved' - this will come out over time). I will be looking to add Blackrock back to the portfolio on the next pullback, as I position the fund for a rocky 1st half 2008. The market can rally all it wants on hopes and dreams of the Fed but corporate earnings are going to be the blast of reality down the road. Timing it all is the tricky thing (euphoria from Fed cuts, to reality from earnings season/guidance for 2008).

Long Mastercard in fund; no personal positions

Bank of England Cuts Rates

As predicted earlier this week, the worldwide rush to cut rates to prop up the US economy (and save the dollar) is now on... Canada, now UK... and will we be surprised to see Europe next? Remember, these were people complaining about inflation just weeks ago. Now all that doesn't matter and it's a race to the bottom. Sadly, economists in England still think central banks are here to fight inflation and not just provide easy credit to reinflate assets. (34 of 62 did not forecast a rate cut). These academics will soon learn.... politics above everything. It's amazing how policy can change 180 degrees in just weeks. Thus far only those stodgy Australians have held the line... a few more phone calls of pressure and we should be able to get them to drop their rates too; I mean it's in everyone's best interest after all. Bailouts, easy money, rate freezes the works - we all benefit.... this is how free markets work....

Bank of England Cuts Rates, Says Inflation Will Slow

• The Bank of England cut its benchmark interest rate for the first time in two years, saying inflation is likely to slow as higher credit costs hurt economic growth. The nine-member Monetary Policy Committee, led by Governor Mervyn King, reduced the bank rate by a quarter-point to 5.5 percent.


• Economists were the most split about today's decision in three years, with 28 of the 62 economists surveyed by Bloomberg News forecasting the central bank would lower rates.


• ``Conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead,'' the bank said in a statement accompanying its decision in London today.


• The slowest services growth in four years and surging money market rates led Bank of England policy makers to set aside concerns about faster inflation expressed just last week by King.


• ``This is likely to be the first of several rate cuts,'' said James Knightley, an economist at ING Financial Markets, who changed his forecast yesterday and predicted a reduction.

As for the market, we once again sit at this key S&P 1490 level - been the key level for over a month now... first as support, now as resistance. If we break above it in the flurry of 'interventions' by all pieces of our government (remember, recessions are not allowed to cleanse the system) than I will need to sharply reduce all shorts as the markets run to new ALL TIME HIGHS in the face of potentially the worst credit crunch since the early 90s, a potential recession, a housing bust, and state governments now finding 'subslime' on their books. But aside from that things are swell. The way the market is so happy you can almost here Uncle Ben whispering to Goldman Sachs "I got your back, 50 basis points are a coming, and heck we might drop that discount rate 75....just watch what we can do this to stock market.... together." In fact I am slowly liquidating the short hedges as we speak as we enter "happy time"....

As predicted in my outline for the next 1-6 months - politicans are now falling over each other to come up with plans to 'fix' the free market, and provide 'solutions' - I thought the free market was supposed to do that? Thats why we cheer the free market and push it onto other countries. The height of hypocrisy.

Now please excuse me while I go try to land a subprime loan for $500K here in the next few days so I can start to default and be 'saved' by 'innovative' government plans... who wants my vote? Hillary? Obama? Paulson (Paulson, you're running?) I want this $500K for 1.25% for the next 5 years - give it to me.... I deserve it.

This Day in Bubbles - Chinese Small Caps are Back

Well it didn't take long... a week of rallying and our old friends the Chinese small caps are full of speculators. Some very familiar names...

China Natural Resources (CHNR) +88.3%
China Precision Steel (CPSL) +37.9%
China Shenghuo Pharma (KUN) +26.5%
China BAK Batter (CBAK) +30.8%
Origin Agritech (SEED) +22.6% (chinese co.)

You know the game that worked so well when discussed in September, buy the 5 stocks that went up the most today, and they will go up on average 40% tomorrow. Welcome back to the carnival of speculation. Thank you Ben! I will have to look up the old posts to see what other fine and dandy stocks are going to be worth 50% more tomorrow than they are today - there were at least 30-40 companies of this ilk.

As I wrote in November, any one foolish enough to actually buy and "hold" these were wiped out completely [Chinese Small Cap Speculators Wiped Out] But I am sure that post, which showed 5 previous posts chock full of companies ready to take over the world, will be on everyone's hot list as we enter the twilight zone of free money....

History, just keeps repeating itself...

Jim Rogers Speaks...

Worth your 9 and a half minutes... talks about dollar, the Fed, bailouts, commodities... from one of the best investors of all time.

Agrium (AGU) Trying to Increase Potash Supply

One reason I like Mosaic (MOS) and Potash (POT) so much is due to the fact, of the 3 major nutrients in fertilizer, potash is the one that must be mined. And it's very expensive to add capacity - hence a wide moat - high barriers to entry and a lot of time/money to expand production. Eventually it will come, but it's going to take quite a bit of time. Looks like Agrium (AGU) the other major potash player is also looking to expand (in time).

• Canadian fertilizer company Agrium Inc (AGU) expects rising prices for potash leading into 2008, and hopes to expand production of the nutrient in coming years, its chief executive said on Tuesday.
• Agrium recently increased capacity at its Saskatchewan mine by 300,000 tonnes to 2.05 million tonnes, and is now working on engineering studies for another 800,000 tonne expansion.
• Calgary, Alberta-based Agrium will need up to a year to finalize plans and costs, with an eye to boosting production in 2010 at the earliest, Wilson told the conference.
• Wilson said he expected China, the world's largest potash consumer, to pay more for its supplies after upcoming price negotiations. "I see potash prices continuing to strengthen. China should be paying a minimum of $100 a tonne more, maybe even more given today's situation," he told Reuters. China paid about $100 to $150 a tonne less than other countries for the potash it imported in 2007. Some analysts have projected price increases of up to $150-$160 per tonne.
• "Who knows how it will play out, the Chinese may decide to be stubborn for a while and not buy for a couple of months. But at the end of the day they need potash and they'll have to accept a price increase," Wilson said in the interview.
• Agrium's shares have climbed since announcing a friendly takeover on Monday of UAP Holding Corp (UAPH) for $39 per share in cash, or $2.165 billion, even though Agrium plans to pay in part by issuing $1.25 billion in equity. The deal will make Agrium North America's largest seller of crop fertilizer, chemicals and seed. The retail expansion will help stabilize its earnings when prices for nitrogen, phosphate and potash fertilizers cycle lower, Wilson said.
• Booming potash prices will attract more players and production, despite high startup costs, he predicted. At these prices, people will come in and the price will fall, there's no doubt about that. But it's going to take quite a while for that to happen," he told the conference.

I've focused more on Mosaic and Potash because they are pure plays on fertilizer, whereas Agrium is a retailer as well in part of their business, but with this recent purchase Agrium is doing a good job in consolidating power. Less players = more pricing power = good for corporations.

Long Mosaic, Potash in fund; long Mosaic in personal account

Legg Mason (LM) Chief Says Credit Markets in Worst State of 47 Year Career

I know... I know, Fed cuts and discount rate cuts fix everything.... but back to the real world

• Chip Mason, chief executive and founder of Legg Mason (NYSE:LM) , one of the world's largest money managers, said on Tuesday that the credit markets are in the worst state he has seen in his 47 years in the business.
• "It is a very unusual situation. I have not seen anything like this, where nothing is traded," said Mr Mason. Legg has more than $1,000bn in assets under management, including several large money market funds.
• Mr Mason said the US Treasury should put $20bn into the planned structured investment vehicles superfund, in an indication that the government was standing behind it. (sure, why not - bailouts help everyone)
• Isaac Souede, the founder of Permal, another Legg subsidiary which is one of the largest hedge fund of funds, said this year had also been the most challenging he had experienced in his 21 years in the industry.
• He added that if the US went into recession, "China will fall hard and take the rest of Asia with it. I don't think that China can withstand a severe US recession". (but they keep telling us it's all decoupled....)

From the Telegraph, the British are begging for cuts as well... easy credit, its a worldwide drug.... not that there is a problem or anything and the US market is near all time highs ;)

• The sterling interbank market has collapsed at the fastest rate in modern history, prompting pleas for immediate rate cuts from a chorus of top British economists.
• Office for National Statistics data sourced to the Bank of England shows the volume of market loans in the banking system plunged from £640bn at the onset of the credit crunch in August to £249bn by the end of September, suggesting British lenders have been hit even harder than US banks in relative terms.
• "This is one hell of a shock to the financial system," said Professor Tim Congdon, a leading monetarist at the London School of Economics. (I'd say)
• "A market that has taken 30 years to build has completely imploded in a matter of months. Lenders have been squeezed savagely. We've moved into a different era," he said.

Funny... just keep in mind, the easy credit drug is now in all developed nations. Once again, America leads the way with its innovation and trend setting. For this we have housing bubbles in the UK and Spain. Those darn Germans never fell for these tricks - they kept down payment requirements at 20%. They must be stuck in the stone age - don't they realize this is the era of financial innovation and unabashed risk taking? an era where you can package 1000s of bad loans together into 1 product and that product becomes safe? It's call alchemy. Try it sometime Germany....

So the solution to all these problems? Get us back to the same place we were in 2001-2002 so we can play this game all over again. Fantastic.

Now the good news, is it appears we are on a path for all developed '1st world' (i.e. very innovative) countries to drop rates in unison because recessions are no longer allowed. So the dollar should not crumble against those nations partaking in this return of free money for everyone. So I guess this is 'great' news if you hold dollars... we are all in this together.... meanwhile somewhere Mr O'Neil from Merrill Lynch is enjoying is $160 million, and snickering at those left to clean up this small mess [You're Fired! Now Here is $160M to Help Ease the Pain].... did everyone forget the story about asking hedge funds to hold bad loans until this mess "blows over" - how quickly we forget. [The Games They Play: Merill Lynch]

***********
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.

The Market wants it Both Ways

I love 'analysis' like this:

Wall Street rallied Wednesday after new data showed the U.S. economy is in good shape and that another interest rate cut is still a possibility.

*****
Ok so if the economy is in good shape (per economic reports) why would we need to cut rates?

Oh I see we can have both a good economy and Fed cuts.... yes the best of both worlds... cheaper money by the day, and a good economy. Bubbles? What bubbles? ;)

Amusing at best...

Riverbed Technology (RVBD) Up 10% on Upgrade

Speaking of analysts....

Riverbed Technology (RVBD) is up strongly today and it appears to be due to an analyst report from Think Equity

• Riverbed (RVBD) shares are sharply higher today after ThinkEquity analyst Jonathan Ruykhaver today raised his rating on the company to Buy from Accumulate, while maintaining his $48 price target.
• Ruykhaver writes that “the WAN optimization secular growth remains strong and Riverbed’s product market leadership appears intact.” He adds that he is encouraged by the company’s “commitment to invest in growth while also targeting operating margin expansion in 2008.” He sees potential earnings upside, and advises that investors should buy the stock at current levels.
  

This reverses a call made in mid October when the stock was $47, and he downgraded on valuation. Finally, an analyst who makes sense with good timing....

I continue to love this space with Riverbed Technology (RVBD) and Blue Coat Systems (BCSI) but they seem to get lumped in with Cisco Systems (CSCO) and persistent fears of 2008 slowdown in corporate spending seems to dog these stocks. I did cut back a bit on my position today on this strength in Riverbed, about 18% of my position and this takes Riverbed Technology back down to a 1.9% type of position for the fund.

Despite the horrendous fall in the stock price, by booking profits during good times and averaging down in the mid $20s range - after todays 10% rise the stock is now "only" at a 4% loss for the fund. Until the space shows material signs of weakness, I will continue to hold these names, although investors have truly trashed the stock(s). I do like Riverbed as the technical leader (although richer in valuation) and Blue Coat as the 'value' play in the space.

Long Riverbed Technology, Blue Coat Systems in fund; long Riverbed Technology in personal account

Sohu.com (SOHU) Raises Guidance

Sohu.com (SOHU) is not a company currently in the portfolio but one on my radar. Aside from an interesting space, this company fits in with the 'Separating Chaffe from Wheat' crowd, in that despite being a volatile Chinese stock it never broke the 50 day moving average even during the worst of the selloff in November. This shows a lot of strength and pushed the stock from a long term watch list to my immediate attention.
I was hoping to add Sohu.com (SOHU) on a pullback to the mid $50s, but last night the company had to go and raise guidance for the quarter. Darn them....

• Chinese Web portal Sohu.com Inc (SOHU) raised its fourth-quarter outlook as its Tian Long Ba Bu online martial arts game is proving more popular than expected, sending the company's shares up almost 6 percent after-hours.
• Online games have wide appeal in China, where they make up one of the single largest Internet segments, linking thousands of players who compete within a virtual role-playing world. China's online game market is expected to grow at an average 11 percent a year from 2007-2017, Credit Suisse said.
• For Sohu, or "search fox" in Chinese, Tian Long Ba Bu marks a renewed foray into gaming, as the company looks beyond its search engine roots to social networking services like blogging and video-sharing.
• Sohu had a 3.3 percent share of China's 2.91 billion yuan ($393.8 million) online game market in the third quarter, behind leaders Shanda Interactive Entertainment (SNDA), Netease.com Inc (NTES) and Giant Interactive Group Inc (GA), according to research firm Analysys International.
• Sohu raised its quarterly earnings forecast by 3 cents to 36-38 cents a share, excluding share-based compensation costs, and increased its total revenue forecast by $2 million to $55.5-$57.5 million.
• October-December advertising revenue forecast was kept at $31-$32 million.
• Analysts on average expect the company to earn 29 cents a share, before items, and post quarterly revenue of $55.4 million, according to Reuters Estimates.

Sohu.com's business has 'evolved' quite a bit over the years - I used to invest in these type of stocks in my personal account about 2-3 years ago when they were very different type of companies, focusing a lot more heavily on the wireless market. There are now a number of Chinese gaming stocks public in the US - this is a part of the Sohu business but as the article stated, it's not a leader in this space with only 3% share. The interesting component to me is the advertising component of the business - so one could look at Sohu as a "very very very" poor man's Baidu.com (BIDU) - and I mean that in a very distant comparison - Baidu.com is the king - Sohu is a distant 3rd cousin - but the upside could be very meaningful in advertising over the years as even the distant 3rd cousin should do very well over time in such a young space. When I first read the news I was hoping the upside surprise would of come from the advertising space instead of the gaming space, but beggars can't be choosers.

Sohu.com is pricey at 40x 2008 estimates, and has had quite a run this year - but again, judging from it's strength in the recent sell off, this appears to be a stock that institutions want to be in and this relative strength is very appealing. And a company under promising, and over delivering (raising guidance) is one who is playing the "Wall Street" game correctly. I am still going to hold off and hope for a pullback to a more preferable stock price to begin a position.

No position

Bookkeeping: Selling some WuXi PharmaTech (WX)

I like this name a lot, but it has made a huge run in a short time, and this is a technical near term sell. The stock has run from low $20s to $30+ in two weeks and is now sitting at a key resistance level, the 50 day moving average. I hope to cut back here and buy back lower. I really like what WuXi PharmaTech is doing, it's space and its long term situation - it is just a bit rich in valuation. I also think going into 2008 the medical "space" will be a place people flee too, but since WuXi is a Chinese company it might not benefit from that flight to safety during the 1st half of 2008. I am actually looking at some of its US peers as "safe" investments for 1st half 2008, but they are rich in value too. Anyhow I am selling here in the low $30s and would like to add back if we get a nice pullback somewhere in the $20s - this is a very volatile stock so I don't have an exact buyback point at this time, but mid $20s would be attractive.

Long WuXi PharmaTech in fund; no personal position

The Games Analysts Play... Why No One Ever Says Sell

Watching investors scurry like lemmings each time an analyst says boo is a bit amusing but unfortunately in can affect your portfolio. What many new investors do (as did I) was take these analyst reports as gospel. Over time, you see the games that are played and you catch on, but usually after many lessons. Myself, I like to read the "why" of a report, but other than that don't care one bit about the actual ratings unless its an outright sell (which is as rare as a dodo bird). I also take into account downgrades the week before an earnings report, because usually the only time an analyst will stick out his/her neck is when they have (ahem) "close to the vest" news (I won't go as far as to call it insider news). I also will give a lot more weight to an analyst who works for a research only firm, meaning they do zero investment banking and their whole business is providing research....

One must always remember what the motives are for analysts, and where they are in the food chain of a bank. There was a big fuss after the late 90s and all these "new proposals" were put into place to make the analyst community change to a more useful service instead of beholden to other interests within a bank. Everyone asked why is there almost never a "sell" rating?? As with all things regulatory in this country - this fuss was raised, fines (minor ones) were levied, we were told everything was fixed, and everything went back to business as usual within 2 years. I just have to laugh when I see all these sells NOW showing up for the financials... it would be amusing if the reasoning behind it were not so pathetic. Read on to learn about "business as usual"

No Sign of "Sell" on Wall Street as Analysts say "Buy" "Hold"

• Anybody who followed the advice of Wall Street's top-ranked analysts, none of whom would say ``sell'' for a single company in the securities industry this year, is reckoning with subprime-like losses.
• Merrill Lynch & Co.'s Guy Moszkowski, UBS AG's Glenn Schorr and Sanford C. Bernstein & Co.'s Brad Hintz maintained either buy or hold recommendations on Bear Stearns Cos. as it fell 39 percent in 2007, the most since the firm went public in 1985. Moszkowski and Hintz had buy ratings on Morgan Stanley while the stock shed 22 percent in New York trading. Moszkowski and Schorr advised holding on to Citigroup Inc. as it dropped 40 percent.
• Shrinking fees from brokerage commissions mean fewer dollars for research and more pressure on analysts to hang on to paying customers such as hedge funds. While clients care little for ratings, they covet meetings with company executives -- audiences that favored analysts can deliver. As a result, ``sell'' ratings on Wall Street are even scarcer than four years ago, when 10 securities firms paid $1.4 billion to settle allegations by then-New York Attorney General Eliot Spitzer that they used research to improperly promote stocks.
• ``An analyst cannot issue a sell rating because he doesn't want to lose access,'' said Tom Larsen, a former Credit Suisse Group analyst who now runs research and helps oversee $6 billion at Somerville, New Jersey-based Harding Loevner Management LP. ``It's logistically cumbersome for the buy-side to arrange its own meetings with company management, so this concierge service is very useful.''
• Analysts rarely said ``sell'' before the Spitzer settlement because they didn't want to jeopardize investment banking fees. Now, they're more concerned about maintaining good relations with company management. Only of analysts' recommendations have been sell this year, 7 percentdown from 11 percent in 2003, data compiled by Bloomberg show.
• Institutional investors are willing to spend more for meetings than ratings, according to a survey of money managers by Greenwich Associates, the industry consulting firm founded 35 years ago in Greenwich, Connecticut.
• Investors ``place a pretty high premium on brokers that can do a good job coordinating access to the companies' CEOs, CFOs, treasurers,'' said John Feng, a principal at Greenwich Associates.
• Hintz, 57, the third-ranked brokerage-industry analyst according to Institutional Investor magazine, said in an e-mail that his ratings aren't intended as trading advice and aren't influenced by any desire to mingle with company managers. ``We are not supposed to make trading calls,'' Hintz said. ``Just because a brokerage stock goes down over a short period doesn't mean it's an underperform.'' (keep that in mind the next time everyone panics when a broker downgrades from strong buy to buy; it is not meant for trading advice)
• Instead of saying ``sell,'' analysts have stuck with ``hold'' ratings that are less likely to antagonize the senior executives they're monitoring, Larsen said. The ratio of hold recommendations has climbed to 48 percent this year from 40 percent in 2003, Bloomberg data show.
• While a ``hold'' might be enough to signal to institutional investors that a company is in decline, retail investors follow analyst recommendations literally, according to a study published in the Journal of Financial Economics in August. (Darn retail investors.... handing money over to institutions hand over fist until they learn "the game")
• ``Companies can live with a hold recommendation,'' said Larsen of Harding Loevner. ``The tacit understanding by everyone, except possibly the retail investor, is that it's a less-harsh way to say sell.''
• Hintz and Schorr downgraded Merrill to hold on Oct. 25, a day after the firm announced a $2.24 billion loss. By that point, the stock had lost 32 percent.
• Hedge fund manager Colby Harlow, who oversees more than $100 million at Dallas-based Harlow Capital Management LLC, said he only uses Wall Street research reports as a way of gathering data on the firms he tracks and never follows the recommendations.
• ``These guys don't want to get out in front of the crowd and make a big call because if they're wrong they're out of a job,'' Harlow said. (to me this is the most important thing people need to understand - if you are an analyst and you are wrong by agreeing with the crowd, you can simply say "well everyone was wrong" - this is why they rarely, if ever, take chances)``I don't use sell-side research because I want to have some kind of edge.'' (what a quote!)
• Analysts with the most bullish recommendations are typically the most accurate at predicting earnings, according to research by professors Shuping Chen and Dawn Matsumoto at the University of Washington in Seattle. That proves that companies provide more information to analysts who make favorable ratings, (that's fair!) Chen and Matsumoto wrote in their paper published by the Journal of Accounting Research in September 2006.
• For analysts, the punishment for a negative rating can be as swift and unmistakable as a door slamming shut, said Richard Bove, a Lutz, Florida-based analyst at Punk, Ziegel & Co., who downgraded the top five U.S. brokers to ``sell'' in July. ``At one of the companies I've been writing very negative things about for a while, the CEO absolutely refuses to talk to me anymore and I don't have access to that management,'' Bove said in an interview, declining to identify the executive. ``And if you lose access to management, you lose the ability to take them on the road and that reduces your commission income.''

And this folks, is why most retail investors lose their shirts the first few years of investing....

Canadians Buckle Under US Pressure - Cut Rates

Well I am disappointed in those Canadians. As I wrote yesterday I expect a worldwide drop in interest rates to help good ole America inflate its economy into a new bubble. I did NOT expect it to happen so soon. I wrote yesterday:

At this point other central banks are holding rates steady or in fact raising rates (i.e. Australia) to fight inflation. I think this changes once the reality of the US situation happens. After all we are all tied together, and a recessionary USA is not good for anyone. I think central banks in developed world by next year will begin cutting rates in unison as (a) Western Europe enters its own slowdown and (b) they are forced to, to bail out the USA for its mistakes. Inflation will have to be worried about another day. We will be going back to a world of easy money, so we can repeat this whole cycle once more (how sad)

Yesterday the Bank of Canada, which only in July was RAISING RATES, buckled to Goldman Sachs, errr I mean the US Government and cut rates out of the blue. This messes with one of my trades which was the buying the Canadian Dollar ETF (FXC) [Adding 2 Weak Dollar Plays] since it would hold up relative to the US Dollar. That trade is now moot since Canada is going to just follow us into the abyss of 'easy money' (anything to help a friend!)

Hence I am closing my position in Canadian Dollar ETF for a 3% loss and need to go find a country who is not America's lap dog. How disappointing (but not surprising). Australia just raised rates, but who knows what pressure is being applied there from our government, and I am 100% sure the UK will follow in tow soon enough, because their own situation is now closely mirroring the US. Maybe the Swiss will hold out.... they are supposed to be 'neutral' type of people.

Bank of Canada Cuts Interest Rates a Quarter Point

• The Bank of Canada unexpectedly cut interest rates Tuesday by a quarter-point as the rally of the Canadian dollar slowed inflation and market "volatility" threatened to cool economic growth.
• The bank is the second among the Group of 7 to reduce borrowing costs as officials try to keep the credit collapse of August from pushing the world into an economic slump. The bank's governor, David Dodge, and his team are also concerned that a stronger national currency is making Canadian products uncompetitive.
• The Canadian dollar fell and bonds gained after the decision, which pushed the target rate for overnight loans between commercial banks to 4.25 percent. The change, which reverses an increase in July, was anticipated by 12 of 27 economists surveyed by Bloomberg News.
• "We are likely going to see another cut," said Paul Ferley, assistant chief economist in Toronto at Royal Bank of Canada, the biggest lender in the country. "Going into the fourth quarter, our sense is the growth rate in Canada could get halved" from 2.9 percent in the third quarter, he said.
• Across the Atlantic, the European Central Bank and the Bank of England have so far resisted cutting borrowing costs, while trying to push down market lending rates by offering banks extra cash. The Bank of England and the ECB are to meet Thursday. (PREDICTION? A CUT! TIME FOR EASY MONEY WORLDWIDE - NEW BUBBLES NEED TO BE FORMED SO WE CAN DO THIS ALL OVER AGAIN in 2010) woo hoo

No position

Bookkeeping: Cutting back LDK Solar (LDK)

With the 2nd tier solar names in a tizzy over the past few days, and daytraders arriving en masse, I am reducing sharply my exposure to LDK Solar (LDK) - the stock has moved from $30 to $40 very quickly (2 days). The price action has confounded be a bit in terms of the portfolio as the stock was extremely weak last week in a good tape - indicating perhaps some bad news was coming from its audit report. So I lightened up prematurely. But this week, speculation has trumped everything else and the stock has put a huge move on.

Apparently the names are rallying today on the Congressional energy bill. I guess it's as good of an excuse as any. This bill has been floating around in various forms for weeks but today was apparently the day for it to matter. When a sector is in play, any old excuse to run the stocks up will do. If this were truly "the" reason, the 2 leaders in the sector would not be down 4% today. But I guess a news reporter can't write "many names in the sector are up 10-25% today as day traders roll in buying up stocks that were up 15-20% yesterday as they momentum trade". It just doesn't make for good copy.... so they come up with some more legitimate 'reason'.

Either way, as I said this former high flier could be worth $50, $60, or even old highs of $70 as long as they get the audit news out of the way in the coming weeks. Until then it could be up 40% or down 30% in the blink of an eye so I am going to book the gains of this smallish position and let the information come to the forefront. I do expect LDK Solar to have spectacular revenue gains in the months ahead, it's just a matter of what their true gross margin is. Well that matters to me - to the people speculating in these 2nd tier solar stocks its back to mania time "what it was up 40% yesterday? Buy more today, it can only go up". Again, I am constantly fascinating and always underestimating what little time it takes for greed to triumph over fear. Humans have very short term memories.

One can ask, why would you do this? You could be leaving 50% on the table. Certainly. But I always like to work from a position of more information rather than less. While I believed downside risk was relatively limited near $30, it begins to increase more as we move upward. Once again, just like a Fed meeting we are encountering a bipolar event where a stock could be up 60% or down 30% in a blink of an eye based off a news event. I have no information advantage here, its simply a roll of the dice. Hence we move from investing to pure speculation and the advantages of fundamental analysis are lost, and we move to Vegas style 'guessing'. Someone will win very big soon on LDK Solar, and someone will lose very big. I have no idea who it will be, so I'd rather not be either party at this time. I was more willing to sit at the table at $30 without information - now I'd rather pull back, and yes as strange as it sounds it would be more safe (to me) to buy at $55 with a full plate of information than at $40 with huge unknowns. But that's just me and each invests accordingly. Half the battle is not losing money... so I try to avoid it when possible.

Long LDK Solar in fund; no personal position

Positioning Ahead of the Fed

As always a tricky time approaches; the one thing I hate more than anything are bipolar events in which the market can rise 5% or fall 5% all based on perception of an event or words. So each Fed meeting in times like this (versus says 2005 when Fed meetings were sleepy affairs) is such an event.

We have a jobs report Friday and a conspiracy theorist would say it will be bad. Why? Because when the Fed needed an excuse to cut discount and fed funds rate by 50 basis points in mid August, the Friday before the meeting the jobs number came in NEGATIVE. How convenient. Why do I say that? Because that number was revised up 80,000 within 30 days when the government suddenly "found" 65K government jobs.... hidden in a sock drawer.

Why anyone pays attention to these numbers that are subject to revisions of magnitude of 50% is beyond me, but thats the game we play and we have to follow the market rules, and animal spirits. Whatever the case I believe 25 basis point cut will be greeted with a yawn. So I would not be surprised for yet another 'shock to the system' (remember they were saying 5 weeks ago, no need for cuts for now blah blah blah) and the potential for 50 basis points. And of course the market will cheer, rally, high five blah blah, until realization hits again on why we need such drastic efforts. When that happens, and how it plays out who knows.

Either way, it is a guessing game and the small investor has no advantage. So going into this Friday's job report I will be going to more of a cash position, reducing the short exposure because in a blink of an eye the market could 'rejoice' bad news and be up 3% (or down). Remember, bad news is good news - the worse the news, the more we can clap like seals for the Fed cuts. So we have a week ahead of us now where the debate will be "how bad of news do we prefer/want". Again, this would be laughable to main street, who never wants to see such bad news, but on Wall Street its a perverse game. Certainly we can be in a time where bad news is 'great news' because Fed cuts 'solve everything'. Hence raising cash and letting the market decide if they are happy about bad news and sort it all out without a 100% exposure one way or the other is the way to go. Since I've liquidating on the long side as far as I want to go (sub 70% long exposure), if we get some weakness in the next few days I will probably start cutting back some short ETF exposure and simply let funds sit in cash (around 20% currently) until next Wednesday afternoon when the "jury" decides if Uncle Ben did enough to make it happy.

We continue to trade below key technical levels and the old 'leadership' - Apple, Google, and oil stocks are not doing well. This would point to a negative outcome, but one could always argue the market loves to climb a wall of worry and the Fed can solve everything. I will let the market make up its mind and then go from there. I have a big lead on the market since fund inception on August 3rd, so unlike the institutions scrambling to increase performance before year end, I can remain patient and pick spots.

Et tu, 1st Half 2008? Predictions for the coming 6 months

Back in late August I did a series of predictions (a roadmap if you will) in my post 'Et tu, September?' Most were quite negative, and unfortunately most are coming to fruition... One thing I like about the blog is I can have a history of thoughts, sort of an open journal, and go back to see why I thought things at the time, and to revisit those themes to see what led me to those conclusions. Back when I wrote the late August post, the politicos were mostly dismissing the issue of a housing crunch but finally relented with a breathless speech by President Bush on a plan to help out a whopping 100K home owners. We had just had our 'surprise' 50 basis point Fed/discount cut and people were cheery as the Fed was going to fix everything.

Now a quarter later it's time to update the thoughts and thesis for the coming 1-6 months. We now have the next bailout...err, solution by the politicos. Now its up to "2 million" home owners, with proposals to freeze their rates. And people are cheer that the Fed is going to fix everything. The more things change....

Keep in mind, these are not 'stock market' predictions, more of 'economic thoughts' - how the market 'behaves' to these is anyone's guess. Remember, sometimes bad news for the real people of the country is good news for the market - until the bad news becomes so overwhelming, it finally turns inward on itself.

The Consumer/Housing/Inflation

1. First and foremost I think this focus on subprime is misguided. The subprime borrower is a relatively small piece of the puzzle and truth be told as a heartless capitalist, many of those who bought homes of the subprime category should never of gotten homes. Many would not of under 6% fixed rate mortgages with income documentation. So while it is correct to say, this is a smaller slice of the mortgage market, and why should they effect the economy as a whole, my arguement is their troubles are not the central issue facing us. It is "everyone else" (excluding the top 5%)
2. I keep hearing how housing is 4.5% of the economy.... baloney. There are so many related jobs to housing that this figure is laughable. Estimates I've read are 1 in 5 jobs in California are related to housing in 1 fashion or another. And California is a huge part of the US economy. This is also why I find laughable when I read the housing issue is containted to California, Florida, Michigan, Ohio. Well even if you believe that line of hooey, those are 4 of our top 10 biggest states by population. California alone as a stand alone country I believe would be 7th largest in the world (by GDP). We are a SERVICE economy - yes we have some exports still but nothing like 20 years, 30 years, or 40 years ago. When a huge part of our service economy implodes that effects far more than 4.5%.
3. Going back to point 1, I think the consumer (not subprime) is in trouble. Many people bought over their heads in the past 5 years (housing) all across many income strata. To pay for the consumption they drew down equity out of their house. And now the homes are not rising in value and in fact falling in most cases. *This* is where my main fears lie, not with the subprime. These are the people who have driven the economy over the years - the 'middle class' and 'lower upper income' class. I've read countless times (who knows the exact number) that 70% of people live paycheck to paycheck, regardless of income. To cover their shortfalls, they'd dip into the house equity (those who owned homes). Now that spigot is turned off and not coming back anytime soon. Now what?
4. Now what indeed - you live paycheck to paycheck, you have very little buffer and savings so either you draw down consumption or you head towards bankruptcy. This is where our real troubles lie in my opinion. In the past half decade especially, anytime there was trouble there was always a 2nd mortgage, a HELOC, etc. Now those are gone. And even when the mortgage market comes back, without RISING home prices you don't have equity to draw on.
5. Wages are rising on average 3-3.5% a year. Inflation? Far higher. The consumer, living paycheck to paycheck, with little buffer in their budget, fought this by drawing down on their credit cards and house. That game is getting long in the tooth. Inflation? Rising far higher than government tells you, and far higher than 3-3.5%. Many would cite 8-11% as real inflation. Health care, energy, tuition, and now food - you name it.
6. Food inflation is going to be the next killer - it has started the past year, and it will continue; food inflation is due to factors outside our general control - in part worldwide demographics (emerging markets middle class moving from rural to urban lifestyle), food habits changing worldwide (a push to more western diets heavy on meats) and a misguided push to ethanol (diverting corn from food chain to energy chain). In short a world of shortages. And this does not change if China and India drop from 11% GDP growth to 3%. These factors are here, and staying. Yes, food will ebb and flow - it cannot continue at the pace of 'inflation' it is going now - but it has already started to create demand destruction and for the countless people living paycheck to paycheck, they don't have the wiggle room to add $40 a week to their weekly grocery bill. We are going to a world of shortages (with ebbs and flows over time) and the world is not set up for 4-5 billion urbanized.
   
7. Jobs will remain the main wildcard - we are already seeing the losses in mortgages, housing, and "some" financial - to what level this spreads through the rest of the economy as the economy slows will be a key driver in how bad this slowdown gets. If job losses are contained it could be relatively shallow of a drop; if corporations really start cutting due to profit margin erosion it could be ugly.
8. Returning full circle to homes - prices are TOO HIGH. The average American cannot buy a home in many parts of the country (major urban areas) at 6% fixed rates. Prices detached from rents and wages due to the 'innovative' financial products cheered by Uncle Alan. If those innovative products had not been produced, asset prices (home prices) would never of risen like they did... now that we are in a 'unrealistic' home price environment relative to wages, those prices need to come down and in many cases severely to adjust back to reality. When this happens we will be near the bottom. We are not close.
   

Corporate America and the Markets

1. Next shoes to drop? Corporate profit margins. I found this yesterday on Realmoney.com and have been saying this would happen for months "Three months ago, Wall Street forecast Q4 operating earnings growth for the S&P 500 of 8.8%. Today that number is down to 1.1%. " I still believe 2008 profits are far too high in most industries. And as they get cut, in theory stock prices which are in essence a reflection of profits, should be cut. Look for a slew of warnings on 2008 profits come January... (I am still incredibly curious on how a cut back in ad spending will affect Google)
   
2. Energy prices will pressure many industries and those industries dealing with food are already seeing massive pressure on profits. While consumer related stocks have already taken a hit and are starting to price in recession - corporate related stocks have thus far held up relatively well - I believe this changes in the next 2 earnings seasons (January and April)
3. The transportation companies are already telling us we are heading to recession. YRC Worldwide CEO was saying it 3 months ago, now Fedex CEO is saying a "slowdown, but not precipitous decline".
4. Auto sales will see a horrid 2008 for all the same reasons mentioned above - negative wealth effect, lack of confidence, inability to finance via home, wage stagnation in the face of real inflation.
   
5. Commercial real estate will start to drop. Thus far it has held up, but in a slowing economy why would rental rates hold up? They won't. It won't be as bad as residential real estate, but it will be far worse than it is today.
6. Housing companies will begin to go bust. I don't know if it will be in the next 6 months, because they are beginning to take desperate steps (note Lennar's sale of their land stock at 60% off to Morgan Stanley), but it will come to the weaker players sooner rather than later. To keep the boat floating, new home prices will be SLASHED - this has now begun, it will continue and accelerate - while stubborn home owners cling to the hope of inflated 2005 prices - the reality will be shown to them when brand new homes are built at 40% off the value of what hey paid for 2-3 years earlier. This is when the correction 'really begins'.
7. Credit card debt, much like residential mortgage debt, is now being packaged into "ultra safe" instruments and sold on Wall Street as a way to squeeze out more yield. Don't these cats every learn? I don't know if it will be in 6 months, but in 2009 you should start hearing how these turned out to be pretty bad bets as the strapped consumer is turning to credit cards as a lifeboat now that the house ATM spigot is turned off. This will be a longer term play but truly the 'financial innovation' in this country never ceases to amaze.
   
8. The web that is credit will pop up in places we don't even know about yet - you are starting to see it in state governments in Florida (and Montana) You will see it in other places - credit is the lifeblood of the service economy, and these 'innovative' schemes, err I mean solutions will show themselves in many places we'd never expect. If we start seeing money market mutual funds needing to infuse cash to keep the $1 NAV, that will be an interesting time indeed....
   
9. Credit is drying up worldwide - until banks are honest about their exposure this will continue to be the case. "Solutions" such as the Superfund, which simply moves hidden assets from 1 pocket to another only draw out the issue. Banks know best what dirty deeds they have done. And they know if they did it, a lot of other people did it. That's why they don't trust each other - LIBOR rates remain extremely high (a measure of rates banks use to lend to each other). The US banking system is a big black box of 'innovation' - until a lot more of the onion is pulled back and revealed we won't see the stink.
10. Corporations will become very conservative with cash, beginning to hoard it (less buybacks for example) just like the banks are doing now. This is never good - not for a financed based economy. Risk taking will be looked down upon.
    
11. The world will slow down - I don't buy this decoupling one bit. Yes, foreign countries are BETTER equipped to handle slowdowns, but not immune. Their middle class is growing but has nowhere the consumption levels of the US or Western US. They will get hit, but its all a matter of 'relative'. They will still do 'relatively' well, but right now many markets are priced for perfection.
12. At this point other central banks are holding rates steady or in fact raising rates (i.e. Australia) to fight inflation. I think this changes once the reality of the US situation happens. After all we are all tied together, and a recessionary USA is not good for anyone. I think central banks in developed world by next year will begin cutting rates in unison as (a) Western Europe enters its own slowdown and (b) they are forced to, to bail out the USA for its mistakes. Inflation will have to be worried about another day. We will be going back to a world of easy money, so we can repeat this whole cycle once more (how sad)
13. China - everyone says its safe to buy until Olympics 2008 - this tells me that is not going to happen. When everyone thinks something, it never happens. Either the bull will happen far after the Olympics or the bust will come sooner. I vote sooner. Again I am not speaking of the economy, but the market. The economy *IS* overheated in China and they need to take steps to slow it down to a more sustainable 7-8% type of growth. How that plays out is anyone's guess, but inflation is a real worry there (food especially).
14. Ironically so many US investors are now piling into foreign markets as a safe haven - as always, those piling in last will get the hammer applied to them. While foreign markets (emerging) will be the place to be the coming decades, there will be ebbs and flows and the coming 6-12 months could be an ebb. And ebbs in those markets don't mean 5% corrections in their markets. Again, not a market fall but a "fear of global slowdown" could severely hurt these markets - even if there is little truth to a major slowdown in those specific markets (i.e. most countries would love to "slow down" to 6% GDP growth)

The Response

1. I expect a lot more programs to "save" the banks, save the poor homeowners, save everyone. More government programs, more bailouts, more money printed out the wazoo at the Federal Reserve, perhaps a surprise cut here or there, perhaps a major discount rate cut. I've said at 2:31 PM Halloween when the Fed signaled they would go back to neutral, forget about it. We are going to mid 3%s by spring 2008 on the Fed funds - the more I see, the more I could be conservative. Maybe low 3%s or 3% by summer 2008. Anything and everything will be on the table to bail out the economy into an election year. That's just the reality folks. The long term be damned, whatever course of action is needed to be taken will be taken. Hence why its always dangerous to be too short the market - many forces will conspire to make sure serious damage is limited. Massive amounts of liquidity will be fed into the market. (and dollar will continue its death spiral, eventually bottoming but not "bouncing back" anytime soon)
   
2. Foreign buyers will be flooding the US market by spring summer 2008- specifically sovereign foreign funds - it has already begun. But this is just the first steps - many US assets will be taken over. This time it is "for real", unlike the fears of Japan taking over in late 80s - petro dollars and massive trade imbalances make for very rich counter parties. In fact this is going to be an issue for many years as we have taken no steps to shore up our systematic issues of unfunded long term liabilities, trade imbalances, and petrol dependence.
   
3. Politicians will be talking in very protectionist terms - and as the economy worsens, it will only get worse. I believe food inflation will be a major talking point in fact. Whom they will blame (considering the farming lobby is a major contributor to political coffers) will be interesting. The economy will become the #1 issue heading into the 2008 presidential race. President Paul will realize this.... oops, that's not reality. President Huckabee? Honestly I believe this man's populist talk of a 'fair tax' will gain a lot of ground into the type of economy we will be facing by spring 2008. So we could get an 'upset' results by a dark horse. In fact if the election were fall 2009 instead of fall 2008 I'd almost guarantee it, but by spring 2008 many of our economic problems will not have fully taken effect.
   
4. Whatever solutions the politicians do, unfortunately will be focused on the near term - and be as always reactive instead of looking at the root cause and getting to the heart of the problem. If it's a matter of lack of will, lack of education, lack of vision - I don't know. I just see nothing being done for the long run. As with almost everything in this country on the political front, we will act in a reactionary measure after its created massive problems for us (social security is a small bone compared to Medicaid and we can't even address social security as a country) - so look for draconian measure perhaps in 15 years since we refuse to address it now. The 'solutions' will be mocked in this blog I am sure.

So there you have it folks - on the surface it sure sounds gloomy. Whatever numbers the government puts out, and if they indeed eventually call it a recession or not, well that is subjective. I do see a very serious retrenchment as global forces are now to the point they overwhelm "some" of what the Fed can do. In the long long run, a world of shortages is going to create a very interesting time. I do believe in the "long run" technological innovation will solve many of these shortages - but the question is what happens between "now" and the "long run". And for all the doom and gloom above, I do trust principles will be tossed out the door and the government will do everything in its power to stimulate, stimulate, stimulate - by any means possible. So as investors we can cheer that; as Americans and those living supposedly in a free market? I wouldn't say the same.

How Overpriced is land in the US? 60%?

Interesting story here from TheStreet.com. While I don't think land is truly 60% overvalued - when desperate sellers meet buyers, these buyers generally get good prices. But land is overpriced, and probably at a 20-35% rate in many places that saw huge run ups. Keep in mind this is not 'housing' - just pure land. And as always, in the end deep pockets win. So let's review, Fed prints new money, hands to banks, banks buy distressed assets on the cheap, banks wait 3-5 years, and flip the asset for nice profit, we all win. Wait, the banks win. "We" get devalued dollars and inflation. Oh well, at least bankers win! America, for the 2%, by the 2%. Rah Rah.

Now if we could all go to Bernanke and cry, we made very bad errors in judgement, and we are too big to fail, so please give us some money so we can shore up our balance sheet, and then we get a bag of cash handed to us - then I would not be complaining. But somehow I don't think you can go to your regional Fed bank and get quite the same 'perks' the big boys do.

p.s. did I mentioned that Lennar is actually one of the more STABLE home builders? Just imagine what is going on at Hovnanian (HOV) and Beazer (BZH) homes. I continue to say, (if I could) I'd be short - a handful (or a bushel) of these will be bankrupt in the coming quarters/year or two. And you will make 100% with patience. They are not too big to fail.... nor do they have big brother watching their back (and filling their back pocket with newly printed dollars). In the end the banks will win and once we get through this 'dislocation' (fancy word for years of stupidity, greed, and bad decisions that cause hell for the rest of us normal people), the financials *WILL* be a good buy. Homebuilders? The ones (one?) that remain, check back around 2010.

• Lennar's (LEN) sale of a chunk of its land portfolio at a steep discount boosts liquidity for the homebuilder, but it also points to troubling signs about the stock's valuation. The company sold its land to Morgan Stanley (MS ) at a 60% discount to book value. That raises the question: What if all of Lennar's land is worth 60% less than what is stated in the company's financials? If that's the case, Lennar's stock is wildly overpriced
• The Morgan Stanley deal highlights how much land values are plummeting across the country. The discount falls within the range at which builders are shopping deals to real estate vulture funds, sources say.
• KB Home (KBH) and D.R. Horton (DHI) are also said to be searching for similar deals to the one Lennar has pulled off, one industry source says.
• The agreement, announced late Friday, is structured as a joint venture in which Lennar will keep a 20% ownership stake. The two parties will jointly acquire, develop and sell the properties, which consist of 11,000 home sites in 32 communities in California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and New Jersey.
• The properties, which include raw land and partially developed home sites, carried a book value of $1.3 billion and were sold for $525 million, Lennar said. Since the properties are being sold at a loss, the deal will likely create tax write-offs for the builder
• John Peshkin, CEO of the real estate investing firm Starwood Land Ventures, told TheStreet.com last month that finished home sites and raw land are being sold by homebuilders for 50% to 75% discounts off peak values from 2005. (meaning a lot of people bought very overinflated homes)
• While the deal surely creates liquidity for Lennar, it also raises the question of how much investors can trust homebuilder balance sheets. "How can they sell land for 60% less than what they said it was fairly valued two months ago?" asks one homebuilder analyst, who declined to be named. "It raises an accounting issue," the analyst says. "Auditors need to come in and take a close look at what assumptions builders are using."
• Management teams are given a lot of discretion in determining whether land and other housing inventories are required to be impaired each quarter. In theory, auditors are eyeing the builders' assumptions, but the impairment models remain a black box for investors. (sound familiar? Sort of like level 3 assets in the banks? )

If you want to read some accounting terminology and the potential book value this implies for Lennar, please click on the link - I know it's probably too boring for some, but essentially if this 60% discount is reflective of Lennar's entire base of business, than Lennar is overpriced by at least 2/3rds. And again, its one of the "good guys" in the sector.

As I keep saying, and it gets lost from time to time in between Fed cus and this talk of bailout or that talk of subprime solution, we are just getting this party started. I have moved us up from the top of the first inning to the bottom of the first inning in this correction, as of last week. I will know its close to the end when no one wants to buy a home because "all they do is go down" and aside from San Francisco and New York, a 'normal' person with a 'normal' job can actually afford the median house with a 6% fixed mortgage in the major urban markets. We are not even close. Keep in mind, we haven't even entered a recession yet - all this is happening with the economy 'booming' (if you believe the government reports). What would happen if we actually slowed down to 1% GDP growth or (gasp) went negative? I know recessions have been outlawed in the country but just asking....

Eric Bolling Fans...

Just fyi, there was a sighting this weekend on one of the Fox Business Channel weekend shows. I thought there was supposedly some sort of non compete but he at least made an appearance - of course he deserves a whole show. I do have to say I think Najarian is doing pretty well on Fast Money (using options as his 'tell' for hot money) but some of the other players are close to zero value add in my book. There is no 'chartist' on the show and that is severely missed.

Anyhow, Mr. Bolling was crowded out by the other 5 very loud guests on that particular Fox show, so he did not have much to say... but it was good to see him see the light of day again and hopefully we get more from him; definitely in just the 1 year of watching Fast Money when he was on, his timing and sector calls were near impeccable.

Long Bolling

Today I'll Bask

Been a quiet day but have to say, a day like today is when you feel like you hit a home run

Of my top 10 positions, 5 are long, 5 are the Ultrashort ETFs

The 5 long positions make up 5 of the top 8 positions, and all 5 are up between 3.5-6.5% in a down tape.

And all 5 Ultrashorts are up from 0.5% to 3.3%.

So on one day alone like this you can outperform the indexes (S&P 500, Russell 1000) by +2% - and when your goal is 15% annually, that is a heck of a day. (in fact it would be a heck of a month)

Can't ask for much more... now send me your money ;)

p.s. with sales today cash is up to 20.5%
p.s.s. Crocs (CROX) finally showing recovery and has now jumped back to right below a major resistance area - I did lighten a small bit here, but if this name can pull through the $42s area it has a lot of open road ahead.... I still find this company extremely undervalued - even up through the mid $50s.

Long calm days on the market when winners and losers sort themselves out

Bookkeeping: Addition to Research in Motion (RIMM)

I am continuing to slowly build a Research in Motion (RIMM) position on the weakness. It is now up to 1.65% of the fund. The risks are a few - #1 real OR perceived slowdown in corporate spending could hurt perception of the company - all it takes is 'a fear' of corporate slowdown in gadget spending and the stock can get whacked even if it is not reality (remember perception IS reality on Wall Street) and #2 valuation.

I like this company for the long run and it's move into the consumer space and especially international markets will be wonderful initiatives. But the stock has now gapped down below its 50 day moving average of $108.25 or so which generally does not bode well for the near term. Hence I am not rushing in. Recent lows were in the upper $90s and since I sold some of my position near $120 last week I am just buying back what I sold. Always a risk in buying a cult stock (i.e. chock full of retail investors) of the lemmings panicking and hence I tread carefully with a stock like Research in Motion.

If the stock regains its 50 day moving average (and the market strengthens) I'd continue to add to this position.

Long Research in Motion in fund; no personal position

Bookkeeping: Taking some Fertilizer Names off the Table

I know Gordon Gecko says greed is good, but we have had some tremendous moves in the fertilizer names, and today especially the 2 potash producers, Mosaic (MOS) and Potash (POT) are running hard. I don't see any specific news driving these names.

Mosaic, my top holding had put on a quick 25% move in just over a week - as I stated last week when I started to take some off the table in the mid $60s, I felt true value was at least $80 but in this market environment I am taking profits where offered, and I sell in layers, so I am stripping off another layer in both names. Again I am very glad to see when the market calms down, true value be rewarded. I am very top heavy in fertilizer names and plan to be for quite a while, but will be cutting here with hopes of buying back at lower prices.

Long both names in fund, long Mosaic in personal account

Quite a Recovery for the Infrastructure Group

My 'focus' group for U.S. based Infrastructure names are the following (in order of market cap):

1. Fluor (FLR)
2. McDermott (MDR)
3. Foster Wheeler (FWLT)
4. Jacobs Engineering Group (JEC)
5. KBR (KBR)
6. Chicago Bridge & Iron (CBI)
7. Shaw Group (SGR)

I actually own a basket of all these companies aside from Fluor (FLR) which was a recent sale (of a smaller position) on technical weakness. Going through the charts tonight for this group, some interesting views in the short run.

Despite fantastic fundamental prospect, strong pipelines, and increasing backlogs - this group has been trashed with the rest of the market. While most of these names held the all important 50 day moving average for the first 2/3rd of the recent correction, all aside from Chicago Bridge & Iron (CBI) finally succumbed to the persistent selloff and all broke this key technical level. This would be a short term indicator to sell for those who only use technical analysis since stocks who exhibit this behavior generally break down further or at best hold "flat line" for a while.

Interestingly, in just a half week rally, all the names in this group save McDermott (MDR) have now rallied back above the 50 day moving average, many quite a bit over. As I was saying in the worst of the downturn, even the best performing companies were getting tossed out as people fled to such 'high growth' areas as Procter & Gamble for safety reasons. Yet another situation where one can nail the fundamentals but in an environment where most every stock is viewed with disdain, one can lose money being long even the best names. I continue to like this group, along with agriculture as 'recession proof' global themes, but obviously in the worst of the selling, nothing is a safe haven. However, it is comforting to see such reversals and strong price action when we even gets a few back to back days of rallying.

I have lightened up a bit in these names as I don't really trust a sustained rally until the market proves otherwise, but a strategy to add back to these names will involve (a) step 1: buying back if they retest their 50 day moving averages and (b) step 2: if those levels fail, buying back at lows we reached at the height of this sell off. I hope I do get an opportunity to add exposure to these names at those lower prices, so I can employ this strategy allowing me to 'bank' some near term profits while rebuilding back positions in this group.

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

Bookkeeping: Weekly Changes to Fund Positions Week 17

Week 17 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: 17.1% (vs 2.7% last week)
53 long bias: 66.8% (vs 91.3% last week)
5 short bias: 16.1% (vs 6.0% last week)

58 positions (vs 56 last week)
Additions: Best Buy (BBY), Huron Consulting (HURN), FTI Consulting (FCN), KHD Humbolt Wedag (KHD)
Removals: CGG Veritas (CGV), JA Solar (JASO)

Top 10 positions = 32.7% of fund (vs 36.2% last week)
42 of the 58 positions are at least 1% of the fund's overall holdings (72.4%)

Major changes and weekly thoughts
After a major down day Monday, the market rallied for the better part of the rest of the week tacking on 5-6% type of moves in the latter 4 days of the week. As the market has rallied from a major oversold condition to reach technical resistance levels, I did a lot of trimming of long positions this week. If the market continues to strengthen in the face of deteriorating economics news, and simply clings onto the Fed's back yet again (much like mid August through late September) I will return to a more bullish mode simply because "the market wants to go up". However despite a quick and strong thrust up, the market is still below key technical levels which I am watching closely to determine near term positioning. On the plus side this week reminded that the positions chosen in the fund will do better than average when the market moves from fear to greed. The volatility has been tremendous of late, and instead of these huge moves up or down I'd simply prefer general down or uptrend so individual winners and losers can separate. Right now we are simply in a market where everything is trashed or everything goes up, so excellent stock picking is not rewarded - simply knowing when a Fed official is speaking or how happy the market will be about future Fed cuts has been all that matters. From a very long heavy exposure last week, I am positioned much more neutral entering this week pending the market "mood".

Economics news is pointing to continuing deterioration of the economy but this can be ignored for many weeks by a market hung up on the thinking of a magical rescue plan by the Fed. (and the feds) What is interesting to me, is the Fed is now warming up the ideas that I have been espousing for months - that we are going to be some serious slowdown in 2008. Now they cannot word it that way because they have to spin things in the most positive light but my take is the Fed is seeing in just 4 short weeks, what level of deterioration is going on. In the typical irony that is the market, we have applause for a degrading economy because that means more Fed cuts. Shortsighted - but typical Wall Street. Bad news is good news, once again - at least for this week.

1490 on the S&P remains key as it has been for much of the past 6 weeks. While on the surface it makes little sense for the market to rally to all time highs in the face of a weakening economy; what makes sense and what happens has little direct correlation in the market in the near term. The huge expanses of liquidity being driven into the economy by the printing press that is our government will eventually put a floor into the market, since this money needs to find a home and real estate and bonds just are not providing any real return.

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. I cut back my exposure to refiner Tesoro (TSO) by over 50% Monday when Tracinda started raising a fuss about the poison pill provision; Tracinda fully balked on the tender later in the week and the stock dropped like a rock so this sale, while not insulating my fully, helped save some money.
2. I cut some of my #1 position Mosaic (MOS) in the $64s, as the market was degrading, to raise some cash.
3. I lowered some of my exposure to Silver Wheaton (SLW) on the rally in the name Monday.
4. I stated my interest in Best Buy (BBY) last weekend as its technical strength was lining up with its fundamentals and my belief that consumer electronics will be extremely hot this Christmas, and began a position Monday in the $48s, to which I added to later in the week as the stock rallied and confirmed its near term strength.
5. Tuesday I started to build some exposure in 2 consulting firms which should benefit from a slowing economy in 2008-2009: Huron Consulting (HURN) and FTI Consulting (FCN). I did add to these positions as the week went by, but these are more 2008 plays than 2007. In fact, FTI Consulting weakened considerably as the week continued and is in a deteriorating technical condition whereas Huron Consulting strengthened. I am trying to find some ideas that are more buffered from the global growth story but still have their own growth drivers; another area that people will flee to in a slowing economy are medical names so I am poking around this area for some names to build into 2008.
6. My near term call on a weakening crude oil price has been correct, however my thesis that the refiners would benefit from it has not been. However, this weakening crude has affected the oil service names, many of which have been weak of late. To reduce my exposure to the space I closed out my position in CGG Veritas (CGV) - but I did add some small portion of Core Laboratories (CLB) Wednesday as it had weakened tremendously. I like the names I hold in this sector but the market overdoes things as usual, and when crude drops 4%, these stocks get whacked for far more even though crude at $65, $85, or $105 have no real effect on the overall business and need for these oil service companies business. But sentiment is all that matters near term, not logic.
7. Wednesday AM I continued to cut into the strength, cutting both names with large weightings in the fund and positions with outsized moves - to raise cash. These are trims not wholesale massive moves, consistent with my thesis of layering in and out of positions.
8. I closed JA Solar (JASO) Wednesday (about 24 hours too early in retrospect as the solar stocks had a heck of a rally Thursday), but you never catch the timing perfectly. I am simply going to concentrate on names I feel the utmost confidence in right now in the space as speculative furor has once again (just like that) hit some of the weaker names and these names have shown in a downturn to lose 30-40% in the blink of an eye.
9. Thursday, I was cutting back some names for technical reasons - those that had fallen well below their 50 day moving average in the selloff but had now risen back to right "below" that level; McDermott (MDR) was a key example. The thinking here is sell them when you can, not when you are forced to. If the market continues strength, one can always buy them back for a few % higher and the stocks will be in a far 'safer' position from the near term technical basis. And if they falter, you saved a lot of lost dollars.
10. I continued trimming Friday, as some of the 'high beta' names made some huge moves in a short time - especially the small cap international names which had been beaten (obviously in panic) despite tremendous fundamentals in the selloff. I'd like to buy these positions back, at lower prices, when/if the market returns to weakness.
11. I did finally on Friday add some long exposure to existing names - namely Research in Motion (RIMM), CNH Global (CNH), and just a small touch of McDermott (MDR). Aside from Best Buy and the consulting firms I did very little on the long side this week.
12. I started an initial position in Hong Kong infrastructure name KHD Humbolt Wedag (KHD) Friday.

The above do not include the trades in my Ultrashorts which I am trading quite often as the market ebbs and flows. I added quite a bit this week as I tried to move to a more neutral stance in the fund.