Bookkeeping: Weekly Changes to Fund Positions Week 19

Week 19 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: 24.2% (vs 29.7% last week)
54 long bias: 56.5% (vs 62.9% last week)
5 short bias: 19.3% (vs 7.4% last week)

59 positions (vs 57 last week)
Additions: Illumina (ILMN), MedcoHealth Solutions (MHS)
Removals: N/A

Top 10 positions = 30.9% of fund (vs 23.8% last week)
39 of the 59 positions are at least 1% of the fund's overall holdings (66.1%)

Major changes and weekly thoughts
In general this was a relatively quiet week; as the markets trended above most indexes early in the week I was looking (reluctantly) for some buys. Most of the names I liked had made some major moves already, and other names I like were still stuck below key technical levels in their charts, so I was hard pressed to find any ideas. So I mostly stuck with my large cash position (near 30% entering the week), and bid my time, making some small trims and buys. After the hysteria that was Tuesday post 2:15 PM, most of my moves entailed asset allocation adding in 2 large chunks some short exposure, first a 5% switch from cash to Ultrashort positions after the 25/25 cut, and then another 5% after the major averages technical support levels were broken. Most of the rest of the week was status quo, keeping cash high along with short exposure.

Going forward key support levels on the S&P are 1440 and 1405. We went through this just a few weeks ago. But every time a new 'intervention' is announced, the market rallies for a few days/weeks, everyone gets giddy that the federal government, which solves nearly nothing, figured out a way to stop potential recession, inflation, housing bust, credit crunch, in 1 fell swoop. So we go up when people drink the kool aid, and drop once they face reality. I keep watching LIBOR Rates (the rates banks use to lend to each other) and even with the new initiatives by world banks, they remain stubbornly high. Monday will be the first auction - I expect since these are anonymous auctions and no bank has to show their face and say "look we stink, we need this money, we are strapped for capital" all $20 billion will be voraciously gobbled up. CNBC will trumpet the bottom is in, it was a success and time to rally to all time highs. And so it will repeat. And I expect future auctions to get bigger and bigger, feeding the drug addict. Each one will be heralded as a success, CNBC will cheer, and the bottom will be in and we should rally to all time highs. So betting against the market will need to be a cautious maneuver because kool aid is this decade's crack. Unfortunately, until banks become a lot more transparent and/or a lot of time passes and people get confidence that there are not more land mines sitting on balance sheet (I am not talking weeks or months, I am talking quarters) - that's when we will see true confidence return (although I cannot imagine LIBOR rates going even higher from here?). If this were the only issue that was one thing, but a world economy where major western powers are potentially heading for "a major slowdown" combined with inflation is a whole different layer of complexity. So here and there along the way, the banks and homebuilders will rally - the calls for the bottom is in will ring out - stocks in these sectors will rally 20% as shorts furiously cover and cheers will ring out. And then we will continue down. Until enough crack is put into the patient to inflate it back to life, or it collapses under its own weight. With a political season fast approaching in the US I expect many more "plans" to be coming from both Treasury and Fed - all of which will get people giddy and happy. If one believes interventions can save the economy, I suppose one should be happy and very optimistic. Just not what I see from this end, but it's not what I see what matters - it's all about perception. When perception is that the government can fix all our ills, we go up. When reality hits, we go down. Timing it all (mood swings) is the trick. And so we go, I expect for a few quarters.

I will get a lot more bullish when a lot of expectations are taken out of earnings estimates for 2008 and a lot more people get to the point where they are down on 2008 prospects. At this point, very few are calling for downturn, and most of them joined the bandwagon in the past 2 weeks. Eternal optimism reigns. When I see persistent pessimism (or materially lower stock prices) I will get back on the bullish bandwagon full bore.

Some of the major investment banks report this week and they will probably dominate the show along with Research in Motion (RIMM).

Below are the fund changes this week - the specific rationale for each of these major moves is explained in the weekly posts which can be accessed in the left margin under archives.

Some of the larger changes (chronologically) to the fund below:

1. Monday, in my quest to find anything to buy in case the Fed bowed to public pressure for huge cuts, I added to Shaw Group (SGR) as the stock broke above a key technical level, the 50 day moving average. This level was violated later in the week (Thursday), so I actually cut my position right back down, and actually exited the week with a smaller position than I entered the week. Why the stock is so weak with such a great backlog is beyond me; I don't view it much differently than a Foster Wheeler (FWLT) or Jacobs Engineering (JEC), but the market is not treating it well, hence I don't have much room for a major position in the fund until the market begins to like the stock more.
2. Tuesday I was away from the computer most of the day, but as stated above made some allocation adjustments to the short (hedging) side in the afternoon post Fed.
3. I sold down some Solarfun Holdings (SOLF) after a quick spike from my purchase last week. Just locking in some profits.
4. I was buying some National Oilwell Varco (NOV) in the middle of the week as the stock strengthened in some terrible action. I missed out on the deep sea oil drillers so instead I bought this stock which was making a technical 'breakout' after lifting up and through its 50 day moving average. This stock is still dirt cheap in my opinion and the recent weakness has been strange action to me. NOV is back up to a top 10 position with 2.1% of the portfolio.
5. On Thursday, even though I still like Ciena (CIEN) I cut my 0.9% position in half after 'ok' guidance and a SIV exposure confession. This is a tough environment to hold networking stocks. I think Ciena lowballed its guidance but no one cares about that now. Until the stock begins acting better technically I won't be raising exposure (unless it tanks to $30ish) or so.
6. Friday, I added 2 healthcare names to provide some more diversity into the portfolio - MedcoHealth Solutions (MHS) and Illumina (ILMN). The former is a 'defensive' recession type of play, and the 'latter' is a growth stock that finally retreated back to support in its chart after a big move. The charts of many defensive stocks i.e. Altria (MO), Coke (KO), Procter & Gamble (PG) are doing very well, but most of these have relatively benign growth - while MedcoHealth is not exactly a high flier itself, it does have some growth component to it. Last, while higher inflation might hurt consumption of some items sold by the names above, drugs are necessities so I don't see people cutting back on those.
7. I trimmed back fertilizer stock CF Industries (CF) as the name broke through $100, and made a 25% gain in just a few weeks.

So again, relatively quiet week in individual names. I am hoping to see either the market break down to a panic level (and stronger stocks on my buy list break down to their 50 day moving averages), or see the market return back to a good technical position before I make large outlays of purchases. With my Ultrashorts I do plan to cut back in the S&P 1440s as I expect a good fight to be put up there by the bulls, but anywhere between S&P 1405 and 1490 is just random white noise trading. Until amore long term trend is created either up or down, I will maintain a similar stance in varying degree to what I have now, as I expect choppy trading as reality fights interventions.

Ron Paul on Mad Money with Jim Cramer 12-14-07

Caught Ron Paul last night on Cramer. Amazing to see the # of reactions on YouTube. Who ever thought the Federal Reserve would ever become such a hot button topic. I also find it amusing how many high profile 'financial types' really like Dr Paul!

Fed Taking on Abusive Lending Practices

An interesting story out this weekend; it looks like the Fed is finally going to do something about the ridiculous lax standards in our mortgage industry. My thoughts (a) bravo - about time (b) why must there always be a disaster before people do anything about a problem

Again, I am a-political (meaning I think both parties are a disaster) but if Republicans are worth their salt, they should be fighting the initiatives below tooth and nail because the "free market fixes everything". After all this was the reasoning behind having little to no regulation in the first place.

In the big picture I do agree free markets fix everything... in the VERY long run. But the disclocations caused in the short and middle run can be devastating before things get to equilibrium. Unfortunately we have such wackos on both sides of the political extreme - either regulate everything to the point it does or don't regulate anything and let harm play out, that common sense approaches seem to stall. Only when we have disasters (i.e. Katrina, Enron era) does anything happen. But as long as good times are rolling and profits are piling up no one cares, about the underlying issues.

For those who hate regulation I say to you - lets get rid of the police force entirely. That is a form of regulation. Instead everyone would arm themselves and we'd move to a "Mad Max" world (think Baghdad). Tribes and clans fighting over land and resources - why just like the 11th century. That's progress! In the end the free market would solve everything... but not before extreme harm and destruction in the short and middle run. This is how I think of all regulation. Humans are at their basis self preserving. To ignore that and say "let everything sort itself out in the free market" without any check on human behavior itself is pure insanity. And the irony now is those who purport to be free marketers are the ones wailing loudest for bailouts, fed cuts, etc.

The next few things I expect to blow up in the next decade are our infrastructure (the bridge in MN is just a preview) and our air traffic control system. Both have been warned about for 20+ years as antiquated and in disrepair. But we continue to ignore them - it costs too much to fix them, and we have wars to wage after all. Until I suppose 800 people die on a bridge in NYC or 2 planes collide midair - then it will be an issue. Typical reactive (not proactive) government.

Anyhow the proposals below are actually sensible. Too bad they weren't around half a decade ago.... or 2 decades ago...

• People taking out home mortgages may gain new protections soon against shady lending practices as the Federal Reserve seeks to back even the riskiest borrowers, already hit hardest by the housing and credit crunches.
• The plan from the Fed, which has regulatory powers over the nation's financial system, could be finalized next year. The effective date would be know then.
• The Fed is considering:
• barring lenders from penalizing subprime borrowers -- those with spotty credit or low incomes -- who pay their loans off early.
• forcing lenders to make sure that borrowers, especially subprime borrowers, set aside money to pay for taxes and insurance. (that's a concept....)
• restricting loans that do not require proof of a borrower's income. (which were originally meant for high net worth borrowers, not Joe Six Pack making $35K a year)
• examining lenders' failure, in some cases, to consider a borrower's ability to repay a home loan.
• improving financial disclosure so people better understand the terms and conditions of their mortgages and get this information when it is most useful.
• curtailing abuses in mortgage advertising.
• The issue has taken on heightened importance given the meltdown in the housing and credit markets that has led to record numbers of home foreclosures.

Many simple solutions that a group of 10 non partisan, intelligent, men and women could sit in a room for 8 hours and figure out. But far too many special interest groups to allow it to happen ... until a national crisis develops. And then the public outcry will finally outweigh the views of those lining the pockets of our politicians.

And it will repeat... somewhere else in the system, in 4-5 years.

Bookkeeping: 'Rising Tide' Performance Week 19

Week 19 performance of the mutual fund

Comments: As always the markets were paralyzed ahead of the Fed meeting. Not a creature was stirring, not even a mouse ... because if the Fed cut 25 basis points or 50 thats the difference between saving the economy or not. Yes, I write it in such a ridiculous way, because it truly is ridiculous. But that's the market for you. Well Tuesday we got the decision and the market was none too happy with it, as we got a 25 basis point Fed funds cut, with a 25 point discount cut. Markets tanks, longs cut exposure, shorts got happy. All major indexes broke key technical resistance late Tueday. Everyone was to be surprised when that evening (Tuesday) rumors were floated out of 'Fed officials' that even more initiatives were on the way. These were announced in full force 9 AM Wednesday just in time to peeve off longs and short alikes (for different reasons) - longs had cut back exposure and shorts were overextended. Well as Wednesday rolled on the market weakened all day, and after a huge morning rally broke down below the key technical levels yet again. The only thing saving the market was a suspicious buy order late in the day to get it "near" technical resistance again. The same pattern happened Thursday on a generally weak day due to inflation fears due to the PPI figure. But a 'magical' series of buying happened late in the day Thursday to push the market back again near to resistance (S&P 1490). If only....we.... could... get... above... resistance. Then Friday, CPI came out and it re-asserted what most Americans have known for 2 years (at least) - inflation is everywhere (except in government reports). Even the faulty government reports are starting to show it, no matter how hard they try to make it disappear. The market valiently tried to hold on, but weakened throughout the day, and no magical buy order was to be found late in the day as in the previous two.

For the fund, I entered the week cautious - negative on the economy but open to any movement in the market which had been drunk on the dreams of a bailout by the Fed the past few weeks. Once the decision came down Tuesday and market participants did not get what they had whined for, for weeks on ends - the babies threw a tantrum and crushed the market. Once the Fed words came out I added about 5% exposure on the Ultrashorts and another 5% once key technical levels were broken. Of course I was not happy to hear of the Fed acting like a teenager, keeping 'secrets' from us, and passing along the news that more things were in store that they didn't tell us about hours earlier. Longs originally seemed happy about the moves but then the realization that this Fed is either acting in a panicked fashion (reacting to markets) or in a terribly uncommunicative fashion (which adds risk for everyone - long and short), the longs began throwing in the towel. With a series of lower highs in the indexes I remained steadfast in the short positions and indeed despite the best efforts of "last half hour" rallies attempted out of the blue Wednesday and Thursday, I remained unconvinced... as did anyone who has been watching these markets over the years. It looked like baloney buying and it was. I also continued to cull some of the larger long positions, and kept buying at a minimum and added to more defensive areas such as healthcare. If you look at the charts of the defensive names - the Altria's (MO), the Procter & Gambles (PG), the Express Scripts (ESRX), the Coke's (KO), you see a raging bull market. Unfortunately those are recession plays, so these stocks ramping are not a good sign at all.

While I do think what the Fed is doing is (unfortunately) necessary the fact the banks have to rely on 'secret identity' auction to tap money supply instead of getting the same money that has been offered to them every day of the week through the discount window is a pretty sad statement. I do expect even more 'innovative' moves by the Fed (and Treasury department) as each week/month passes, but I am afraid the systematic issues are just too big. Until banks become less opaque and be up front about their balance sheets, they will not trust each other. That *IS* something the Fed/Treasury could force onto the system but they seem resistant. Perhaps because they know if everyone came clean it would be more scary than what we have now. If we have inflation with high growth that is 1 thing, but inflation with slow growth (or negative growth) - there is no good in that. It's very very bad.

Anyhow back to business.... the S&P 500 and Russell 1000 had terrible weeks, down 2.4% and 2.5% respectively. Readers, your future investment would of been safe sitting in Rising Tide Growth Fund as it pulled out a +0.3% return this week, outperforming the indexes by 2.7-2.8%. And as a bonus, we hit that magical $12.00 mark again (right on the dot). This puts together a nice 3 week winning streak of beating the indexes by nearly 6%. Needless to say, it was an excellent week, and my goal of beating the indexes by 15% a year is firmly on track.

Price of Rising Tide Growth: $12.000
Lifetime Performance to date (vs Aug 3, 2007): +20.00%

Comparable S&P 500: 1,468.0 (+0.20%)
Comparable Russell 1000: 799.4 (+0.40%)

Fund return vs S&P 500: +19.81%
Fund return vs Russell 1000: +19.60%

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

Updated Positions

I've updated positions which can be found in the right lower margin. Obviously since the Fed decision and technical breakdown in the averages, I've gone back from neutral to bearish...

Again, I am tempering myself with about a 20% limit on Ultrashorts - otherwise I'd be more overweight in that direction :) The inability to short individual names though just truly stinks.

12 New Stocks to Buy on a Pullback

My early September entry '12 Stocks to Buy on the next Pullback' has been one of the more popular entries on the blog in its entire history. Since we are now a quarter later, and a lot more info has emerged since, I want to update this entry with a new set of choices for the coming months.

With the markets at a precarious perch, just below major resistance but certainly with the help of the 'invisible' hand could be pushed back above... but assuming the prospects of a Fed with their hands tied by the twin towers of inflation and slowing growth, let's assume some pullback is coming. What are the most interesting sectors that would be enticing on a pullback? Please note the above list only contains stocks that have yet to 'correct meaningfully'.

Last time around I focused on the following sectors with a top down approach: (less cyclical) oil service, deep sea oil drilling, solar power, networking, techology - other, global infrastructure, global agriculture, china, and retail.

Many of these same sectors strike my fancy

(Less cyclical) Oil service
I still like this area but aside from National Oilwell Varco (NOV) most still trade below a major resistance area (50 day moving average), so NOV quickly becomes *the* pick as it has recently broke out to $78. A pullback to its 50 day moving average near $71-$72 area would be enticing.

Deep Sea Oil Drilling
This whole group has broken out so it's a perfect candidate for this sort of "buy on the next pullback" review. With GlobalSantaFe (GSF) now off the table after its merger with Transocean (RIG), we have RIG, Atwood Oceanics (ATW), or Diamond Offshore (DO) as our choices. I prefer the latter two as more of pure plays in deep sea and less on rigs closer to shore... Diamond Offshore has 50 day support in the mid 110s, and Atwood Oceanics around $83. Pick 1.

Solar
A group on FIRE.... the easiest choice in terms of 'safety' and knowing what you will get is Suntech Power (STP). It currently trades at $83, and its 50 day moving average is way down there at $63, so it would take quite a calamity to correct that far. With stocks in such strong uptrends, I try to buy at least a beginning position at the 20 day moving average (currently $75) and then cross fingers for more weakness to add to it. Even with it's huge move, it is still cheaper than its American counterpart Sunpower (SPWR). First Solar (FSLR) is another candidate but with 'potential' for some slower 1st half 2008 guidance due to capacity constraints and a stock priced for more than perfection it might not be the safest to hold going into the next earnings with an investor base that demands perfection.

There are numerous more speculative fare in this sector - literally throw a dart and you hit a stock making a huge move.

Technology - Other
Out of all the teflon stocks - Google (GOOG), Apple (AAPL), Research in Motion (RIMM), Baidu.com (BIDU), Apple and Baidu.com have held up the best in the past week or two. With the clarity of the Apple roadmap, it just seems too good to pass up. We currently have Apple in the low $190s; any gift such as a pullback to the 50 day moving average ($174) would be very enticing - this will be an Apple Christmas

Global Infrastructure/Energy
I follow 7 names in this sector - the best relative strength has been shown by Foster Wheeler (FWLT), Jacobs Engineering (JEC), and Chicago Bridge & Iron (CBI). Literally throw a dart, pick 2, and hope for a pullback to their 50 day moving averages. These stories will be playing out for years, even as investors switch from 1 to another on their short sighted focus simply on the next quarter.

Agriculture
I like fertilizer so much, I'd say pick 2 names - my stocks have been Mosaic (MOS), Potash (POT), and CF Industries (CF). Again, hope for a pullback to their 50 day moving averages (which they did pull back to in November), and this is where we'd want to be buying. Another multi year bull market. The fertilizer side has been much stronger than the equipment side (i.e. tractors) of late.

Financials
Yes you heard me. We have two beauties in Blackrock Financial (BLK) and Mastercard (MA). The more messy things get in the financial world, the more business that seems to be flowing to the former, and the more the world goes to plastic the more the latter benefits. If one prefers to be in the asset manager business they can go with Blackrock; if one prefers 'transactions' they can go with Mastercard. With Mastercard in the $220s and its 50 day moving average around $183, if the market would correct, this would be currently my choice of these 2.

At this point I don't see any sufficient names in China, or retail, or networking (areas I covered last time around) so I will have to find 3 new names/sector

Coal
I've been a big bull on this sector for months. We have multiple domestic names - really pick your poison among Peabody Energy (BTU), Consol Energy (CNX), or Massey Energy (MEE). I'd be adding heavily to all of these on a pullback to the 50 day moving averages as we have the quietest bull market on the street developing

Foreign non China/India
Two picks here I really like - if mining is more your bent, Mechel (MTL) the Russian coal/iron/steel maker continues to impress. If energy is more your thing we have Brazilian oil giant Petrobras (PBR). Both have pulled back from recent highs, Petrobas at $108 is 14 points above its 50 day moving average of $94. $94 is also where the stock bottomed out in the November correction so we can hope for a pullback to that level (hope being operative word). Mechel has quickly pulled back from >$100 to $94, just a bit above its 20 day moving average of $90. It's 50 day moving average is in the upper $70s and rising quickly so we can hope for a pullback there. Almost made the cut: Millicom International Cellular (MICC), but some slowdown in Latin America cell sales could be an issue - have to monitor this one closely.

India
While Chinese stocks have suffered of late, India has propsered. While I think this recent run needs some correction, that's exactly what we are hoping for. Multiple picks in India - one can go with the banking sector and find a HDFC Bank (HDB) or ICICI Bank (IBN), or if one wants a more industrial bent there is copper stock Sterlite Industries (SLT). All 3 names have corrected a bit to their 20 day moving averages but still are far above the 50 days. Pick 1.

******
So there is a quick and dirty overview of a new dozen.... all made tremendous runs of late when the market was up 5-6% from November lows, and most are holding their own in this post Fed weakness; but if the markets wake up to the fact of potential recession, growing inflation, credit crunch and weakening profits (what a combo!) - the above groups should see correction and make for solid buying opportunities. And if you want to benefit from a coming correction, may I suggest some Ultrashorts.... but that's another post.

[Please note that none of the above are buying advice for YOUR portfolio, please do your own research and determine what is best for you. And after you determine that... come invest in my mutual fund. :)]

Long all names above except deep sea oil drillers & Sunpower in fund; long Suntech Power, Mosaic, and Foster Wheeler in personal account.

Bookkeeping: Cutting back CF Industries (CF)

While this fertilizer name has had quite a run, I don't want to get too greedy, and I've simply cut back this position as we break over $100. I've cut it back to 1.3% of the fund and will let the rest run if it is so inclined. I still find CF Industries (CF) very cheap on 2008 estimates.

I will add back to this (former #1) position on any sizeable pullbacks....

2 New Positions in the Healthcare Field

Since I am mandated to have long positions, I am trying to expand out to some other areas - and am looking for things that will do ok in a more conservative environment. One could use an Altria (MO), Procter & Gamble (PG), etc. I still want some growth so I am going to move some exposure to the healthcare field. While these companies will never have rocket moves upward, since I am down to nearly 60% long exposure I need to get that up one way or the other.

One company I really like is Gilead Sciences (GILD) but this is a relatively highly valued biotech which still has some risks to it, it is currently at $46; if it drops to $44 or so, near its 50 day moving average I would probably be more interested. While $2 means nothing for a solar stock, an agriculture stock or a infrastructure stock, with more conservative companies, your entry point means a lot. As a rule I don't really play in the biotech field because many of these stocks are like gambling in Vegas - if a drug gets an approval, the stock shoots up 40%, if not it drops 50%. Not my type of thing. But Gilead has quite the pipeline, and track record and multiple drugs. However, even these "up and coming biotechs" you need to watch very closely - a peer in this area is Celgene (CELG), which not even 6 months ago was considered as promising as Gilead but whose stock has imploded. Hence, why I find this sector VERY difficult to invest in.

So instead of areas that are so dependent on FDA approval I like to invest in areas that are affiliated in the sector but not dependent on ABC drug passing phase 2 trials...

One area are the labs that the biotech and big pharma outsource some of their research work to - I have a Chinese version of this in WuXi PharmaTech (WX), but the American counterparts are doing very well. In fact a company such as Charles River Labratories (CRL) actually put out lowered (slightly) guidance for 2007 and weaker than expected 2008 guidance yesterday... and the stock is up today right to where it was before this news came out. That shows you the 'flight to safety'. There are about 4-5 stocks in this sector I am still sorting through - they have all made huge runs (for them) but despite high valuations investors keep fleeing to the safety (no recession will stop them), of this sector.

Two stocks in the pharmacy benefit management area (and are defensive) are MedcoHealth Solutions (MHS) and Express Scripts (ESRX). These stocks will do well through thick and thin, although not generally that exciting - essentially they help manage the process of delivering drugs to Americans - simple enough. Express Scripts actually generally has a higher beta (swings up and down more rapidly) but in this case I am going to buy MedcoHealth Solutions for the fund since it is closer to a support line (20 day moving average of $98.50) - and I don't see a need to buy both, and maybe Express Scripts runs up more in the near term, but I don't really want to add 2 "sort of boring" names doing the exact same thing to the portfolio.

Last, is an interesting company named Illumina (ILMN), which is one of a very small handful of companies working in the mapping of DNA - the Wall Street Journal had an interesting story on this group back in early October [DNA Decoding Maps Mainstream Future]. Interestingly, the big dog in the sector, Affymetrix (AFFX) is name near and dear to those from the late 90s - it was a market darling of the era. The 2 companies are in fact engaged in a nasty patent battle. Now again, for those used to investing in a fertilizer stock or solar stock this will be a boring name; but its exposure to the healthcare field without dealing with drug approvals and the risk to your stock imploding overnight.

Motely Fool had a quick story about Illumina's last earnings report here:

• The problem with a company's stock going up 45% since the beginning of the year is that its employees tend to cash in their stock options. Illumina (Nasdaq: ILMN) faced that problem in the third quarter as its bottom line was eroded by $8.7 million in non-cash stock compensation.
• The company experienced a stellar 82% year-over-year increase in revenue, but gross margins excluding non-cash charges slipped a whopping 700 basis points from the year-ago quarter to 63.1%, cutting into the bottom-line growth.
• The change in gross margin was mostly due to the 206% year-over-year growth in sales of lower-margin instruments, including the new Genome Analyzer. Half of the 100 Analyzers that Illumina has so far sold were sold outside genome centers, and that bodes well for continued growth of instrument sales since there aren't that many large genome centers in the world. The placement of all those extra machines should drive sales of higher-margin consumable products used by the machines in the years to come.
• Illumina doesn't expect this quarter to be a fluke. The company guided for about 5% sequential increase for fourth-quarter revenues, even in the face of holiday slowdowns in laboratories. Illumina needs to sustain that growth into 2008 if it wants to maintain the lofty valuation that investors have bestowed upon it.

Illumina is not cheap... on $1.20 estimate for 2008 it is trading at 47x '08 estimates, but with long term growth rates around 30% and a 'wide moat' (very high barriers to entry), it will be hard to enter this area in a cheap way. Affymetrix, which is growing slower, and has been stumbling around all year in execution has the same valuation at this time.

Technically after a large spike in late November, Illumina has pulled back from near $59 to it's 50 day moving average in the lower $55s. So I am buying here. The stock will either bounce or break through this support level. If it breaks through I will quickly reduce exposure and wait for a better entry point. This is essentially the tact I take with stocks trading near major support levels - the dangers (always) in using this type of strategy is stocks that 'pull back' to a support level will fall right through - so when this happens you have cut back or close out the position. More times than not, quality companies that pull back to support will bounce and hence this provides a great entry point. But not always.

So MHS is more of the safety stock, and ILMN is more of the growth stock - both should diversify me away from the type of holdings I am heavily focused on.

I am starting $15K-$18K positions in each name; or 1.2-1.5% of the fund's holdings in each.

150 shares of MedcoHealth Solutions @ $101

325 shares of Illumina @ mid-upper $55s

On strength I will be willing to add to both; especially Illumina.

Long MedcoHealth Solutions, Illumina, WuXi PharmaTech in fund; no personal positions

Black & Decker (BKD) - A Sign of Things to Come on Profits

While everyone obsesses about a faulty CPI that underrepresents inflation by a factor of at least 50%, I'd like to point out something such as Black & Decker's (BKD) profit warning this morning. I don't follow this stock, but its a 'reprsentative' general economy type of stock, that does not have enough overseas exposure to offset domestic weakness. Therefore it is a good proxy as it represents most of the small and mid cap stocks in the US indexes. While the multinational larger caps might be able to offset (at least to some degree) domestic weakness with overseas sales, the companies who are reliant on the US consumer are in trouble. Hence why I have been using the UltraShort Russell 2000 (TWM) as my short against the market instead of something that shorts the S&P500. Thus far this has been the correct way to go, and I expect it to continue as smaller companies also get hit much harder by lack of access to capital.

One reason I am bearish on the market is I feel 2008 profits are very overstated (guidance). I said in January we will begin to get confession season - not necessarily on this quarter's earnings (although I think those will weaken more than people expect too for domestic based companies) but the great hope is "this is just a rough patch" and things will rebound in a few months. I highly doubt it and I think the companies themselves will be telling you this soon enough. And eventually (although the market is in a state of denial now) stock prices follow profits. Profits go lower, so should stock prices. Now with that said, there are many forces (invisible hand if you will - see Plunge Protection Team) which will do as much as possible to prop up stock prices as a double whammy of falling real estate prices AND falling stock prices will crush consumer confidence and going into an election year we sure wouldn't want that to happen. So one must be cognizant that everything (incl. the kitchen sink) will be tried to prop up this market...

So let's see what Black & Decker has to say about 2007:

• Black & Decker (BDK) slashed its fourth-quarter operating earnings projections amid a product recall and a worse-than-expected slowdown in North America.
• The Towson, Md., toolmaker now sees earnings of $1.03 a share for the fourth quarter and $6 a share for the year, excluding a gain from a tax settlement. Previously, Black & Decker forecast fourth-quarter earnings of $1.55 to $1.65 and a profit of $6.50 to $6.60 for all of 2007.
• Analysts polled by Thomson Financial project earnings of $1.61 for the quarter and $6.55 for the year.
• But the company's underlying results reflect weaker-than-anticipated conditions in North America as the housing slump cuts into demand for repair-related products. Black & Decker now expects a low-single-digit sales decrease for the fourth quarter, compared with its prior projection for "modest" organic sales growth.

So that's Q4 2007, in which I've been arguing things are degrading far faster (if you listen to the companies themselves) than any government report is telling us. And unless you expect a sudden pop back to nirvana in 2008, you can expect more of the same. I expect countless companies to lower 2008 estimates, amid uncertainty on the consumer, credit, and economy in general. Hence a "relatively good valued" market based on 2008 earnings, suddenly will get quite a bit more expensive. But that is not priced into the market yet, in my opinion. Let's see how it plays out.

Long Ultrashort Russell 2000 in fund and in personal account

The Web of Credit Snares Another: Cleveland

One point I forgot to mention in the 2008 1st half predictions piece is the role of ever decreasing housing values on state (and city) revenue. A large part of revenue inflows is based on an asset (real estate) that is decreasing throughout the country. Budgets (and benefits) are set to recent 'good times'. Like most enterprises very few government institutions will save for coming rainy day times - they just assume the good times will continue to roll. But when they don't, they are in trouble. Especially if a very large revenue source starts to shrink (property taxes). And this should be happening over the next few years throughout the country.

What's the solution? Print more money. Wait. You can only do that at the federal government level. So I guess the solution is.... well, I don't know what the solution is. Neither does Cleveland. (source of Cleveland story: Minyanville.com)

• Cleveland Mayor Frank Jackson said today that he and top advisers are working to stave off a money crunch that could jeopardize large capital projects on the horizon. Such projects, ranging from roads and bridges to developments such as Bob Stark's $1.5 billion plan for the Warehouse District, rely on the city's ability to borrow money.
• But several factors have combined to cripple that ability. Among them: Successful appeals of property tax assessments and disappearance of the tax on business equipment.
• "There's no room for us to borrow money," Jackson said in an interview with Plain Dealer reporters and editors Tuesday morning. "That means I have to find a new way to do business."
• What I don't want is anyone to interpret this in any way to discourage investment or induce panic that the world is ending, because it's not," the mayor said. (no, it's never panic time... it's always contained.... right Paulson?)

Again, it is so easy to peg the blame on 'those lousy subprime borrowers'. This is such a bigger issue than that. Subprime lending was a sympton of the disease, not the root cause. Just as a virtious cycle of more and more credit leverge happens during the good times, the reverse appears to be happening on the down side. It will hit the Midwest first, and I would be very surprised to not see a major hit taken in CA and FL next. But maybe not until 12 months from now. Until then - well it doesn't matter.

As an aside after doing some reading on the latest plan by central banks to induce lending, I expect this to be just step 1 of a many pronged approach. LIBOR rates (the rates banks use to lend to each other) are still not budging. That should scare people... coordinated actions by central banks that are ineffective. But there is nothing to fear but fear itself. Inflation. Recession. Housing Bust (now in full effect in Spain, spreading to UK next). Credit crunch. It's all good. Markets off 4% from all time highs. Sensible...

S&P 1490 Clearly Violated

With that technical level lookings broken, I've topped off my Ultrashorts which are now up to 20% of the fund. Since this is a long mutual fund, 20-25% would be the maximum I'd go short. 20% remains in cash, I am not interested in buying anything at this point. I will hope that the stocks I am most interested in fall to their 50 day moving average and look for buys there. They are nowhere near those levels at this point.

I will be away for the majority of the day, suffice to say my personal account is far greater than 20% short at this time. 1440s look to be very doable soon enough. If that breaks 1400s and if that breaks it just gets ugly.

If the economic news were truly being treated serious I think we should be a few thousands points lower on the Dow... just my opinion.

I'll check back late afternmoon.

U.S. PPI +3.2%, Largest Increase since 1973

First, I'd be a hypocrite if I lent credence to this inflation figure by this faulty government report when it is higher than expected, just like I dog it when it is lower than expected. As we saw yesterday, import prices are up >11% year over year [Real Inflation Showing in Reports Not called PPI/CPI], so these CPI/PPI figures are still bunk. But since apparently the Fed freedom fighters at central command use these CPI/PPI figures maybe it will jolt them to reality that inflation pressures are real. Not that it matters, because as I keep saying, I think *this time* inflation is different - its not a US specific situation - its a worldwide issue due to global shortages. So the Fed won't be able to fight it like it did in the past. Hence to avoid stagflation (stagnant growth with high inflation) once must get the growth engine of America going. But with the credit crisis and housing crisus, that sir, will be a miracle to pull off ... at least anytime soon.

• Wholesale prices rose 3.2% in November, the largest growth since August 1973, as the rise in energy goods prices hit a record high, the Labor Department reported Thursday.
• Wholesale energy prices rose 14.1% in November, beating the prior record growth of 13.4% in January 1990. Gasoline price growth also hit a record -- reaching 34.8% -- up from the prior record of 28.8% in April 1999.
• "Ugghh," said John Ryding, chief U.S. economist for Bear Stearns, in reaction to the producer price index results. "This is a horrible inflation report of the kind that hasn't been seen in 21/2 decades." "Our reading is that both import prices and producer prices point to significant inflation problems ahead," he said.
• Meanwhile, the core producer price index, which excludes food and energy costs, rose 0.4%. Economists had expected November's producer price index to grow 1.8% and for the core to grow 0.2%.
• Producer prices are up 7.2% in the past year -- the largest growth since 7.5% in October 1981. Core prices are up 2.0% in the past year.

Well first, I am sounding less and less like an outlier - I was making these same calls in the summer (coming recession or "major slowdown", persistent inflation), but was a quiet voice in the ocean. Now things are starting to come to the surface to show this to be the coming reality. In this case, however, I am not very happy about being correct because it bodes very poorly for all of us.

Ciena (CIEN) Reports Ok Earnings, Guidance Light, SIV Exposure?

My gosh - talk about a new risk. Ciena (CIEN) reported earnings this morning, and the stock is off 10% due to guiding for 20% revenue growth instead of 21%. (they beat analysts by .06 - shows you how much that matters). While that guidance is simply under promising and over delivering, investors are so trigger happy in this sector because of the thinking of how enterprise spending could be slowing. More alarming is a trend that I hope does not begin showing up ... Ciena is reporting a $13 million loss due to SIV exposure. Are you kidding me?

I had a minor position in Ciena (0.9% of fund), and there customer base is quite different from a Cisco - Ciena ssells into telcos and they are rushing to outdo each other (AT&Ts, Verizons of the world) so I am not as worried about a near term slowdown in that space as I am in normal corporate America (routing). But now we have to forecast SIV exposure on a company by company basis? Cmon now. I said earlier this web of credit junk would spin into places we had no inkling of, but I certainly was thinking more along the lines of state governments, perhaps county governments, but not individual non financial companies. Ouch.

I did sell half of my smallish position in Ciena - not so much on that bad guidance or even the SIV exposure but near term perception about the stock. Again its a small position and I have some decent gains in this name - when I have more time to read into the earnings report and guidance I will decide if I will hold the remaining 125 shares. Today I sold 125 of 250 remaining shares in this name (which was once a major position in the fund). But if this is a new era where individual companies are going to report SIV exposure - well that just is going to be something altogether bad.

• Ciena Corp. on Thursday said profit more than doubled in the fiscal fourth quarter amid strengthening demand for its networking products.
• Yet shares of Ciena fell more than 8% in U.S. trades after Ciena issued a 2008 sales estimate slightly below Wall Street's forecast and reported a $13 million loss on a short-term investment known as an SIV.
• In the quarter ended Oct. 31, Linthicum, Md.-based Ciena reported net income of $30.4 million, or 30 cents a share, up from $13.1 million, or 14 cents a share. Revenue jumped 35% to $216.2 million from $160 million.
• Excluding the cost of stock options and other special items, Ciena would have earned $50.3 million, or 48 cents a share, compared with adjusted income of $22 million, or 24 cents a share, a year ago.
• On that basis, Ciena beat Wall Street's forecast. The company had been expected to earn 42 cents a share on sales of $211.3 million, according to the average estimate of analysts surveyed by Thomson Financial.
• For fiscal 2008, however, Ciena Chief Executive Gary Smith forecast that sales would rise 20% above the $779.8 million in revenue generated in fiscal 2007. Wall Street was expecting sales to rise 21% to $945.4 million.
• Aside from the conservative forecast, some investors may have been alarmed by the company's $13 million loss in so-called structured investment vehicles. Many SIV-related investment have gone sour in 2007 amid a widespread credit crunch earlier this year. On a conference call, executives assured analysts that the company's exposure to SIVs was "limited" to two specific investments and that the $13 million loss represented just 1% of Ciena's total cash on hand.
• The vendor has benefited from sales of equipment to big customers such as AT&T Inc., which are upgrading their networks to offer faster Internet connections and meet a surge in the number of music and video downloads.

Long Ciena in fund; no personal position

Mechel (MTL) Reports Earnings, Considers Mining IPO

Mechel (MTL) the Russin iron ore, coal, and steel company had an earnings report today and the good news continues. The company is reporting its first 9 months together in the report issued today.

• Net revenue for the first nine months of 2007 amounted to $4.6 billion, as compared to $3.1 billion in the first nine months of 2006. Operating income was $1.1 billion, or 22.6% of net revenue, compared to operating income of $483.0 million, or 15.4% of net revenue, in the prior year period. The main contributing factors were strong market demand and related increases in selling prices for all of Mechel's major product groups, increase in production of high value-added products as well as a decrease in cost per tonne on some of the Company's core product groups.
• For the first nine months of 2007, Mechel's consolidated net income nearly doubled to $706.0 million, or $5.09 per ADR ($1.70 per diluted share), compared to consolidated net income of $372.1 million, or $2.76 per ADR ($0.92 per diluted share) for the year-ago period.

The companies business is essentially mining and steel. Below are results from mining (mostly coal, iron ore, and a bit of nickel)

• Mining segment revenue from external customers for the first nine months of 2007 totaled $1.3 billion, or 27% of consolidated net revenue, an increase of 33% over segment revenue from external customers of $952.3 million, or 30% of consolidated net revenue, for the first nine months of 2006.
• Operating income in the mining segment for the first nine months of 2007 more than tripled to $604.1 million, or 34.1% of segment revenues, compared to total operating income of $185.5 million, or 15.5% of segment revenues, a year ago.
• Igor Zyuzin commented on the results of the mining segment: "Growing demand and positive pricing trends in the global coal and iron ore markets continued into the third quarter. As a result of our efforts aimed at expanding the mining segment and optimizing technical processes at our mining facilities, we increased coal production by 8% and nickel by 22%, as compared with the same period of last year. The increase in production output and the strong pricing environment enabled Mechel's mining segment to record operating profit three times higher than operating income for the same period of last year. Today we are witnessing further price increases for coal products on the back of rising demand in Asian markets and infrastructural challenges faced by major coal exporting counties

Results from steel

• Revenue from external customers in Mechel's steel segment for the first nine months of 2007 increased by 45.2% to $3.1 billion, or 67.3% of consolidated net revenue, from $2.2 billion, or 68.6% of consolidated net revenue, for the first nine months of 2006.
• In the first nine months of 2007, the steel segment's operating income increased by 67.6% and reached $485.1 million, or 15.2% of total segment revenues, compared to operating income of $289.4 million, or 13.3% of total segment revenues a year ago.
• Igor Zyuzin commented: "On the whole, we are pleased with the overall performance of Mechel's steel segment during the first nine months of 2007. Favorable pricing environment allowed for a significant increase in net income compared to the same period of last year. In line with our strategy of increasing the share of high value added products, we reduced the output of billets and scaled up the production of hardware.

And they have expanded to start a small(ish) energy portion of the business

• Igor Zyuzin commented: "This is the first time when we have separately disclosed financial and operating information for the Mechel Energy segment. Since the beginning of 2007, the Company has acquired a number of energy assets, extending its presence in the energy business. As a result, we established an integrated energy division with its own raw material base, power generating facilities and extensive client base. We consider this business to be very promising, given rising energy consumption in Russia and the upcoming deregulation of the electricity market.

Reuters is reporting, Mechel is considering spinning off the its mining division into its own IPO

• Russian steel maker Mechel is considering an initial public offering of its mining business as it prepares for a second consecutive year of record profits, the company's chief executive said on Tuesday.
• New York-listed Mechel (MTL), Russia's sixth-largest steel maker, reported net profit of $706 million for the first nine months of 2007, up 89.7 percent year-on-year, as it produced more coal, steel and nickel and sold it at higher prices.
• "We are considering the option of listing our mining sector on exchanges and are now engaged in this process," Mechel Chief Executive Igor Zyuzin told a conference call. "We don't rule out carrying this out in the near future."
• Mechel plans to invest $2.7 billion by 2011 -- $1.5 billion in steel and $1.2 billion in mining -- to boost production.

While I find it difficult to invest in Russia due to political risk (entire companies have been converted to state owned businesses in a blink of an eye), Mechel is just too appealing to stay away from. It covers a lot of areas I like from coal to iron ore (pricing power), and Russia is a neighbor to China, much like Australia is so you get that side benefit from any commodity business. I still think this is a major undiscovered gem.

You can read my original basis for investing in Mechel back in early November here. The company held up very well in the November correction, despite a huge run up earlier in the year, and although I have pared back my position in this big rally, I wish to buy more on any decent pullbacks. The chart is a thing of beauty, and combined with fundamentals like this...

Long Mechel in fund, no personal position

Three Deap Sea Drillers - 3 Great Charts

I've been long these names for most of the fund history but not of late... my thesis was once the Transocean (RIG)/GlobalSantaFe (GSF) merger concluded maybe whatever weight was holding this group would be lifted. It seems this is true, but I've missed the ride by being very underweight the energy space (ex solar, coal) of late.

Below you can see 3 almost identical charts. I will be very interested in this group (once again), if we can get a nice pullback. For earlier thoughts on the group see

1. (Sept 4th) I'm Buying One Group Today: Deep Sea Oil Drillers
2. (Sept 13th) I Found Goldman's Other Deep Sea Driller Pick: Atwood Oceanics
   
3. (Oct 11th) Could It Be Finally Time for the Deep Sea Oil Drillers?

So obviously I was early, as these stocks have been dead money for months, but it looks like they are finally breaking out of their trance.

In lieu of these I did add some National Oilwell Varco (NOV) today which is an oil service stock, whose chart has finally perked up.... Core Laboratories (CLB) is not far behind... I'll look to add drillers on any meaningful pullback to support now that they seem ready to finally reach their potential.

Long National Oilwell Varco, Core Laboratories in fund; no personal position

Just a Quick Update on Portfolio

Rightly or Wrongly, I've reduced cash by about 10% (near 30% to about 20%)

Once the Fed did 25/25 I put about 5% of that into Ultrashorts. Once we broke 1490 yesterday I put the other 5% into more Ultrashorts.

The 2nd purchase above was obviously hurting this morning as we hurtled higher but at this point is not doing so bad. If the markets improve I will cut back that last 5% and take some losses, but for now I just don't see any impetus for buying on the long side. We've had a 7% bounce in past 2 weeks on smoke and mirrors of Fed cuts - the market got those, and the market even got a bonus this AM. And still we are hanging around 1490. Not much progress.

If we break 1490 (on a closing basis), looking for first stop at 1440s, and then we go back to November issues - risk of downside to 1405 level (which if broken would bring many bad bad bad effects), and then any bounce will be met with resistance around 1490. So stuck once again in 1405-1490 Groundhog Day era, if we break down from here. If the equity market were following the economy or bond market it would be markedly lower. Thus far it has resisted. So we shall see if the bond market suddenly improves and says 'we were wrong about this recession risk, credit markets freezing up, and general fear' or if the equity markets begin to falter (again). I am positioned now for either direction but being a long fund (no individual shorts) have to always be weighing long. If I were a hedge fund I'd probably be looking to have almost the reverse of my portfolio at this time *IF* the S&P breaks down under 1480 (below yesterday's lows)... but that's against the rules of the mutual fund :) Hence I am restricted (if the market falters) to simply trying to lose less money than the market, instead of truly benefiting by a falling market by being aggressively short as the technicals break down. So that's what I am going to try to do here with the index short hedges/20% cash.

No reason to do much here until the equity market picks a direction. I'm as negative as I've felt on the US economy for many years... but than again I'm a dismal scientist by nature. It doesn't mean the market needs to go down - that would simply be the logical extension.

Just as an fyi - a few major brokerages economists' have finally begrudgingly began forecasting in the past week a heightened risk of recession in 2008; a position I've advocated since summer. Again, the markets can disassociate from the economy for a while; and who knows, maybe we have a market at all time highs in the middle of recession - anything is possible with all the currency being printed in this world needing a home (real estate and debt is out, why not equities) but if logic would dictate that stock prices follow profits, and profits will be retrenching in 2008, than it would logically dictate a lower market. Logic has no place in the market in the near term though; I am simply speaking of the longer run.

Real Inflation Showing in Reports Not called CPI/PPI

While the market will obsess about the hugely flawed PPI, and especially CPI (Consumer Price Index) coming later this week, let's focus on a report that is not based on a flawed model (click on the inflation link at the bottom of this post and scroll through and you can see some discussions on why CPI report is an absolute joke)

Today, on the other hand we have a realistic report with numbers that sound reasonable - and it is saying our imported goods cost 11.4% more than they did a year ago. Now that actually jives with what real Americans see every day in their lives. And this is why the Fed is in a box - inflation on one side, an imploding lending system on the other.

Since, in my view, there is very little the Fed can do about inflation near term (it is more a condition of a 'World of Shortages'), the Fed must worry about the credit system. However, without forcing banks to disclose what is in their black boxes, banks WILL NOT trust each other, NO MATTER how much liquidity the banks are handed by central banks. They are simply HORDING this money to shore up their quickly degrading balance sheets. Much of the 'assets' on their balance sheets are literally disappearing by the month, so they simply take the freshly minted money handed to them and horde it. So creating new money out of thin air, only serves to devalue currencies... and help prop banks up and save them from their awful decisions. That money is not getting passed on (in large part) through the system. That is the issue here... and it's not going to get solved by any easy schemes.

This is why I fear we are going to stagflation - real and persistent inflation not caused by overheated economies, but too few resources spread over too many countries entering the "1st world" realm of consumption and industrialization, combined with (in the US and W. Europe) slowing economies. I hope I am wrong on this fact, since it will hurt a lot more in the real economy than the stock market, and will cause severe fear. But at this point in time, looking out 1 year this seems to be the path we are going. We have many years (in fact decades) of easy credit, and a leveraged financial system - if it even corrects 20% - it is so leveraged through the system it will have effects everywhere.

Anyhow back to that import report

• Driven by a weaker dollar and much higher prices for petroleum and natural gas, import prices surged 2.7% in November, the largest monthly increase in 17 years, the Labor Department reported Wednesday. Even excluding fuels, import prices rose 0.5%. (while a bit alarming any one month report does not make a trend, so I don't get too worked up over this figure)
• Import prices have now risen 11.4% in the past year, the largest gain in the 25-year history of the import price index. (now this is the trend, and the worrisome figure - how the Feds can with a straight face tell us inflation is 2-2.5% when we import almost all our consumption is beyond me)
  
• The import price index report certainly highlighted the inflationary dangers facing the Fed and the economy.
  
• Intense competition has limited the ability of firms to pass along 100% of the higher prices they must pay. Profit margins are squeezed instead. (so either the consumer will suffer if these prices are passed along - bad for main street and eventually bad for wall street as demand drops, or the sellers will eat the higher costs - which is bad for wall street IMMEDIATELY as profit margins drop - so it is either pay now or pay later - eventually we all pay for higher prices)
• Prices received by U.S. producers also jumped in November, rising 0.9%, the biggest increase in 12 years. Export prices are up 6.1% in the past year, also the largest yearly gain in 12 years. (worldwide inflation; a world of shortages)
• Prices of agricultural exports rose 1.4%, the sixth straight month of 1%-plus gains. Agricultural export prices are up 23% in the past year, reflecting the weaker dollar and the boom in commodity prices.

Like a Magnet Back to 1490

One must ask with all these bullets expended.... fed fund cuts, discount cuts, bailout plans, worldwide liquidity injections not on the level seen since Y2K concerns... and the market is not even close to yesterday's highs.

Well if we break back down below 1490 (right there now) it really doesn't look very good for the bulls... I consider this a very important test here. If all this 'assistance' cannot get the market moving in the 'right' direction, what will? Next few hours/days important, this level really needs to hold for Santa Clause to re-appear. If not, all we saw today was short covering and not real buyers. As mentioned yesterday - the pattern of lower highs remains intact, hence until we get back to S&P 1525 or so, you cannot get too bullish.

I am going to need to patent "S&P 1490" as I keep returning to this theme so much

Peabody Energy (BTU) Aims to Build Coal Mine in China

While it is easy to say coal stocks are up today (many things are up), they continue to exhibit fantastic strength.

Today, Peabody Energy (BTU) out with news it "hopes" to sign to develop a coal mine in China. Peabody has been one of my picks due to its exposure in Australia (which in turn means exposure to China) but this is the first news I've read of a frontal attack right within China. Looks like Peabody is turning in a global powerhouse. Other coal stocks are up in concert.

• Peabody Energy Corp., the world's biggest listed coal miner, is hoping to sign a deal in the next year to develop a coal mine in China, the world's biggest coal market, its top executive said. "We're very close," Peabody chairman and Chief Executive Gregory Boyce told a small group of reporters Wednesday. "If an opportunity is presented in the next 12 months or so, we're ready to sign."
• St. Louis-based Peabody is searching for a Chinese partner to develop an open-pit coal mine. Such mines cost hundreds of millions of dollars and can produce about 50 million tons of coal a year. Some smaller foreign firms have already announced deals to dig for coal in China.
• Chinese companies, including top coal miner China Shenhua Energy Co. and utility Huaneng Power International Inc., are considering teaming up with Peabody on projects within China, Mr. Boyce said. In exchange, Peabody would join forces with them internationally. Shenhua and Peabody are looking into investing in Mongolia or Australia but talks are in early stages, Mr. Boyce said.
• Peabody executives were in China for the signing of a previously announced $1 billion deal to build a power plant that would capture the greenhouse gasses produced and store them underground. The trapped carbon dioxide would be used to enhance oil recovery in nearby offshore fields. Peabody said Tuesday it has taken a 6% stake in the project, which is led by Huaneng and is set to have the first phase completed by 2009 in the northern coastal city of Tianjin.
• Soaring energy needs from emerging economies like India and China has mean coal consumption has been increase rapidly despite those worries. Countries and companies have been scrambling for a way to lessen the impact of burning coal. China relies on coal for more than 70% of its power, and will surpass the U.S. soon as the world's top emitter of greenhouse gasses.
• China's energy demands are starting to outstrip how fast it can develop its vast domestic coal fields. In the past year, China, a traditional coal exporter, has become a net importer, triggering a domino effect in international coal markets. India is now importing from South Africa, displacing Europe which is now looking to the U.S.
  

And that last point is exactly why I turned bullish on coal a few months ago - this is now turning, much like oil, from a domestic based story (like natural gas) to a global commodity (like crude). A big change from the past - very big. And with a weak US dollar, the US companies will benefit even further as their coal will be ultra competitive in terms of pricing on world markets.

Long Peabody Energy in fund; no personal position

Petrobas (PBR) Having a Good Day

I don't own Petrobras (PBR) directly but through the iShares Brazil (EWZ) ETF in which it holds a very large position, but I have been debating adding Petrobras (PBR) as a stand alone company as it is increasingly looking like one of the few oil companies which can meaningfully increase production over the next decade. I don't see much in terms of specific news other than this Reuters article which states a new rig delivering 180,000 barrels of oil is finally starting up.

• Brazil's state oil company Petrobras has started up a new 180,000 barrel-per-day rig, meeting its 2007 goal for new capacity, if not production, after months of delays.
• It is the second rig with that production capacity to start working on Roncador in the past two weeks and the third platform to go on-stream since Nov 16
• The rigs are slowly ramping up production and should reach capacity by the end of the first half of next year, when more platforms are expected to be launched.
• All the rigs have suffered delays due to problems with suppliers in an overheated market as well as the complexity of the projects, but still, Petrobras added 560,000 bpd capacity this year as planned, proving that Brazil is a key area of new world crude output growth.
• Because of the long delays with bringing on-stream the new rigs and slow ramp-up at others, Petrobras output should rise just between 1 percent this year from last year's average of 1.78 million bpd, below the initial growth target of about 10 percent.
• Domestic oil output by Petrobras fell 2.3 percent in October to 1.73 million bpd from September in its fourth straight monthly drop and was a steep 5 percent below year-ago levels, but the company says November presented an ascending production curve again.

While Petrobras (PBR) could be a victim of any drop in crude prices (baby thrown out with bathwater), the market discount 6+ months ahead, and while output increases in 2007 failed miserably to meet goals, 2008 looks much more promising. Much like the coal stocks, the market is discounting current issues and looking ahead. Chart wise, you can not ask more from Petrobras of late - at worst it's generally fallen only to its 20 day moving average. Again, I will be considering adding this stock as a stand alone position (in addition to the iShares Brazil position) if we get a nice pullback.

Long Petrobras through iShares Brazil in fund; no personal position

More Financial Bad News

Despite this hurrah, the UltraShorts Financial is down less than 2%.

Why? The financials continue to degrade on an unprecentended pace. Much like UBS a few days ago who forecast a figure for Q4, and then not 4 weeks later had to announce much larger write-offs, we are seeing the same throughout the system.

Another 4 today...

Bank of America (BAC)

• Bank of America Corp. said Wednesday in a regulatory filing it expects fourth-quarter writedowns of collateralized debt obligations to exceed the $3 billion it estimated a month ago, but that it expects to remain profitable in the period.
• In a Securities and Exchange Commission filing, the bank said it was unsure how big the writedowns would be for the quarter.
• "The markets turned down sharply in August and then many segments appeared to be recovering during the fall," Bank of America Chief Executive Kenneth Lewis, said in the filing. "However, in the past month, the markets have turned down again and will probably remain challenging into next year."
• Bank of America expects to set aside $3.3 billion in the fourth quarter to cover loan losses, about $1.3 billion more than the previous quarter. About one-third of the increase will cover traditional growth and seasoning of portfolios while the remaining two-thirds is the result of deterioration primarily in consumer real estate lending and to a lesser extend small business lending.
• The bank also expects trading revenue to decline sharply from the lack of business activity during the final quarter of the year.

Wachovia (WB)

• Wachovia Corp. doubled its expected loan-loss provision for the fourth quarter on Wednesday, and said the value of securities it owns that are backed by loans fell another $240 million in November amid a worsening credit crisis.
• Merrill Lynch downgraded Wachovia shares Wednesday morning to "Sell" from "Neutral," according to media reports.

PNC Financial (PNC)

• PNC Financial Services Group Inc. expects fourth-quarter earnings to decline due to weakening housing and mortgage markets, according to a filing with the Securities and Exchange Commission Wednesday.
• PNC said fourth-quarter adjusted earnings will range between $1 and $1.15 per share. Analysts polled by Thomson Financial, on average, forecast fourth-quarter earnings of $1.39 per share for the Pittsburgh-based financial firm.
• Earnings are expected to fall due to writedowns of a mortgage portfolio, rising loan-loss provisions and declining trading volume.
• PNC expects to take a writedown on its $1.5 billion commercial mortgage portfolio it is holding for sale. Deteriorating credit markets have led investors to stop purchasing loans. Without those investors, banks have been forced to reduce the value of their mortgage portfolios.
• As of Nov. 30, PNC estimates the portfolio's value declined $95 million, and warned it could still decrease further before the end of the quarter.

Sallie Mae (SLM)

• Sallie Mae on Wednesday slashed its profit forecast for the remainder of this year and all of 2008, as it hoards cash to offset bad loans and feels the effects of a new law that reduced federal subsidies to student lenders.

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I am just wondering how much longer we keep repeating the pattern. Financials cut estimates, make writedowns, stock sink. A few weeks later, everyone assumes the coast is clear and drives these stocks up (and/or Fed cuts etc help drive the stocks up), then a few weeks later another round of cuts, earnings revisions, writeoffs happen. And they say this is the bottom... and people wade back into these stocks. This is about the 4th round of this action happening. I don't get the bottom fishing in this group. Investors don't realize that even these banks CANNOT forecast their own losses/writedowns... yet we believe them each time they forecast a loss? Yet 4 weeks later they forecast an even worst loss? Why would you believe their accuracy in anything at this point? It befuddles me, but the market continues to run to these stocks every few weeks as the "worst is over" crowd shuffles in. This is like Pavlov's dog....

Edit: by the time I wrote this post - the Ultrashort Financial just turned green. How many bullets to the central banks have left in their gun? They will run out sooner or later and then what? We are left to fend for ourselves? The horror.

Interesting Posts on RealMoney.com

Have to just agree with this entire missive....

Am I happy about the FOMC now? No way. No how. This was a Fed that promised to be more open and transparent. They thought by cutting down on "Greespeak" that transparency would increase. Wrong. Now we have Bernanke madness.

If the FOMC knew they were going to take this morning's action when they released their announcement yesterday then why did they not say so at that time? There are two responses to that. First, the FOMC is not transparent and its inability to communicate is a huge flaw. Second and more worrisome is that they had no intention of taking this morning's action yesterday afternoon. That would mean that they realized the errors of their ways after the fact and then had to react to the market's afternoon Bronx Cheer that the FOMC received. Neither of those responses gives me confidence in or a feeling of renewed transparency from the FOMC. I would speculate that the idea of the global intervention may not have been that of our Fed. We have to wonder if Jean-Claude Trichet called up Bernanke and alerted him to the errors of his way

This will go down as the Volatility Fed not the Transparent Fed. The market hates volatility and hence will hate this Fed. This Fed is so poor at communicating that I suggest it hires its own public relations firm and communications staff. We have the FOMC and other Fed members making speeches and then acting in complete contradiction to those speeches. If the FOMC wants more transparency then why do we have to wait 3 weeks for the FOMC meeting minutes? We have the technology - after all we are the USA for crying out loud.

Unprecedented Times, Unprecedented Moves

Well once again shorts get blown up by the "independent of the market" Fed. In some unprecedented moves, 4 world banks are setting auctions for money to inject into the global system (read: banks). While this is being celebrated, this same money is available each day of the week through the discount rate, but since it is too "shameful" (read: embarrassing) to borrow through that methodology this is a work around. While it will be a smart move; again it's nothing different than what they could get today, yesterday, or 2 weeks ago. It's just a less embarrassing way to get at the money.

Anyhow all my Ultrashort positions added yesterday are getting fried of course... but until we break S&P 1525 or so I will still not declare a new trend up.

The question needs to be asked - why was this not announced yesterday. Why such a calculating step? These sort of initiatives are worked on over time - they are not suddenly made out of thin air. Essentially either this is a calculated move to burn those on the short side of the market and/or when mommy (Fed) saw baby (markets) crying and whining yesterday afternoon - mommy decided to give more toys. This could of been announced any time - yesterday, 2 weeks from now - etc. Again, I have no issue with the announcement and while continuing to just return to the same easy money policies that started all this, it is almost necessary to keep the banking system in tact.... I just have an issue with how calculating this all is. The central banks are supposed to be independent and above markets, governments, etc. This is essentially timing things to provide utmost pain for those who see the bigger picture of degradation.

While I think effective in the near term, and it helps sentiment (sentiment is all that matters in the near term), again it is no different than what is available to the banks now - it just is a way to tap money in a less embarrassing way. I guess thats a hollow victory.

Once again these measures are not a surprise - just the timing - the bailouts are accelerating even faster than I expected....as I wrote just last week:

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 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)

Fed Joins Other Banks in Measures to Inject More Funds Into Markets

• The Federal Reserve has joined with four other major central banks to announce a series of measures designed to inject added cash into global money markets in hopes of thawing a credit freeze that threatens their economies.
• The Fed said today it would create a new "term auction facility" under which it would lend at least $40 billion and potentially far more, in four separate auctions starting this week. The loans would be at rates far below the rate charged on direct loans from the Fed to banks from its so-called "discount window." But the new loans can still be secured by the same, broad variety of collateral available that banks pledge for discount window loans.
• The European Central Bank, Bank of England, Bank of Canada and Swiss National Bank simultaneously announced parallel measures.
• The Fed also said it had created reciprocal "swap" lines with the European Central Bank, for $20 billion, and the Swiss National Bank, for $4 billion. These will enable the ECB and SNB to make dollar loans to banks in their jurisdiction, in hopes of putting downward pressure on interbank dollar rates in the offshore markets, principally the London Interbank Offered Rate, or Libor, market. The inability of foreign central banks to inject funds in anything other than their own currency has been a factor creating the squeeze on bank funding in those markets.

Lower Highs

This chart exhibits the problem the market has right now. You do not want to see lower highs, but this is the pattern developing unless we get a quick rally... 2 lower highs since the peak high in early October

You can see the peak in early October (Oct 9 or so) - 1570s
Then on the Halloween Fed cut (Oct 31) you see a lower high - 1550s
Now (if and it is a big if) this "high" is even lower, than you have a bad trend - 1520s

Technicians will draw a line from the 3 peaks mentioned above and that is now the 'resistance', and a pattern of new lower highs could be developing. Still too early to tell but we'd want to see a move back to S&P 1530+ or so, to see this pattern broken

Fed Decision

Ok folks, just got back in the saddle. Looks like 31% of you guys can pat yourself on the back. Personally, I think the Fed is now officially behind the curve for the coming tsunami. While I hate the printing press, I think its a necessity in some ways since things are so bad. OR at least 'necessary' if they think they are going to solve this problem the same way Uncle Al fixed 2002-2003. (personally a good cleansing recession would be good in the long run)

I'm really blown away that the discount rate was not cut over and above the Fed funds.

I bought a lot of Ultrashorts in the past 10 minutes. When/if S&P 500 breaks 1490 I will buy even more. Now what will the bulls point to as savior for the next 6 weeks....?

Amazing how we always go to 1490. For now it will provide initial support. If it breaks, well down we go....