Tuesday, January 15, 2008

A Quick Look at Earnings Today

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Just some quick comments

#1 Intel (INTC) was "ok" but in this environment "ok" is categorized as "end of the world". They came out with a bombshell, stating they had some concerns about the US in 2008. This was a bombshell to the 25 people in the country working at Fox Business News who still think everything is fine (and the market is only going down because Democrats look headed for the White House), but otherwise it's not much of news. But we can still sell this same old news, down 15% after hours. Why not? There are times good news is bad news, average news is bad news, and bad news is bad news. This is one of those times.

#2 US Banncorp (USB), which I see Guy Adami tout every night on "Fast Money" (Eric Bolling, come back!) looks very solid. I don't follow the banks that closely (other than to shun them) but this is apparently the 7th largest bank in America. They are deciding not to buy back shares to maintain capital - which is a decision most banks don't even have an option of mulling so they must be doing something right.

#3 California Pizza Kitchen (CPKI) which is just another random restaurant stock, so I wanted to keep an eye on it's earnings... down 20% in after hours after cutting back estimates for 2008. Along with retailers, it appears we will be losing most of our restaurants as well, based on stock price action. Folks we are not going to have any place to spend our money in 2 years after all the retailers AND restaurants (save Walmart, Target, Best Buy, McDonald's, and Costco close). CPKI is now down below $10. Six months ago? $25. Ouch.

#4 Forest Labs (FRX) is a healthcare stock (do I need to go any further - of course it did not fall), drug development company with solid earnings. Ironic to see this sector (safe haven) perform so well, considering all the drugs coming off patent in this group, and very good odds for a Democratic President in the fall, but none of that matters as fear takes over the market and people can't cut back on drugs.

#5 State Street (STT) - this is a financial company that is probably most like fund holding Blackrock (BLK). However it is not as much of a pure play on asset management. Earnings dropped nearly 30% based on mortgages. I don't follow it closely but I assume they are holding some mortgage backed securities (these cockroaches are everywhere). Let's see what Blackrock has to say Thursday. BLK has a great CEO so I doubt they would hold this junk but nothing would surprise me anymore - heck, little towns in Norway have been discovered to have subprime exposure.

Tomorrow AM aside from Intel fallout we have JP Morgan (JPM) and Wells Fargo (WFC) earnings - supposedly 2 of the better run banks in America. One fact lost in Citigroup's (C) mega billions mortgage writeoff is the $4 BILLION extra in provisions for write offs in their CONSUMER loans divisions.
  • "We had losses in our U.S. consumer business, up over $4 billion, and these numbers completely overwhelmed record performance in many, many of our other large businesses," Chief Executive Vikram Pandit said on a conference call.
  • Analysts, noting that Citigroup's bread-and-butter consumer business provides more than one-third of the firm's recent profits, said keeping that side of the company strong -- and its capital reserves healthy -- is a must if the bank has any hope of riding out current turmoil in the markets and the economy.
  • "The reserve build signals that tougher times are ahead in the U.S. consumer channel, which has accounted for 30%-40% of Citi's recent profits," Goldman Sachs analyst William Tanona wrote in a research report.
A totally different area and one of the things I highlighted last summer & fall that will be the long term issue for banks as the economy weakens. As we work through this mortgage situation in the first half of the year, I expect the failing consumer and his inability to pay off all other types of consumer loans to take over the reigns as an issue in the back half of the year. We are seeing these banks already start to take write offs for this - last week COF, AXP. This is why I don't see why people even bother with this niche of financial stocks or try to call a bottom - they will be at best (in between dead cat bounces) sideways money for a long while, even if you call the bottom. That doesn't mean they won't have bouts of 25% increases off dramatic drops, but those gains will be given up as more and more consumer weakness is exposed on their balance sheet.

I did have to say I was bemused to see early AM a headline on CNBC: "Citibank's kitchen sink quarter". I believe I saw that headline in August... and October. They can just keep using the same graphic.... every 3 months. And eventually it will be the kitchen sink. But not yet.

Anyhow, another day where nothing much is working outside of Altria (MO), healthcare, utilities, gold, and coal stocks for some odd reason. Even safety stocks like McDonald's, Pepsi etc are beginning to falter. Just a tough environment and stock selection in any sector outside of "safety" sectors is meaningless. They are all being sold.

With the Intel news it appears now we are destined to break August 2007 lows tomorrow AM on the S&P 500. It closed at 1380, and below 1370 we break new ground. With all the "quant" computers in NYC set to sell concurrently the minute that happens, tomorrow should be another "interesting" day. By interesting I mean painful. Next would come March 2007 lows = 1360. Next comes a lot of thin air. But an early morning painful heavy selloff, could set up conditions finally for a trade-able bottom as people throw up their hands and just give up. Let's see if the Plunge Protection Team comes up with a solution in premarket tomorrow.

Oh yeh... almost forgot; the useless CPI will be out tomorrow. As if a "hot" (i.e. high) figure will stop the Fed from cutting... but another thing to hand wring over :)

Apple's Macbook Air

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[13 Outlier Predictions]

As worldwide laptop sales burst past desk tops, Apple unveils a new consumer convergence product, something bigger than an iPod but smaller than a laptop, but something so good, so sexy, so necessary, people will want to have it surgically attached to their arms.

Not too shabby Jobs... not too shabby... larger than iPod, smaller than laptop - good call Mark.

Apple Introduces MacBook Air
  • During his Macworld Expo keynote address on Tuesday morning, Apple CEO Steve Jobs introduced the MacBook Air Tuesday, a computer that the company billed as the world's thinnest notebook -- small enough to fit inside an interoffice mailing envelope. It's priced starting at $1,799 and will be available within two weeks.
  • Sporting a silvery finish, the MacBook Air features a 13.3-inch LED-backlit widescreen display that has a 1280 x 800 pixel resolution. The backlighting saves power and provides "instant on" response from the moment you turn it on, according to Jobs. The device has a slightly wedge-shaped profile. It weighs about 3 pounds, and sports a thickness of 0.16-0.76 inches. It's 12.8 inches wide and 8.95 inches deep.


Steve Jobs puts his pinkie to his lips and cackles like Dr. Evil as he quickly positions Apple to be THE consumer electronic convergence BRAND of our lifetime.

--> Apple has cut deals with every major studio, including 20th Century Fox, Paramount, Sony, MGM and Universal, to offer movie rentals through its iTunes online music store. They can be played not just on the Air, but also on iPods, other PCs, and televisions attached to an Apple TV digital entertainment device.
--> Prices are $2.99 for an older movie, or $3.99 for a new one. High-definition versions are offered for a dollar more. More than 1,000 titles will be available by the end of February. Customers have 30 days to view their rental, although they only have 24 hours to complete the film once they start watching it.

Slowly...surely... taking over the world. You heard it first... in 2007. :) Apple will be a brand, a lifestyle, a word toddlers today use in lieu of TV set or CD players or computer. A verb. To Apple. (much like To Google)

Long Apple in fund and in personal account

I've Never Been so Interested in an Intel Earnings Report or Conference Call in my Life

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I really don't follow Intel (INTC) since its slower growth, somewhat cyclical tech but I will be very interested in what we hear today.

I think guidance could move the market - the stock action has been horrendous so one would think this is signaling something bad.... or it could "already be priced in".

Hopefully for the bull side we hear something along the lines of "business is strong, no slowdowns in Asia and Europe surprisingly strong, Vista cycle driving sales etc etc"

not

"First signs of slowdown in Asia blah blah"

IBM seemed to indicate things were still strong overseas so it would seem a bit surprising that Intel would say something completely different. But all it took last quarter was one seemingly innocent about "some slowdown" in financials buying Cisco (CSCO) product and the whole tech sector took a bath. Literally every phrase means something with a market so nervous.

The stock *is* up today... hmm....

Popcorn ready and waiting...


Will There Be Anywhere Left to Shop in 2010?

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Judging by the stock charts, the answer is no - not really. (I knew there had to be some solution to making Americans stop over spending!)

I wrote a piece in early November [Are Department Stores Signaling a Recession?] with the charts of Kohls (KSS), JcPenney (JCP), and Nordstrom (JWN), all in free fall. But compared to where they are now, these were great prices to get out at.

Where are we going to have left to shop? All these stocks are being priced as if on the way to $0 (but there is 1 winner left standing, seen at the bottom of this post)

*** High End Consumers, no place will be left for you...








*** Middle End Consumers, no place will be left for you...








*** Lower end? Not at Sears or Kmart




*** We can't even buy drugs...






*** or Home improvement products






*** Not even Office products?




*** But at least we can rely on women to shop for clothes right?? Not so much....





BUT - there is ALWAYS a bull market SOMEWHERE. With middle class being squeezed away by all time income inequality [Do the Bottom 80% of Americans Stand a Chance?]- smitten by job losses and inflation (I know, I know folks - the solution is cutting corporate tax rates - that always helps the middle class!), who can we rely on? Who will stand there ready to help?

There must be 1 retailer left standing which like a cockroach will survive after every other retailer goes out of business.... whose stock holding up great (what correction?) and is telling us they will be doing well in the economic tsunami... as they say stocks predict 6 months in advance, right?... so who will do well in the economy we will have in 6 months+, in this "pooring" of America scenario... where will all these formerly upward middle class and upper middle class with their knock off Gucci bags be shopping.... hmmmm...


Horrific Fall in New Oriental Education (EDU)

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Just an amazing fall in New Oriental Education (EDU) today, down 30%. Again "what have you done for me lately" - yes you beat estimates on both the top and bottom line, but you didn't beat expectations for future guidance. Away goes nearly $1 billion in market cap in 1 afternoon. It is now not only below the 50 day moving average but the 200 day moving average.

Well I could be setting myself up for a "Croc's" moment (catch falling knife, get fingers ripped off), but at $56 I just have to pull the trigger. Again I am buying in layers... $4000-$6000 tranches. I am already down $14 on the last layer bought at $70 this morning when it was down 12%. Just incredible action... most foreign stocks are seeing no mercy.

I can only imagine what penalty would hit this stock if it had missed. Next year's earnings are $1.80ish so a 30x multiple puts us at $54. Again, not a cheap stock, but much like WuXi Pharmatech (WX), a smaller Chinese stock that reported very good growth but didn't raise, beat, smash etc etc (and got hammered) EDU is simply being decimated despite the type of growth which is hard to find in the US market. I'll hold the line here as I don't want to make this position more than 3%. If it's worth $56 it might be worth $26 the way the market is thinking right now. Or I suppose -$6.

All eyes move to Intel earnings tonight. If they can simply say "look the world is not ending" we should get some decent rally but if they are negative we could be in trouble. With IBM reporting good business overseas, I would expect the same from Intel - but that game will probably only last another quarter or two until we start seeing "we noticed weakness in so and so foreign market" type of language. Other than coal, HOGS (of all things), and the 2 healthcare stocks, nothing in the entire watch list is green. Oh wait, all those Ultrashorts I lightened up on 7 days ago are green... blah. I have not really applied much of the cash I raised this morning, but will wait until the last 10 minutes to assess. Usually markets this bad do not end the day well, so we'll see if we can find some 'bargains'.

Long New Oriental Education, WuXi Pharmatech in fund; long New Oriental Education in personal account.

Bookkeeping: Closing iShares Malaysia (EWM)

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I am closing my position in iShares Malaysia (EWM) today. I've held this position since day 1 of the fund - it has never been a huge position since its a country index, but I really like this country as a "natural resources" play on Asian growth. I booked about $2700 in gains which is not a huge amount, but contributed about 0.25% to the fund's return over time.

In the fall I owned multiple Asian ETFs, Hong Kong (EWH) as a proxy on China, Singapore (EWS) as a play on the emerging financial capital of Asia, Malaysia, and the closed end India Fund (IFN).

In late October as US investors ran up Chinese stocks like mad without any sense of valuation (and Shanghai also ramped with no sense - those were the days of PetroChina achieving $1 trillion of market cap), I was very nervous about the speculation. A week after the Shanghai IPO of Petrochina, in mid November I exited out of iShares Hong Kong. Then a week later I sold iShares Singapore. At the time I wrote:

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

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

I think that time I called for in November is now fast approaching.

The charts show, selling the Hong Kong and Singapore ETFs was prudent to do in mid November (and you can see the extreme spikes in October as the world was awash in Chinese Kool Aid).





While keeping Malaysia also worked out well (better than I anticipated in fact)



But I don't want to press my bets. A lot of "myths" have been busted of late. A couple of myths still left to be destroyed are "it is safe to buy Chinese stocks until the Olympics" and "emerging markets are safe havens". The latter is especially shocking - if you said that 5 years ago, you'd be laughed out of a room. Now it's conventional wisdom. This ties into another myth - that if 3/4 of the world's GDP is heading to contraction (US, UK, Western Europe, Japan) - especially consumer lead... that somehow the small sliver of middle class in India, China, Brazil will offset that. Hardly. So this leaves these markets a lot of room to fall.

I still have kept my India positions, but unlike the fall when I was very interested in this market since it was being ignored as US investors chased into any Chinese stock and ignored India [China v India the past 2 Months], I have pulled back my Indian exposure as well. Much like Malaysia, India has bucked the trend and its index was at all time highs in past few weeks. While I still like all these markets for 2010+ and believe this area of the world *IS* (and will continue to be) the next great growth engine over the coming decade(s), the very rich valuations more than support this view and once the myth of "decoupling" between emerging markets from developed markets is broken, we could be subject to a large sell off. I don't know when this myth is busted but I believe 2008 will be a year one can make a lot of money with Ultrashort Emerging Markets (EEV) along with Ultrashort Xinghau China 25 (FXP), both introduced in October. [New Ultrashorts Being Introduced for Foreign Markets]That said both are extremely volatile with huge daily swings, and I cut back exposure to these 2 names (after some nice returns the past 2-3 weeks) last week expecting some sort of bounce in the markets... (hello? bounce? where are you?) So I am not participating much in today's huge moves.

Much like the US stock market this fall and early winter I expect a thrashing type of action to take place in these foreign emerging market indexes as "denial" battles with "hope". Just as we denied the slowdown and thought the Fed would fix everything (remember that powerful move off that first Fed cuts post August). So it won't be straight down but Singapore and Hong Kong already seem to be telegraphing what the rest of Asia might be facing. So I am cutting Malaysia here (also will help raise cash) and as stated over the past 2 weeks have cut back Indian exposure to its lowest in a long time. When those markets start pricing in US recession and W Europe slowdown, I'll get more interested. As I've stated before, specific to Malaysia think of it as a mini Brazil - it will be buffeted to a large degree due to its commodity based economy, but in panic people don't differentiate - they just sell everything off (we've seen this lately in the US market), so I expect a sell off there during the next year just like the others.

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

Bookkeeping: Taking Some Profits in Coal

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We just discussed the coal names yesterday [New Coal ETF (KOL) Introduced], and the stocks are up (I don't see any specific news) 3-4% across the board this morning in a tough tape, continuing a nice bounce off oversold levels from 5-6 days ago. While this bodes well for the sector (relative strength), I did add quite a bit of exposure from those oversold levels to raise some cash I am going to cut back a bit on this group among Massey Energy (MEE), Consol Energy (CNX) and Peabody Energy (BTU). These are sell offs of about $7000-$8000 each (less on Massey since its the smallest position).

Since my cash position is essentially nil, to buy one long position I need to sell down another. This is the rationale behind selling these names, which are up about 10% from where I added to the positions last week in the height of the selling pressure, so I am just downsizing back to the position size these names were a few weeks ago. More out of necessity due to lack of cash.

I also took a bit more Mosaic (MOS) off the table (about 15% of the position) as the stock put on yet another 10% move yesterday and (again) I need to sell down one long position to add another due to low cash positions. These sales were around $107 (I was buying this in the low $80s last Wednesday). The move has been quite extraordinary in a very short period of time in this name. Hopefully it pulls back and allows a better entry point.

All these sales go under the category of "sell when you can, not when you're forced to."

Unlike a real fund, where people would send fresh cash in, I only work with a fixed amount of money so I cannot rely on "fund inflows" from investors to make new buys. So I'll sell off some of the stronger positions and redeploy into other positions I like just as much, but the market is selling off. However, now that the S&P has broken 1400 yet again I am not to antsy to redeploy cash yet.

It continues to be a very tough market from the long side. It is very reminiscent to middle to late 2001 where we ground downward, interspersed with some hopeful rallies. Hopefully we don't have a repeat of 2002 ahead of us. That was a backbreaking year for many bulls.

Long all names in fund; long Mosaic in personal account

New Oriental Education (EDU) Solid Report, Stock Trashed

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A nice solid report from New Oriental Education & Technology (EDU) but since they put their typical conservative guidance out, the market is punishing the stock.
  • Revenue up 43% year over year to $32.6M (estimates @ $30.9M)
  • Net income up 77% year over year to $2.0M or $0.10 EPS (vs analysts $0.07)
  • Total operating costs and expenses for the quarter were RMB241.9 million (US$32.8 million), a 43.3% increase year-over-year.
  • Cost of revenues increased by 35.2% year-over-year to RMB116.1 million (US$15.7 million), primarily due to the increased number of courses being offered to a larger student base and the greater number of schools and learning centers in operation.
  • Selling and marketing expenses increased by 49.9% year-over-year to RMB38.1 million (US$5.2 million), primarily due to brand promotion expenses and headcount increase.
  • General and administrative expenses increased by 52.6% year-over-year to RMB87.7 million (US$11.9 million), primarily due to increased headcount as the Company expands its network of schools and learning centers.
  • Excluding share-based compensation expenses (non-GAAP), operating margin for the quarter was 5.8%, compared to 4.9% in the corresponding period of the prior year. This increase was primarily due to the improved operating efficiency as revenue growth outpaced the growth in operating costs and expenses.
  • Student enrollment up 18.5% year over year to 217,500 (with 1.4 billion people that leaves some room for growth) ;)
  • Opened 1 new private kindergarten in Beijing, and 14 new learning centers in the quarter. Total schools now 38, and learning centers 126.
So we have a fast growing company whose expenses are increasing in line with with the rapid growth. Operating margins are still expanding, despite the hectic growth.
  • "During the second quarter of fiscal year 2008, we experienced continued strong growth in our student enrollments and net revenues, enabling us to beat our top line guidance," said Michael Yu, New Oriental's Chairman and Chief Executive Officer. "Furthermore, we continue to execute on our strategy of leveraging our leading brand name to enter new areas for growth by establishing our pre-school business with the opening of our first kindergarten in Beijing. To further enhance our content offerings in our educational programs and services, we reached an agreement with ETS to sell their TOEFL Practice Online in our training classes and through our bookstores. We also entered a partnership with Heinle ELT, a part of Cengage Learning, formerly Thomson Learning, to launch a line of custom learning materials tailored to our iEnglish brand conversational English language classes."
  • New Oriental's Chief Financial Officer, Louis T. Hsieh, stated, "During our second fiscal quarter, we continued our strategy of foregoing short term profit in favor of rapidly expanding our leading nationwide network by establishing 34 new schools and learning centers in the first half of our fiscal year 2008 compared to 19 new schools and learning centers for the entire fiscal year 2007. In order to staff our rapidly growing physical network, we have added over 900 teachers and other employees in the first half of our fiscal year 2008. In addition to increasing our G&A spending, primarily due to headcount increases, we also increased our marketing expenses in the quarter by approximately 50% year-over-year in order to drive strong student enrollment and revenue growth. We expect to continue benefiting from this rapid expansion strategy in the quarters and years to come. Given the vast potential for growth in China's private education market, we are confident that we are well-positioned to continue capturing this lucrative market opportunity."
  • Mr. Hsieh added, "We continue to see surging demand for our educational programs and services, and to the best of our knowledge, we have not as yet been adversely impacted by the economic slowdown and related events in the US, as almost all of our revenues are derived from the China market. We also continue to benefit from a strengthening RMB given that virtually all of our revenues are in RMB and are translated into US dollars for financial reporting convenience." (I love how management has the foresight to even mention that, as if it would be a concern - but they still addressed it)
  • Mr. Hsieh noted that the second quarter of the Company's fiscal year is typically the slowest in terms of revenues as students are occupied with the beginning of the formal school year.
Again, this is a company with near monopoly status in their niche and now expanding rapidly to establish leadership position and brand in the education market.

Outlook
  • New Oriental expects its total net revenues in the third quarter of fiscal year 2008 (December 1, 2007 to February 29, 2008) to be in the range of RMB311.2 million (US$42.1 million) to RMB326.5 million (US$44.2 million), representing year-over-year growth in the range of 22.0% to 28.0%, respectively. [Analysts @ $44.75M]
  • New Oriental's third fiscal quarter 2008 revenue growth rate will be especially challenging when compared to the third fiscal quarter of 2007 which showed year-over-year net revenue growth of 51.3%. The Company's third fiscal quarter 2007 benefited from the late timing of Chinese New Year in 2007 which fell in the third week of February 2007 allowing Chinese students an extended winter break and a longer period of time to take language training and test prep courses. This will not be the case in 2008 as Chinese New Year falls in the first week of February, a more typical date for the Lunar New Year holiday. In addition, many schools throughout China, including those in Beijing, have decided to shorten the 2008 winter break for students by one week or more in return for extending the 2008 summer recess by a corresponding length of time, in order to allow students time to study and enjoy the Olympic Games in Beijing this summer.
So as is typical there is an overreaction to a (ahem) "miss" on revenue guidance. As with all smart companies, the job is to under promise and over deliver, so you can play the "beat the estimates" game that is so ridiculous. If the company produces a $45M quarter this "miss on future guidance" will be an afterthought, but today due to guiding the top end of the range down half a million, yes $500,000 (or 1% of revenue) below analysts estimates the stock is down 12%. With a market cap of $3 billion that = $360 million in value of company lost. Due to a $500,000 revenue "miss". (I use the word miss mockingly) And this is the way of the Street - beat revenue estimates, beat earnings estimates and issue conservative guidance and take a big loss; just another reason why I really dislike earnings season for its focus on the wrong things.

I am adding to the fund position here around $70, and will lighten up when it invariably rebounds back to upper $70s. Unfortunately its technically broken its 50 day moving average with this selloff.

Long New Oriental Education in fund and in personal account


Monday, January 14, 2008

Barron's Out with Negative Piece on Foster Wheeler (FWLT)

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Thanks to a good reader for pointing out this news that Barron's was out negative on Foster Wheeler (FWLT) this weekend. It seemed to weaken the whole infrastructure group today, but I did add to some Shaw Group (SGR) [which held up quite well] with the Mosaic (MOS) profits today. Technically the charts of these stocks in this group are very similar - (almost) all are sitting right below the 50 day moving average - I'd say they will move with the market. If the market can firm up for even 2 weeks, I would expect many of the stocks in this group to burst through the 50 day moving average (now serving as resistance), and make some nice runs. But we need some confidence first into the market, and some follow through to today.

Fundamentally, to summarize what I wrote in a comment response to the reader earlier, the bear case is these are cyclical companies. Much like with Mastercard (MA), I am taking the opposite to the bear case or "analysts conventional wisdom" for this group - my belief is the customer base for this group is very important - I wrote just last week [Infrastructure Companies Cleaning Up on Contracts] we have 3 sets of customers which are cash rich (a) countries with massive trade surplus (b) countries rich with petrodollars (c) A US government that prints as much money as they need

So I'll take the other side of this "cyclical" trade - I am not saying there are not cycles, but unlike something like dry bulk shipping in which a bevy of ships will be in the seas by 2010, killing that "cycle", I expect quite a long cycle in infrastructure. We have a shortage of companies (and human resources) that can do the engineering and design for power plants, infrastructure projects and the like throughout the world. And a very captive audience flush with cash.

Every 6-8 weeks we get a scare like this in this group i.e. "The End is Near" crowd. And every 6-8 weeks I point to that backlog (slowing or "not") its well over 2 years worth of business for most infrastructure companies. How many business sectors do you know that have pricing power, cash flush customers, and 2 years worth of business already locked in. If you could tell me, feel free to append to this blog entry as a message. Again, the sky is falling crowd is now everywhere as seen by last week's doom and gloom McDonald's downgrade. The world is not ending, there will be winners and losers, even in down market or down economy. I might be correct or incorrect on this call, but this is my rationale so readers (or future investors) would understand why I am high on this group.

Here is Barron's rationale on Foster Wheeler (FWLT) in specific, but what they say for FWLT could apply to all the companies in this sector (and why not a hatchet piece on Fluor which is valued significantly higher, instead of Foster Wheeler? All the same 'issues' apply to Fluor and its valued higher. Hmm...):
  • INVESTORS LOOKING FOR A PLAY ON global growth and an escape from U.S. economic doldrums have embraced Foster Wheeler. The company generates about 80% of its revenue outside North America, and its businesses -- designing and constructing industrial plants and equipping power plants -- are thriving. But after a three-year run, we'd suggest taking some money off the table, as the shares no longer appear undervalued.
  • At a recent 145, Foster Wheeler's stock had climbed 181% last year and 979% since we first wrote about it ("Survivor," Jan. 31, 2005). Earnings have grown faster than analysts expected as it's enjoyed a boom in new energy projects thanks to the sharp rise in oil prices. And Foster has eliminated the types of cost overruns that almost led to its demise early in this century, dramatically boosting margins.
  • Success, however, has made the shares start to look pricey. They trade at 21 times estimated 2008 earnings of $6.96. That's below the 27 multiple sported by competitor Fluor (FLR), but it's slightly higher than Foster's earnings growth of 19%, and substantially above the S&P 500's P/E of 14. Also, this is a cyclical company. Earnings multiples are supposed to contract as profits rise in anticipation of the cycle's downside. But that doesn't appear to be happening. If the cycle runs longer than expected, such exuberance will have been justified. If not, the stock could quickly correct.
  • The cycle has at least five more years to run, says CEO Raymond Milchovich. The business isn't affected by the U.S. subprime meltdown, and only a macroeconomic shock in China, the Middle East or India would hurt it. A sharp decline in the price of oil would also bite the company.
  • The company still has fans. Vance Brown, a principal at Grisanti, Brown & Partners who was bullish on the stock when it was at $13 a share, remains an enthusiast. He has taken profits to keep his firm's stake from growing too large relative to its portfolio. But Brown remains in the name because he can envision a 2009 where Foster earns $8.50 a share and sports a 25 multiple. That would put the stock just north of $200.
  • Still, the company's business backlog may be signaling that the cycle is in the late innings. Investors look to the backlog, though lumpy, to predict future earnings growth. The backlog grew 98% and 47%, respectively, in the third and fourth quarters of '06, and slowed to 25%, 11% and 3% in the first, second and third quarters of '07, notes John Rogers, an analyst at D.A. Davidson & Co. with a Neutral rating on Foster.
  • Backlog growth could pop in the fourth quarter, thanks to Foster's new contract to help build a liquefied-natural-gas plant in Australia. But with the backlog at record levels, growth was bound to slow due to the law of large numbers, and that could mean earnings growth will slow, too.

What I highlighted in red is the main concern I'd have with this group. I have mentioned I believe growth WILL slow in China, and India. But down from 11-12% GDP growth to 6% or so; or something reasonable. Crude could drop to $75 or go to $125 - that won't stop projects from continuing.

So if as a bear, one believes China and India are going to negative growth in the coming years, the countries stop their industrialization push, the Middle East countries stop their push, and/or crude is going to $40 again and projects will get cancelled left and right - well then you should be on the opposite side of my trade. I find that scenario a little extreme, and indeed if it does happen, as I wrote this weekend, what exactly can you buy? You can't buy anything in the USA - because last week analysts are saying people will cut back spending at Walmart and McDonald's, and you can't invest in anything overseas because "it's all cyclical and will go to pot" - therefore we have nothing to invest in. Unless there is something between "domestic" and "overseas" I have not discovered. And if indeed this is the scenario as I wrote this weekend, we have a lot worse to worry about than a recession - we are looking at something starting with a D not a R. I am not in that camp - if you are, again I would point you to a 100% gold portfolio because cash will be useless with the type of inflation we will be fighting as the Fed prints money to fight the D word.

As for the 979% return, keep in mind Foster Wheeler (FWLT) was on the verge of bankruptcy a few years ago due to mismanagement (among other things). So it's a bit misleading. I also love how "backlog growth is slowing" but "backlog is at record levels". If you word it one way it sounds "bearish" but I am unclear how one can view "record backlogs" in a bearish light. But I am biased.

Long Foster Wheeler, Shaw Group in fund and in personal account


New Coal ETF (KOL) Introduced from Van Eck Global

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From our friends who brought us the agricultural ETF MOO that I highlighted in early September [This MOO for You? An ETF to Play the Global Agricultural Boom], is a new ETF for coal.

The Coal ETF seeks to replicate, before fees and expenses, the total return performance of the Stowe Coal IndexSM. The Index provides targeted exposure to 60 companies worldwide that are engaged in the coal industry. As such, the Fund is subject to the risks of investing in this sector.

While the influx of new ETFs is turning into a tidal wave and some of them are quite useless, the people over at Van Eck are bringing out some interesting things in areas I definitely favor. Long time readers of the blog will know I turned bullish on coal (as the forgotten commodity) in September, despite knowing the coming earnings reports (at the time October earnings season) would be atrocious.... you can see some history on my views on coal through this post.

This is another interesting ETF with a very global mix, much like MOO and a nice 1 stop shop. It is very top weighted with the 5 top names making up 35% of holdings, including a familiar name from China (not available in the US) which debuted as an IPO during the height of China mania in October, went up 90% in its first day and its Chairman reported he was "Disappointed" (China Shenhua Shares Rise 90%; Chairman "Disappointed"). Ah, the height of bubbles....

Well this 'disappointment' is a 8.2% position followed by fund holdings Consol Energy (CNX) and Peabody Energy (BTU) @ 7.5% and 7.3% respectively. Further down the list are two names who deal with the mining equipment end, Joy Global (JOYG) and a name I have been considering adding to the fund multiple times Bucyrus (BUCY) @ 4.6% and 4.3% respectively. Also in this group are Arch Coal (ACI), fund holding Massey Energy (MEE) which focuses on metallurgical coal, and Yanzou Coal (YZC).

The entire index can be found here. The ETF has 60 names, but again in a strategy I find useless the bottom third of the ETF is full of names with 0.1%, 0.2%, or 0.3% exposure. Granted it's trying to replicate a coal index so there is no leeway with buying a lot of tiny positions in the ETF...

By geography the US represents 40%, Hong Kong 24%, Indonesia 11%, and Australia 9%.

Again, another quick and easy way to get exposure on a global basis to a specific sector. If you don't want to pick among individual names, I highly recommend such an offering.... of course until this fund launches ;)

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

Doug Kass Attracted to Financials

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I've been reading Doug Kass for many years over on the TheStreet.com family of sites; but I have to say in all that time I don't recall being more in tune with his economic views as I've been the past 12-15 months. We were both 'early' (but ultimately correct) on views on housing, credit crunch, and the financial fallout - which I think until even 4-8 weeks ago were being dismissed. We both contend the recession will be deeper than the 'shallow, short' scenario, that these new converts are now singing about. My 13 Outlier Predictions for 2008 have a lot of overlap with his 20 Calls for 2008 (p.s. are you hearing the chatter of Yahoo (YHOO) being bought out by Microsoft? I predicted a buyout by News Corp (NWS) in '08, but heck I'll count any buyout as a victory.)

He does have more old school individual picks from traditional sectors and he has a lot more of a short bias than I do (I believe his hedge fund is short focused), but at least from an economic point of view we seem to treading in the very same direction. Today he has an article on 'Buying the Financials' with a very in depth reasoning - I will put the Cliff Notes versions below and you can click on the link to read the whole story. His viewpoint is if he (and I) are wrong and this is just a shallow slowdown this is the time to get into these names. Myself, while I will be warming up to the investment banks later (ex-Bear Stearns whose whole business growth the past few years was based on mortgages), I can't really see this being a great bottom for an investing point of view. But as I wrote this weekend, for a trade...

For example, we are seeing some bottoming action in financials. I've scaled back my Ultrashort Financial (SKF) to almost nil due to this. In fact, for those with very short time frame (say 1-3 weeks), the exact opposite - Ultra Financial (UYG) might be a good trade - it closed Friday @ $36.51 - it would not surprise me to see something like this bounce 20% as we get an oversold bounce in this area. Same with some retail, homebuilder, and restaurant stocks.

For example, Citibank (C) is swirling with rumors of a 20K headcount reduction (as predicted; once management bonuses were secured, time to cut the people), $15B more of foreign capital infusion (as predicted), and a larger than even I expected writedown of "up to $24B". And the stock is up. Hence, my point that much of the bad is 'priced in'. (for now) As an aside I wrote in December that investors apparently were immune to these (yawn) $4B, $5B type of writedowns - I mean what is a few billion among friends. But $20B+? Now that's impressive!

Anyhow, the marketplace is adjusting and while I think the consumer slowdown shoe to fall (which won't be as drastic as the mortgage mess), is still to come - that will affect the traditional banks and lending organizations more than the investment banks. Hence, why I still find the traditional banks to be more of a trade if one is so inclined. Here are Kass' rationalizations:
  • On Thursday and Friday, I covered all of my longstanding shorts in the financial sector. That includes positions in brokerages, banks, mortgage originators and mortgage insurers. Last week, I described the most difficult issue that investors face today: To what degree have market prices discounted the emerging fundamental weakness?
  • We seem to be moving in the right direction. For the first time (coincident with the recent drop in share prices), a discounted cash-flow model today, based on my consistently below-consensus 2008 S&P 500 profit forecast of $80 and other reasonable assumptions, produces an undervalued market reading.
  • Anecdotally, even the formerly "Liebnetzian" mood from Larry Kudlow's band of merry men, to judge by when I appeared on Friday night's "Kudlow & Company," is growing more cautious. And so too is the formidable Ben Stein backing off of his previous and unadulterated optimism.
  • Permanent capital is being replenished.
  • Government policy will not be standing still.
  • The seized-up credit markets will not be a permanent condition.
  • Credit writedowns will likely peak in fourth quarter 2007.
  • Many managements have been turned over -- and more will be in the near term.
  • Business franchises are intact.
  • Financials are statistically cheap against sustainable earnings.
  • Financials have dramatically underperformed relative to the S&P 500.

I do agree with the above positives although I am not sure these financials are as 'cheap' as they look. Very importantly, the LIBOR rates which were a major problem we discussed in the late fall and early winter have started to act more normally once the Fed starting doing their special TAF auctions (originally there were going to be 4; now its been changed to 'unlimited') and the HALF a TRILLION European Injection [LIBOR Rates Plummet on Half Trillion Infusion by ECB]. So these are net 'positives' for the worldwide (namely US and UK) financial system, all at the small cost of massive devaluation of US dollar, and tremendous inflation. So we save the bacon of the banks at the cost of all our purchasing power being decimated. Sounds like a win win! Ok, well not so much.

No position


Beating a Dead Horse - Fertilizer

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First, I have sold 10% of the Mosaic (MOS) position @ $104 simply because we have a 30% gain from the $80 "false bottom" created last week after earnings: $80 -> $104 in 3 days. I won't be selling any more until we go higher - as I stated 2008 estimates are just plain wrong and need to go up for the group. As they do, so will stock prices. I expect a carbon copy with Potash (POT) when it reports earnings - and as I stated this $80 price in Mosaic was simply a shake and bake move and citing "sulfur costs" as a reason to drop the stock for a few hours was just a convenient excuse. If you have confidence in the fundamental story, when the stock price disassociates from reality you have the opportunity for out sized gains.

Further evidence for the bull market in agriculture with Friday's USDA report. So while the media obsesses with crude at $91 or $101 or $111, they need to be looking in the grocery aisle. I continue to believe people are missing the forest for the tree. Tomorrow and Wednesday we will have bogus CPI/PPI inflation figures showing 3-4% price hikes. Meanwhile we'll snicker.
  • Soybeans jumped to a record, corn reached an 11-year high and wheat rallied after U.S. government reports showed that production is failing to keep pace with rising global demand for food and biofuels.
  • The world soybean harvest will fall 6.5 percent this year, U.S. corn inventories will be 20 percent less than estimated a month ago, and wheat farmers in Kansas and Texas planted less even as the price of the grain doubled, the Department of Agriculture said in separate reports today.

  • Tighter supplies will boost the cost of feed for hog processor Smithfield Foods Inc. and poultry producer Pilgrim's Pride Corp. General Mills Inc., the second-biggest U.S. cereal- maker, said today it raised the price of Pillsbury refrigerated dough to offset higher wheat costs. Globally, food prices have doubled on average in the past five years, UN data show.

  • ``We can't grow our way out of this grain-shortage hole,'' said Jim Gerlach, president of A/C Trading Inc. in Fowler, Indiana. ``We'll have to price our way out. I'm bullish until furter notice. We'll see ups and downs, but the trend will remain higher.'' (read: even more inflation in the future)
  • Soybean futures for March delivery rose 38.5 cents, or 3.1 percent, to $12.9875 a bushel on the Chicago Board of Trade, after earlier reaching a record $13.1025. The last record was in 1973. Futures gained 78 percent last year, after U.S. farmers planted the fewest acres in 12 years and sowed the most corn since 1944.
  • Soybean oil, used to make cooking ingredients and biodiesel, also reached a record in Chicago, and soybean meal used as animal feed touched the highest price since June 1973.

  • Corn futures for March delivery rose the Chicago exchange's 20-cent daily limit, or 4.2 percent, at $4.95 a bushel, the highest for a most-active contract since June 1996. Prices have surged 44 percent in the past three months, even after the U.S. harvested a record crop.

  • Corn supplies on Aug. 31 will total 1.438 billion bushels, down from 1.797 billion forecast in December, the USDA said.
  • ``The battle for grain acres is just starting to heat up for the year,'' Credit Suisse Group analyst Robert Moskow said in a note to investors today. ``A precarious situation gets more precarious.''
  • Corn is the biggest U.S. crop, valued at a record $33.8 billion in 2006 with soybeans in second place at $19.7 billion, government figures show. Wheat is the fourth-biggest crop, behind hay, with a value of $7.7 billion.
I encourage readers to really read each bullet point; the rate of price increases seem unreal on first glance. There are only so many acres to farm - each acre chasing after subsidized corn, is 1 less acre for minor thing like food we can EAT. Corn ethanol subsidies are the classic case of unintended consequences - unfortunately the costs here will be global and hit those that can least afford it the hardest. Global demand from newly minted middle class (for better foods and meat based products) along with US misguided corn ethanol proposal is just a perfect storm. From a political and societal standpoint, we will see serious fallout from this - think of people on food stamps, people on fixed income, and the effect on food banks. People currently affected don't have much of a "say" in the political process (i.e. they don't contribute money since they are working poor) - but it will move upstream and effect more and more strata of society. Only then will it "matter". Until then? "Let them eat cake". (and more subsidies to corporate farmers)

Long Mosaic and Potash in fund and in personal account

Sunday, January 13, 2008

Earnings of Interest This Week

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Alcoa (AA) led us into the earnings season last week, but this week is really the first wave. Let's look ahead at some interesting names; financials will dominate the news.

Monday
Nothing too interesting - Genentech (DNA) in biotech is about all

Tuesday
Citigroup (C) - we'll see a large writeoff, news of new foreign cash infusion and possibly a dividend cut; how the stock reacts will be interesting - if we see a nice bounce we probably have put a short term low in as the "bad news is priced into the stock".

Intel (INTC) - this company has been destroyed the past week and a half. I think even if they say something like "the end of the world is not here" the stock could rally. But the stock is acting if a large earnings guide down is in store. Which is going to be the risk this entire next 4-5 weeks as we go through earnings season.

New Oriental Education (EDU) - one of the fund's holdings. I expect good things but as always it's all about results versus expectations i.e. are expectations too high?

State Street (STT) - this is an asset manager like fund holding Blackrock (BLK); pne of the few financial sectors that have held their own

Wednesday
JP Morgan (JPM) - maybe we'll get news of a buyout of Washington Mutual (WM)

Wells Fargo (WFC) - probably the best run big bank, but certainly not immune to all the issues that are and will continue to plague the consumer

Thursday
Various financial names: Ameritrade (AMTD), Bank of NY (BK), CIT Group (CIT), Comerica (CMA), others

Blackrock (BLK) - fund holding, see State Street above

IBM (IBM) - expect to see strength overseas, strength from service but weakness in hardware. This used to be a bellweather but not anymore. However I could certainly envision them saying "seeing some slowdown" blah blah

Merrill Lynch (MER) - one of the 5 investment banks - huge capital inflows, huge writedown; first of job losses might be announced

Novartis (NVS) - one of the larger foreign healthcare companies

Seagate Technologies (STX) - large disk drive maker, might push tech one way or the other

Washington Mutual (WM) - "help, someone buy us"

Friday
General Electric (GE)

Schlumberger (SLB) - large oil service name that surprised to the downside last quarter, catching us by surprise

Wipre (WIT) - Indian Outsource company

**********************

So those will be the names I will be watching, and many of the larger caps could move the market

Bookkeeping: Weekly Changes to Fund Positions Week 23

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Week 23 Major Position Changes

Fund positions of 1.0% or greater can be found each week in the right margin of the blog, under the label cloud and recent comments areas; I highlight weekly the larger position changes.

Being a long only fund, via Marketocracy rules, the only hedges to the downside I have are cash or buying short ETFs. I cannot short individual equities.

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

Cash: 0.0% (vs 2.7% last week)
56 long bias: 98.7% (vs 88.1% last week)
5 short bias: 1.3% (vs 9.2% last week)

61 positions (vs 61 last week)
Additions: Mercadolibre (MELI), Zhongpin (HOGS)
Removals: Ciena (CIEN), General Cable (BGC)

Top 10 positions = 36.3% of fund (vs 30.3% last week)
41 of the 61 positions are at least 1% of the fund's overall holdings (67.2%)

Major changes and weekly thoughts
Another tough week in the markets, where the indexes performance hid the ugly truth beneath the surface. I've been typing it this week (the average stock is off 30% from October highs), and Bespoke Blog has it in graphical form here. The S&P 500 is off less than 12% from October highs but
  1. Average large cap stock: -25.1% off
  2. Average mid cap stock: -29.5% off
  3. Average small cap stock: -35.2% off
For those who have been around a while you see I have been holding Ultrashort Russell 2000 (TWM), instead of a Ultrashort S&P500 type of ETF - my thesis in the summer was companies tied to the US consumer would be hurt the worst - since they do not have overseas sales to bail them out. Smaller companies generally fit that profile (lack of international exposure). This has proven true as the above figures show - and I will contend will remain true for the years ahead. Further, the worst performers in the fund in the past 90 days have in fact, been the small caps - think Crocs (CROX), Blue Coat Systems (BCSI), Riverbed Technology (RVBD) etc - so I am living it from the long side as well, although I tend to focus on mid caps and large caps overall. Unfortunately there is no Ultrashort ETF that focuses on the smallest stocks; even the Russell 2000 by nature includes the S&P 500 stocks. I'd prefer an instrument that shorted companies from say 1000-3000 only, and avoiding the 1000 largest companies but this is the best we have to work with....

The Bespoke entry also shows how bad each sector is doing - you'd think financials would be worst correct? Well you'd be wrong - its consumer discretionary stocks (read: retail, restaruants) at a whopping -43.4% (on average!) in 3 months. I prefer median to average because average is a bit misleading but it's ugly either way. Financials by the way are on average down -34.7% and the 3rd biggest loser is technology at -33.6%. Remember the common myth in early fall (for those blog readers who were around?)... technology is a "safe haven". A lot of myths have been blown up the past 3 months... and I contend more will blow up in the year to come. (Best sector is Utilities @ -11.4% by the way)

So all in all, this market is far tougher than it looks and the indexes are holding up far better than the average stock. When I see this sort of analysis it makes me feel even better about the fund performance the past 3 months, when the fund has essentially been flat despite being 70-90% long for that time frame.

So that's the past, where to from here? Good question. We go either 2 ways - (1) the more probable bounce, or the once every decade free fall into oblivion. Certainly we must be open to either scenario, but I have to say some stocks in the worst sectors (especially consumer discretionary) are approaching valuations even I am surprised at. That said, valuation is moot in this sector. Why? People are saying "my gosh look at this retailer, it's trading at 5x forward earnings!" Do you really think a stock with any growth component would trade at 5x earnings? No. The reality is forward earnings are still much too high... it is very probable that when we look back in 6 months, we will see (after earnings estimates are slashed for 2008) that the stock that is trading today at "5x forward estimates", will in retrospect have been trading at "15x forward estimates" (today). And the only way to get there is for earnings figures to fall throughout the year. Which was my fear entering January - companies and analysts needing to slash 2008 estimates... I just didn't expect all the *bleep* to hit the fan at once. :) With that said, 15x estimates is pretty fair for some of these stocks getting destroyed, but since we have no way to estimate future estimates of companies tied to the consumer, we have a lot more uncertainty - and the market hates uncertainty more than bad news. So we are in a vague free fall area. These stocks will bounce, they are overdue - but I expect a long period of downward and sideways action mixed in with a few periods of hectic over sold bouncing as we come to grips with a US recession.

This was also the week the "upper middle class" & "lower upper class" got hit, as experienced by the American Express warning and (I missed this at the time) but the Tiffany (TIF) warning. Tiffany showed strength (where else?) overseas... and in their NYC flagship store. Everywhere else in the USA was a major dud. Why did NYC do well (sales up 10%)? Our free falling dollar makes goods very cheap for foreign buyers - many people are now flying in from Europe for a weekend of NYC shopping and going back Sunday night - it is THAT cheap to buy our goods. But when that's your only bright spot you are in trouble. And we only have 1 NYC in this country.

Further, this was the week that people got silly and started saying that even the McDonald's of the world will see a major slowdown due to recession. Folks, if Walmart (WMT) and McDonald's (MCD) start seeing large declines in sales, we are going into something a lot worse than a recession. People still need to buy goods, and eat "something". If they cannot even afford Walmart and McD's, we need to flee for the hills entirely. So as I stated this week [No Safety, Even in McDonald's], I find this logic overdone, BUT you can't argue with fear. We unfortunately have an analyst community chock full of newbie MBA types who were in college in 2001-2002 (during the last 'recession' and stock market correction), so even a halfway decent slowdown is going to scare the lights out of them, as they have known nothing but "good times" the past half decade. So ANYTHING will look like a depression for them, considering what their baseline is. ("Oh my God, earnings growth for the S&P can actually be negative? Let me go check the textbooks for that") Last, this was the week we saw the fingerprints of the Federal government (Countrywide/Bank of America) moving from behind the scenes to out in the open. I expect to see more in the coming week, months, and indeed year as things worsen in this economy.

Looking big picture at the technical aspect of the market, keep in the mind the series of lower highs we discussed in the last few days of December on the blog.



We have a lot of room to the upside, before getting to the next "lower high" - probably roughly 1470-1480. It would not surprise me at all (and I am positioned this way) if we see that "bounce" and make a run back to those levels. At that point I will be lightening up on long positions and reintroducing a heavy exposure with Ultrashorts; concurrent to when CNBC will be telling you the correction is over, recession is avoided, the Fed saved us, and the housing boom will resume this fall. The mood will be euphoric... when you see all that, just remember how you felt the last 2 weeks. At this point until I see this series of lower highs broken, every rally will be a time to lighten up, and reintroduce sizeable short exposure to the fund as portfolio insurance. It would be the time (if I had the ability to short individual names), a time to short the names that are most reliant on the US consumer. Etc. This pattern will continue until it changes.

For the fund, we took some hits this week expecting a washed out bounce sooner or later. Again, it may never come and we continue into freefall but that would be an atypical move... and positioning for something that happens once out of every 50 times is not really a great strategy. I did kept buying into downward moves into the 'best merchandise' and have been able to load up large exposure in some of my favorite names. I do expect this to pay off in the coming weeks (barring free fall and panic selling in the market). The stocks that did move this week were many times sectors I would not touch except for a very short term trade - hence not really in the style of this fund. For example, we are seeing some bottoming action in financials. I've scaled back my Ultrashort Financial (SKF) to almost nil due to this. In fact, for those with very short time frame (say 1-3 weeks), the exact opposite - Ultra Financial (UYG) might be a good trade - it closed Friday @ $36.51 - it would not surprise me to see something like this bounce 20% as we get an oversold bounce in this area. Same with some retail, homebuilder, and restaurant stocks.

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

Some of the larger changes (chronologically) to the fund below:
  1. Monday, I cut back my exposure to the Indian Banks, ICICI Bank (IBN), and HDFC Bank (HDB) in the face of ICICI Bank's 10% move up, on news of a potential IPO of its brokerage unit
  2. I was going to add some Crocs (CROX) as it went into a free fall based on some patent news, but instead other parts of the market starting selling off randomly based on emotional selling, which was a moment I was waiting for, so I sold down my Ultrashort positions quite severely, along with MedcoHealth Solutions (MHS) and added to 11 current positions along with starting a new position in Latin America internet name Mercadolibre (MELI). This name was only recently added to Marketocracy.com database so I was unable to buy this stock when I first identified it in the mid/upper $30s. Since then (only a few months ago) Cramer mentioned it and it hit $80. With this fall back to upper $50s I decided to bite the bullet and begin the position even though its much higher than the price I wanted to start the position at a few months ago.
  3. Tuesday, I closed the small position in networking stock Ciena (CIEN) with a tidy profit. This stock, held since the early days of the fund, actually did very well in the fall, at which time I booked the majority of profits. However, right now the perception is all networking stocks are going to zero since all buying will stop of every router, optical switch, et al in the world. Or at least the stocks are trading as if this were true. Since I want to keep the # of positions manageable this was a logical candidate to go, ALTHOUGH I think its value here is very good. But I had cut the position down to such a small exposure and with my favorite stocks finally getting a haircut, I decided to devote more money to those more favored positions.
  4. I continued cutting back on LDK Solar (LDK) - anticipating further correction in the sector and with the some of the leadership stocks in the sector, I moved some funds to Suntech Power (STP) during the week instead. I still find LDK Solar and Trina Solar (TSL) to be the 2 value stocks in the sector, but it appears I might be the only one. When the charts shape up better, I will review both these names again, but my overall exposure to this sector which is full of trigger happy investors is already at near maximum for my comfort level.
  5. I had cut back my Mosaic (MOS) exposure (my #1 winner in the fund) as it kept moving upward (and away from any key technical support on its chart), while the market corrected - it was actually down to below 2% of the fund last week, after enjoying the top spot for much of the past month or two. When the stock finally corrected to its 20 day moving average (upper $80s) Tuesday, I began buying and after a stellar earnings report, I pushed the position up to 3.3% as the stock was stuck near the 20 day moving average Wednesday morning. I wrote at the time "With the stock market so putrid, there is no need to rush into the name right here as it is sitting right near its 20 day moving average. But if the market goes into free fall, this is the name I will be loading up and if we get a drop to the 50 day moving average $79), I see Mosaic going right back to the top position in the fund where it has sat for most of the previous quarter." and "If we are fortunate enough to see a fall to $79 or so, I will make this a 6-8% type of position." Lo and behold, not a few hours later on some ridiculous "sulfur cost" excuse to drive down the stock we saw a dip to $80. That was good enough and I moved the position up to 5.5%ish of the fund. I would of added more but I ran out of cash. Since that swoon Wednesday to $80 the stock has returned to nearly $100 or a 2 day return of nearly 25%. This appreciation alone has added about 1% exposure to the fund, as it now sits at 6.5% of the fund. I still contend this name is vastly undervalued at 17x 2008 estimates (which are still too low) and I will be looking for a price target of at least $120. In fact, if not for such a putrid market I think Mosaic would of been up over $100 immediately following the earnings release. Needless to say I found a price point of $90 to be a gift, not to mention $80. I expect Mosaic to claim the top spot in the fund for most of the next 3 months, although if my price target is achieved I will be cutting back. Not due to the stock itself, but due to my assumption the stock market will continue to have a rough first half of the year, and we need to book gains as we get them.
  6. Along with a large lot of Mosaic, I added to 5 other names Wednesday during yet another correction in my favored sectors - again I created a list of 12 Stocks to Buy on a Pullback and most of these were names on my list. Hence when the pullback is happening, the gameplan went into effect. Even though it hurts performance in the near term.
  7. I did add a small cap stock to the fund, Zhongpin (HOGS), a Chinese pork producer who is a niche player in the very fragmented industry; as the stock was down 12% Wednesday. However, as Chinese become more affluent and meat consumption increases; and this company goes about its strategy of consolidating and rolling up a part of the industry (even if its 10-15%) it would be a huge win. If it works. I am willing to put a small stake towards this end as so far the results as a public company have been impressive.
  8. I cut back severely the formerly #1 position in the fund, Ultrashort Real Estate (SRS) - I had cut quite a bit last week as well, but with the ETF skyrocketing 27% in a week, and 36% in 2 weeks, it was time to wait for a retrenchment. Already the ETF is back down to $127s. I am hoping for some "hope" to return to the market, and the price for this ETF to be driven down, so we can repeat the same success in a few weeks.
  9. Thursday, one of my top 10 positions, Illumina (ILMN) announced a settlement to a patent dispute, and the stock rocketed up >20%. Short of cash, and wanting to lock in this large gain, I cut back the position severely moving it from 3% to 1.25% of the fund. I am hoping to buy back this stock in the lower $60s at some point in the future. I am just wary of large gaps in charts (when a stock opens many points above a previous close). Plus as said, I am very short on cash at this time, and I am rolling profits from winners into stocks that have been correcting severely.
  10. I closed a long term position in General Cable (BGC), another stock I like for the long run. Similar to my sale of Cummins Engine (CMI) in the fall, this is a name I like but "perception is reality" and perception is that these industrial stocks won't be able to do well in a slower growing US economy, and their international exposure won't bail them out. At this point I am not going to argue with the market, but perhaps in back half of 2008 as more of this slow down is priced into the stock market in general and people realize every company in the world won't be going to $0, we can return to these type of names. Again, it was a smaller position, and while I expect it to bounce from its very oversold situation I have a lot of stocks that will bounce from oversold situations that I have more near term believe that "perception" won't ruin their stock performance in the next 2-4 months as much. So I am focusing on those.
  11. Friday, I was adding to Mastercard (MA), as the bad news in credit card companies took Mastercard down with them in a "baby thrown out with bathwater" scenario. Without any credit risk, Mastercard is immune. However a bear case against the name could be made to the tune of "as the American consumer is hurt by the economy he will stop spending, even with credit cards". If this indeed true, as I wrote above, we have a lot more to worry about than a 'recession'. If a strapped US consumer gets to the point he stops going to McDonald's, stops shopping at Walmart, and lacking cash stops using credit - well folks, you want to be in gold and bonds. And nothing else. But this is the scenario we've turned too... when 4 weeks ago the same analysts were saying nothing was wrong. Emotional extremes in both cases - the truth is somewhere in the middle.
  12. With the last of my cash, I added some to my New Oriental Education (EDU) position ahead of next week's earnings.

57 Stocks Returning >8% Last Week

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Always some winners out there - as I stated last week the indexes were actually not down that much; but a lot of individual names that had previously been holding up took some serious hits. Below is a list of 57 stocks that returned >8% and also
  1. Market capitalization >$2 Billion
  2. Average trading volume >100K
  3. Stock price >$10
In order from best to worst (I've highlighted names in green we own, and in blue those of interest or discussed in the past) - a lot of "safety" or "washed out" (i.e. airlines?) type of stuff moving. Good moves in healthcare stocks (I count at least 17 healthcare related of the 57), Indian stocks, and as mentioned during the past two weeks we are seeing Chinese large cap stocks perk up. And another winning week for... gold.

Again a list dominated by gold, airlines (based on merger rumors), washed out financials making a dead cat bounce, and healthcare (defensive) is not exactly something bulls want to see.

Of the winners we own below, I cut back Illumina (ILMN) [Illlumina Up 20%, I am Cutting Back], after its big spike on news of patent dispute win (this was a 3% type of position ahead of the surprise news), and also cut back on some the Indian exposure - moving funds from "winners" to stocks not doing well at this time and offering better value.

Symbol Company Name 1 Week %
TNE Tele Norte Leste ADR 30.3
NWA Northwest Airlines Ord Shs 24.5
ILMN Illumina Inc 23.5
SLM SLM Ord Shs 21.1
GOLD Randgold Resources ADR 17.4
IBN ICICI Bank ADR 17.0
CLWR Clearwire Corp 16.8
HWAY Healthways Inc 16.4
DAL Delta Air Lines Inc 15.8
CHU China Unicom Depository Receipt 15.8
EJ E House China Holdings Ltd 14.0
PPDI Pharmaceutical Product Development 13.6
AUY Yamana Gold Inc 13.5
SEPR Sepracor Inc 13.1
NETC Net Servicos de Comunicacao ADR 13.0
DLB Dolby Laboratories Inc 12.7
MYL Mylan Ord Shs 12.5
WM Washington Mut Ord Shs 12.4
KGC KINROSS GOLD CORP 12.3
CZZ Cosan Ltd 11.9
VFC VF Corp 11.9
CIT CIT Group Ord Shs 11.5
CHA China Telecom ADR 11.5
APOL Apollo Group Inc 11.2
FII Federated Investors, Inc 11.0
CAL Continental Airlines Inc 10.7
KG King Pharmaceuticals Inc 10.7
HDB HDFC Bank Ltd 10.7
STJ St Jude Medical Ord Shs 10.6
BAX Baxter International Ord Shs 10.4
RHHBY Roche Holding 144A ADR 10.0
DV DeVry Inc 9.7
LLY Eli Lilly and Co 9.7
TSU Tele Celular Sul ADR 9.4
SBUX Starbucks Corp 9.3
CELG Celgene Corp 9.3
HLF Herbalife Ltd 9.2
UBB Unibanco Depository Receipt 9.2
AGN Allergan Inc 9.0
AZN AstraZeneca ADR 9.0
CAH Cardinal Health Inc 8.9
HMY Harmony Gold Mining ADR 8.8
MER Merrill Lynch Ord Shs 8.8
BVN Buenaventura ADR 8.6
AU AngloGold Ashanti ADR 8.6
IFN India Fund ETF 8.5
OKE Oneok Inc 8.5
MLEAY Millea Holdings ADR 8.5
SGP Schering-Plough Ord Shs 8.5
ABT Abbott Laboratories 8.4
SNV Synovus Ord Shs 8.2
PDS Precision Drilling Trust 8.1
RPM RPM International Inc 8.1
HNT Health Net Inc 8.1
WYE Wyeth Ord Shs 8.1
STRA Strayer Education Inc 8.0
ABC AmerisourceBergen Ord Shs 8.0


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