Bookkeeping: 'Rising Tide' Performance Week 20

Week 20 performance of the mutual fund

Comments: Another interesting week - quite bad Monday, quite good Friday, and quite quiet in the middle. As outlined this morning [Santa Claus Rally?] the news flow this week was actually quite poor in the economic (i.e. real) world, but on Wall Street it's only as bad as your last Fed infusion of capital (or ECB infusion of a half a trillion dollars). Needless to say, despite the drumbeat of bad news, it essentially fell on deaf ears. Remember, as "they" say, when good news is treated badly, get bearish and when bad news is treated well or with indifference, get bullish. So this is why (at least temporarily) after seeing the markets only down half a percent all week despite all the wickedness thrown the market's way, I went back to somewhat bullish mode. There is nothing insightful to really add here - using the S&P 500 as our gauge we are right back to a key level; the 50 day moving average (1485, dropped down from 1490 of late). You can either view it as the markets knowing more than the economic numbers, or the market ignoring the economic numbers. Either way it does not matter from an investing standpoint - it is what it is. No reason to stand in front of a herd of bulls...

For the fund, I entered the week relatively bearish (and the spike down Monday confirmed this to be a good view), and spent most of the week in a heavy cash position [around 25%] waiting for the market to make a decision of which way to go. We tested that ever elusive S&P 1440 level mid week, which regular readers will know is the magical marker which draws the markets like a magnet. And then we didn't break through despite the bad news, so one would assume that to be bullish near term. In a mixed up market like this where fundamentals seem to be disassociated from the news flow, it is better to rely on technicals and just let the price action dictate your actions. Which I do. Fertilizer positions really came to the forefront Thursday (unfortunately I am at my lowest allocation in months at only 6% of fund allocated to this sector), and then Friday we had a nice rally in many names.

So despite a heavy cash position (nearly 25%) and only about 75% of my money actually 'working for me' in the market (either long or otherwise) for most of the week (until Friday), Rising Tide Growth Fund generated a +2.20% return. This compares to +1.1% for the S&P 500 and +1.2% for the Russell 1000. If not for a late week foray into LDK Solar (LDK) which knocked off about 0.4% of performance it would of been even better, but some future week the fund will derive a nice benefit from the position just built in this name.

Only 6 weeks more until "my" 2nd quarter is in the books; so far so good.

Price of Rising Tide Growth: $12.264
Lifetime Performance to date (vs Aug 3, 2007): +22.64%

Comparable S&P 500: 1,484.5 (+1.31%)
Comparable Russell 1000: 808.9 (+1.59%)

Fund return vs S&P 500: +21.33%
Fund return vs Russell 1000: +21.05%

Last week's results here.

Since the market cap of the median stock in the Rising Tide Growth fund (median $9.8 Billion as of November 07) is significantly below the SP500 index (median $13.1 Billion as of September 07) but higher than the median market cap in the Russell 1000 (median market cap $5.8 Billion as of September 07), I am measuring the fund against both indexes. Click here to see all fund's holdings as of mid November 2007.

Basis for indexes is 5 day weighted average of closing prices Aug 3-9
SP500 : 1,465.2
Russell 1000 : 796.2

To see why I use the 5 day weighted average of the first 5 trading days to smooth out the volatility of the indexes as the fund launched, see here.

Please click here: fund performance for previous updates

Bookkeeping: Are We Having Solarfun (SOLF) Yet?

Taking off some Solarfun Power (SOLF) on this 15% move (this was not a major position - just a bit over 1% of fund). Cutting my position in half on this spike.

With all my purchases of LDK Solar (LDK) in past 24 hours, I have enough solar to go around. I'll look to add back this very volatile name on pullbacks...

Thank you Santa...

p.s. it is very hard to be bearish when you have "Here Comes Santa Claus" in the background - try it, I dare ya! ;)

Long both names mentioned in fund and in personal account

Here Comes Santa Claus (christmas music)

Nice Rally Indeed

Nice rally overall, but unfortunately we already are butting against resistance as I outlined this morning. The S&P 500 keeps butting against level 1480 and the chart shows why. 50 day moving average hanging there creating a ceiling. If we didn't have that stubborn resistance sitting there I'd be more inclined to think we get a more serious rally but for now this will do.

Fortunately a lot of individual names are rallying quite severely in the face of this; I think a lot of market participants simply want a flat market at this point. On the positive side, stocks that deserve to go up, are going up as opposed to "everything goes up" or "everything goes down" attitude which we have had for many of the past few months.

Again this doesn't change a thing in the economic backdrop but the attitude in general has gotten a bit too negative, and nothing goes straight up or down. I will look forward to adding some more short exposure if we do get a spike higher here in the coming week, when many institutions stay home and its amateur week. We have a half day Monday, closed Tuesday, than the kids come out to play Wed - Fri (by kids, I mean us) :)

I have updated my top positions in the far right lower margin to reflect where things stand as of noon.

Illumina (ILMN) Gaps Up Today

I wrote about Illumina (ILMN) yesterday and mentioned the one downside was some patent issues; the stock has gapped up this morning upon a re-examnination on these patents.

“We are pleased to hear that the U.S. Patent Office has decided to re-examine the validity of these two patents. We expect the Patent Office to consider closely the applicability of the prior art in their evaluation of whether these patents should be amended or invalidated in their entirety,” said Jay Flatley, President and Chief Executive Officer of Illumina.

Long Illumina in fund; no personal position

Bookkeeping: Some Morning Purchases

While S&P 1490 lies as resistance ahead, I am trying to wash out the bad economic thoughts and am basically looking at healthy charts (or very beaten down stocks) to add to, today. Unfortunately the indexes might have some issues making some sustained runs but hopefully some individual names can do well in this tape. Below are the major morning transactions

1. I am increasing my financial exposure by returning to Blackrock (BLK), a position I've held in the past. This is an asset manager and 'best of breed' in my book, and does not seem to be exposed in any way to the mess that is the credit crunch. This was one of my '12 New Stocks to Buy on a Pullback' and although I was hoping for more of a pullback then this, the stock is sitting at its 20 day moving average ($204) and refuses to fall further the past week, which is an impressive feat. Since I've owned this name in the past, I am restarting this position in quite large fashion with 100 shares or $20.5K (1.7% of fund). Earlier posts about Blackrock can be found here. (please note this is not Blackstone Group the private equity outfit)
2. I am continuining to add to LDK Solar (LDK) here in the $45s range. I see worst case downside to $40, and once sanity returns to the name, a move back to $50s should be very reasonable in relatively short order.
3. Speaking of financials I've added to my existing Mastercard (MA) as well, which again only seems to fall to its 20 day moving average. I was hoping both it and Blackrock would fall to its 50 day moving average but the relative strength in these 2 names is enormous.
4. I'm adding to infrastructure name Chicago Bridge & Iron (CBI), which is yet another stock which is showing fantastic relative strength - not falling below its 20 day moving average.
5. I'm adding to iShares Malaysia (EWM) which has fallen off the cliff. (considering its an index) - it traded in low $13s just over a week ago, and yesterday was down almost near $12. I have cut back a lot of my Asian index exposure by selling iShares Singapore (EWS), and iShares Hong Kong (EWH) over a month ago, but I still like Malaysia due to being a petroleum and natural resources based economy. While I like all these countries in the "very long" run, for now I am focusing only on Malaysia until the 'next big correction' happens. I do think China probably has a good run in it as well since it's been trashed for weeks on end, so I might return to the EWH soon as well.
6. I'm adding to my bankruptcy and consulting play FTI Consulting (FCN), which has been lagging Huron Consulting (HURN) of late but seems ready to make a move.
7. I'm adding to Peabody Energy (BTU), one of my coal stocks - the chart for Consol Energy (CNX) looks like an interenet stock from the late 90s, or a solar stock today - so instead of adding there I am going to take some profits there and actually roll that money into a laggard like Peabody.

Most of these purchases above are of the $5-$8K type of variety as I layer in (and out) of positions. Blackrock is obviously the exception.

Long all names above in fund excl. iShares Singapore and iShares Hong Kong; long LDK Solar and Chicago Bridge & Iron in personal account

Santa Claus Rally?

Well Santa may be late this year, but I have to say after a slew of bad news this week the market is showing a lot of resilience. Let's review just a handful of ominous items we discovered this week:

1. California is headed to a state of fiscal emergency
2. Greenspan hints at stagflation and is concerned enough to admit we should just hand out cash to strapped homeowners as the least bad of many bad scenarios
3. Darden Restaurants which hits square at middle America (Olive Garden, Red Lobster) reports both food inflation and rising labor costs
4. Coach (COH), which hits square at upper middle income, lower upper income aspirational American consumer continued its implosion
5. FedEx, which is a great tell on the economy warns of rising fuel inflation, and talks about softness in US industrial production
6. One bond insurer gets downgraded by Moody's and another decides its time to fess up about what they really have on their balance sheet
7. Goldman Sachs (GS) reports solid earnings but says November was the toughest month they have faced, Morgan Stanley posts a much larger loss than they anticipated even 4 weeks ago and is forced to go hat in hand to China, Bear Stearns warns of larger loss than they anticipated, and this AM Merrill Lynch will be getting a cash infusion from Singapore.

That's just a sampling off the top of my head. To offset that central banks across the world stand united to inflate the world back to Greenspan era levels with unlimited resources (how's half a trillion suit you?)

With all that said, we are down a measly 0.5% on the S&P 500 this week. In the face of that avalance of bad news. Hence, why it seems Santa Claus looks prepared to enter stage right. I am not sure what else could be thrown at this market and if all this news can't keep a good equity market down, what can? While I believe January earnings reports will showcase many more companies hand wringing over 2008 profit levels, and expect to see guidance slashed by many US focused companies, that is "then", and this is "now". Again, the economy is not necessarily the stock market, so this dichotomy can exist for quite a while. The market seems to be shrugging everything off, so to be an adament bear would leave some good profits on the table.... hence I am an adament chameleon instead and will change with the mood.... just a personal hunch but with a lot of traders off next week, and the market back in the hands of amateurs it's possible we get some nice move up, although some technical resistance lies ahead. Let's see how it goes.

Research in Motion (RIMM) Nice Results

Quite impressive growth from this large of a company - Research in Motion (RIMM) comes in with 22% sequential revenue growth (and 100% year over year), up to $1.67B (slight beat vs analysts $1.65B) and EPS of $.65 (vs analysts $0.62). But that's old news the second it hits the presses; the all important guidance is what the mad hordes clamor for....

In that arena, the company is saying $1.80-$1.87B (vs $1.75B expectation) and EPS of $.66 to $.70 (vs $0.65)

Now for a normal Research in Motion quarter, this "small" of a guidance increase would be perhaps deemed disappointing but with the stock so weak of late, we have a nice set up where even solid news will be looked upon positively. Of course now we have to deal with the trecherous conference call where one slip of a word can send a stock plunging 15% (ask Cisco), but overall it looks quite good and the fears of Research in Motion falling off the tracks should be quieted... at least for a few weeks .... before the hand wringing begins again. Keep in mind this is still mostly a North American play - the world is still RIMM's oyster.

Technically the stock was trading just below the 50 day moving average and "stuck" for much of the past few weeks, but as long as no ill word is spoken in the conference call this should provide a nice catalyst for a move back up above this resistance level ($107 or so).

Long Research in Motion in fund and in personal account

Bookkeeping: LDK Solar (LDK) Hits Targets

Ok my targets of $46-$47 are now here. I am now adding 400 more shares in the upper $46s to mid $47s, taking LDK Solar (LDK) up to a 3.9% position. From here I will monitor the last 40 minutes of the day. I would think $46 would provide a good floor but with panicked investors they could overshoot to the downside (could happen tomorrow morning or in last 5 minutes as people cannot take the pain anymore). Could it overshoot even more and go to $40 tomorrow? Perhaps - no crystal ball here. But this would start to become a function of panic and nothing to do with the stock or company at that point....

My original thought mid day was LDK Solar (LDK) would gap down tomorrow to reach these mid $40s price points but we got it all in 1 day. Can't complain. I wrote yesterday:

I will be hoping for a pullback to some key gap levels such as $60 before adding any to my small position. (There is a nice gap down south of $46 which would be even more tasty)

So I am getting the tasty level all in 1 day. Quite amazing to watch this meltdown, but always have a battle plan going into every trade and it won't seem so bewildering. The gaps in the charts both got filled, shorts are engorged and happy, longs bewildered, and I just got a new number 1 position in the fund.

Long LDK Solar in fund and in personal account

Fertilizer Continues to Rock and Roll

I don't see any clear catalyst today but the fertilizer group on my watch list is just flying

TNH +7.8%
CF +7.7%
MOS +6.8%
AGU +5.9%
POT +4.7%

In a flat tape, even more impressive. Even MOO is up 3.4%. I can't find any specific reason why - if you happen to know throw a message into a reply to this post.

While I hate the financials, a lot of bad news has been thrown at the market of late and its sitting flattish of late - with Research in Motion (RIMM) coming tonight and I expect good news we might get a quick Santa Claus rally at least to S&P 1490 level or so. Let's see how it plays out. I wouldn't mind a market that rewards winners and punishes losers but it seems for most of the past 4 months its been an 'everything stinks' or 'everything must go up' type of market. The worry is every day you wake up and the next shoe in financials is going to drop everything in your portfolio...

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

Bond Insurer MBIA (MBI) Drops a Bombshell - Down 30%

I realize reading about bond insurers is like going to the dentist but as I implored yesterday [What a Day on the Street] I think it is imperative to understand what is really going on behind the scenes here and the magnitude of potential risks, even if all you care about is fertilizer or solar stocks. We have such a leveraged financial system, and the delevering of this system is 100x more scary than anything simple such as a simple recession. Again let me point to Financial Day of Reckoning Approaches. I keep writing that we have so many layers of this credit web, and much of it won't be discovered until things implode in the dark of the night. How it stops or how it ends, I am frankly, totally unclear about. This is what worries me; I don't see what a solution could even be if we truly begin to unravel decades worth of leverage of credit. Maybe there is some stop gap I cannot think of; I assume there must be something being cooked up but the worry here is finally the problem is larger than the system. I think the general game plan by central banks is to try to keep pushing this off for 2-3 more years and hopefully the main asset much of this junk is based on (home prices) rebound by then; or drive mortgage rates to 5-5.5% levels so people can refinance. But many of these people have little to no equity in their homes, or worse are upside down - hence cannot refinance. All at a time the credit market is drying up as we become more risk averse by the day. Ugh.

Today, bond insurer MBIA made some troubling 'surprise' disclosures.

• The financial guarantor's shares dove more than 30% in early trading after the firm dropped a bombshell revelation that it has significant exposure to some of the most risky elements of the structured product market.
• MBIA announced that it guarantees $8.1 billion of structured products called CDOs-squared, among some $30.6 billion in total exposure to CDOs, or collateralized debt obligations. That means MBIA guarantees payment on CDOs that package up other CDOs. Many are filled with subprime or other mortgage-backed debt, which has been subject to downgrades, deterioration in value and default of late.
• "We are shocked that management withheld this information for as long as it did," writes Ken Zerbe, analyst at Morgan Stanley in a note Wednesday.
• The news comes as investors are increasingly concerned that the credit market woes that have roiled financial markets in the second half of this year will intensify with the potential default or credit rating slide for a financial guarantor.
• The credit ratings agencies have been scrutinizing the finances of companies like MBIA and competitors Ambac (ABK), Financial Guaranty Insurance Co., XL Capital Assurance, CIFG Guaranty and Financial Security Assurance. The guarantors rely on having pristine credit ratings and more than enough capital to guarantee that investors receive their payments on securities they own.
• A ratings downgrade could force some fixed-income investors into a selling spree, because parameters of their investment funds require that their holdings be insured by a guarantor with a triple-A rating.
• But the fallout of a guarantor downgrade reaches beyond forced bond sales. The guarantors also underwrite credit-default swap protection on securities like bonds, CDOs and other asset-backed debt. These firms have already taken writedowns based on widening risk premiums, or credit spreads, on their credit default swap portfolios, and analysts expect they'll take more.
• Zerbe had thought Ambac had more risky CDO exposure until MBIA's announcement Thursday. He notes that the news validates S&P's prediction that MBIA's stress-case scenario would engender losses 61% higher than Ambac's $1.5 billion.
• And many banks and brokerage firms are buyers of guarantors' insurance and credit default swaps as well, begging the question -- why wouldn't someone pony up cash to rescue the firms from capital shortfalls?
• According to a New York Times report Wednesday, Merrill Lynch (MER ) and Bear Stearns (BSC) were negotiating a bailout of smaller insurer ACA Financial Guaranty Corp., but they were too late. The firm's rating was slashed Wednesday deep into junk territory by Standard & Poor's, to triple-C from single-A.

I know... it's dry reading... blah, even for me. But these companies essentially hold the key for the entire credit system. Without their insurance, it all implodes. As the flashlight searches around the dark room, we see more and more cockroaches emerge - one by one.

More of a detailed look here in a Fortune article - whats interesting is the companies (banks) that bought this insurance are so desperate not to have the insurance agent go under they are willing to infuse capital into the insurance agents to keep them afloat. In layman's terms what is happening on Wall Street is if you had a medical emergency, and your Blue Cross was about to go under, but you knew if it did you'd be on the hook for the 70K hospital bill so instead you start sending money to Blue Cross to keep it afloat - just so it can cover your insurance. That's essentially the stage we are now entering.

While a cash infusion to struggling bond insurers may keep downgrades and write downs from happening right now, at the end of the day the bonds, insured or not, are full of worthless paper. Someone will have to pay, whether it be a bank a bond insurer or some other party. "What we're seeing now is a valuation crisis," says Sylvain Raynes, a former Moody's analyst and principal at the structured finance consultancy R&R Consulting. "Wall Street is a big wheel that is moving the same losses in a circle and only postpones the ultimate reckoning and makes it much worse."

LDK Solar (LDK) Target Fast Approaches

Well my mention this morning of a potential to buy LDK Solar (LDK) in $46-$47 range is coming to fruition much earlier than I anticipated. I await with limit orders... currently $49 and weakening by the minute as the "long and strong" bulls abandon ship with a fury. I just cannot imagine what those who were buying yesterday in the $60s or even $70+ must be thinking.

This is the other part of investing that took me a long time to recognize. Trying to identify whom you are investing with - the crowd. When you are stuck with the fast money crowd - they will turn on you in an instant... the same guys talking about how this is a great 5 year stock to own, will be the first to flee as their intention was simply to pump the stock up for a day trade or a swing trade. So always look around the room and realize who these sharks are.

Compare this to a stock like Suntech Power (STP) which is like the old folks home (no offense to any old folks reading the blog) ;) ... very little fast money, a lot of actual long term buy and hold types who look to the long term. A very different environment. Doesn't mean that stock cannot go down, but it will be for very different reasons. Anyhow the high school camp that is LDK Solar investors is quickly clearing out.... soon the parents can come in and try to clean the mess. And no I don't expect a V shaped bounce back - it might happen, but certainly this could take quite a bit of time to fix the damage left by those darn teenagers....

The irony in it all, is we have far more information than we did when the stock went ballistic...

Long LDK Solar and Suntech Power in fund; long both in personal account

Nice write up on Illumina (ILMN)

I mentioned an initial stake in Illumina (ILMN) last Friday [2 New Positions in Healthcare Field], as I continue to expand to areas that should do well in a slowing economy. While I like healthcare I hate risk associated with biotechs since FDA approval or non approval can push up (or down) a stock 40-50%. Since I have no advantage in information, these are tough stocks for me to get into. Hence I am always on the look out for ideas in this sector not tied to FDA approvals. Unlike MedcoHealth Solutions (MHS) which should be a good recession play, Illumina has some of the very high growth component to it, that I really like. The main risk here is patent based risk...

A nice article here from a San Diego newspaper (where Illumina is based) which goes into more detail on what exactly they do: DNA Analysis Behind Illumina's Growth

• When Illumina Inc. entered the local life sciences scene 10 years ago, the fledgling equipment provider had seven employees and 10,000 square feet of office space. Nearly a decade later, Illumina counts almost 1,000 employees worldwide with commercial operations in San Diego, Hayward, China, Japan, England and The Netherlands with plans to add 90,000 square feet of manufacturing, research and development and commercial space directly across from its UTC headquarters.
• The company estimates it will reach a net income between $69 million and $71 million for the year on revenues between $354 million and $358 million. In 2006, the company reported a net income of $40 million on revenues of $185 million.
• Its five-year growth spurt — 250 percent — was enough to earn the No. 1 spot on Forbes magazine’s 25 Fastest-Growing Tech Companies index published this year, a rate even surpassing Internet search engine phenomenon Google.
• Illumina makes tools that allow commercial scientists, academic researchers and government agencies to study genetic variation. Besides differences in eye and hair color, genetic variation gives researchers clues to help them better understand complex diseases. Researchers have employed Illumina’s technology to discover significant genetic variations in adult-onset diabetes, Crohn’s and Parkinson’s diseases and prostate cancer.
• Illumina has captured a piece of the analysis market by offering a technology that uses miniature beads and fiber optics to conduct large-scale experiments that allow researchers to analyze genetic makeup.
• And its purchase of DNA-sequencing company Solexa for $600 million in January gave it access to a market worth an estimated $1 billion or more. It also created the only life sciences company with genome-wide technologies for genotyping, gene expression and sequencing, considered the three cornerstones of modern genetic analysis.
• “This is, of course, like the darling of the research community because genetic sequencing is much quicker and less expensive,” said Eric Topol, director of the Scripps Translational Science Institute and whose work on the genomics of coronary disease led to the discovery of the first coronary disease and heart attack mutation of its kind.
• More recently, Illumina began partnering with Google and Genentech-financed 23andMe and Iceland’s deCode Genetics, services that allow a person a peek into their own genetic makeup for about $1,000.
• As Illumina prepares to grow its capacity and expand its offerings, it also faces increased pressure from the competition. A jury awarded Santa Clara-based Affymetrix, a dominant player in the area of gene expression that also supplies chips to companies involved in genetic decoding, $16 million in March after it was successful in proving allegations Illumina had infringed on five patents.
• “The real risk in the eyes of investors is that the jury does not rule in their favor and the judge issues an injunction against Illumina selling their products,” Schenkel said. “The belief is Illumina should hopefully be able to get a couple of these (patents) knocked out and that they will be successful in getting a re-examination with the (Patent and Trademark Office).”

Long Illumina in fund; no personal position

Bookkeeping: Adding to LDK Solar (LDK)

Well as expected LDK Solar (LDK) is all over the place. It was trading at $70 yesterday, late in the day. I was hoping to get some at $60 and if the market gods were extremely good to me, adding at the gap in the chart at $46.

For now I will be very content to add in the low $50s. I made a series of buys to take my position from almost nil to 2.5% of the fund (I bought a lot)

I bought 3 lots - 420 shares
smallest in $56s
middle in $53s
largest in $52s

If we get a drop to $46-47s I will add more. Again this is the danger of holding a stock with so much fast money in it - when they all try to rush out of the exit at once or the move works against them the stock can implode.

As the chart shows, anything over $45 still keeps us in a nice uptrend. I could of bet earlier and bought ahead of earnings but this takes us from investing to 'gambling' - 50/50 odds up or down. That's against the whole point of being in the stock market as opposed to sitting at a craps table. Now by waiting for the outside audit and the earnings report/conference call I have more information and can make a much better analysis of where LDK is going in the next few quarters. I could still be "wrong" in my analysis, but at least I have more information. It still might take some time to shake out some of the newer players to the stock, but I am content with this size position for now, and as I said above if we see further weakness I will be adding more in a move down to the $40s. Further, this is a very overextended sector ripe for a pullback so we could see some near term weakness. But that's what the big cash position is for.

Long LDK Solar in fund and in personal account

FedEx (FDX) - Another "Tell" Stock

As I mentioned with Coach (COH) yesterday, there are a select few stocks to watch as economic tells - UPS and FedEx (FDX) are always interesting to watch as well.

We had a great report from Oracle (ORCL) last night, I expect Research in Motion (RIMM) to be good, Nike (NKE) was great overseas, poor in the USA (what's new?), and the market can rally off these things but a company like UPS or FedEx intertwines through all parts of the economy. Some of the commentary in their earnings report are quite foreboding...

• Package courier FedEx Corp. reported Thursday its second-quarter profit fell 6 percent from a year ago, largely due to high fuel costs and a sluggish U.S. economy.
• The delivery company's growth overseas tempered the effects of the domestic economic slowdown and helped FedEx meet its lowered earnings expectations for the quarter. But it forecast profit for the current quarter that was below Wall Street estimates.
• The company lowered its expected earnings for the quarter last month to a range of $1.45 to $1.55, down from an earlier estimate of $1.60 to $1.75. Analysts surveyed by Thomson Financial expected earnings of $1.50 per share.
• "High fuel prices and weak U.S. economic growth year-over-year have impacted our business," said Frederick W. Smith, FedEx Corp. chairman, president and chief executive, in a statement.
• "We continue to benefit from solid international growth, which helps mitigate softness in U.S. industrial production. "

So we see these same trends over and over (Nike for example last night) - struggling US economy offset by strong growth overseas. This is why I have been and continue to have a hedge short on the Russell 2000 instead of S&P 500; Russell 2000 has far more smaller companies which are reliant on the USA and have little to no overseas exposure. So those stocks will suffer more since they have no help from overseas, as opposed to US multinationals.

With that said, at what point does overseas slowdown? The tail does not wag the dog... for long. Much of the world's growth is based on western world consumption, specifically good ole US of A. All these corporate profits by the multinationals are surviving by saying "well at least we have Asia growing". But what if Asia slows from 11-12% GDP growth to even 6%? Then where will profit growth come from? Just something to keep in mind. Right now even these multinationals are like sitting on stools with 1 leg missing. If another leg falls (international growth) you are going to be falling straight to the ground. Will make for a very interesting 2008...

Last point - when the transports/logistic companies are faced with higher fuel costs, they increase their surcharges to their corporate customers... (i.e. raise prices) i.e. inflation. Again, this is either eaten by corporations (meaning lower profit margins) or passed along to us peons (consumers) - so someone has to suffer. There is no escaping the "worldwide tax" that is energy inflation.

Thankfully our politicians are taking great steps to alleviate this such as continuining subsidies to oil companies and farmers who grow ethanol, and pushing out alternative energy incentives. Glad they are on our side! Woo hoo.

No positions

'Fund My Mutual Fund' Makes Sramana Mitra's Top Financial Blog List

Just wanted to say a public thanks to Sramana Mitra for mentioning the blog in her list of 12 Good Financial Blogs. Her website can be found here. It is one of the few websites that when I read, I realize how behind the times I am in technology :) I am analysis 101 (ok maybe 102) over a very broad spectrum; her work is like PhD level in some specific areas. She looks at things with a very long point of view but has some interesting thoughts always on the future roadmap. I have always read with interest her views on Akamai Technologies (AKAM), since she is still extremely bullish on this name in the long run, whereas I gave up very early in the life of the fund as there are too many "easy" stories out there versus struggling with all the potential (imagined or real) issues a company/sector like this faces. The market is hard enough as it is, with the "easy stories" so I try to avoid most "controversial" stocks, if you will.

Either way, too many blogs out there, too few hours in the day to get to them all. And wanted to take this moment to say thanks to the readers of this blog, the growth the past few weeks has been tremendous and I appreciate it, as always, with all the choices out there. Now go bring a friend so I can get this darn fund off the ground sooner rather than later. ;)

LDK Solar (LDK) Reports Solid Results

In one of the most anticipated reports ever? hah - LDK Solar (LDK) reported a $0.37 EPS which matched analysts estimates. Revenue came in at $158.7M vs analysts expectation of $143.2M

Gross margin was down to 30.8% of revenue, lower than previous quarters but still high considering this space. (solar in general)

Guidance for next quarter is $180-$185M revenue with EPS of $.40 - $.43 vs analysts estimates of $167.5M in revenue and $0.41 EPS.

At this time most solar 'investors' (speculators) only care about revenue growth, and with 60% sequential revenue growth this should satisfy the rabid appetite for revenue growth. The law of large number begins to hit as next quarter's sequential growth will slow down....

Some day minor things like gross margins and net margin levels will matter in the solar space, but at this time it's all about revenue from the reactions of watching which stocks are 'favored' and which are put in the dog house. Hence why it's hard for me to value these stocks because measures that matter to me, such as margins do not matter for the type of people who run these stocks up 80% in 3 days. :)

How the stock of LDK Solar will react is anyone's guess as this stock is full of every type of investor, daytrader, momentum trader, short, and all believe adamently they are correct. I call this a 'battleground' stock, much like a Crocs (CROX). I will be hoping for a pullback to some key gap levels such as $60 before adding any to my small position. (There is a nice gap down south of $46 which would be even more tasty)

Either way, best to stand aside and let the battle play out and then enter once the dust is settled. Margin guidance on the conference call will also be interesting, especially if they mention longer term guidance (out past 1 quarter)

Long LDK Solar in fund; no personal position

What a Day on the Street

Who said you cannot get entertainment value from watching your market. Some very classic things happened today under the radar as outlined in Minyanville's - 5 Things You need to Know

1st - (on a serious note) S&P finally got around to downgrading some of the bond insurers - which MIGHT cause a domino effect - if you want to read something that should scare the bejesus out of you, take 3 minutes and click here -> Financial Day of Reckoning Approaches

2nd - (on a lighter note) I guess Sallie Mae (which we've spoken about in the past as the credit contagion moves from suprime to auto and student loans) CEO had a rough day explaining how tough things are going.

• First, Sallie Mae (SLM) CEO Albert Lord told investors in a pretty defensive conference call that an increase in borrowing costs would hurt the company's profit growth.
• In one particularly hostile exchange, Lord said he "didn't know" the answer to the question what SLM stock is worth.
• "We're trying to put together projections together here, Al," one questioner said. "We're trying to figure out what your stock is going to be worth and you've got to give us some guidance." "You should give Steve [McGarry, Managing Director of Investor Relations] a call," Lord said. "But you're the CEO," the questioner objected. "That's right. I'm the CEO," Lord replied. "Next question."
• Let's cut to the chase. We're no public relations expert, but here's a tip: It's probably not a good idea to close out a particularly testy investor call by saying, "Steve, let's go, there's no questions, let's get the f*ck outta here." But hey, that's just us.
• Check it out at the 26:40 mark via the mp3 file here.

Folks, it's getting testy out there!

3rd, and even more entertaining in how it was written was this continued theme of food inflation. Apparently General Mills (GIS) passed along higher wheat prices in their cereal by lowering prices on their cereal boxes.... huh? Well they made the boxes smaller, and hence you get less cereal. And the boxes (volume) shrunk more than the price shrunk - and tada they passed along an increased cost and made the customer think he/she saved money. Sneaky!

However, the commentary below is hilarious - sounds like Abbott & Costello's Whose on First!

The move by General Mills back in June to raise the price of its cereal while decreasing the box size so that customers would hopefully be fooled by the cost increase, prompted a mixed response from Wall Street analysts. Some applauded the move, upgrading the stock from "Earnest" to "Sneaky", while other Wall Street analysts found the whole thing confusing.

Minyanville obtained a transcript from a portion of that previous analyst call.

Analyst: So let me see if I understand this. The price of your cereal is going up?
General Mills Spokesperson: That's correct.

Analyst: But the price per box is actually going down?
General Mills Spokesperson: Correct.

Analyst: So then how is the price going up?
General Mills Spokesperson: Because we're making the box smaller.

Analyst: Ok, but you just said the price of each box is going to be less.
General Mills Spokesperson: Yes, that's true.

Analyst: So then you're actually lowering prices.
General Mills Spokesperson: No, we're raising prices.

Analyst: How?
General Mills Spokesperson: Look, you're an analyst, you work with numbers.

Analyst: Right. Ok. I got it.
General Mills Spokesperson: Next question.

Analyst: Uh, actually, I don't get it. How can you raise the price by lowering the price?
General Mills Spokesperson: Because we're decreasing the size of the box.

Analyst: Ok, but you're charging less for each box.
General Mills Spokesperson: Yes. Because we're decreasing the size.

Analyst: Ah, I get it. So then the price is really the same, you're just making the box smaller which makes the price look lower.

General Mills Spokesperson: No, no, no! Listen. We're raising the price of our cereal.
Analyst: But -

General Mills Spokesperson: Shut up! Now listen, we're raising the price of our cereal.
Analyst: (Silence).

General Mills Spokesperson: Say it.
Analyst: We're raising the price of our cereal.

General Mills Spokesperson: Good. We're raising the price of our cereal... while simultaneously making the box smaller. Go on, say it.

Analyst: While simultaneously making the box smaller...
General Mills Spokesperson: But... and this is the important part... but we're raising the price more than we're decreasing the size of the box... go on...

Analyst: But we're raising the price more than we're decreasing the size of the box.
General Mills Spokesperson: So...

Analyst: So...
General Mills Spokesperson: That...

Analyst: That...
General Mills Spokesperson: Come on...

Analyst: Come -
General Mills Spokesperson: No, I mean, come on and follow the thought. So that...

Analyst: Oh. So that...
General Mills Spokesperson: The...

Analyst: The... price is lower?
General Mills Spokesperson: No! So that the customer...

Analyst: So that the customer...
General Mills Spokesperson: Will.

Analyst: Will.
General Mills Spokesperson: Oh good Lord. So that the customer will think the price has gone down when it's really gone up!

Analyst: Oh.
General Mills Spokesperson: See? Price increase. Smaller box. Larger price increase than smaller box.

Analyst: Right. I still don't get it.
General Mills Spokesperson: You know what? Just forget it.

Analyst: I'm going to have to downgrade your stock, you know.
General Mills Spokesperson: Good. Good. You do that.

Analyst: I will.
General Mills Spokesperson: I don't even want you to rate our stock positive.

Analyst: Good, because I won't.
General Mills Spokesperson: It would be an insult to the company for you to rate it positive.
Analyst: I'm downgrading your stock to "Mean."

Bookkeeping: Adding to KHD Humbolt Wedag (KHD)

I wrote a long piece on a Hong Kong based infrastructure stock KHD Humbolt Wedag (KHD) when I initiated a position at the beginning of this month. [A New Position Started: KHD Humbolt Wedag] This is in essence a cement focused infrastructure stock; and one thing I really like is the focus on non traditional markets such as Africa, Eastern Europe, and the Middle East. It is very hard to find stocks that let you play on trends in those markets.

For an example see a list of recent contracts

• Plant engineering and equipment supply company KHD Humboldt Wedag International Ltd. said Monday it received a contract worth about $51 million from Lithuania-based cement producer Akmenes Cementas AB to provide 4,500 tons of clinker a day. Under terms of the deal, Hong Kong-based KHD will be responsible for supplying equipment as well as engineering and design services.
• The company also said it received two contracts in November worth a total of about $179 million. It has an $89 million contract to provide equipment for a cement facility to be built by India's Jindal Steel Works and a deal worth about $90 million from Cairo, Egypt-based Orascom Construction Industries.

With that said, I made an initial stake of 0.7% of fund in the mid $31s. At the time the stock had support of the 200 day moving average, just under $29. Well when the stock trended back to that level a few sessions ago - it sliced right through it. Quite bearish. Generally this sort of price action indictaes someone "in the know" is getting out, before Joe Six Pack; especially yesterday when volume 'spiked' to 500K shares (this is a very thinly traded stock). Or it could be as simple as a hedge fund with a large stake facing forced redemptions as it goes into the year end out of business sale. We will never know. But generally since we WILL never know, I let the price action dictate my moves in the near term. I do get nervous when I see such a 'cheap' stock, that gets cheaper by the day. Usually that means it is not as cheap as it appears on the surface - and someone has a lot more information than I do....

Traditionally I would be selling a stock acting this miserably but since my original stake was so low as I had just started an initial stake, and the stock has quickly fallen to sub $26, which was also the level it reached at the worst of the market meltdown in August, I decided to add shares instead. So to the 250 shares I already owned, I bought another 300 shares here in the mid to upper $25s. This increases my exposure to 1.2% of the fund.

My battle plan now will be as follows. I will sell these 300 shares if/when the stock rebounds to $28s as that is where the stock will see the 200 day moving average again. Except this time instead of being support it will be resistance. This would (if it works) give me a nice little profit on a trade. Then it gets interesting. If the stock falls back and trends down lower than we have a broken stock. If the stock breaks right through this level (near $29) and regains its 200 day moving average, than its bullish and in fact I'd be buying back the shares I had just sold. Might seem strange to buy back shares higher than where you sold them, but again this is a technical call. So that's the game plan; again I traditionally do not buy stocks in this sort of tragically weak position because in MANY cases (see Coach) they just continue to fall and fall. Stocks under the 200 day moving average are usually on "avoid at all costs" list. But last I checked selling cement to emerging markets is different from selling handbags to subprimed out US consumers. We shall see.

Fundamentally? I see the 2 analysts who follow the stock drop down estimates 10% (which could be contributing to weakness) in the past 7 days, down from $2.22 to $2.05. But this is a company growing anywhere from 20-35% (depending on what # you use), selling now for under 13x 2008 estimates. I'll take that risk/reward.

Long KHD Humbtol Wedag in fund; no personal position

Coach (COH) Imploding

Amazing to watch the deterioration in Coach (COH).... simply astounding for this once market favorite. After a very brief stint on the long side in the first week or two of the fund, I punted this name and went negatve in late August [Coach as the true retail tell]

Coach is a bit of a status symbol, and something many people in mid/upper class suburbia buy. The problem is many people in suburbia are overextended on their $600,000 home bought with 0% down interest only loans. This does not mean they they don't have good credit; it just means they are very leveraged. So it's a risk.

So in fact I think this is a lot better tell on the economy than Walmart. The core customer of Walmart is more of the discount shopper already strained by the hikes in gas, energy, and now grocery prices.... whereas the core shopper of Coach is the suburbia soccer mom who loves her trinkets (do you know there are even websites now where you can rent a purse, errr... handbag - in fact, I just googled and I also found a competing site.) This speaks to America's obsession with appearances and keeping up with the Joneses. Even when one cannot afford a handbag, one can pretend to show others they can afford it for the evening. So with this subset of consumer being the main subset buying $450K homes in northern VA, $600K homes in southern CA, $800K homes in northern CA, $400K homes in AZ/NV - many with little down and some scary initial 2 year teaser terms, I am watching Coach to see how it performs. To me, it's a great tell.

There are a few stocks I really watch very closely just as signals and Coach (COH) is the one I watch for the health of 'aspirational' middle and upper middle income level America. The inability to short individual names is really a drag when you make calls like this and cannot benefit. The chart the past few days truly signals (to me) the foreshadowing of a weak Christmas, outside of Walmart shoppers (where a lot of former Target shoppers probably are fleeing as they become poorer by the month) and electronics (i.e. Best Buy)

1. (Sep 14) I'm Watching Coach Like a Hawk
2. (Oct 9) Our Old Friend Coach - Don't Forget Her
3. (Oct 15) Coach Continues to Break Down
4. (Oct 23) Coach Down 7% On Earnings

In fact, I like this business long term and once they get into China and reach out to the aspirational middle class there, they should benefit. But for now this is a play on the US and Japanese consumer. Both slow growth economies facing some very large structural problems - and at least in this country with a government unwilling to face them by cutting back spending and not driving the country into subprime status.

As they say a picture is worth a thousand words - if I could short individual names; I'd probably be covering now as I wouldn't be too greedy - that's not to say there is not more downside, but the meat of the move is probably now in the stock. Since late August when I went bearish its down from $45 to $30 today... a nice 33% gain (for shorts that is).

No position but wish I could....

Get Out Of Debt

Funny 2 minute clip on how to get out of debt. Sadly it's probably quite true for many people. Found this through
http://www.crossingwallstreet.com/archives/2007/12/my_solution_to.html

Analysts Starting to Show Some Love for Deep Sea Oil Drillers

Let me preface this by saying take everything analysts say with enormous grains of salt but.... as I mentioned last week the charts for the deep sea oil drillers finally are starting to look good [Three Deep Sea Drillers - 3 Great Charts] and I started back in the sector this week on the pullback in Atwood Oceanics [Restarted Atwood Oceanics]

Yesterday Diamond Offshore (DO) was initiated at Bank of America with price target $159 (current $125)

And here is some more color on the call in reference to Transocean (RIG)

• Banc of America is out with a good call saying they see incremental demand for deepwater rigs from exploration success driving additional backlog and ultimately multiple expansion from the higher visibility. Among the names, the firm reits Buy on Transocean (NYSE:RIG) with a $175 tgt.
• with the industry's inability to keep up with growth in crude oil demand (the tyranny of geology and politics), the lack of deepwater rigs (73% of floater days are already committed over the next 36 months), and upside from a forecasted increase in exploration activity (BAC estimates Tupi alone needs an incremental 25-50 deepwater rig years), they expect the 'high' return on capital period for the oil services, equipment and drilling companies to last for the foreseeable future. While the lack of rig availability may limit 2008 EPS upside, the increase in pent-up demand, most visibly in the deepwater rig market, implicitly provides backlog for service companies as well, and should make for a multiple expansion the story for 2008.
• While forward cash flow and earnings multiples have compressed for the better part of the last four years, multiples appear to have bottomed. With the pent-up demand offering unprecedented visibility, they expect the 'high' return on capital period for the oil services, equipment and drilling companies to last for the foreseeable future, and drive multiple expansion in 2008. Interestingly, multiples for the group also expanded as the cycle matured back in the 1970s cycle.

My timing has been off on this group - as for the most part since fund inception the deep sea oil drillers have been comatose but at some point they will start discounting all the positive trends developing in the sector, and the 'scarcity' value of their rigs.

Long Atwood Oceanics (ATW) in fund; no personal position

Darden Restaurants Weak - Another "Tell" Stock

I started writing about the tough times ahead for Restaurants back in September [Tough Times Ahead: Restaurants?]

Middle class consumer squeezed along with skyrocketing inputs for their food doesn't bode well for profit margins in this group as a whole. We have the cheese inflation, the dairy inflation, the corn inflation and now the wheat inflation.

While everyone focused on the home builders, and they had just begun to get negative on the retailers, I was mentioning how restaurant stocks outside of magical Chipotle [Chipotle - the One Impervious Restaurant Stock] were the next shoe to drop. I sounded like a raving doomsday lunatic then, but slowly all these items are coming to fruition, one by one. Unfortunately, I cannot short individual stocks in this simulation and there is no ETF that shorts restaurants so all I can do is talk about it, and not act on it. But we have slowly but surely seen the shoes fall.

1. [Oct 11th] Let's Check in on Ruby Tuesday's
2. [Oct 31st] Food Inflation Starts to Hit Restaurants

I have a few other entries but to be blunt I don't follow this sector closely because we have a very saturated retail and restaurant situation in this country, so it's not exactly a growth story. But last night we had one of the really big names in the sector, Darden Restaurants, miss estimates by a country mile, and the type of restaurants this company runs (Olive Garden, Red Lobster) smacks right dab in the sweet spot of middle America. Also this company is generally run very well so we can't blame bad management for the results. 50 cents was the expectation - they came in at 30 cents. And lowered guidance. The talking heads blame the miss on acquisition costs but when you spend more than 30 seconds looking at their report you see the truth. The truth that Ben Bernanke and team have failed to acknowledge the past few years - raging inflation.

• Darden Restaurants Inc., which operates the Olive Garden and Red Lobster restaurant chains, said Tuesday its fiscal second-quarter profit dropped 30 percent due to charges and higher costs for food, beverages and labor.
• For the quarter ended Nov. 25, net income fell to $43.5 million, or 30 cents per share, from $61.7 million, or 41 cents per share, in the prior-year quarter.
• The company said Olive Garden U.S. same-store sales, or sales at locations open at least a year, grew 3.2 percent in the quarter. Red Lobster's same-store sales grew 0.1 percent.
• Costs of sales jumped 20 percent in the quarter, led by a 22 percent hike in food and beverage expenses. Labor costs rose 16 percent.

A few items to note. The Fed can ignore the food and energy costs (they say it is not part of core, therefore not important to Americans apparently), but now we see labor costs rising 16%? Well I know they care about that. Although in their government reports it probably says labor costs are going up only 3%. This is why you have to ignore all the BS coming out of government reports and listen to the companies themselves.

Second, as this story evolves and the pressure on the middle class only grows [Do the Bottom 80% of Americans Stand a Chance?] the next step will be demand destruction. That is a very fancy word for saying, people will slowly cut back on buying a product/service as they get priced out of the market. Now I am not saying people cannot afford to eat at Olive Garden. What I am saying is people who used to eat out 4x a week might go down to 2x, due to affordability. Not just affordability at this restaurant but in their lives. When gas prices are up $30 more a week from 2 years ago, along with home heating, along with buying groceries, something needs to be cut back. So you will see demand destruction. Especially as the restaurants need to hike prices to maintain their margins.

Inflation... it's out there. It's nasty. But the government doesn't want us to believe it exists. Ignore their BS reports as CNBC splices and dices the numbers as if written by god's hand. Period. Again, the 'real economy' and the 'stock market' are 2 separate things... just because the economy is slowly doing a small supernova, doesn't mean stocks need to go down. Not with the all the world's most powerful men working together to make sure stocks don't go down - I mean that would be free markets and all....

Morgan Stanley (MS) Posts Larger Write Down and gets $5B from China

And the beat just keeps going. Months ago I had written about how all these financial companies which were saying "this is the kitchen sink quarter" and once they wrote off the bad losses, the bottom was in blah blah.... that indeed we were just getting started...

Two weeks ago we had kitchen sink quarters in financials - it was ignored (again I ask what will we say in 3 months if we see another slew of terrible earnings from financials? that it was a bathroom sink quarter?).

If you search for the term "sink" on this blog you will see me mention, well we started with the kitchen sink writeoffs in August, then we went to the bathroom, then the bedroom, and now where are we going? Living room I suppose. Wherever, we go we have a full house of write offs. This is why this issue will be with us for a while. The underlying assets (mortgage based assets) continue to deteriorate in an "unknowable" way. It is impossible to gauge where things are going and how big the write offs will be in future quarters because it is based on a living, breathing organism - all the mortgages in this country, of which those of vintage 2006 and 2005 are degrading at a very accelerated rate. So we will continue to see write offs, and continue to see investments by Asians and Middle Easterners to prop up those poor colonizing countries like USA. In fact I saw this term coined and I am going to steal it, "reverse colonization" - essentially those countries that western powers 'colonized' (or attempted to), are now the ones who actually have the power. It is funny how it comes full circle. But as I have been stating, watch this trend only exaggerate as decision after decision and a system of CEO compensation that encourages short term extreme risk taking (if you make stupid decisions for the long run it does not matter as long as you have a great 3-4 year run, run off with huge compensation and stock options, and then get 'fired' and get $160M pay out the door), weakens our financial corporations (and others) to the point outside ownership is necessary to prop them up. Risk is rewarded with implicit bailouts (ABC company is 'too big to fail') so do whatever stupid actions you want, because in 5 years you will be long gone, with the type of wealth the other 99.9% of Americans only dream of, and "we" the collective will be left to fix the mess - and in this increasingly flat world, if not us, other countries will come in and slowly take over our entities with their conservative and forward looking policies.

Today's case in point is Morgan Stanley and China. Other days we have Singapore, Abu Dhabi, UAE - pick a country 85% of Americans could never find on a map (don't make me go off on our failing education system), and find a country who is slowly "reverse colonizing" the great empire. What's amazing is the terms these countries are getting to prop up our most prestigious financial institutions. 11% at Citi? 9% at Morgan? People those are JUNK BOND rates. Meaning the risk is extremely high, so to be compensated you need to pay out extreme rates just to get investment. Citi is lending money out at 5-6% and paying out 11%. Thats how desperate it is for capital.

• Morgan Stanley, the No. 2 U.S. investment bank, on Wednesday reported a larger-than-expected fiscal fourth-quarter loss due to a $9.4 billion writedown from its exposure to subprime and other mortgage-related investments.
• The company also said China's government-controlled investment vehicle has invested $5 billion to help replenish its capital.
• China Investment Corp., which also owns a stake in private-equity firm Blackstone Group LP, will control no more than 9.9 percent of Morgan Stanley once its investment converts to common shares in 2010.
• "The writedown Morgan Stanley took this quarter is deeply disappointing -- to me, to our colleagues, to our board and to our shareholders," said Chairman and Chief Executive John Mack. "Ultimately, accountability for our results rests with me, and I believe in pay for performance, so I've told our compensation committee that I will not accept a bonus for 2007."
• The equity units the Chinese fund purchased from Morgan Stanley will yield 9 percent per year before they are converted into common shares on Aug. 17, 2010.
• The investment bank disclosed in November that it would be taking a charge of $3.7 billion because of losses in credit market investments. But the total for the quarter grew by an additional $5.7 billion, Wednesday's report showed. (look how much it is accelerating, and how little visibility these companies have - they cannot even guide out 4 weeks anymore)

Now again all day you will hear on CNBC how "this is the bottom", "the worst is in" and "this was the kitchen sink quarter". Just like they told you in August. And in October. And in November. Eventually a blind squirrel will find the nut and the financial press will be right. But not before being wrong time after time and costing people lots of money which are chasing into financials....

Why Fertilizer Will Continue to be a Winner; and Why Food Inflation Won't be Stopped by the Fed

I have talked about this subject of resource shortages relentlessly in the blog, but now the mainstream press and 'academic studies' are seeing the strains on our food supply by a 'World of Shortages'. Our inflation this time is not due to an overheated economy like past cycles but demographic worldwide trends (the world was not built for 7 billion plus people, with >50% urbanized which is where we are headed within a decade); this is why I argue the Fed just needs to forget about inflation (it is powerless to stop the trends behind it) and work on growth. It would also help if our gosh darn politicians did not encourage programs that diverted food supply away from food and into energy, especially such inefficient things as corn ethanol but votes are votes, and they will be bought off any way they can in Iowa, to the detriment of us all. It is one thing to put sarcastic comments into a blog, but these are truly very bad things happening that our politicians are in fact encouraging (they kill the solar incentive in the recent tax bill? they keep subsidizing the bad types of energy and call this a 'victory'?) What a joke. Just like the mortgages, until it gets so terrible that wide parts of our population suffer and raise hell, then they will reverse course - and look back at these type of energy bills and say "so and so is to blame for such a bad decision". Check back in 3-4 years, trust me, this will happen.

These are not things that get fixed if China GDP drops from 12% annual to 3% or US "slows down". This is what "those in the know" either don't know or are ignoring. And again we move to a 'reactive' situation than 'proactive'. I am not sure what it will take to put this on the radar, since people unable to pay for food in the lower tranches of society won't affect the investment banks in New York and thus do not require any urgent action or Fed hand holding. As I have stated, this is incrementally happening year by year (all this inflation, not just food), but now it's really starting to accelerate and affect much larger swathes of people. And this is why the economy will be issue #1, #2, and #3 by the time the general election is in full swing. I expect to see an angry electorate in fact.

First, World Food Supply is Shrinking U.N. Agency Warns

• In an “unforeseen and unprecedented” shift, the world food supply is dwindling rapidly and food prices are soaring to historic levels, the United Nations’ top food and agriculture official warned Monday.
• The changes created “a very serious risk that fewer people will be able to get food,” particularly in the developing world, said Jacques Diouf, head of the United Nations Food and Agriculture Organization.
• The agency’s food price index rose by more than 40 percent this year, compared with 9 percent the year before — a rate that was already unacceptable, Mr. Diouf said. New figures show that the total cost of food imported by the neediest countries rose 25 percent in the last year, to $107 million.
• At the same time, reserves of cereals are severely depleted, the agency’s records show. World wheat stores declined 11 percent this year, to the lowest level since 1980. That corresponds with 12 weeks of the world’s total consumption, much less than the average of 18 weeks’ consumption, in storage during the 2000-2005 period.
• There are only 8 weeks of corn left, down from 11 weeks in the same five-year period.
• Prices of wheat and oilseeds are at record highs, Mr. Diouf said Monday. Wheat prices have risen by $130 a ton, or 52 percent, since a year ago. United States wheat futures broke $10 a bushel for the first time Monday, a psychological milestone.
• Mr. Diouf said the crisis was a result of a confluence of recent supply and demand factors that, he said, were here to stay.
• On the supply side, the early effects of global warming have decreased crop yields in some crucial places. So has a shift away from farming for human consumption to crops for biofuels and cattle feed. Demand for grain is increasing as the world’s population grows and more is diverted to feed cattle as the population of upwardly mobile meat-eaters grows.
• “We’re concerned that we are facing the perfect storm for the world’s hungry,” said Josette Sheeran, executive director of the World Food Program, in a telephone interview. She said that her agency’s food procurement costs had gone up 50 percent in the last five years and that some poor people were being “priced out of the food market.”
• To make matters worse, high oil prices have doubled shipping costs in the last year, putting stress on poor nations that need to import food and the humanitarian agencies that provide it.
• Already “unusual weather events,” linked to climate change — like drought, floods and storms — have decreased production in important exporting countries like Australia and Ukraine, Mr. Diouf said.

Next, Food and Fuel Compete for Land

• Shopping at a Whole Foods Market in suburban Chicago, Meredith Estes said food prices have jumped so much she has resorted to coupons. Charles T. Rodgers Jr., an Arkansas cattle rancher, said normal feed rations so expensive and scarce he is scrambling for alternatives. In Oregon, Jack Joyce, the owner of Rogue Ales, said the cost of barley malt has soared 88 percent this year. (ok I have to admit I laughed at the first sentence... poor lady had to resort to coupons at Whole Foods, a very expensive place to shop for you darn yuppie types)
• For years, cheap food and feed were taken for granted in the United States. But now the price of some foods is rising sharply, and from the corridors of Washington to the aisles of neighborhood supermarkets, a blame alert is under way.
• Among the favorite targets is ethanol, especially for food manufacturers and livestock farmers who seethe at government mandates for ethanol production. The ethanol boom, they contend, is raising corn prices, driving up the cost of producing dairy products and meat, and causing farmers to plant so much corn as to crowd out other crops.
• The results are working their way through the marketplace, in this view, with overall consumer grocery costs up roughly 5 percent in a year and feed costs up more than 20 percent.
• Now, with Congress poised to adopt a new mandate that would double the volume of ethanol made from corn, ethanol skeptics say a fateful moment has arrived, with the nation about to commit itself to decades of competition between food and fuel for the use of agricultural land.
• “This is like a runaway freight train,” said Scott Faber, a lobbyist for the Grocery Manufacturers Association, who complained that ethanol has the same “magical effect” on politicians as the tooth fairy and Santa Claus have on children. “It’s great news for corn farmers, but terrible news for consumers.”
• But ethanol critics are not getting much traction with their argument. Last week, the Senate voted 86 to 8 for a new energy bill containing expanded ethanol mandates, and the House is expected to follow suit this week.
• Experts with no stake in the argument say ethanol has indeed contributed to rising food costs, but that is only one among several factors. Higher fuel costs are driving up the expense of growing and transporting food. And strong economic growth abroad is increasing demand for agricultural commodities, allowing once-destitute people to augment their diets with meat and dairy.
• It is also a tough time, politically, to make a case against ethanol. With continuing turmoil in the Middle East, sky-high gas prices and presidential candidates stumping in Iowa, the heart of the Corn Belt, a new renewable fuel standard has plenty of supporters on Capitol Hill.
• “We did get whipped,” said Jay Truitt, vice president of government affairs for the National Cattlemen’s Beef Association. “We continue to be caught up in this fervor, almost spirituality, about ethanol. You can’t get anyone to consider that there is a consequence to these actions.”
• He added, “We think there will be a day when people ask, ‘Why in the world did we do this?’”
• The bill in Congress would increase the mandate for renewable fuels to a striking 36 billion gallons by 2022. That is far beyond a requirement on the books now for 7.5 billion gallons of ethanol by 2012. Much of the newly required ethanol could be made from agricultural wastes like corn stalks and straw, and its production would not compete directly with food production. But the proposed mandate, known as a renewable fuel standard, also calls for 15 billion gallons of ethanol made from grains, primarily corn.
• Mark W. Leonard, who raises cattle and corn in western Iowa and owns a stake in several ethanol plants, said it was “absolutely essential” that the government increase the mandate for ethanol, and he urged Congress to push up the deadlines. (clearly an unbiased opinion) “This is a national security issue more than anything else,” said Mr. Leonard, noting the nation’s dependence on imported oil. “We need to quit sending money to people who want to blow us up.” (of course, the fallback for everyone when questioned - the terrorists will come to our corn fields if we don't go to their corn fields first)
• Joe Victor, vice president for marketing for Allendale, an agricultural research firm in the Chicago suburbs, said Midwestern farmers would face a pleasant quandary in the spring in deciding what to plant because wheat and soybean prices are at or near record highs and corn prices remain bullish. “Oh geez, they’ve got money galore,” he said. “The Senate vote for the energy bill was a real confidence builder for the farmer to think, ‘They are not going to pull the rug out from underneath us.’”
• Feed costs have increased 25 to 30 percent in the last year, according to David Fairfield, director of feed services at the National Grain and Feed Association. He attributed virtually all of the increase to the demands of the ethanol industry
• As the debate continues, one thing is certain: American shoppers are increasingly frustrated over rising prices. “It’s the staples, the cheeses, the milks and produce,” said Ms. Estes, shopping at the Chicago-area Whole Foods. “It’s going up, and my grocery bill at the end, it’s like, ‘Are you kidding me?’”

If this blog is around in 3 years, let's check back and ask in joining Mr Truitt "Why in the world did we do this?’. So when you see your politicians on local and national TV trumpeting this plan, unless you live in a corn filled state, I'd urge you to boo and hiss. And call them.

Until then I will just complain in the blog and continue to look for the people with deeper and deeper pockets (farmers) and find the items they will be throwing our tax money at (fertilizer).

What a system.

Top 10 Winners and Losers so Far

Thought it would be interesting to see which stocks have contributed the most and least to the fund since inception in August 2007.

Here is a breakdown - interesting that none of the sexy names people talk about in technology are anywhere to be found, Apple, Google, Baidu.com etc. Instead my winners are generally such sexy industries as fertilizer, coal, infrastructure, and short?

Top 10 Winners
Mosaic (MOS) +28.3K - fertilizer
CF Industries (CF) +22.7K - fertilizer
Ultrashort Financial (SKF) +15.0K
Suntech Power (STP) +12.4K - solar
Consol Energy (CNX) 11.7K - coal
Foster Wheeler (FWLT) +10.8K - infrastructure
Mastercard (MA) +10.1K - credit cards
Peabody Energy (BTU) +9.2K - coal
Ciena (CIEN) +9.2K - networking
Ultrashort Real Estate (SRS) +9.2K

Top 10 Losers
Riverbed Technology (RVBD) -9.8K -networking
LDK Solar (LDK) -9.5K -solar
NII Holdings (NIHD) -8.6K -cell phone
Trina Solar (TSL) -3.7K -solar
WuXi Pharmatech (WX) -3.6K -pharma outsourcing
Excel Maritime Carriers (EXM) -3.4K -dry bulk shipping
Western Refining (WNR) -3.0K -refining
CGG Veritas (CGV) -2.8K -oil services
JA Solar (JASO) -2.7K -solar
Tesoro (TSO) -2.5K -refining

Funny to notice I have 3 losers in one of the hottest (and most volatile) sectors in the market - solar. Shows you that timing means a lot in this group since the volatility has been enormous; also my style works poorly in a 'mania' type of condition - when stocks that are up 30% one day get a flood of daytraders to buy the next day and to push a stock up 25% the next day (I am selling out while daytraders are piling in). Also when you make mistakes, if you can cut the losses quickly it will help as my top 10 losers are far smaller amounts than the top 10 winners gained. A couple of these went on to be far bigger losers - the refiners especially WNR, Excel Maritime imploded after I sold, and Trina Solar also crumpled. LDK Solar I just didn't want to gamble on an audit I had no advantage of information on; I could of easily reversed the big loss with a huge gain if I had bet a lot of chips and the 50/50 bet went my way; but I also could of risked even more capital chasing a 'guess' so I can live with that. As for Riverbed Technology, well it's just starting to get ridiculous - this is my personal black hole and in fact I bought more today. While I have cut back my NII Holdings severely it continues to take on massive amounts of water. I am just shocked at how poorly it has performed considering its a solid long term growth story but apparently the end of business in Latin America is being priced into this stock.

Continuining to Like the Action in Huron Consulting (HURN)

I've moved Huron Consulting (HURN) up to the top position in the fund with a 3% allocation. This was one of two 'recession plays' I bought in late November [2 New Recessions Plays] - 2 companies (along with FTI Consulting (FCN)) that would benefit from a wake of restructurings that I anticipate will be hitting US companies in the coming 2 years. But these are also companies with many other consulting opportunities in an increasingly flat and sophisticated world. Since my original purchases of both, around 1% of the fund at the time, FCN has generally been sitting flat, hovering around its 50 day moving average but threatening to break below at any moment. Huron on the other hand, has had much more promising action, and has cleared recent intraday highs of $77... hence a nice bullish move today, with a 4% gain, and an attack on $78.

After Huron's earnings snafu a huge gap was created in the chart between $70 and $80, so I expect the stock to have some issues once it reaches $80, but if it can get through that level, a move to all time highs north of $83 could be in order. As I stated, with the difficulties in the US economy, the need for services from these type of companies will be far greater in the coming years, and Huron seems to be reflecting this. I will wait for a similar move from FTI Consulting before adding any more to that position - it has had a tremendous run in the past year (100% gain) and is currently consolidating those gains.

Long both names in fund; no personal positions

S&P 1440 will be Defended

As expected that S&P 1440 level is defended. Should put in some rally ... I was surprised, now in retrospect learning of this huge cash infusion overseas, the market did not rally even better.

As I keep saying S&P 1440 and then if that fails 1400s will be defended tooth and nail. I've lightened up a bit on the Ultrashort exposure here - and will add it back once we break down below S&P 1440, or back up to near 1480. Everything in between here and there is just white noise and 'invisible hand' working its magic. Not doing any real buying right now, just snippers here and there when stocks get tremendously oversold like a Riverbed Technology (RVBD) which was pole axed this morning. Now everyone can scurry back into solar stocks and declare the 'correction is over'. ;)

Essentially this whole space between S&P 1400 and 1490 is a trading range. Either we recapture above 1490 at which time it's time to get happy again, or we break down below Aug/Nov lows and its time to not be happy. In between its simply trading; right now we are smack dab in the middle so other than for very short term moves there is not much to do, so we'll wait for the next round of either euphoria or panic.

LIBOR Rates Plummet on Half Trillion Infusion by ECB

Ok wow. I thought Helicopter Ben was working overtime. I keep pointing out how LIBOR rates (lending rates among banks) remain high despite these infusions, but the Fed auctions are of $20 to $35 billion... now this move by the European Central Bank on the other hand is half a trillion dollars. Quite breathtaking, and the LIBOR rates dropped by half a point. The amount is just staggering. But more along the lines of what is really necessary to get things moving. These $20 billion auctions are useless.

Notice how often we are using the words unprecedented around here? Everything is unprecedented because the problems are so huge, so ingrained, it is taking the magnitude of moves one would never of imagined in the past. As I keep saying, you ain't seen nothing yet in terms of bailouts and helicopter droppings. I expect even more in 2008, but this one (so far) has taken the cake. Massive. Just massive. But again the problem is the banks need all this cash to shore up balance sheets - and they are still not giving it out to their customers. So we are just helping banks save themselves... pathetic really. I am just waiting for the day when instead of saying we will hold this toxic paper for 30 days, just give it to us for 5 years and you have to buy it back from us (central banks) around 2012. That looks like the end game we are going to.

• The cost to borrow in euros plunged after the European Central Bank added an unprecedented $500 billion to the banking system as part of a global effort to ease credit-market gridlock through year-end.
• The two-week euro interbank offered rate dropped a record 50 basis points to 4.45 percent, the European Banking Federation said today. The rate had climbed 83 basis points in the past two weeks as banks anticipated a squeeze on credit through the end of the year.
• ``These are strong-arm tactics intended to show the market they're seriously committed to breaking the deadlock,'' said Marc Ostwald, a fixed-income strategist at Insinger De Beaufort SA in London. ``The ECB is helping to bankroll banks out of a problem that they themselves created.'' (think about that statement for a moment)
• The decline may signal that policy makers, in their first coordinated action since Sept. 11, 2001, are making headway in reviving lending between banks.
• The Bank of England also held the first of two special operations today, offering three-month loans in pounds. Yesterday, the Federal Reserve auctioned one-month cash in dollars, the first of four such operations. (sounds like the CIA, special operations - special times call for special operations)
• The ECB action ``doesn't address the fundamental issues of banks hoarding cash and while the central bank has succeeded in stabilizing the shorter-term rates, it makes little impact on the longer-term rates,'' said Lena Komileva, an economist at Tullett Prebon in London.
• The TED spread, or difference between what the U.S. government and banks pay for three-month loans, narrowed for a fifth day to 188 basis points, indicating an increased willingness among banks to lend. The spread was 35 basis points at the start of the year.
• ``Maybe this is the sign we've all been waiting for that a peak in Libor has been reached,'' said Patrick Jacq, a fixed- income strategist at BNP Paribas SA in Paris. ``It's a definite sign of an improvement in the market.''
• Goldman Sachs Group Inc. estimated last month losses related to record home foreclosures in the U.S. may be as high as $400 billion for financial companies. If accurate, banks, brokerages and hedge funds would need to cut lending by $2 trillion, triggering a ``substantial recession,'' the firm said.
• U.S. corporate defaults probably will quadruple next year after the number of companies that lost their investment-grade credit ratings rose at the fastest pace since 2003, according to Moody's Investors Service.
  

Portfolio.com weighs in with my favorite bearish economist Mr. Roubini

• "The operation is highly unusual and heterodox; and while getting creative in dealing with liquidity crunches may be appropriate, this action signals some desperation on the part of the E.C.B.," says Nouriel Roubini on his blog.
• "And since most financial and other private contracts are indexed to Libor, an average Libor that is about 100 basis points above policy rates, it is equivalent to the E.C.B. having raised its policy rate by 100 basis points in the last few months," Roubini says.
• Others are skeptical of the actions by the central banks. "This is basically Father Christmas to those who have access," Erik Nielsen, an economist at Goldman Sachs, told the Financial Times. "They are bailing out people who have not really adjusted their balance sheets to the new reality."
• Yet American investors have been looking for additional liquidity efforts from the Fed.
• Yves Smith at the Naked Capitalism blog notes: "Markets are right to be concerned about recession risks, but there is an awful lot of whining mixed in here. After all, most traders' year-end bonuses stand to benefit a lot from an even softer Fed policy stance. The markets were not satisfied with one dessert; they wanted two." (and that pretty much sums up the entire game folks - we will over use/abuse the toy, and then we get bonuses, and then when we break the toy with our greed, we expect to get bailed out because we are "too big to fail", and we get bonuses from that too. End of story.)

What I wonder is if/when people start seeing these unprecedented actions as worrisome as opposed to comforting. At what point do people wonder "why exactly" do we need to do such historic actions? What is so screwed up, so deeply flawed that central banks worldwide need to take such action... what is so dark out there? Instead we continue to just clap like seals each time it happens since it will fix everything. Interesting to watch.

Long watching unprecedented times and unprecedented actions play out; short bailing out the system from itself ....

Remember the Pattern

Well we got a bogus rally this morning as hope came into the market once again on the 'success' of the auction of the Fed. Remember, I wrote this weekend, we will rally once CNBC pumps the trumpets about how this was a great auction BLAH BLAH BLAH. But it doesn't look like much of a rally.

I mentioned yesterday morning [Who Will Be the Last to Fall], that the pattern last time around of correction was: teflon tech stocks, then solar, then agriculture, and infrastructure.

Well later in the afternoon we started to see the teflon tech stocks begin to succumb - Google (GOOG) and Baidu.com (BIDU) fell to 50 day moving averages (I bought a very tiny amount of each since I was very underweight these names)

Then solar weakened.... but fertilizer held strong.

Today fertilizer looks to begin to weaken - I sold 100 more shares of Mosaic (MOS) to lock in some profit but won't drop it below 2% of the fund come hell or high water. My hope with these names is once again get them around the 50 day moving average and be able to layer in more buys there. With Potash (POT) this would be down at $116 (not too far now) and Mosaic $68 (quite a distance).

So we are at an interesting cross roads - some of the most loved stocks in the market especially in tech are already at key support levels. During the worst of the mess in November Google never closed below the 50 day moving average. But we are already there today.

My thesis would be the bulls would put up a fight in the 1440s area (which they did with a bounce this AM) and if/when that breaks the real fight would be in the 1400s area. Thats where a double bottom sits (August and November lows). A double bottom simply means a place where the market fell to twice. Now in general triple bottoms do NOT hold... meaning if we get back there, the odds would be this 1400s level would NOT hold. No guarantee, just saying this is the 'odds'. But I do expect a "stand" to be made there as the "invisible hand" realizes this is THE level to hold; if it breaks katy bar the door. On top of this, all major indexes closed below their 200 day moving average as of 4 PM yesterday - another bearish sign on the technical side. But again, nothing straight down, and nothing straight up - there are always weigh stations along the road. But the trend seems to be clearly in place (down).

At this time I just don't see a great catalyst to buy. I can see Research in Motion (RIMM) earnings report possibly bringing in buyers to the teflon tech stocks later this week but even a good report like Best Buy (BBY) gets treated with selling. Remember I sold this name at $50.50 yesterday [Closing Best Buy Ahead of Earnings] - it actually had a nice report and its down nearly 4% today. So you can't win for losing.

Remember there are times stocks (and the market) go up on bad news. And times when stocks (and the market) go down on good news. We seem to be in the latter. Hence no reason to be a hero here. The markets are slightly green today, but there just doesn't seem much of a catalyst to get too bullish.... and if the indexes reverse and go red it would yet another bearish signal. I get the hunch a lot of people are going to the sidelines (institutions) and happy with their haul for the year, and counting on their year end bonuses, and not needing to take risks going into the last week and a half of the year.

Bookkeeping: Restarted Atwood Oceanics (ATW)

I mentioned last Wednesday [Three Deap Sea Drillers - 3 Great Charts] that the deep sea oil drillers finally seemed to be moving into the 'blessed' area of the market - meaning people were actually recognized the value in these names. My timing has been off in this group constantly.

I mentioned in that post

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.

So today we saw some pullback; of the 3 names I was interested in Atwood Oceanics (ATW) fell the closest to the 50 day moving average ($83). So I restarted a stake in this name which I have held in the past with a 0.75% stake, 100 shares @ $84.66. This stock had an intraday high >$91 as of Friday so this is a nice 7% cost savings.

Long Atwood Oceanics in fund; no personal position

Greenspan Jumping on my Stagflation Thesis

Looks like more and more are coming around to my viewpoint of potential stagflation - no less than the Maestro in fact.

Greenspan Sees Early Signs of Stagflation

• The U.S. economy is showing early signs of stagflation as growth threatens to stall while food and energy prices soar, former U.S. Federal Reserve Chairman Alan Greenspan said on Sunday. In an interview on ABC's "This Week with George Stephanopoulos," Greenspan said low inflation was a major contributor to economic growth and prices must be held in check. "We are beginning to get not stagflation, but the early symptoms of it," Greenspan said.
• "Fundamentally, inflation must be suppressed," he added. "It's critically important that the Federal Reserve is allowed politically to do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer-term period." (very interesting comment, notice how he throws in the word 'politically'. The Fed is supposed to be an independent entity not concerned with politics but you can only imagine the pressure being applied to cut rates going into a major election)
• Greenspan repeated his assessment that the probability of a U.S. recession had moved up toward 50 percent but noted that corporate America's debt levels were in good shape, which should help cushion the blow from tightening credit terms. "The real story is, with the extraordinary credit problems we're confronting, why the probabilities (of recession) are not 60 percent or 70 percent," he said.
• Greenspan said real estate prices will stabilize only when the overhang of unsold new-construction homes begins to ease, and estimated that financial losses could be in the range of $200 billion to $400 billion as securities tied to failing subprime mortgages lose value. (keep dreaming)
• He warned against any sort of government bailout plan for homeowners that interfered with the normal functioning of markets for home prices or interest rates, saying it would "drag this process out indefinitely." Offering cash to stricken homeowners instead would cause less long-term damage, he said. (wow, while I agree with the assessment in sentence one, I was being facetious when I said we should give every upside homeowner in America $10K to help them out - apparently this is not so facetious and now something Greenspan is considering?)
• "It's only when the markets are perceived to have exhausted themselves on the downside that they turn," he said. "Trying to prevent them from going down just merely prolongs the agony." (but it helps the 'right' people get elected in the short run)

As I have been predicting, expect all the stops to be pulled out in terms of future bailouts. The fact a former Fed chief is even floating the idea that cash should be handed out to homeowners to help alleviate the stress is scary enough. But should point you to the thinking that is going on behind closed doors. Pathetic really. Just more forms of bailing out people from bad decisions and the system that helped create it. All the while 'fired' CEOs who benefited from the system sit at home with their massive severance packages and generations of their family will never have to worry about the damages they created. What a system.

Another article out of Bloomberg today on stagflation

• The world economy is facing the risk of both recession and faster inflation. Global growth this quarter and next may be the slowest in four years, while inflation might be the fastest in a decade, say economists at JPMorgan Chase & Co.
• The worst U.S. housing slump in 16 years, coupled with a tightening of credit by banks, has brought the world's largest economy ``close to stall speed,'' according to former Federal Reserve Chairman Alan Greenspan. At the same time, rapid growth in China and other emerging markets is driving energy and food prices higher worldwide.
• ``What lies ahead is a period of stagflation -- slow or no growth combined with rising inflation -- in the advanced economies,'' says Joachim Fels, co-chief global economist at Morgan Stanley in London.
• Harvard University economist Martin Feldstein is among those who say it would be just a mild case of what the world endured in the 1970s and early 1980s, when a 10-fold increase in oil prices drove both unemployment and inflation above 10 percent. Still, it poses a dilemma for the Fed and other central banks as they struggle to decide which problem they should tackle first.
• ``Central banks don't have as much flexibility as they'd like, with inflation rising and demand slowing,'' says David Hensley, director of global economic coordination at JP Morgan Chase in New York.
• Even so, no less an authority than Greenspan himself expresses concern. Speaking on ABC's ``This Week'' program aired yesterday, the former Fed chairman said a period of ``remarkable disinflation'' is ending. ``This is a much tougher monetary-policy environment than anything I experienced,'' Greenspan told the Wall Street Journal on Dec. 14.
• ``The numbers are scary,'' says Stephen Cecchetti, former director of research at the New York Fed, who's now professor of international economics at Brandeis University's International Business School in Waltham, Massachusetts. It isn't just a U.S. concern. Inflation in Europe last month rose at its fastest annual pace since May 2001, increasing by 3.1 percent as food costs soared. ``The oil-price boom and rising food prices have clearly accelerated inflation developments since summer,'' Austrian central bank Governor Klaus Liebscher said in Vienna on Dec. 14.
• Surging food prices are also pushing up inflation in China. Consumer prices in the world's fastest growing major economy rose at a year-over-year rate of 6.9 percent in November, the quickest in 11 years. Behind the burst of inflation: rapid growth in emerging markets that is lifting prices worldwide for everything from oil to gemstones.
• The same emerging-market nations have also helped stoke inflation by sheltering their consumers and companies from rising oil prices through subsidies. That's kept energy demand in China, India and other countries high because domestic prices are still low. (a key point!)
• If the global economy faced only the risk of faster inflation, the policy prescription would be clear: higher interest rates. Yet with growth slowing in the U.S. and Europe, central banks remain under pressure to cut.

Why this is a surprise or news to anyone is beyond me; we've been talking about this phenomenom since blog inception in August. A "World of Shortages" theme permeates. And the scary thought is even as economies slow, demographic trends will not be changing this issue. So high growth is essential to offset it. And the US is not a high growth economy anymore, no matter what the government GDP reports purport to say.

Just interesting to see more of the economic community come around to this view.... the equity markets continue to ignore it of course.

Bookkeeping: Closing Best Buy (BBY) Ahead of Earnings

I see Best Buy (BBY) is reporting earnings tomorrow, so I am going to close my position ahead of this news. Best Buy is not the typical stock I own in the fund, but I leave 10% of the portfolio open to more catalyst type of trades as opposed to secular growth sectors.

My call in Best Buy was actually very good, and timing of the buy in late November was excellent as the stock immediately broke out and made a great run, but I did not horde enough profits when the stock spiked, so now instead of a bigger gain will go home with about a 3.5% gain. Good enough, and I will sell the remaining 225 shares around $50.50s and sit on the sideline awaiting earnings. I had sold Best Buy down to a 0.95% type of position by locking in some gains earlier at a higher price. In hindsight of course I would of liked to lighten up more in the $53s, but truth be told the stock took off right after I bought and I never got the opportunity to build the position up to a level I wanted in terms of scale.

I still think consumer electronics is the place to be for Christmas, but with the market so weak and an earnings report ahead I don't really need to take the risk. The stock has support at $49 but if they breathe the wrong word in guidance the stock could break that easily - hence the risk/reward is not tilted my way at this time....

No position

Who Will Be Last to Fall?

Interesting to watch which sectors have been getting hit, and in which order

In November while the market corrected 4 sectors stood strong - teflon tech stocks (the big cap names everyone knows, Apple, Google et al), solar, agriculture, and infrastructure. For about a week and a half, when the market first began to degrade these names refused to go down. Then in order, they fell - first the teflon tech stocks, then the next day the solars, then the following day finally in 1 horrific day long implosion (you can see the huge spike down in the fund performance) down went the agriculture and infrastructure stocks.

We seem to be entering a similar time frame now (short of a big recovery in the markets). Solar, while down a bit today, is up huge in the recovery and is holding most of its gains, the teflon tech stocks have been relatively benign (not going up a lot but not going down a lot either), infrastructure this time around is more of a mixed bag (some names are already imploding), and in the agriculture space the fertilizer stocks have been bulletproof. Another sector also has held up very well - coal.

So if this pattern repeats as it played out last time (no guarantee) - these sectors will hold up while the rest of the market slowly crumbles, and investors in these groups will be giddy that they won't be affected by any correction. And then suddenly out of the blue these stocks will take 10-20% corrections in a matter of hours/days. So this is what I am observing to see if we see a similar playbook as we did just over a month ago. I am using solar, fertilizer, and coal as my tells as these are the 3 strongest sectors in my universe. Along with Apple and Mastercard. If these go, we all go....

I have my buying list at the ready.

Bookkeeping: Doing Some Foreign Buying this Morning

The foreign stocks are getting whacked this AM, so I am wading into some positions I had severely cut back such as the Indian stocks. Below are some names I am adding to today...

1. Indian copper company Sterlite Industries (SLT) has dropped from $28 a few sessions ago to nearly its 50 day moving of $23.50.
2. Indian bank ICICI Bank (IBN) has dropped from $66 range a few sessions ago to its 50 day moving average of $59.
3. Indian bank HDFC Bank (HDB) has dropped from mid $140s range a few sessions ago to nearly its 50 day moving average of just under $124.
4. The India Fund (IFN) has dropped from low $70s to low $60s in a few sessions so I am adding here (since its an index of many stocks, technical measures are not quite so applicable)
5. Brazilian homebuilder Gafisa (GFA) has dropped from the $42s to nearly its 50 day moving average of the 50 day moving average of $35
6. I am continuing to add to Russian steel/iron ore/coal play Mechel (MTL) on weakness post earnings; it is only around its 20 day moving average (upper 80s), so I am being patient and hoping for a fall to near $80 (50 day moving average) but adding in increments.

So you can see the same pattern in all names above except Mechel and the India Fund (IFN). As I stated last week, these were names I was interested in buying on a pullback, and with extreme volatility in these foreign names I am getting these pullbacks rather quickly. With that said, the 50 day moving average is but 1 support. If the markets weaken considerably the stocks will continue to falter. Hence most of these purchases are of the $5000-$7000 range variety. But my style is to layer in and out of positions, and here is the first layer I am adding. I am keeping a lot of powder dry in case of future breakdown. I had cut most of the Indian names down to very small positions (i.e. 0.3-0.4% in most cases) so I am just taking them now back to 1%+ type of positions with this first round of buying. I had wrote last Tuesday that the Indian stocks looked overheated, and that was some good timing. [China v India the past 2 Months]

At this point I think the move here in the Indian stocks are a bit overextended, and if not for the fact Chinese large caps are STILL extremely highly valued compared to similar peers in US, I'd be getting more constructive on China.

Long all names above in fund; long Sterlite Industries, Gafisa in personal account

National Oilwell Varco (NOV) is Buying Grant Prideco (GRP) - I'm Adding to my Position

National Oilwell Varco (NOV) is buying Grand Prideco (GRP) in a cash/stock deal that should be accredative to earnings. I've never held Grant Prideco in the fund but have looked at in the past and found it to be a solid company; so I like this deal which puts a 22% premium on Friday's closing price for GRP. National Oilwell Varco, as discussed last week, broke out technically and this news has put pressure on the stock, with it down 7% in early trading... conveniently taking it right down to the 50 day moving average (mid/upper $71s). Thank you market; I will be adding here. While this deal will add some pressure to the stock near term, in the long run it looks like a good acquisition and makes National Oilwell Varco even more of a powerhouse than it already was.

I've pushed up my exposure to National Oilwell Varco from 2.1% of the fund to 2.5% - buying some shares on this pullback this AM, and when National Oilwell Varco resumes an uptrend I will continue adding. I am taking my own advice, as NOV was one of my "12 New Stocks to Buy on a Pullback". This type of news could stall the stock for a while however. We shall see.

I would not be surprised to see more deals of this type in the oil service space - creating some nice powerhouses. :)

• Oil and gas service company National Oilwell Varco Inc (NYSE:NOV) said on Monday it would buy peer Grant Prideco Inc (NYSE:GRP) for about $7.37 billion in the latest link-up in a sector that has been bolstered by record oil prices.
• The combination would create a leader in the production and maintenance of pipes used in oil and gas wells, a business expected to post strong growth on the back of oil prices that have hovered near $90 per barrel.
• "You have to say where Grant Prideco stock has traded, it's a good price," said Natixis Bleichroeder analyst Roger Read, who has a $72 target on the stock. "Varco is getting a good deal."
• Stock in Grant Prideco, which makes drill, pipe and other tubular products for oil and gas wells, has fallen about 20 percent from its all-time high of $59.99 reached in June.
• The deal, which has been unanimously approved by both companies' board of directors, will give National Oilwell Varco 86 percent of the combined company. It will have an estimated market value of $32 billion.
• The purchase is expected to add to earnings and cash flow in 2008, assuming a full-year rate of cost savings of $40 million, said National Oilwell Varco, which will finance the purchase with cash on hand and debt.

Long National Oilwell Varco in fund and in personal account

Bookkeeping: Closing Tesoro (TSO) Position as it Rebounds a bit

Refining stock Tesoro (TSO) is trading back up near $50 on an upgrade from Citigroup, after a dip down to $45 late last week, so I am taking this opportunity to close out this position. For those who have been reading along you know the play in Tesoro was twofold - (1) Tracinda had a plan to buy a 20% stake at $64 (2) oil was near $100 at the time and I predicted it would fall back and correct which would help the refining stocks, as it helped their margins. [See earlier posts on Tesoro here]

Well oil did fall from $100 to the $80s, but I sure did not benefit from this by buying refining stocks so that thesis strangely failed. Also Tracinda promptly withdrew their bid sending Tesoro's shares into a freefall. Since I like Frontier Oil (FTO) far better as a company in the refining space than Tesoro, my impetus for buying the name was now gone. Luckily I sold half my Tesoro out @ $55 when Tracinda started whining about the poison pill provision Tesoro had added [Tracinda Says Tesoro Rights Plan Threatens Tender], so the damage was not too severe. I did not want to panic sell the rest as the stock imploded, and said I'd wait for a rebound to get out of the position. Well here is the rebound. The stock is now (on the chart) running into resistance as it's 20 day moving average is near $50 and its 50 day moving average is under $51, so this area looks as good as any to close out the position. If refining stocks get market favor, than Tesoro will not adhere to the chart and continue to run but if that is the case I will just pile into Frontier Oil as my refining play.

So here is a trade that did not work out too well, but luckily I cut it back sharply so the damage was not too severe, and instead of just dumping it, by waiting a week or two, I was able to wait for some event to drive the stock up, and get out at a reasonable price. Can't win them all, but can always try to limit damages from the ones that do not work. I still took about a 8% loss in this position, but selling near $50 for the 2nd half of the position saved some money versus panicking and selling in the mid $40s.

Long Frontier Oil in fund; no personal position

LDK Solar (LDK) Probe Finds No Error - Stock up 30%

Well in a surprising development, not one iota of error in the LDK Solar (LDK) report, and the stock is back up to mid $70s....

If this is indeed the fact, a certain controller needs to be formally sued for causing so much damage to so many shareholders. The stock is now back to where it was before this whole circus started.

• LDK Solar Co. said Monday its investigation into whether it had incorrectly reported its silicon inventories found "no material errors" in the inventories. The solar-product maker's investigation stemmed from allegations of its former financial controller, Charley Situ, that LDK had a 250-ton inventory discrepancy and poor financial controls.
• The company said Situ did not take into account all the locations where the company stores its silicon -- an important component of solar products. It also concluded that a provision for obsolete or excess silicon is not required because LDK is using each of its silicon types in wafer production.
• The company will report its third-quarter results, which had been delayed as a result of the investigation, on Wednesday.
• Outside directors Louis Hsieh and Bing Xiang oversaw the investigation, which was conducted by the audit committee's independent counsel Simpson Thacher & Bartlett LLP and an accounting firm that was separate from the company's external auditors. Independent experts in the evaluation of silicon feedstock and the production of multicrystalline solar wafers also assisted.

Again pending the news I had just a small position (tiny in fact) in this name; now on any pullbacks, this is a buy. I will be very curious to see if Wednesday they still report gross margins in the low 30s, which was the case in the past before these allegations came to the forefront.

What is unusual is this is not driving other solar stocks upward... as this sort of news generally creates euphoria across the sector. Might indicate the sector is currently 'tuckered out' after a huge run and needs to consolidate here.

Long LDK Solar in fund; no personal position

California in State of Fiscal Emergency - Coming to a Theater Near You

Here it begins folks.... as I stated in this week's piece [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.

Again, keep in mind how critical California is - its GDP if it stood as a stand alone country would place it around #7 in the world. So these 'messy subprime mess' that 'only affects' Ohio, Michigan, Florida, and California... (as the politicians put it), is so much bigger. Housing "only" affects 4.5% of GDP blah blah blah...

I don't know when (or hey, even if) the equity markets will finally come to the realization of the scope of the coming damage, as the bond markets obviously have. But this is only 1 of many shoes. Again, do you expect home values to go up in 2008? How will California's 2009 budget look? In just over a month the projected shortfall in CA has risen from $10 billion to $14 billion. Give it another 12 months... as many people sitting on overinflated 'assets' are finally going to sell at 20-30% lower prices. Remember, new homes are being sold off at 40% off levels seen in 2006 as home builders desperate to get rid of inventory price at fair value....

Why do you care if you don't live in California? Well it will be hitting a lot of other states for one, and secondly eventually the "real economy" affects the market ... eventually... no matter how persistent the 'invisible hand' is in seeing that this not happen. I will repeat, by the time these political candidates get to their primaries the economy is going to be the 1st, 2nd, and 3rd issue. We're just getting started here.

Fiscal Emergency for California

• Facing a projected $14 billion budget deficit, Gov. Arnold Schwarzenegger on Friday said he will declare a fiscal emergency, which will allow the governor and lawmakers to cut spending more quickly and also sets the stage for slashing state services and programs - perhaps by as much as 10 percent.
• California's fiscal crisis, which is beginning to approach levels that contributed to the 2003 recall of Gov. Gray Davis, is due primarily to a collapsed housing market and related woes in the subprime mortgage industry.
• It doesn't help that while revenues are especially volatile - disproportionately reliant on income taxes - the state has a number of fixed costs as well as guaranteed funding adopted by voters, most notably for public education.

It's just too bad they could not print money. That seems to work 'wonders' at the federal level. Maybe the Asians or Arabs will be interested in high interest rate junk bonds floated by California. And Florida. And Michigan. And Ohio. Luckily the rest of the country has no issues...

Wait! Paulson wants local municipalities to float tax free bonds to pay for the housing bust. Wow, it sounds like a lot of credit is going to be needed with all these new bonds that are going to be needed to pay for BOTH the housing bust AND to generate tax revenues. All in the fact of a credit crunch. The timing could not be more.... perfect.