Monday, December 31, 2007

Bookkeeping: Taking Some Profits on KHD Humboldt Wedag (KHD)

I am taking profits on this very interesting Hong Kong based infrastructure stock which I mispell every time I write about it. :)

On December 19th I described a trading position I had on this name (an addition, I bought in the $25s) - now as we close out the year, the stock has breached $30. Again this has been a minor position, so while a good trade, it did not affect the overall portfolio much. I am still trying to get a handle on this stock, as its relatively new to me, and trades with very little respect to technical moving averages. Today's move of +7% comes on not much volume. Strange.

Another reason this stock is confusing is from a fundamental point of view I think it should be worth at least $10 more from here. Yet it was hitting mid $20s two weeks ago. So either this is the value of the century or I am missing something. At this point I am going to wait and see on the name, and will buy more on a breakout if it proceeds that way. By breakout, I'd like to see the stock break through its 50 day moving average ($32.50). Since my fair value for this stock is far higher than that, I have no issue buying a stock for higher than I am selling now. As I stated in my previous post on this name, I generally don't go overboard in buying stocks below key technical moving averages because they can stay that way for months (see Blue Coat Systems, Crocs etc). This is indeed an interesting stock I've held for a month [A New Position Started: KHD Humboldt Wedag] and could become a big winner in 2008 - however it is under the radar right now so I want to see how the market treats it before going 'all in', with a larger position. But it is one of the few ways to play some of the emerging market themes of the Middle East and Eastern Europe so I am watching it closely and trying to dig up new information to feel more confidant that this is not 'too good to be true'. The stock action could simply be a condition of a very thinly traded stock OR harbinger of something bad I don't see yet. For now, I will take these trading gains, keep a very small position, and either buy more on a pullback or a breakout.

Long KHD Humboldt Wedag in fund, no personal position

Merrill Lynch Tapped Singapore - next China and Middle East

One of the themes I have been mentioning lately is the mainstream press clamor for how this must be the bottom for the financials because the 'smart money' is in... by smart money they mean mostly people sitting on eons of dead dinosaurs. I actually make the argument that the more money you have the more risk you can take, because heck, if you blow a few billion here or there - well there are more dead dinosaurs producing petrodollars tomorrow, and the next day, and the next. As for China, well that trade surplus is not going anywhere soon... so if you blow a few billion, US consumers will send you a few more billion next week. So in fact 'smart money' doesn't have to nail bottoms or tops very accurately. It is people with limited capital that actually have to be a lot more careful.

Just because you have a lot of money from one arena doesn't mean you are a smart investor, especially if your money is through no work of your own. We've seen many people (think Paul Allen of Microsoft fame) who took huge sums and proceeded to destroy much of their wealth in their future investments. Is that smart money? Are heirs of fortunes from their parents "smart money"? Do you think Paris Hilton's investing prowess is something to be excited about? Are people who just happen to be sitting on huge amounts of long dead dinosaurs suddenly "schrewd"? That's the talking points we are handed by the financial media. I'd rather listen to Buffet myself. Remember, when you print billions of dollars each day due to your dead dinosaurs you can afford to be "early" or "buy high" for the "very very long term". For the rest of us, we don't have those benefits, so we need to invest accordingly.

But anyhow, 'smart money' is at it again. And again the media will tell you, oh forget about the last round of infusions when we told you that was the bottom, in fact we meant THIS time it's the bottom. Because they are smart investors. Because they have huge trade surpluses due to petrodollars or massive US overconsumption.

The other thesis I have been pointing out is this first infusion of cash is not 'the bottom', just like the first disclosures back in August were not the 'kitchen sink' as the financial media would tell us. A lot more sinks to come, just as a lot more capital infusions to come. Merrill Lynch is going for the triple play - Middle East, China, and Singapore. Talk about a marriage of convenience, desperate banks and countries flush with capital, much of it from US consumers - this 'reverse colonization' (please note I lifted this great term from another website) is in full effect. If this is good or bad is an indifferent arguement - the reality is this is a forced transaction from the point of view these banks are desperate for capital. And I'd argue the investment banks are in far greater shape than some of the money center banks i.e. Citi, Washington Mutual, etc. And this is in a 'roaring economy' with 'nearly 5% GDP growth' with almost 'no inflation'. Just imagine a world where the economy slows and inflation appears... wait, don't imagine it... just imagine a world without faulty government reports that tell us everything is ok.
  • John Thain, the new chief executive of Merrill Lynch, is this weekend in talks with Chinese and Middle Eastern sovereign wealth funds that could lead to the sale of another big stake in the US bank in a desperate bid to raise capital, according to sources in London and New York.
  • The discussions come just days after Thain was forced on Christmas Eve to sell $4.4bn (£2.2bn) of stock to Singapore investment firm Temasek as part of a wider plan to raise some $7.5bn.
  • Merrill Lynch has already taken an $8bn hit related to sub-prime investments, but Wall Street fears that the bank's problems could go far deeper. 'Thain is desperately seeking an additional infusion of foreign capital to bolster Merrill's balance sheet,' said one source. 'It could be done by selling shares or other assets to raise cash.'
  • A US observer said: 'The multi-billion cash injection from Temasek was not enough and Thain is taking calls from a host of other potential saviours, which are understood to include sovereign fund investors from the Gulf and China.'
  • Analysts believe that Thain needs funds urgently in a bid to thwart future liquidity problems. The bank has already announced plans to lay off 1,600 staff. 'Thain is raising capital in anticipation of a large fourth quarter write-down,' said Sanford Bernstein analyst Brad Hintz. (more layoffs to come after the holidays)
  • Sources close to Merrill Lynch say that Thain has cancelled New Year leave among his top lieutenants and that his team is working around the clock on various 'scenarios' that could be employed to save the bank if problems related to the credit crunch continue to worsen.
  • 'It is all hands to the pumps here,' the source said, adding that the possibility of exploring a merger with another banking group had not been ruled out but was considered 'an extreme scenario'. 'Everything is on the table,' he said. (this would not surprise me - Bear Merrill? Because as we all know, when you combine 2 desperate companies that solves all the problems)
  • Analysts have so far predicted that the bank will be forced to write down between $10bn and $11.5bn, but the value of the assets affected by the credit crunch is falling in value by the day as the market continues to seek a way out of one of the worst liquidity crises in history. (and this my friends, is the hell of it all)
Short "the bottom is in because smart money is coming!" calls

Mastercard (MA) to Benefit from VISA IPO Hype

Along with all the great things about Mastercard (MA) as a business [Rebuilding Mastercard] and [Bravo Mastercard], it appears the hype machine for VISA is going to be "Google like". I think if VISA were priced "low" it would have a massive IPO 1st day performance [VISA IPO Priceless], but with a peer now out in the marketplace as a publicly trading entity the pricing of VISA's IPO should be in line with Mastercard valuation, thereby limiting to some degree the level of first day pop. And unlike some commentators, I don't think VISA coming public will hurt Mastercard. You essentially have a duopoly - the only 2 ways to play the increasing plastic based society (cash is trash!), without the credit risk. Further, the more I think about the cash strapped US consumer, and how he/she is turning to plastic to fund gas and groceries (as their discretionary budget evaporates and inflation rips into them), the more I see credit card usage and hence each transactions is just more money for these companies.

Notable Calls blog says Morgan Stanley is seeing these trends:
  • Morgan Stanley is out positive on Mastercard (NYSE:MA) saying data from Visa Inc.’s latest SEC filings indicate that Visa strongly raised prices over its past fiscal year. This gives the firm increased conviction in their pricing power thesis on MA.
  • For the year ended September 30, 2007, Visa Inc. revenue grew 33% year-over-year; fully 11% came from direct price increases to its customers. Another 5% emanated from reducing rebates to its bank and merchant customers, a symbol of pricing power in firm's view. During the same period, MA revenue rose 20% year-over-year, with 3% coming from price increases
  • MSCO believes on average, Visa prices slightly below MA. Price increases from Visa should make it easier for MA to raise its prices, in turn.
  • 2008, they think MA could enjoy flat to up pricing year-over-year, fueled by Visa raising prices (in connection with its planned IPO) and MA’s strong competitive position. Reits Overweight on MA.
Again, pricing power, near monopolies, growing secular market (don't forget most emerging markets have yet to really discover plastic - that is a decade of growth ahead in places that are used to cash based transactions). Not sure what more you could ask for - while the stock is not cheap, it is going to remain one of those "not cheap" growth stocks for a long time. Hopefully somewhere along the line it has a quarter where it stumbles, and investors flee like panicked lemmings, allowing those in the know to load up. I have been slowing accumulating these shares to push Mastercard back up to a 2% type of position. In a year ahead where finding 'guaranteed' earnings growth is going to be harder and harder to find, I expect this name to be one people flock to. If the market weakens, the 50 day moving average is down in the $190s and slowly right by the day. All indications point to a February 08 VISA IPO.

Long Mastercard in fund, no personal position

13 Outlier 2008 Predictions

One of my favorite reads of each year is Doug Kass' Annual Predictions over on Now, unlike most prediction lists he posts things that are way outside the box, and amazingly a good proportion of these do happen (generally 1/3rd to 1/2). So instead of doing a non descript "Predictions for 2008" I thought I'd follow his script and make some predictions that are not part of the conventional thinking. I want to get this posted before he posts his list, so that I am not influenced by his comments... keep in mind, by nature of this list quite a few will not come to fruition due to the extreme difference versus conventional wisdom.... a few will be a bit tongue in cheek

#1 I have been stating since late in the summer I expected the Fed, in a desperate attempt to mimic Uncle Alan's intervention policies, to cut rates to 3.5% by the Spring despite lip service about inflation. By year end as the financial world contracts, and despite raging inflation in things that affect Americans, the Fed cuts rate to 2.75%. The central UK bank follows suit (as fellow 'financial innovators'), and arm twisting gets the Canada central bank to lower rates substantially as well. Only the stubborn European Central Bank holds out, wondering what the heck this world is going too. However, a housing implosion in Spain, causes the ECB to cut rates to some degree during the year, but nowhere near the level of the subprime nation aka USA.

#2 Now that 2007 bonuses are secure, financial CEO's start laying the axe down and over 100,000 financial jobs are lost in Q1 2008. Workers are outraged, but CEOs say "well that's how it works" - we get the reward from our dumb decisions, you get the pain. Social acrimony in this country only continues to increase. Another round of major layoffs hits in summer as the spring "housing boom" never materializes. CEO's mention they have to be mindful of 2008 bonuses, and cannot keep carrying "dead wood" such as ... workers. Despite hundreds of thousands of job losses throughout the country through 2008, the unemployment rate only bumps up to 5.2%. George Bush smile knowingly and can point to a "raging bull economy" and wonders what all the complaining is about... anyhow, it's someone else's problem soon enough.

#3 Food inflation ramps worldwide causing serious issues and front page news in countries across the world. The US central bank says, really who cares, after all its not part of core inflation. Somewhere a defeated Ron Paul exhales loudly and exclaims "If they only had listened to me." Inflation becomes an evil term, and part of the mainstream vocabulary again, even by non investing types.... aka "Milk for $6, what the hell, this is ridiculous inflation". Private equity firms and hedge funds start snapping up farmland in the greater Midwest, as this is the "next great investment front", driving up prices to record levels and sparking talk of a "farmland real estate bubble". Food banks report shortages and inability to feed the poor in the country, as people are finding it too expensive to hand out such an expensive commodity for free. They'd rather give peso donations... err, dollar donations, as its a much more worthless commodity than say, beans. Gold spikes to over $1000, and pawn shops become a huge business as people start selling jewelry to pay for gas and food.

#4 Political Scenario A: Not 1, but 2 independent candidates emerge to make an unprecedented 4 horse run to the White House. Ron Paul, after winning every online poll every devised, decides the public swell is too great and he must out of principle run after the Republican party refuses to acknowledge there is a person in their party with the name Ron Paul. Mike Bloomberg announces a candidacy in April 2008, and with the public's utter disgust with the 2 party's incompetence, wins the 4 party election with a 34% majority.

#5 Political Scenario B: In a stunning comeback, John McCain finishes a respectable 3rd in Iowa, and moves on to win New Hampshire. McCain, not Romney or Guliani, emerges as the anti-Huckabee candidate. A series of primary battles between "experience" and "religion conservatism" break out, with the experience of McCain winning over enough Republicans; especially after the machine that is the Clintons wins the Democrats despite a great run by Obama. After a spring and summer dominated by economic concerns on the political trail, a major terrorist attack in a Western country during the summer, sets in motion the groundwork for a McCain presidency. In a major icing of the cake, Mike Bloomberg is brought in as McCain's VP, setting up a dream ticket and trouncing the conventional wisdom that this election is the Democrats election to lose.

#6 A major hurricane hits the southern US, spiking crude oil prices to $125 and gas to near $4, in the middle of an economic slowdown. Natural gas prices temporarily spike, hurting profits for corporations for 1 quarter but quickly fall right back as a slowing US economy continues to put a cap on pricing. Coal continues its ascent as voracious appetites for energy across the world continue. The Fed ignores this and says, well it's not part of the core inflation rate so really if a tree falls in a forest and no one is there to hear it, did it really happen. Senior citizens on fixed income and only getting cost of living adjustments equal to government 'official' statistics begin to agitate.

#7 After over 2.5 years of not suffering a down 2% day dating through early 2007, volatility in the stock market takes over as the theme of the year, 2% daily increases and drops become a weekly occurrence. The market suffers its first 20% drop (from Oct 9, 2007 peak) in the first half of 2007 as consensus emerges that "a major slowdown" (which dared not be called a recession due to elections coming), is happening. The first half of 2008 is marked by major downward revisions in 08 estimates and a 'cheap market' doesn't look so cheap. The major terrorist attack in Western country (to try to influence US elections), along with record spike in oil prices due to hurricanes (along with a Google warning - see next post) mark a dramatic bottom in the markets through late summer/early fall. Markets make a dramatic rally off these lows as all the worlds banks coordinate to flood massive infusions into the system (all this money needs to go somewhere) - and in combination a massive wave of foreign investment hits US firms (non financial), driving up equities late in the year. Investors are giddy before realizing a 10% return in equities marked with 9% inflation really only means 1% return, but they clap like seals anyhow. Pundits will claim how resilient the economy is without realizing we are selling off large pieces of it... The market ends the year only down 2.78% as economic based bloggers throughout the world wonder what it takes to make the market ever go down?

#8 Google is finally hit by an earnings miss by Q3 2008. It won't be a major miss, but enough to rock psychology. Advertising slowdown, led by US recession... err not a recession but a "slowdown" (its a political year folks), finally hits Google, despite secular growth. Google will be seen as human and a company that is not immune to the business cycle, driving the stock down. will suffer a 40% loss as investors, not realizing Baidu is in China and Google is in the US, think US advertisers will cut their spending with as well. Or maybe it's just too expensive. In a sick twist of fate Yahoo emerges as the best performer in the space as News Corp comes in with a buyout as the stock trades listlessly again in 2008.

#9 Not 1, not 2, but 3 of the top 12 homebuilders file for bankruptcy after the spring and summer of 2008 see no serious rebound in the real estate market. Bankers, finally seeing the light, stop extending life support to these homebuilders who just continue to build homes no one needs, to create cash flow. This creates a major tradeable low in the homebuilders in the fourth quarter and massive rallies on order of 50% are seen in the remaining players. While the ultimate bottom is still a year away, a great trading opportunity is created. Meanwhile the National Association of Realtors throughout the year pushes out their date of "major rebound in all real estate markets" from January 1, 2008 to March 2008...then May, then July, then September, then November, and then January 1 2009 right at midnight.

#10 After writing off every kitchen sink in America, the 5 major investment banks, after a poor first half of 2008, stage a massive rally in fall 2008, proving once again the black box rules the world. Goldman Sachs attributes its weak first half of 2008 to "we were too busy in strategy sessions figuring out how many government posts should be filled with ex Goldman executives in the next administration, so our core business of milking the financial system for all it's worth and transferring wealth from middle class to upper class suffered. So while we didn't have our eye on the ball, in a way we were. I mean complete dominance of all parts of the world economy, both economic and political, is important no?" This disclosure will be found on page 143 footnote 17 in the 2008 10K. Goldman executives are named to 53 of the 54 top posts in the McCain/Bloomberg administration. The other goes to Bill Richardson so Republicans can be seen reaching across the aisle and win over the Hispanic vote in 1 fell swoop (Goldman of course advised on this move). Somewhere, Ron Paul screams. Money center banks suffer another year of disaster with no end in sight. Repeated dead cat bounces prevail but the increasing defaults in auto loans, consumer loans, and the "that's so 2007" mortgage loans continues to puncture them. The Federal Reserve takes unprecedented actions, buying bad loans and keeping them "until markets return to normal" instead of overnight or for 25 days, etc. Normal doesn't return for 2-3 years. Another 2-3 waves of foreign capital infusion from the Far East and Middle East is needed... but at that point these investors realize these banks really are toxic waste dumps. Citibank trades to $23. Even the best run like Wells Fargo cannot escape the coming defaults by the overextended US consumers. Credit cards become in 2008 what 'subprime mortgages' are in 2007. Defaults rage across the country, and politicians, clueless to what is happening in the real world, haul credit card executives back to Washington to make a circus about their tactics (yet again). After this show and dance to try to impress the peeved electorate they whisper post meeting "I'm not really mad at you, this is just for show - just keep doing what you are doing and please make sure you contribute at least $2300 to my campaign"

#11 Apple continues its run to become the largest market cap stock in the USA, tacking on another 50% to finish at $300 by end of 2008. Steve Jobs puts his pinkie to his lips and cackles like Dr. Evil as he quickly positions Apple to be THE consumer electronic convergence BRAND of our lifetime. Macs quickly approach 10% market share, and consumers in foreign countries flee to Apple as a consumer cult brand like a Nike or Adidas. iPod Touch is a surprise massive hit, and the revenue sharing agreement (on subscriptions) from the iPhones is finally realized as the Trojan horse brilliant idea it is. As worldwide laptop sales burst past desk tops, Apple unveils a new consumer convergence product, something bigger than an iPod but smaller than a laptop, but something so good, so sexy, so necessary, people will want to have it surgically attached to their arms. Apple investors will tell you "I told you so" and "please join the cult", and Apple naysayers will say "just wait until next quarter, it's overpriced I tell ya". Dell announces it is buying Apple brand computers for its corporate headquarters (ok just kidding on that last one)

#12 China has a raging success in its Olympics, although everyone notices no cars are allowed to drive during the 2 weeks (smog and all). Meanwhile the decoupling effect is proven to be yet another farce by CNBC pundits, and major foreign markets, following the lead of the US market fall in tandem. China Shanghai market drops 30%, and daytrading housewives countrywide panic. Taxi cab drivers go back to driving taxis instead of trading stocks. China's sovereign fund decides to simply keep buying Chinese stocks in a desperate attempt by the government to keep the prices high.

#13 Sports: The Indianapolis Colts travel to Boston for the AFC championship game, and in a stunning victory beat the Patriots 35-34 as .... oh nevermind, we can't get that crazy - I have to retain some credibility.

Saturday, December 29, 2007

Bookkeeping: Weekly Changes to Fund Positions Week 21

Week 21 Major Position Changes

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

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

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

Cash: 7.4% (vs 13.5% last week)
54 long bias: 73.6% (vs 79.2% last week)
5 short bias: 19.0% (vs 7.3% last week)

59 positions (vs 59 last week)
Additions: Trina Solar (TSL)
Removals: Frontier Oil (FTO)

Top 10 positions = 36.6% of fund (vs 26.8% last week)
37 of the 59 positions are at least 1% of the fund's overall holdings (62.7%)

Major changes and weekly thoughts
After a short lived Santa Claus rally (2 days?) last Friday and Monday, we ended the week with 2 quiet days sandwiching a down day on Thursday. All in all, we just continue to make lower highs since the October peak [Like a Moth to the Flame], and if this pattern is once again repeating itself we are at the top of a channel, which would point to downside ahead. I have repeatedly said, I am worried about this earnings season in particular - not so much for what companies will be saying about quarter 4 2007 earnings, but for what they say about their 2008 guidance. The tells on the broader economy weakening are everywhere when you listen to the companies themselves (Fedex, Target, Darden), and ignore the bogus data from the federal government (they can't manage any program effectively so why should we believe their financial figures anyhow). So I'd make the arguement the weakness is now spreading from the 'low cost', subprime folks to our middle class. Our largest "middle class" retailer is telling us, our largest "middle class" restaurant chain(s) are telling us, and the two largest transport companies are telling us. Only the talking heads and our politicians are telling us the opposite.

I think this market is very tough for all but the most apt traders especially if you are not in a very narrow piece of the stock market. A lot of stocks have been relatively comatose of late even on the very short rallies, or at best they are just making up lost ground. Not an easy market as shown by the action in the indexes. With earnings estimates for 2008 far too high for many sectors in this market I remain cautious as the market needs to adjust to the 'new reality' at some point. I do still feel areas I am focused on such as fertilizer, infrastructure, et al have pricing power and a lot of visibility - but these are again, very narrow parts of a very large economy and stock market. Do you think any consumer based stock outside of a select handful (Apple?) has any idea where things will be in summer 2008? Not likely. Just simply rolling out a 10-13% annual growth figure as many have done the past half decade won't cut it this year. Analysts might actually have to do some work this year and not just nod "yes" to everything the company's say for 2008 guidance.

For the fund, we caught some major breakouts from the November lows with many of the top holdings giving very good returns. However, after such big runs I have turned cautious and indeed cut back on a lot of these names, whether from fertilizer, to infrastructure, to technology. You can see the top 10 holdings on the long side are dominated by companies that will benefit from a slow growth economy and if the market takes a downturn hopefully will hold up better than some of the stocks I've had there for the better part of the quarter, which in many cases are not near any technical support level and hence could have quite a ways to fall if the market does indeed fall. (no guarantee the market will fall of course)

With my Ultrashorts, I have moved to more of a focus on the commercial real estate market Ultrashort over financials. While financials still have many shoes to fall, at least they are on the radar of everyone at this point... I don't think commercial real estate has been mentioned much. When you start hearing CNBC whine about it every day then you will know it's starting to reach public consciousness and it will be time to reign in that position more. By that time, the next shoes in the financials should be dropping (i.e. auto loans going bad, credit card defaults, etc). And then eventually people will see emerging markets are not immune after all to the western world slowing down. So we have a lot of opportunity on that side of things in 2008 - it is just a matter of when the market chooses to acknowledge these things (perception is reality). Remember, I went negative on financials and the market chose to smack me for that after the Fed made its first rate cut. Father Fed would save us all and the market went on a gigantic upswing. Perception was reality. Perception was the Fed would be all knowing and financials would be fine. It took time for that perception to fade away and reality to hit us. And eventually that Ultrashort Financial became a big winner for the fund, despite hurting performance in late August and September when the market was drinking Fed kool aid. [Top 10 Winners and Losers so far]. So I am confidant the rest shall also come to pass, it is just a matter of waiting until the market sees the truth and perception matches reality. It could be Monday, it could be 6 weeks or 6 months.

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

Some of the larger changes (chronologically) to the fund below:
  1. In a general sense, all week I took some more off the table in one of my favorite groups, fertilizer. These stocks have run so far in a month, and I want to lock in some profits. I am generally early on these calls, but better safe than sorry. Maybe Goldman called a near term top with its upgrade of Potash (POT). This is my lowest exposure to this group in a long time, but I plan to begin rebuilding in increments on pullbacks to support levels.
  2. Monday I sold down some Shaw Group (SGR), which is an infrastructure name I really like. However, the market doesn't seem to like it of late, so I don't want money sitting idly by until the market agrees with my views. The stock continues to trade below its 50 day moving average, while some of its brethren are making nice moves.
  3. Wednesday, I cut back by 50% what has been left of my Silver Wheaton (SLW) position. The more I think about the actions of the world's central banks the more I think gold and silver have more to go. As we devalue all paper currency to help bailout the subprime nation (aka USA) gold & silver which is a hard physical asset looks like a good alternative. This is not a new view, and in fact I am late to the party. I am looking to add back to Silver Wheaton on any pullbacks, but with its huge move I chose to take some profits.
  4. We had another week of solar mania, with the 'worst of breed' being run up by the retail speculators. I don't own those for this type of fund because I never want to be stuck with something I would not want to own for the long run, but the most speculative name I own (which in relation to the junk that is really moving in this space is not speculative at all), Solarfun Power (SOLF) was cut back to a miniscule position on this latest run up. I didn't catch the top, but then again, I did not expect the stock to reach such heights so quickly either so I was happy with the profit I did get. When I use the word speculative I simply mean in relation to say a Suntech Power (STP), not that this is a pure gamble like some of the stocks making 30% moves on hopes of revenue in 2009.
  5. I had some fortunate timing with Mechel (MTL) and Huron Consulting (HURN) - 2 stocks with larger exposure in the fund. I sold a portion of these Wednesday as they both had made very nice short term moves, but was able to buy some back (smaller positions) on pullback in the downfall Thursday. I had hoped for a $94 price to get back into Mechel but got some back at $95-$96 instead. Again, not major moves - it is not like I sold 80% of these stakes and bought them back the next day, but some trading around the edge of core positions.
  6. I sold down some CNH Global (CNH) Wednesday, as the agriculture fervor seems everywhere right now, and I am wary of this bandwagon overloading. It has had quite a performance, just like Mechel and Huron Consulting, in a very short time, so I took some off the table. I am a bit worried about the strong euro's affect on exports for this company so we shall see how it plays out in the longer run, or if the agricultural boom has no bounds, strong currency or not.
  7. Speaking of solar, I restarted a position in a former fund holding, Trina Solar (TSL) Wednesday afternoon. I had been waiting for this long lost stock to finally make a move, and from a technical perspective it looked poised to break out. With the continuing strength in the later afternoon I in fact added even more. And on weakness Thursday I added more... and now this is the largest long position in the fund. While I am extremely wary of the entire solar sector, Trina has not participated in the recent mania and is closer to key technical levels than most in the sector hence has some downside protection in case if falters. The stock acted very well late Friday, and if the market had not been so weak Thursday (especially solar stocks) I think this stock would of been well on it's way to a breakout - but then again I'm biased. :)
  8. Thursday, I sold some Atwood Oceanics (ATW) - this has been an incredible short term move. I (re) added this position back to the portfolio December 17th @ $84.66. In 2 weeks its approaching $104. So I locked in some of those very quick profits. I just wish I had bought more this time around - I had a much larger position the last time I held this name... the deep sea oil drillers is a group I have been bullish on for a long time but have been dead money for most of the fund's history - until the past 3 weeks.
  9. I sold down some Core Laboratories (CLB) for the exact same reasons I mentioned with Shaw Group in item 2 of this list. Stock I like, that has made a nice run, but sits below a key technical area.
  10. Friday, I cut back some exposure to Chicago Bridge & Iron (CBI). As I mentioned, not much difference to me between this name and a Shaw Group or Foster Wheeler but the market has pushed this name up, so I am locked in some profit. My infrastructure approach is to buy a basket of favored names... what the market does with each individual name is tough to figure at times.
  11. I closed the fund's long standing holding in refiner Frontier Oil (FTO). While I think this is best of breed, the market is just not buying the refiner story, and since this is more of a cyclical story rather than secular, I will wait for the market to rejoin the sector at some point in the future. At that point I will be back.
  12. I added some short exposure here on the back end of the week, as the markets failed to break out and now appear below key technical levels. We keep repeating the same song and dance so until it changes, I will keep doing the same jig. Eventually it won't work anymore, but so far so good.

Worldwide Readership

One of the amazing things about the internet is the flattening of the world. It is quite amazing how one can communicate with people all over the world in this manner. Just for kicks I thought I'd post where the worldwide audience is coming from (over the last month). Of course the USA is far and away the #1 audience member with 83% of visits, but some interesting places making up the other 17%. In the past month alone, people from 90 countries have visited the web site. (although people from 89 countries could not invest in the mutual fund!)

Amazing stats - especially since this website was not in existence in July. Granted probably people from 20 countries got here by mistake (20 countries only had 1 visit - hey I don't hold it against you Ghana, Latvia, Malta, Kenya, Luxembourg, Oman, Nepal, Bolivia, Afghanistan, Syria, Monaco, etc etc - no Jessica Alba pictures here unfortunately)

Here is the Top 20 Countries (I'm a statistics nut so this sort of data Google provides on web site usage is just fascinating to me)
  1. USA
  2. Canada
  3. India
  4. United Kingdom
  5. Germany
  6. Belgium
  7. Singapore
  8. Spain
  9. Estonia (I think 1 person who comes every day)
  10. Taiwan
  11. Israel
  12. Australia
  13. France
  14. Hong Kong
  15. Sweden
  16. Thailand
  17. Slovenia
  18. Russia
  19. Switzerland
  20. Netherlands
Top US cities
  1. New York (I knew Cramer was reading the blog...)
  2. Houston
  3. Bellevue (aka suburb of Seattle)
  4. Seattle
  5. Chicago
  6. (not set)
  7. Brooklyn
  8. Beverly Hills (hey throw me a dime fellas)
  9. San Franscisco
  10. Weston (aka Miami)
Strange to see so much traffic out of Seattle - and a suburb outside of Seattle. Perhaps a lot of Microsoft investors need to find a place to park all those decades of stock options. The next 10 (11-20) is dominated by CA cities. The next 10 (21-30) is dominated by TX cities. Guess it makes sense as those are huge population states.

What Countries Stay on the Website the Longest each Visit (on Average)?
  1. Ukraine (nearly 17 minutes)
  2. Ivory Coast
  3. Uruguay
  4. Indonesia
  5. Vietnam
  6. US Virgin Islands
  7. Israel
  8. Panama
  9. Estonia
  10. Austria (nearly 6 minutes)

And I Thought I was Negative

For those who have been reading the blog, you know I've been negative on the coming year in the economy since inception. [Et tu, September] Sometimes having this type of position (especially in the summer) I felt like a lonely voice in the wilderness... but as each week passes, more and more things are coming to fruition. About 3-4 weeks ago 2 of the 5 major investment banks chief economists have turned quite negative on the 08 economy as well. I updated my thoughts a few weeks back. [Et tu, 1st Half 2008? Predictions for the Coming 6 months]. I found this article on and boy, if you thought *I* was negative [What to Watch for in 2008]- I will highlight the points below. This is more of a long term prediction, going out a year from now and how we will feel on Christmas Day 2008.
  • A credit contraction is well underway, oil remains near its all-time high, the housing free-fall is accelerating, and central bankers are freaking out. So, who would have predicted that the Dow would reach an all-time high in October and still hover within about 6% of that number as the year drew to a close?
  • The market’s relative buoyancy reveals a touching faith in the powers of the Fed and other father figures of the financial landscape. Will this faith remain strong enough to surmount the tests that lie ahead?
  • With equity-free (not to mention upside-down) homes proliferating across the country, consumers turn to their retirement accounts and credit cards to keep afloat. This stop-gap proves very short-term, and consumer credit takes a trip down the subprime path.
  • The rush to sovereign wealth funds for rescue money slows dramatically as politicians and the public push back, alarmed about foreign government interference and the prospect of a Dr. Evil gaining access to American technology.
  • Xenophobia, economic stress, and – this is a sure thing – pandering politicians lead to resurgent protectionism. The march towards legislation is interrupted, however, as international investors remind politicians that the U.S. now works for them.
  • Counterparty risk moves to the foreground as banks and institutions discover that those companies from whom they bought CDS and other types of insurance were just kidding about their capital reserves.
  • The pendulum swing away from libertarianism and towards a more positive view of government and regulation accelerates as insolvent consumers and companies clamor for safety nets and bail-outs. Investors, scorched by hundreds of billions in losses on trillions in asset-backed securities and derivatives, urge regulators to slam shut barn doors across the financial landscape. With structured finance stuck in the penalty box, CDO-financed lending diminishes to a trickle.
  • A dollar crisis forces the Fed to halt interest rate cuts even as the economy moves deeper into recession (yes, the recession has already begun).
  • Corporate defaults and bankruptcies finally begin to rise as over-levered companies find that raw material costs remain stubbornly high (squeezing profit margins), demand continues to soften and that bankers have learned to say "no."
  • Continued drought in the U.S. Southeast and Southwest wrecks more economic harm than Katrina, and drives home the point that global warming's impact comes more from changes in precipitation than in temperatures. Atlanta becomes the poster child for the economic risks of water stress. As water tables fall, H2O rises as an investment theme.
  • Total oil production again fails to meaningfully exceed peaks established in late 2005 and mid 2006. Prices rise and stay above $100 a barrel despite a global slowdown. Emergent bubbles develop in companies specializing in energy conservation/efficiency and alternative energy. Event-driven, regional supply shortages scare the pants off politicians and consumers alike.
  • Faced with shrinking credit and falling asset prices, officials stop talking about inflation, and the dreaded D word resurfaces.
  • As the de-leveraging of the economy continues, the savings rate rises further, cutting corporate profits. With financial earnings under pressure, equity prices either have to fall or P/E ratios rise. You make the call!
So it's nice to read someone who is more negative than me :). I have touched on most of the points above - however some things I have not stressed quite so severely. I have mentioned that consumers are now turning to credit cards to replace the house ATM, and we are seeing the first signs of 401ks being raided to help sustain people. I should mention I expect the latter issue to accelerate and while that will help "bouy" the near term economy, what does it mean for the long term of our country? Nothing good. As with many things in this country, especially in our political decisions we focus on kicking the can down the road - just trying to make sure things don't get bad now, and the future will somehow "take care of itself". Myself? I worry about a lot of people working as Walmart greeters until they literally keel over - instead of enjoying a traditional retirement.

Regarding sovereign wealth funds, while initially celebrated and constant referels to how the 'bottom must be in' because sovereign wealth funds are 'buying' (i.e. smart money) what will the same pundits be saying when the next round of capital is necessary from these same players? Or a third? All at lower prices? Buffet certainly is not finding any value in financials.

Berkshire Hathaway Inc. Chairman Warren Buffett said Wednesday that he rebuffed financial firms that have approached him recently about buying stakes in their companies.

Just because you have a lot of money from one arena doesn't mean you are a smart investor, especially if your money is through no work of your own. We've seen many people (think Paul Allen of Microsoft fame) who took huge sums and proceeded to destroy much of their wealth in their future investments. Is that smart money? Are heirs of fortunes from their parents "smart money"? Do you think Paris Hilton's investing prowess is something to be excited about? Are people who just happen to be sitting on huge amounts of long dead dinosaurs suddenly "schrewd"? That's the talking points we are handed by the financial media. I'd rather listen to Buffet myself. Remember, when you print billions of dollars each day due to your dead dinosaurs you can afford to be "early" or "buy high" for the "very very long term". For the rest of us, we don't have those benefits, so we need to invest accordingly.

As in the article above I've stated to look for more and more bailouts from the politicians, as the economic situation worsens. While I don't agree that a "more positive view of government" will emerge I suppose in our short sighted manner if the government uses our tax dollars to bail out people, those people who got bailed out will see the government is a more positive view. I sure won't.

I agree with the corporate defaults and bankruptcies increasing as I mentioned in my recent investments in 2 firms that specialize in such a thing (and their stocks have been reacting very positively of late as more people jump on the bandwagon) [2 New Recession Plays] I agree with the stubbornly high input costs as I mention constantly in the blog [A World of Shortages]. In fact at this point I think in the larger macro sense we are going to be entering decades of higher inflation as our world is not currently suited (first) for so many people and (second) so many people trying to live urban Western lifestyles of consumption. While this will ebb and flow from year to year, its a long term issue. At some point technological innovation will help solve some fo these ills but we could be talking decades to solve some of the issues. And projections for worldwide human growth only continue to grow.

The drought issue is an interesting one. I've long though that water, not oil will be the commodity that wars are fought over in the coming century. You are already seeing serious strains in the southeast of America and western regions. Unfortunately there are very few investable themes in this area and it is "very very long term", but one day I do think we will be talking about water like we talk about crude today. As for crude, I will be curious to see how it reacts - if in a slower growth world economy crude stays high, this will lend credence to the peak oil theorists. Also keep in mind the USA has had 2 years without a major hurricane. Not sure how much longer we avoid that bullet, and it has a tendency to really spike energy prices if the right area of the country is hit (let's hope not).

His last point is the one that I think will be the most important from the perspective of an investor. All these other bad things he (and I) talk about - well that only affects us in our real lives. It only affects the 'real economy', and the vast majority of this country.... not the investor class (as much). Not until corporate profits actually fall do I suppose the top 5% really begin to care about the bigger issues because then their portfolios may actually fall. (gasp). So, much like he, I suppose if one is a raging bull on the market in 2008 you must ask yourself do you think P/E ratios are set to rise in the coming year as corporate profits fall? If so, the market should hold flat or heck make new all time highs. Certainly possible but not the probable situation in my book....

With that said, the stock market and the economy are at times two different things and with central banks worldwide committed to trying to 'inflate' assets to keep us out of a slowdown one could envision a scenario where markets hold up (or at least far better) than the real economy. All this money circulating and being created needs to find a home - real estate in this country is not an option, and bonds yield almost nothing post inflation. So equities seem to be, by default, where money is going. As more money is being dropped on us, the more can go into equities. While on the surface this sounds "great", keep in mind this helps prod along inflation and when your equity return is 7% and real inflation is 2%, that is no different than when your equity return is 13% and real inflation is 8%. It just 'feels' better because your equity return is 'measurable' whereas real inflation is harder to assess. I think this is the path we are on now. Further, with large parts of the market "un-investable" i.e. financials and most of retail, that eliminates about 25% (20% of S&P 500 was financials before this correction) of the choices to invest, except for those who enjoy trying to catch falling knives. So more and more of the new money goes into the other 75% of the market, further buoying those names. An interesting conundrum. But certainly this could be the case to be made for a sustained rally in the market - it is always important to see the other side of the fence, and opposing views to your own.

Friday, December 28, 2007

Bookkeeping: 'Rising Tide' Performance Week 21

Week 21 performance of the mutual fund

Comments: A quiet week overall, we had some continuation of the Santa Claus rally Monday, a very quiet day Wednesday, a mild sell off Thursday on some bad economic news and bad news out of Pakistan and another quiet day Friday. Most of the fund performance this week actually came on the two quietest days, Wednesday and Friday. [These are the days to make Hay] The bad economic news continues in relentless style and even the most bullish of prognosticators of last summer are now acknowledging "we might get a teeny tiny slowdown for at least a few months" now.

I was a lot more invested to the long side as of last Friday, than I had been in quite a few weeks, but by the end of this week, while my cash position was still lower than it's been for a long time (well below 10%), I have balanced my long positions with some 'insurance' with my Ultrashort positions. [Back to Large Short Exposure] In a general sense, all the sectors I like have really had tremendous runs so I am increasingly finding new opportunities difficult to uncover. Hence I have pulled back on some of my favorites, and in the past at times like this when my favorite sectors had put on such runs, the market was ready to pull back.

Rising Tide Growth Fund generated a +1.92% return this week. This compares to -0.40% for the S&P 500 and -0.48% for the Russell 1000. This created leading an outperformance this week of roughly +2.35%. (which is 1/5th of my YEARLY goal, in just 1 week)

I've surpassed my yearly goal of beating the indexes by at least 15% this year, in 5 months - with 9% extra to spare. So hopefully the remaining 7 months I can build on that and not give away these sizeable gains. As they like to say in the mutual fund literature, "if you had invested $10,000 on August 3rd, 2007 you would have $12,500 today" (ok $12,499 to be exact) ;)

Price of Rising Tide Growth: $12.499
Lifetime Performance to date (vs Aug 3, 2007): +24.99%

Comparable S&P 500: 1,478.5 (+0.91%)
Comparable Russell 1000: 804.5 (+1.10%)

Fund return vs S&P 500: +24.08%
Fund return vs Russell 1000: +23.89%

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

Back to a Large Short Exposure

Well after our Santa Clause rally (seems so long ago?), once again I am approaching a 20% Ultrashort exposure (19.1%) after buys yesterday and today. Per my own "rules", since this is not a hedge fund but a long focused mutual fund, I try to stay in the spirit and stay within a band of 0-20% on the short exposure, so this is about as far as I go on the 'dark side'.

We have broken S&P 1490 now and don't appear too interested in breaking back above it (but I suppose anything could change in a thinly traded market). Even if we did, we have the 'ceiling' above that. So we appear to be in the band of 1490 to 1440 now. As (or if) we move back to 1440, I expect some fight to be put up there; once again. At some point these repeated retests will fail and we will move down to the next area.

In the big picture we have made what is technically known as a double bottom (definition here) on the major indexes (August and November lows). Generally you get a nice bounce out of a double bottom (which we did). Generally, triple bottoms fail in spectacular fashion. So in S&P 500 world this means the next time we rest those lows around 1400-1405, the inclination is we will have a very good chance to break through... and fall to the basement.

Coinciding with earnings season in January, which will be full of confessions (I believe), this is my working thesis. Again, note the words "generally" I use. Nothing works every time. Nothing is fool proof. But in a mid term view (out past a few days), this scenario has the potential to unfold. But even if it did work out this way, the potential for surprise counter rallies can happen at any moment in a downtrend. And S&P 1440 which every one ("the invisible hand") knows is key, will be defended strongly as well. So neither bulls nor bears can rest too easy. :) But I plan to hold these Ultrashorts far tighter to the vest in the coming time frame as I expect a lot of land mines in earnings season about 3 weeks from now.

I expect January 2008 to be a very interesting month!

Bookkeeping: Closing Frontier Oil (FTO)

I am closing the remaining refining play in the portfolio, Frontier Oil (FTO) with a total loss of about 1.1%. I've owned it since August 6th, 2007. So essentially this has been a lot of dead money. Of all the refiners, this one remains far and away my favorite as Frontier has shown an ability to make money in a very difficult environment [More Refining News] but with some additions of late the portfolio is getting more names than my target so in reviewing what should go, I decided on this name.

Refiners are not my typical cup of tea (much more cyclical than secular growth) but a few times a year they are generally good for a nice solid run. But we haven't seen one in a long while - even an upturn in crack spreads has done nothing for these stocks.... very very strange.

The technicals in this stock give a very easy roadmap so by selling the position and waiting for a breakout I can conserve cash or apply it elsewhere, long or short. Simply put we want to see Frontier Oil break back above its 50 day moving average, currently $43 (and falling), and then we have the potential for this good move. The stock has been 'basing' in a narrow range for 3 weeks so this could happen at any moment (or not happen at all). But with crack spreads rising, you'd think the stock would reflect this sooner rather than later.

So this might be a temporary exit, as we await the stock chart to firm up. I had lowered my exposure to Frontier Oil to 1.2% of the fund and am selling all 350 shares @ $41.75. I'd gladly pay $43+ when the appropriate time comes. Much like the deep sea oil drillers, I have been in and out of these stocks during the life of the fund, getting nowhere fast - but of course the deep sea oil drillers finally took off once I had sold out my exposure. :) Hopefully the same will not happen here - I will keep a close eye out. If crude falls in 2008, profit margins should expand meaningfully in this space and perhaps we get "the run" then....

No position

Bookkeeping: Cutting Back on Chicago Bridge & Iron (CBI)

Cutting back my position this AM in this excellent infrastructure stock, Chicago Bridge & Iron (CBI) by 20%. This is more of a technical move, and locking in some profits. The stock has blasted off and is nowhere near any meaningful support - i.e. the 20 day moving average is down at $58 (8% lower), so as the stock pushed to $63, I am going to take some off the table here.

You can compare this stock performance to Foster Wheeler (FWLT), and see a stock correcting and pulling back to support in the latter name, so before this happens to CBI I want to lock in some profit, and in fact I redistributed some of these profits into a small buy in FWLT (hoping to see $150 or lower on that name to add more). Fundamentally, I am as bullish on both names (and the sector) but these two names are interchangeable to me on a fundamental basis but one is being favored by the market at this moment and one is not. Now, I am breaking the "technical analysis" handbook here which tells you to buy the the one breaking out, but that's just a stylistic choice of my investing style and for purposes of this fund I am taking a longer term view - for you swing trading types you'd be wanting to buy Chicago Bridge & Iron for example (which is what I did when I added to this name last Friday as it was "about" to break out during the Santa Claus rally). I prefer to buy things near technical support and cut back on things nowhere near support.

I'd be interesting in buying more Chicago Bridge & Iron on a pullback to a support level...

Long both names in fund and in personal account

Like a Moth to the Flame - S&P 500 and 1490

Amazing how for months on end the S&P 500 and the 1490 level have been key. If you search for the term "1490" on this blog you see I keep coming back to it.
With yesterday's swoon we once again dropped below this level - while the day is young we are sitting below both the 50 day and 200 day moving averages. More importantly is this series of lower highs we continue to make.

I wrote back in mid December we are making a series of lower highs [Like a Magnet Back to 1490] which is quite a bearish development.

High #1: mid October
High #2: late October
High #3: mid December
High #4 (?): a few days ago (too early to tell but it doesn't look good)

If you simply draw a straight line on this chart from each of these 4 points you see our 'ceiling'. Again I am not technical analysis guru, but you don't need to be either - until this trend is broken we are not breaking out to the upside.

I will again keep referring to the S&P500 index as a house.
  1. When we are above 1490 we are in the penthouse, and we'd like to see this ceiling broken and if we did, I'd take a bullish stance
  2. The upper floor is between 1440 and 1490 - this is the floor we bottomed out in during December
  3. The bottom floor is between 1400 and 1440 - this is the floor we bottomed out in August and November.
  4. The basement is below 1400 - we don't want to go there.
This sounds simplistic but essentially as we trade from floor to floor I adjust my strategy. Within each 'range' of each floor as we reach the top of that range (1490) I get more bearish, and at the bottom of the range (say 1440) I get more bullish (expecting at least some sort of technical bounce - S&P500 will be Defended). Unless we break through to another floor. Then I keep repeating the same strategy on the next floor.

At some point we will either break out above the penthouse or into the basement. But for most of the life of this fund (since August 07) we have been stuck in a relatively narrow range. If the economic story truly does matter and corporate profits in January start to weaken as I believe, and more importantly GUIDANCE for 2008 (i.e. confession time) is given by companies in a manner that I think is more accurate, we might be visiting the basement. But until then, we continue to simply go from 1 floor to another, but in aggregate are limited by the ceiling being formed by our series of lower highs. Hence, why it is hard to get too bullish on anything for more than a few weeks around here...

Combined with the fact most of the stocks/sectors I really like have had tremendous runs off the November lows and the "easy money" is in, it puts in a more conservative stance. As I have stated in the past, people are saying the market is cheap based on 2008 earnings. But if in fact 2008 earnings are a mirage is this market that cheap? Since the market seems to be disassociating from reality of the real economy, we are forced to use these technical analysis views to try to make overall market calls for the near term. I've stated in the past, if the market were fully reflecting what I see as an ugly economy in the coming 12-18 months, we probably should be down another 1000-2000 pts on the Dow. However, those Dow components are chock full of multinational corporations which people have deemed immune to slowdown since they are much more highly leveraged to the world economy. With Europe slowing, Japan in 15 year death spiral, and China reliant on US to export (and many other countries reliant on China to buy their commodities) I just don't buy this decoupling argument. But as always, perception is reality.... until perception changes to view a US slowdown to actually matter to China, the multinationals will hold up. I expect sometime in 2008, people to panic on the multinationals as well (many of the Dow components) when GDP growth in China and India finally falters from unsustainable 11-12% levels (even 7% would be great for them, but that is not what people are wanting to hear). So this is the long term road map. Let's see how it plays out.

New Home Sales Plunge

Readers, I am going to spare you from posting about housing every month when these reports come out. For those who have been reading the blog a while you know my views (click on housing bust label at bottom of this post for a history of posts on the subject) Here is a summary for new readers. Month after month it will be bad news. Every so often a report will look "ok" since it was "up" from the previous month (but still massively down year over year). The CNBC talking heads will tell you *this* is the bottom. The home building stocks will rally for a few days, probably 20-30% off of very low levels. Seals will clap on TV. You will just ignore it. And realize until late 2009 or early 2010 it's all a sham.

Until prices come down to a level where people with 5-20% down, 6% fixed rated, making normal American incomes can afford, we are nowhere near a bottom. The only good thing of late I have seen is new home starts are finally slowing, and home builders in desperate attempts to get cash flow have slashed new home prices. We now are going to face a almost comical dichotomy in some markets. New homes selling for 30% below existing homes. It's already happening in southern CA in some spots. This just means that existing home sellers are still in the denial stage and think they can get 2005/2006 prices. This is why your 'median' prices are not falling.

Remember, unlike stock prices, home prices are very illiquid. Stocks are priced instantly, by the second. Homes can takes quarters/years to adjust. Eventually people who cannot afford homes they 'received' (and I mean received since many put NOTHING DOWN), will see they cannot afford these homes - and be forced to sell. Also keep in mind as each month passes, more and more people who bought with 0% down, 1% down, 2% down will be going upside down on their home. So they need to make a decision - do I continue to make payments on something I put almost none of my own money into... for an asset that is depreciating by the month. When they come to their "aha" moment, that's when the real price adjustments will happen. Until then you will hear hopeful talk about how we will have a bounce next spring when people are out and about in prime house hunting season.... and how prices are "holding up" and that is bullish! A bunch of lies.

The reality is it would be better for all of us if housing prices fell. Why? So it would not be such a strain on our budgets. While it would not feel good to lose asset wealth, for anyone who is looking to buy a new home would you rather have a $1400 monthly mortgage payment or a $2700 mortgage payment? Well you would get the former if the median price was where it should be. Please read this if you are new to the blog: Analysis: What Should Median Housing Price Be Today.

Again, I am not going to post these monthly figures every month because it's already getting old very fast. We are in about inning 2 of this correction. A 7 year bubble of epic proportions does not get fixed in 11 months, no matter what the pundits claim. A correction does not end when everyone is looking to "buy a bargain"... which is the stage we are now. It ends when no one wants to buy real estate because "all it does is lose value". We are nowhere near that stage (despair). We are still in the early stage... denial. Just as we are when we talk about coming recession (errr, slow down). Until people see "facts and figures" (which will come to fruition next spring/summer) they will continue to deny, deny, deny. These are people who live in NYC and don't see what is happening in the real world. Just think about the coming few years where every major city, county, and state needs to make budget with real estate tax dollars plunging. Except for areas in secular bull markets (say Houston with its energy market), it is going to be an interesting time trying to make budgets with overspending politicos drunk on excess from 2002-2006. [California in State of Fiscal Emergency]. I'd argue 5 of our largest 10 states are already in recession, California, Florida, Michigan, Ohio, and Pennsylvania. I do expect the sunbelt states who are benefiting from migration trends to do the best on the back end of this, but many of those states were also the most inflated so there is major cross currents, even for them, in the near term (1-2 years).

New Home Sales Plunge by 9%
  • Sales of new homes plunged last month to their lowest level in more than 12 years, a grim testament to the problems plaguing the housing sector. The Commerce Department reported Friday that new-home sales tumbled by 9 percent in November from October to a seasonally adjusted annual rate of 647,000. That was the worst showing since April 1995, when the pace of sales was 621,000.
  • The sales pace for November was much weaker than economists were expecting. They were predicting sales in the weakest sector of the economy to drop by around 1.8 percent, to a pace of 715,000.
  • The median sales price of a new home dipped to $239,100 in November. That is 0.4 percent lower than a year ago. The median price is where half sell for more and half for less. (and this remains the problem)
  • New-home sales dropped by 19.3 percent in the Northeast. They plunged by 27.6 percent in the Midwest and they fell by 6.4 percent in the South. However, sales increased by 4 percent in the West.
  • Over the last 12 months, new-home sales nationwide have tumbled by 34.4 percent, the biggest annual slide since early 1991, and stark evidence of the painful collapse in the once high-flying housing market.
  • A drop in home prices left some people stuck with balances on their home mortgages that eclipsed the worth of their home. Other home buyers were clobbered as low introductory rates on their mortgages jumped to much higher rates, which they couldn't afford.
Again, folks I say again, economy will be issue #1, #2, and #3 in the coming general election. Expect proposal after proposal by these politicians to stop the business cycle from happening and try to keep home prices above where they should be. They should not be allowed to happen since in the long run it will be better for all of us with mortgage payments to have cheaper homes that we can actually afford instead of having to stretch with 40-45-50% in some cases of our income going to try to put a roof over our head. This is what the people trying to come up with bailout plans do not get.

Thursday, December 27, 2007

Hoping to Add back some Mechel (MTL) near $94

Yesterday I mentioned cutting back my position in Russian iron ore/coal/steel stock Mechel (MTL) after it ran so far so quick. I was a few hours early as I sold at $102 and the stock went up to $106 later in the day (never get the exact top or bottom), but already today we have seen a quick retreat to the mid $95 range in this volatile name. The 20 day moving average is sitting at $94 so I will be hoping to buy back my position (plus a bit more) at that level.

With the market so choppy of late, sometimes we can make some nice quick trades like this - doesn't make a huge difference to performance but if you can do this relatively consistently it adds up, and in a directionless market as we have had for months (range bound), this has worked out pretty well. Again this goes back to a strategy of culling some of the winning positions as they move up - then if they continue upward, at least you have some skin in the game. (sort of like the fertilizers right now which refuse to fall down) And if it pulls back you can buy back (and in fact buy more). When it works it's a good thing but of course sometimes you see a stock just run and run and run upward and you miss out in part on that move. On the flipside, when a stock implodes during earnings (i.e. a Crocs (CROX)), by taking these incremental gains along the way you lock in some profits that cannot be erased by the fickle mood of the market or unforeseen events.

No strategy is perfect but having such a large portfolio allows one a lot more flexibility to let winners run to some degree while at the same time trimming (and then adding lower) along the way. Obviously this strategy works less effectively in a market that moves straight up for months on end.

Long Mechel, Crocs in fund; no personal position

Bookkeeping: Adding more Trina Solar (TSL)

I added more Trina Solar (TSL) today and in fact it has now moved to my #2 position. Just like that - from zero to #2 position in 26 hours. While the solar sector in totality is way over run with speculation, the charts are very overextended, and the valuations stretched - I like Trina Solar for the reasons I explained yesterday [Restarting Trina Solar]. Today, the technicals actually confirmed a near term positive outlook. Before the sector got hit, the stock had made a new (recent) high (surpassing the December 5th high), and a higher high and higher low from yesterday. Even after being hit, it still retained those qualities and as I stated yesterday I wanted to see this stock hold its 50 day moving average (moved up to $50.30 today) which it has.

Now the headwinds are against most of the sector, so it's struggled and while a market I don't trust could work against it, if the market can just hold flattish and the sector as well, I think this stock is poised to make a substantial move. Unfortunately, this has been the red head step child of the group in the past half year, so just when it is ready to "run", both the sector and the market take a hit. But that's ok because it let's us build a large position.

Again, if market / sector forces work against it, and it breaks down below the 50 day moving average I will quickly lighten my position but from a fundamental basis, Trina Solar is many times superior than much of the junk speculators are running up 50% in a week's time in the sector. As one simple example, while there is hand wringing about Trina's gross margins falling below 20%, other companies in the sector of similar ilk have posted gross margins of late in the 5-15% range (and these stocks have run up over 100% in the past month) - while Trina has lied like a dog hit by a car on the side of the road since all investors (at this point in this sector) care about is revenue growth and not profit margins. Once capacity comes online for this stock it should be able to prove the naysayers wrong but this might take some time. But unlike some of the junk that speculators have run to (some of which have just a dream of reaching Trina's level), one can sleep at night knowing this is a viable business with real fundamentals underneath. Now we just hope the market (perception is reality) is coming back to this story. If so we should see a print north of $60 sooner rather than later.

Trina Solar is now up to a 4.4% position.

Long Trina Solar in fund and in personal account

Speculators Take the Day off in Solar, On to Dry Bulk Shipping

Well speculators apparently have run the solar stocks up to a level even they cannot believe. Time to give it a rest... at least for 12 hours. Well not for China Sunergy (CSUN), probably one of the most fundamentally challenged solar companies, but that hasn't stopped speculators from taking it on a 2 day ride from $11 to $19 (as if the people who bought it in the past 2 days care about fundamentals). After a thorough investigation, reports are emerging that the company has 2 very valuable assets which are leading to this explosion in value. The assets are: China & Sun. Both in the same corporate name. "Priceless!" Until it falls 50% like it is apt to do every 6-7 weeks.

But for today, the sexy sector of the day is dry bulk shipping, our long lost love - we haven't seen these stocks ramp for 2 months. They deserve some attention too. Solar has been getting *all* the attention and it's just not fair - the divas of dry bulk have been upset. So today they get their day in the (ahem) sun. Dryships (DRYS) +9.2%, Diana Shipping (DSX) +9.0%, Excel Maritime (EMX) +6.5%. Really - everytime the teenagers get the keys to Wallstreet they just go back to the same tired groups. (Did you notice all the chinese small caps making 25-30% moves yesterday on no other reason other than... well they're chinese stocks under $10?)

I've been debating these dry bulk shippers over the past few weeks, especially when they were washed out. At these stock prices, a far cry from where they used to be, there is actually some value. But perception is reality in the market, and the minute perception reverts back to potential slowing global economy these stocks go down, even if their pricing is near all time highs [Baltic Exchange Dry Index]. That's the problem we have with investing in these names right now. Surely they will have very severe bounces where very apt traders can make a large % in a very short time, but knowing "when" the markets "deems" the global growth story is back is just a guessing game. The irony is their business is actually booming... but they are getting discounted for potential future slowdown. This is the tricky part of the market - not only must you be right on your thesis, you must also be guessing correctly what the "crowd" is also thinking. Hence, why despite being tempted on these serious pullbacks from highs reached in the fall, I still am very wary of wading into this pool. I can play the same "global boom" trends with a lot more safety through agriculture stocks in my opinion. So that's the path I've chosen.

No positions

Investors Appear Immune to More Writedown Talk

It is interesting to watch the financials here ... as Goldman (the "man" on the Street) comes out and says writedowns will be far worse than expected, the market seems to be in general shrugging it off. People are saying it is 'priced into the stocks', but I just think its investor fatigue with hearing the same news every few weeks. Much like a drug (or credit injections) it takes more and more to keep the user going. So at some point all this news of billions upon billions of writedowns starts rolling off investors backs.

What? Another $6 billion? Been there! Done that!

Unless its something much more large in scale ("Maybe I'll get scared when you write off $40 billion!") or using some new lingo or a new problem ("Writedowns not due to subprime mortgages but due to commerical property loans"), the market has apparently checked out and moved on. Again, Americans have the attention span of a gnat so away we go to worry about Britney Spears' little sister's pregnancy - we cannot be bothered with such things as another $20 billion+ of writedowns. Whats $20 billion when we already have heard this news before? It's all fake money anyhow - I mean what's a writedown after all? And no matter what the Fed has our back as do our friends in the Middle East and Far East.

So I suppose when these banks are going back with hats in hands asking for yet another round of capital infusion from our foreign friends, maybe that will get the attention of investors. Because right now even a nearly $20 billion write off by Citibank means very little. At this point they are fast approaching the point where they are just writing off every thing they have in terms of CDO exposure and saying 'ok we fess up, it's all a joke.' And investors seem content with that because at least it's contained and measured. Until it's not. Which could be a few weeks or months from now. When the next shoes fall. And maybe we have something attention grabbing enough to get the short attention span investor to realize these are real dollars and real destruction of bank's balance sheets. Gosh, back in the day when a Goldman analyst spoke, people actually paid attention.
  • A Goldman Sachs (GS) analyst on Thursday joined a long line of his peers to predict that fourth-quarter writedowns to be taken by several large banks are likely to be even greater than investors expect.
  • William Tanona now estimates Citigroup's (C) writedowns to come in at $18.7 billion in the quarter, up $7.7 billion from his original expectation. He expects Merrill Lynch (MER) to write down $11.5 billion of CDOs and subprime exposure, up $5.5 billion. Tanona doubled JPMorgan Chase's (JPM) writedown estimates to $3.4 billion, according to an industry note in which he cut his earnings estimates on the three firms. (booooooring!)
  • Following the writedowns, Citi would still be exposed to about $25 billion worth of collateralized debt obligations, or CDOs, Tanona estimates. Merrill will still be exposed to $8 billion of CDOs and $5 billion for JPMorgan Chase, he writes. (and we can write that off next quarter, and all our problems are fixed - magic!)
  • Still, as a result of the larger-than-expected writedowns this quarter, Citi is likely to cut its dividend by 40% to preserve capital, Tanona wrote in a note on Thursday. (boooooring!)
  • Separately on Thursday, Brad Hintz, an analyst at Sanford Bernstein, estimated that Merrill's combined subprime and CDO exposure currently totals $27 billion. The New York brokerage will likely write down $10 billion of its exposure this quarter. (that's just 2 more quarters of writedowns at this pace, and problem solved!)
  • Hintz estimates that Merrill will report a net loss of $5.10 a share, "marking the weakest quarterly result in the firm's history," he writes in a note. (whoooooooooooooooo cares! It's only money - there is always more around the corner to squander - we are too big to fail - nah nah nah)
  • Shares of all three firms were falling between 1% and 2%. (ooooh, scary!)

Folks, we need something a lot more interesting to bother us nowadays. Writeoffs? We're Immune! A write off here, a write off there, here a write off, there a write off... old Mcdonald...

Goldman Sachs Likes Potash (POT)

Looks like Potash (POT) got an upgrade this morning. A little late to the game (?) [Analysts Still Doubting the Fertilizer Stocks - I'm Adding Potash Ahead of Earnings], but hey you always want to be on the side of the smartest guys in the room.... even if you are ahead of them by a few months.
  • Shares of Potash Corp. jumped on Thursday, after a Goldman Sachs analyst upgraded the fertilizer company's stock on higher potash prices. The stock advanced $6.59, or 4.6 percent, to $150 in early morning trading and set an all-time high of $150.26 earlier in the session.
  • Goldman Sachs analyst Edlain Rodriguez upgraded the stock to "Buy" from "Neutral" and said Potash will be able to raise prices because of strong demand and tight supply. Rodriguez noted that Potash shares have risen sharply recently, but still thinks they have further to climb.
  • "Despite the strong run-up in the stock, we believe there is further upside potential, based on the constant upward earnings revisions that will likely continue in the near-term because of Potash's ability to raise prices due to strong demand and tight supply," Rodriguez wrote in a client note.
  • Rodriguez's new price target is $180, from $122 previously, which implies upside of 25.5 percent to Wednesday's $143.41 closing price.

I still love this space for the long run, but the recent run ups have been enormous off of November lows, and the more analysts start to love the stocks the more I get wary. I prefer it when analysts underestimate the estimates, allowing the companies to beat the numbers and raise guidance and continue that pattern. I've seen a lot of fertilizer bandwagon jumping in the past few weeks. While I think justified, the ride is starting to get full. I've cut back my fertilizer exposure to the lowest its been in quite a few months, and at this point am hoping for some pullbacks to add more. In fact I have taken a bit more off the table this morning as the stock is up over 45% in a month. The stocks seem quite extended to me at this point; but again going out 1-2 years I still think there is a long way to go.

Long Potash in fund; no personal position

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