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