To Any Computer Programmer Readers -

If anyone who reads the blog, has any expertise on creating a "widget" for a blog, please shoot me a line via email (available on right margin). Thanks.

Zachstocks on Ctrip.com (CTRP)

Just noticed Zach over at Zachstocks.com has a nice write up on one of the fund holdings, Ctrip.com (CTRP). Ironically for the first time since October, I added to this name Friday. I have noted in October at the height of China mania (PetroChina hitting 1 Trillion Valuation), when every financial expert on TV was telling you to pile into China (doh! at the top no less) that things were getting out of control and instead I was running to India [Buying a Bucket of India] which was getting no attention by the 'savvy smart money experts'. That worked out well in retrospect as Chinese stocks have performed quite poorly the past few months. [China v India the Past 2 Months] However, I have noticed the past week or so some 'relative outperformance' (not performing as badly as US equities) in the Chinese stocks so we might be ready to get some rotation back to these names. Maybe. I own a few small and mid cap Chinese stocks (Ctrip.com being one) but had cut back exposure the past few months, while focusing on India. However, I am watching to see if this group is ready to make a move up - in fact if the portfolio were not already chock full of names (I am trying to keep to roughly 55 long positions) I'd be interested in potentially adding some of the larger cap Chinese stocks if they begin to break out - oil company CNOOC (CEO) is one I have had my eyes on for a long time. So if I do add one as a proxy for large cap China this would be the one.

Regarding, Ctrip.com this has long been a personal favorite and a part of my personal portfolio on and off for quite a few years... this was a Chinese stock to own before Chinese stocks became sexy. The long term story is quite easy to summarize - China, travel. And without the risk of high fuel prices that you would encounter by buying a Chinese airline or things of that nature. Ctrip.com has never been a cheap stock, but it has been one of those "growth stocks that has always been expensive". Yet it always seems to perform and it's management plays the Wall Street game to the hilt; under promise and over deliver. While there are always threats of increased competition to a service company such as this (so one must always be on the look out for slowdowns ingrowth), the growing pie of Chinese travel should provide secular growth for quite a while.

As a side note - as readers know from the name of my mutual fund, I am a big believer that being in the right sector is 2/3rd of the battle, but this sector is a case where you have to be in the right company. Many times over the years, as Ctrip.com has been very expensive I've been called by the siren song of "cheap" eLong (LONG) a competitor. But if you pull up a 3 year chart of eLong you can see what an unmitigated disaster it has been. Thankfully I never touched this name, but it was close a few times. So this is certainly a case of you need to pay up for high quality. Since I have a preference for "growth at a value" I tend to chase after the eLongs in sectors such as solar which truth be told has held me back (I've sat many months in 'value plays' while the most expensive stocks in the sector ramp up day after day)- closing your eyes to valuation and just buying a First Solar (FSLR) [which I found 'expensive' way back at $60] for example, was the better option. So I just want to point that out - because as they say it is sometimes better to pay up for best of breed, and online travel in China is case in point.

Anyhow back to Ctrip.com -in terms of technical stock performance, this has to be one of the most reliable stocks I have been associated with the past half decade. It generally will stair step up - make a move, consolidate (rest), than make another move up, and keeps repeating it. Short of an earnings warning in the future, this just seems to be the historical pattern. And we might be coming to the next move. As the chart below shows, the stock has been range bound for the better part of 2 months after a larger move. The range has become more and more narrow - during this time I winnowed my exposure to the name to use cash in other places with more appreciation. But generally as this range narrows, we begin to enter a stage where a large move can be made. Whether it is up or down is the open question. :)



Here are some points from Zach's article:

• The company operates much the same as the US equivalent Orbitz or Expedia except for the fact that CTRP enjoys what essentially amounts to monopoly status. Bear Stearns estimates that the company holds a 57% market share of the Chinese online travel market and that level has been growing quarter after quarter.
• Despite the high level of penetration, the company’s future growth prospects remain bright because the online travel market itself in China is expected to grow at a 37% rate through 2010. At the same time, Chinese culture is just beginning to embrace the idea of online travel booking whereas in the past, most have used more traditional travel agent services. Add to that, a broad population that has only recently been introduced to discretionary spending and leisure travel and you get the recipie for long-term secular growth.
• Bear Stearns estimates that the company only accounted for 2.7% of total hotel bookings in 2005, and 4% of total airline tickets in 2006. Both of these statistics are likely to increase to above 10% in 2010 and this in the context of a robustly growing overall industry. While eLong (LONG) is also a player in this market, the competition is tilted in CTRP’s favor as name recognition, service offering, and pricing power all appear to benefit the more well established player. Some of the major airlines have created their own online offering platforms, but at this point they have not been able to reach critical mass in order to effectively compete against CTRP.
• A look at industry trends shows that while hotel bookings are a strong cash flow driver for the company (and this business is expected to continue to grow), the primary growth engines will likely revolve around air ticketing and packaged tours. CTRP is set up nicely to benefit from trends in all three of these areas and while domestic travel and outbound travel from China makes up the bulk of its business, the company is beginning to receive more inbound business in relation to the upcoming Olympics as well as a general willingness of the global population to visit China.

Long Ctrip.com in fund; no personal position

Bookkeeping: 'Rising Tide' Performance Week 22

Week 22 performance of the mutual fund

Comments: Well I started last week's review with "A quiet week overall". Can't say the same this time around. It's been a long week - so long in fact it feels like it's been over a year long (oh cmon now, I've been waiting to use that line for months). No, on a serious note - this was a bad week. I was not keeping track of the fund/index performance week by week during the August swoon, but this week was worse than anything we had in very awful November on the S&P500. I don't track the NASDAQ weekly but Friday alone the NASDAQ lost nearly 4%... bringing back memories of summer and fall of 2001 or just about any week in 2002.

For the S&P500 in November the worst weeks were week 11 (of this fund) at -3.9%, and week 14 at -3.7%. Small potatoes as we start 2008 off with a bang with the S&P 500 down 4.5%, and the Russell 1000 down 4.6%. That is obviously some serious territory. Rising Tide Growth Fund fell this week too but a very manageable -1.00%. I'll take it! In fact, relative to the indexes this is *the* best week the fund has had period; with an out performance of >3.50%. To put that in perspective that annualizes to a yearly out performance vs the indexes of >180% (I wish)

This was actually quite the week. Monday was in line with the markets but during the heavy drop Wednesday, the 'pair trading' set up I have, long certain sectors combined with Ultrashorts against others worked great, so the fund was actually up during a 1.5% type of loss day, and Thursday with the market flat, this continued with sectors I am exposed to such as agriculture and infrastructure ramping very strong, while my top position at the time Ultrashort Real Estate (SRS) went on a 1 day 6%+ tear, as people start buying into the commercial real estate slowdown. (remember this is not a residential real estate short). And then it had another big day Friday. While I don't have an Ultrashort against the NASDAQ my Ultrashort against the Russell 2000 continues to outperform as it is chock full of companies dependent on the US economy - note the Russell 2000 was actually DOWN in 2007 whereas the S&P 500, Dow, and NASDAQ were up. This all plays into my thesis started in August that companies without benefit of exports will get hit the hardest.

Only on Friday did the longs in the portfolio suffer as the market started "baby with bathwater" type of selling, but the decent cash position and remaining Ultrashort exposure helped to buffer the fall to some degree.

From here, we appear to be approaching critical support on the indexes. If S&P 1400 does not hold, its a free fall situation. I would doubt this happens right away without a bounce first, but anything is possible. For the fund, I came into the week as heavily hedged as I go (19% type of Ultrashort position - I try to limit myself to around 20% since this is a long focused fund) and kept that level most of the week until late Thursday and Friday. Now with the market swooning so strongly, I am going back to a more long stance anticipating some bounce, and then once we hit 'resistance' again, will return to this negative stance as we enter earnings season. But the complexion of the portfolio changed quite a bit on Friday as I did the first round of heavy buying I have done in quite a while. Sentiment is starting to get quite poor so I would expect at least some attempt at rebounds next week. How successful it will be, I suppose depends on the market mood and if Fed cuts, government bailouts and the like convince people (for the fourth or fifth time) that those actions are enough to stop the business cycle.

As for the fund, it has been quite a hot streak of late. This sort of pace will not continue so I expect the market to take some gains back soon. She is a wild beast, and likes to humble us often so I expect to get some of that humble pie sooner rather than later. When things are working this well, it does not last. So I am expecting some weeks ahead where things don't go so splendid as they have of late. With 4 weeks left in my 2nd quarter of the fund life, I'm at pace to beat the indexes by over 60% this year (my annual goal is 15%), if the 3rd and 4th quarters match the 1st and 2nd. Even Ken Heebner would be proud? ;)

Price of Rising Tide Growth: $12.374
Lifetime Performance to date (vs Aug 3, 2007): +23.74%

Comparable S&P 500: 1,411.6 (-3.67%)
Comparable Russell 1000: 768.3 (-3.51%)

Fund return vs S&P 500: +27.40%
Fund return vs Russell 1000: +27.25%

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

This Week's Performance

Normally at this time I will post the weekly performance of the fund. However, the Marketocracy.com data is not working right now (it is showing most stocks returning 0% return today) so I am unclear on the exact returns the fund posted this week. If it gets fixed in the next 30 minutes I will post the weekly summary. Otherwise I will get it up Saturday.

It was a very good week up to today, but not sure how things went today- I am very curious.

Bookkeeping: More Apple (AAPL)

As discussed this morning I was hoping to add (more) Apple (AAPL) at the 50 day moving average ($184) - I am getting my wish so I am taking this stalwart up to a >3% position, with a larger buy than I did this morning.

Post earnings when it trades at $215, people will look at the chart and ask "why did I not buy", forgetting the emotion of the moment. Charts are so easy to read 2 weeks after the fact. ;) If my personal account was not chock full of other stuff this is where I'd be adding some as well. While we won't get a 40% increase in Apple, like some more speculative names could provide , it should have relatively limited downside as people flock to 'safety' (relatively). And if they wish to take it down to $160 or so I'd be happy with that too.

Remember the pattern discussed earlier this week - first teflon tech stocks fall (check), next solar (starting), next infrastructure (starting today after a blowoff type of top yesterday) and agriculture (sell off? never!). Amazing repeat of November happening before our eyes.

I am exhausted at this point.... been sitting on the sidelines mostly the past few weeks, waiting for this part of the cycle... I am out of practice hitting "buy buy buy". My only worry is we might not bottom until the agriculture stocks are taken out and shot. Maybe Monday.

p.s. Holy Crocs (CROX)! I am adding more down 15%? Wow. I'll start printing up the T-shirts "I went long the stock market and all I got was Crox'd!" Should be a good seller and bring in some revenue ;)

Long Apple, Crocs in fund; wish to be long Apple in personal account

Bookkeeping: Letting more Ultrashorts Go

Well it's been a breathtaking week eh? Happy New Year and all. I have no idea what Bush did or did not say - if anyone had the TV on, please let me know what the 'working group' told him to say.

I am seeing some major negativity in the stocks, but still no drop in the damn fertilizer names :) I assume these will only fall when we get the "crazy throw everything to the curb I don't want to be long anything" sort of selling we got in August and November. But I've decided to chop another layer of my Ultrashorts off. The S&P 500 quickly approaches the August/November lows of 1400-1405, just like that (a week ago we were at 1495? amazing). While it is possible we just continue straight down, the more probable path is some bounce in first half of next week. In a general sense nothing goes straight down, or up. If we get that bounce, I will use that opportunity to reload on my insurance (Ultrashorts). They are helping to mitigate losses to some degree today. If I am wrong and we just continue to go straight down - well I will be giving back some of these large gains in the fund performance but that's why you need to make hay when you can. :)

I also don't want to be in the path of a surprise intervention which the Bernanke Fed seems to love to do at the most inopportune times for shorts. But I do think we have first sniffs of fear in the air - first since November. Reality is finally starting to hit some people over the head - those that have denied reality since that fateful day in July when Bear Stearns hedge funds started to implode. Not a great start to the year for the bulls.

One area that seems to be doing quite well today are the Chinese large cap and mid cap ADRs... so that got my attention. I added to my New Oriental Education (EDU) this morning and just added some to my Ctrip.com (CTRP) here on this relative strength. The Chinese large caps have stunk the past few months, but could be putting in some near term bottom here so I have really lightened up on my Ultrashort Xinghau China 25 (FXP)

Long all names mentioned above in fund; no personal positions

Bookkeeping: Closing NII Holdings

I've added a few new positions today, and since I want to limit my long positions to around 55, I am looking at names to close out of the portfolio. I've decided to send South American business cell phone company NII Holdings (NIHD) packing. This is another name I've held since August 6th, 2007 (I believe the 3rd I've sold this week), so a stock I've had for quite a while. I am perplexed at how the market has treated this name, as it has solid growth, a good valuation yet is trading as if the South America market is saturated. Whatever the reason I am going to cut my losses here, watch it from afar and see if it can regain its footing in the future.

As outlined in mid December, this has been one of my top 3 losers in the fund [Top 10 Winners and Losers Thus Far]. Since that time it's 'improved' from a $8.6K loss to $8.0 loss as the stock has bounced from $42 to $48 the past month. I only hold 150 shares and a smallish 0.6% type of position, so I am letting these last shares go. Technically, this is a chart only a mother could love, and the stock is somewhat comatose. One good earnings report could change this situation but at this point I am going to have to see some performance before returning this name to the fund. I am not really worried about a lot more losses in the name, but it's simply dead money at this time and I don't have a large enough position (or confidence in the company) to make the position larger, as I have been doing with some of my other "losers".

No position

Bookkeeping: Two New Positions

I am adding two positions here, one an old holding I am adding back to the portfolio and another a brand new name.

1. After being bullish all fall on the deep sea oil drillers, and promptly seeing them do nothing I exited my positions about 8 weeks ago. Of course, not more than a few weeks later did this group finally begin to put a move on (Darwin and all). I did mention in mid December how great the charts were looking of the 3 names in this sector [Three Deep Sea Drillers - 3 Great Charts]. I did add a smaller position back in Atwood Oceanics (ATW) shortly after [Restarted Atwood Oceanics], when it pulled back, but certainly not enough considering how huge of a move it made right after that buy. I am maybe making the same error today by being greedy and holding out for a lower price, but I am going to restart a position in Diamond Offshore Drilling (DO) on today's pullback. After peaking around $149 last week, the stock has pulled back to its 20 day moving average today - $134. (10% correction) So I am adding here in the $136s, with hopes to see mid $120s to add more. This would be near the 50 day moving average. As we enter a world of stagflation (I was a kid last time around so should be 'exciting' to see it in this time around), I expect oil to continue to confound 'experts' who don't realize this brand of inflation has nothing to do with the US economy but a continued world of shortages as too many people try to enter the middle class at once across the globe. Much like the oil service names I have been hoping to hop in, deep sea oil service is going to be needed if crude is $60, $80, $100, or $120. Why these stocks are not getting better valuations is beyond me - I think people still think this is a cyclical story, and not secular. I started DO as a 1.5% position. Atwood Oceanics has not budged - I was hoping to add to that name as well. Most traders would actually add ATW since it has the better relative strength vs DO, but I like to buy things near support levels. Just a style difference - I could certainly have the wrong horse, but I now own both once again.
2. For the first time I am adding a steel name to the fund. I am very conflicted over the steel story. On one hand the world growth must slow as Western economies enter slowdown (cough cough recession). On the other hand China seems determined to build build build no matter what.... and India is still building... as is the Middle East. More importantly China increased tariffs on steel exports, so this might be a short term benefit as they slow down their flooding of world markets with steel. While I am not a secular bull on steel, I keep a small part of the portfolio for cyclical companies (short term moves) like the refiners, or just some shorter term trades, so I am going to try one here with US Steel (X). I debated this name versus Arcelor Mittal (MT) which is turning into the worldwide powerhouse in steel, and Cleveland Cliffs (CLF) which is a US based iron ore pellet company (iron going into steel). I like all 3, but chose US Steel for technical reasons. I actually have debated adding Cleveland Cliffs for months as a long term holding since I think it could be bought out at some point and I have very little iron exposure... still debating. Back to US Steel (X) - easy story from a technical perspective... before the Chinese tariff news steel stocks seemed to be weakening on fears of slowdown in world economies, after this news is released stock rallies from low $100s to $122. Now we are back to where we were before the tariff news came out. 50 day moving average is $106 so this is where I enter. Now, since this is more of a trade instead of a long term position I am taking a different tact than normal. Usually I build up a position over time but I am doing a quick 2.6% exposure (300 shares) - if X strengthens I will add to this position and then if I can get a 10% or so move I will flip out. If this 50 day moving average fails, then I will set a stop loss somewhere near $100, take the loss and move on. Let me stress again, this is not a typical position but I try to keep a small portion of the fund for opportunities like this. I have avoided this whole area (metals, mining, steel, dry bulk) the past few months due to the inevitable time when people realize emerging markets can't decouple from their export markets, and it has worked out well thus far. I plan to continue to play the growth in those markets with agriculture and infrastructure (especially energy build out)... I think the other areas are more prone to investor sentiment swinging to fears of commodity slowdown when world economies slow, so those areas are best left to nimble trading in and out - whereas we will have a lot more stability in the ag and infrastructure names in my opinion.

Long US Steel, Diamond Offshore, Atwood Oceanics in fund; no personal positions

Bookkeeping: Morning Purchases

As mentioned earlier today, I cut back my 'insurance' versus my long exposure - the Ultrashorts by about 15-20% each - locking in some very nice profits over the last week, and expecting perhaps a potential positive reaction to King George when he speaks this afternoon after meeting with the invisible hand.

Of course the market can continue to tank but we have tons of support at S&P 1400-1405 and I don't expect that to break without a bounce first (as I type we are at S&P 1422), so we have somewhat limited downside (for now)

I am making some purchases this morning - below is the list and why

1. Research in Motion (RIMM) - series of buys between $109s and $106s. This company is already done with earnings, we have seen it and don't have any earnings risk going forward. After beating estimates a few weeks ago [Research in Motion - Nice Results] the stock gapped up from low $100s to low $120s, where I dumped some shares. I am now buying those back plus more. Along with Apple (AAPL) this is going to be one of the few secure areas of growth, and again RIMM has yet to begin its assault on emerging and foreign markets. The stock did break its 50 day moving average, around $108, but I am confidant enough in the business to ignore that at this time. Downside should be to $100 where I will add more. I took this up to a 2.6% position (from 1.0%)
2. I added some Apple (AAPL) in the $189s - it was sitting at $200 a few days ago, and I am hoping for a pullback to $184 (50 day moving average) to add more ahead of what I think will be a monster quarter (earnings).
3. I started a new position in Brazilian oil giant Petrobras (PBR). I have been chasing this stock for weeks on end, and it just continues to go up. After peaking near $119 yesterday I started my position in the $109s. I am hoping for a further pullback to $102 where I will add more - this is just a small starter position of 80 shares or 0.7%, and I also own it through my smaller stake in iShares Brazil (EWZ) in which it is a huge component. With the recent discoveries, this is one of the few companies that will be able to increase production in a world of continued energy shortages. Earlier posts on Petrobras here.
4. Coal stock Consol Energy (CNX) - I've been waiting for some pullback in this name after cutting the name down (locking in profits), so I am beginning rebuilding here as the stock fell to its 20 day moving average. I added here in the $65s and hope to see a pullback to the $62 area which is near its 50 day moving average, where I will add in larger scale.
5. New Oriential Education (EDU) - I added in the low $81s. Strange move today, up in a bad market. With earnings coming on the 15th of January this might be signaling to us to expect some good things. Either way I don't have enough exposure to the name (I was down to 1.2% of the fund) so I added more today - this is one of my favorite Chinese stocks but gosh darn expensive.
6. Infrastructure stock McDermott (MDR) - this was once my largest holding (way back in the day - August). After an earnings report which people found issue with, the stock tanked and I have been slowly building up this position - it performed very well yesterday as the infrastructure stocks ramped and with todays nearly 7% decline I decided to add more to this already sizeable position ($58s). The stock is still above its 50 day moving average ($57) - if the market continues to tank I don't expect that level to hold, but it's been acting quite healthy and this is one of my favorite groups.
7. Crocs (CROX) is acting like it's going out of business. In fact all retail stocks are. I have been hesitant to add much more but with the stock now approaching 07 lows post earnings implosion (mid $30s), you'd expect some support. I am adding in 2 layers here in the $34s with expectation to sell these lots in the upper $30s. I still really like the story here, and I think people are missing the international expansion opportunities but you have to respec the price action which has been miserable of late. Again, this is not the type of chart I usually buy because stocks below their moving averages can stink for months/quarters on end, but valuation is downright cheap and if I can flip out part of this position near $40 that would be a nice 10%+ gain.
8. Continuing to build up the Illumina (ILMN) position discussed yesterday - now we are at the 50 day moving average ($57), as I wrote yesterday - and this is the type of set up in a chart I like. A growth story, pulling back to key support. The risk is the stock breaks through this support level, but that is part and parcel with a strategy of buying stocks pulling back to key support levels - which is different from today's in vogue style of buying stocks at 52 week highs. Added in the $57s.

On my wish list?

1. Fertilizer - hasn't pulled back enough, but might never do so with Mosaic (MOS) set to report next week
2. Solar - not even close to a pullback
   
3. Oil service names I outlined earlier this week - both Cameron International (CAM) and Smith International (SII) are close to areas I'd start new positions. I am monitoring these two closely as they pull back ... I'd like to see some more weakness though.

Whew... this is the most buying I've done in a while...

Long all names above in fund except Cameron International and Smith International; long Research in Motion and Illumina in personal account

Going to Cut Back on Ultrashorts

While I continue to think the earnings season is going to bring bad news, I am going to cut back some Ultrashort exposure for the following reasons

1. Wall Street will start crying for bailouts
2. Wall Street will start crying for 50 basis points Fed cut
   
3. Wall Street will start crying for 50 basis points Fed cut this afternoon
4. Wall Street will start crying for 50 basis points Fed cutthis morning
5. Wall Street will pin hopes on this magical meeting between King George and his men
6. Wall Street will pin hopes on magical economic stimulus plan
7. Wall Street will pin hopes on massive bailouts mentioned at State of the Union
8. Wall Street will pin hopes on bailout plans by Obama, Clinton, and Edwards
9. Wall Street will pin hopes on bailout plans by Huckabee
10. Wall Street will pin hopes on seeing other Republicans who hate bailouts, see how 'economic populism' seems to work for Huckabeee, and hope those other candidates i.e. Romney, McCain, Guliani start devising bailout plans
11. Wall Street will whine like the big baby it is about everything
    
12. Wall Street the home of FREE MARKET CAPITALISM wants INTERVENTION NOW.

The last point is the hypocrisy of it all.

Therefore I will lighten up on these Ultrashorts and when Wall Street gets its way, runs the market back up a few % on the joke that are the coming proposals, and then cries "now what, whose gonna walk me across the street and hold my hand - waa waaa", I will increase the short exposure.

But since this is a circus, for all of you who watch financial television, just sit back and stare in awe at all the free market capitalists asking for handouts.

Job Numbers Putrid - Is This a Surprise?

Again let me preface this by saying the jobs number is a faulty report - that is theoretical in nature, based on model assumptions, and will be revised heavily. Remember back in the fall before a Federal Reserve Meeting the jobs number conveniently went negative? This gave Fed leeway to cut 50 basis points. Then a month later it was revised up some 80,000 jobs. So it's really a joke. What I look for are what the individual companies are saying and it's been a steady slew of bad news. And more to come as I have been predicting now that the 2007 year end bonuses are locked in, expect to see a lot of heads in NY Financial firms rolling in the coming weeks. If you do care about this faulty report keep in mind the only jobs being created are government jobs, private sector jobs were down. So our bloated government gets bigger.

Unfortunately the bigger picture is many of the themes I have been stating [Et tu, 1st half 2008? Predictions for the coming 6 months] are all coming together. Employment was the last leg the bulls had to stand on - i.e. well if jobs hold up we will come out of this in a few months. And instead of listening to what the companies are saying, the people saying this are the ones using these faulty government reports. The same government who tells you inflation is 2-3%. And these will be the same people clucking like chickens today saying we need 50 basis points of cuts, NOW! Because that won't make inflation go up even more. I just find the whole song and dance amusing. These are the same folks who won't agree a recession is here until the government numbers tell them 6 months after the fact (i.e. next summer/fall)

Now even more interesting news is this Bush meeting with the Plunge Protection Team (i.e. the invisible hand)

• President George W. Bush will meet with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke tomorrow as he considers whether to announce a new economic stimulus package amid slowing growth.
• Bush will speak to reporters tomorrow after a 1 p.m. meeting at the White House with members of the President's Working Group on Financial Markets, press secretary Dana Perino said today.
• ``It will be a number of weeks before the president makes a decision'' on a stimulus package, White House spokesman Tony Fratto said. ``There will be some additional data coming in the next few weeks, and the president has said he won't make any decisions until it gets much closer to the State of the Union'' address on Jan. 28.
• The administration ``will do what we think is appropriate to continue to foster economic growth,'' Ed Gillespie, senior counselor to the president, told reporters Jan. 1. ``There's more to be done, we think, on the housing front to address concerns people have.''
• This will be the first time in his presidency that Bush has met with all members of the financial working group, Fratto said. Normally, Paulson briefs the president on the group's activities, he said. The team meets formally about once a month, Fratto added.

So folks this is how it breaks out. The economy is slowing, cracking, and it's spreading. The bears have everything in their corner.

What do the bulls have? The Plunge Protection Team. And the Federal Reserve. So if you are confident that a government that cannot solve our most basic issues in this country will now ride to the rescue with the next round of plans, you have to be a raging bull. Because we can look forward to more proposals, more Fed cuts, more talk of 50 basis points, and more talk of "we need it now" (intrameeting)

And if this is the market I know and love, the people will eat it up like kool aid and push up the market on any action because the "government has our back". And we will bounce. Just like we did when Bush made his first mortgage proposals in August, just like the 2nd round of proposals by Paulson for mortgages in December. Just like the first Fed cuts, just like the second Fed cuts, just like the third Fed cuts. They all helped right? (no) Remember, these are the same people who told you "it's contained", "it's just a subprime issue", "keep spending" "nothing to worry about" "financial innovation is the backbone of the USA" "please go out and use these fancy new mortgages" "we are a homeownership society, let's get everyone into a home". And the Street trusts these people? I find it fascinating. But all that matters is sentiment. And apparently this Wall Street still is of the mind that the Federal government, in all its glory can engineer away the business cycle. And this folks is the bull case. And why you cannot be overly negative because of such 'sentiment'. It does not matter if has no place in reality. Or we have a gridlocked government that doesn't pass anything except for farm aid bills, and budgets chock full of pork barrel. The minute Bush mentions his stimulus in the State of the Union we can rally! woo hoo. Or maybe this afternoon at 1 PM!

Anyhow, this was all predicted....

I expect a lot more programs to "save" the banks, save the poor homeowners, save everyone. More government programs, more bailouts, more money printed out the wazoo at the Federal Reserve, perhaps a surprise cut here or there, perhaps a major discount rate cut. I've said at 2:31 PM Halloween when the Fed signaled they would go back to neutral, forget about it. We are going to mid 3%s by spring 2008 on the Fed funds - the more I see, the more I could be conservative. Maybe low 3%s or 3% by summer 2008. Anything and everything will be on the table to bail out the economy into an election year. That's just the reality folks. The long term be damned, whatever course of action is needed to be taken will be taken.

The fact is we are a reactive nation, not preventative. And now all the kings men will ride together to 'fix' the economic cycle. And it will fail. But as long as Wall Street can be made happy for a few more days/weeks, we clap like seals at the coming announcements.

Last, I think last night's elections speak in part to the utter disgust with the political system. We want anyone, who even appears to speak as a straight shooter. I just sit here amazed to hear the punditry coming out of NYC and Washington how so few there can understand the angst in the country when the 'aggregrate economic reports show a booming economy'. How clueless.

Earnings Season Begins Next Week

Tomorrow, after a BS labor report ... err the BLS labor report that people pay way too much attention to, but we are forced to acknowledge due to the herd mentality around it... we get to the land mine part of the quarter - earnings season. A wondrous time when we can learn more information about a company, and its future prospects - all at the low low cost of getting a leg blown off at one wrong word in guidance or conference call. Ahh, so fun. You think you are safe when the report comes out, smugly smiling to self, and then *BOOM* the CEO sneezes the wrong way in conference call and you're down in after hours. A time of 40% drops in stock prices for no good reason other than over anxious 'long term investors' are upset a company had earnings growth of 46.6% instead of the estimated 47.1%! Yes, a true reflection of our "long term investing" culture.

Looking ahead to next week, Monday is a quiet day ...

Tuesday, begins the real kick off with Alcoa (AA) the traditional "first stock that matters" to report. KB Home (KBH) will tell us how the home business continues to stink but they continue to build homes anyhow so they can continue to employ people - but I actually think this company will make it through the other side when things brighten up... in 2010. Drug development outsourcing company Pharmaceutical Product Development (PPDI) reports, this area has been doing quite well the past half year as people flee to recession proof areas - the sector is quite pricey though.

Wednesday, former #1 position (and biggest winner) and personal favorite Mosaic (MOS) will report a blowout quarter - it's just a matter of how great it will be and will its new fans be satisfied. My guess is yes but you can never judge the behavior of rabid lemmings - I hope something goes awry, and the company falls 30% so I can load up. Ok, I'd settle for 12% at this point. Ruby Tuesday (RT) will tell us how a slowing consumer and food inflation is killing them, but you knew that back in August/September. Every restaurant not named Chipotle (CMG) scares me on slowing consumer/food inputs. And Chipotle's valuation scares me. Hence all restaurants scare me. Hence I ask they come out with Ultrashort Restauraunt ETF (PIG) soon.

Thursday and Friday I don't see much of interest... and then the real fireworks begin the week after.

Long Mosaic in fund and in personal account

Merrill Lynch Downgrades Peabody Energy (BTU) and Consol Energy (CNX)

I was wondering why the stocks were down in the coal sector and it looks like an analyst downgrade. Unfortunately, the stocks are not down much (only 4%) - I've cut back on these positions quite a bit after they were top 10 positions simply to lock in profits after some huge runs. I am hoping for more severe cutbacks in the stock price in the relatively near future so I can add more - with the growing global imbalance in energy supply/demand I remain a long term bull and will remain so come recession or not. I am going to remain patient and hoping that a general market pullback will push these 2 down to my buy targets. In the interim, I have been adding to Massey Energy (MEE) instead which is focused on metallurgical coal and has been nearing some support levels. I am not as bullish on this one as the former two since its more reliant on industrial usage and steel.... which could see some slowdown....

• Investors pulled back from U.S. coal producers Wednesday after a Merrill Lynch analyst downgraded two of the largest domestic miners. Merrill analyst David Lipschitz cut shares of Peabody Energy Corp. and Consol Energy Inc. to "Neutral" from "Buy," saying the stocks are trading close to their peaks.
• Howald said growing Asian demand made 2007 "one of the most prolific periods ever in the coal industry," which sent the sector's stocks soaring in the second half of the year. China and India represented 20 percent of total global coal consumption in 1980, and are expected to account for 60 percent by 2030, he estimated.
• And as international demand soars, the analyst predicts an impending shortfall in U.S. supplies of steam coal -- used to produce electricity -- and a subsequent surge in prices. (more good news for US consumers, not that it would cause inflation or anything - at least note CORE INFLATION)
• Howald noted that the volatile sector may allow for some buying opportunities for investors going forward. Stifel Nicolaus analyst Paul Forward raised coal price expectations for U.S. coal miners, following a recent rise in prices and a better-than-expected supply and demand balance for the coming years. He maintained his "Buy" rating on Consol Energy Inc., Massey Energy Co., and Peabody Energy.
• Forward kept other major coal producers at "Hold," but noted that a further rise in coal prices could support an upgrade to "Buy" in the future.

Long all 3 names in fund; long none in personal account

Marketocracy data Whacky Today

p.s. if you click on the Fund Data via Marketocracy the graph at the top is accurate (the fund performance is the orange line) but the data at the bottom of the screen is all screwed up for some reason today - i.e. I did not lose 99% yesterday :) In fact yesterday was one of the best days ever for the fund, relative to the indexes (nearly 2% outperformance in 1 day). :)

The Long Term in Solar

Let me preface this post by saying I am a long term bull on solar, and in fact was an 'early adopter' among the investor class, that is I was invested over a year ago in my personal account. So I am not a Johnnie Come lately to this area. With that said, I do have some serious concerns in the 'mid term' (1-4 years)... my thesis is like all mfg goods, especially now heavily based in China, we will have periods of time over the next decade where capacity does not match demand, and even if this holds for a 4-6 quarter period, serious price wars can develop. I outlined this theory in detail in November in [Interesting Survey from Chinese Solar Companies - Price Concerns Already an Issue] In fact Jeffries analyst even thinks this is going to start happening next year [More Concerns about Solar ASP Pricing]. It is not a matter of if, it's just a matter of when ... but "when" is the key to investing in this space. (one can make a lot of money, before having to face the music)

In times like this when speculative juices are flowing in the sector, and even the tiniest of companies get run up 100s of percent it is hard to reconcile these performances with long term logic. The market in the near term is anything but logical. We will have some great shakeouts and many of these no name companies rising 400% I expect to be delisted, acquired for pennies on the dollar in half a decade or just be gone. Hence why I remain focused on the leaders such as Suntech Power (STP). But that does not mean between now and then they cannot rise another 1000% before the market comes to its senses. It won't be the first time a sector has this sort of action, nor the last.

The reason for this post, is to point out an excellent blog post [PV Industry Oversupply in 2008] who writes in even greater detail the same thoughts I espoused above and for anyone either in the sector or interested in it, I'd highly encourage a read. In 1 paragraph I'd summarize as below:

Bottom line: by the end of this year, 2008, cell producers will have installed capacity of 12.2 GW annual production according to present manufacturer plans. When you add in solar thermal capacity (Ausra, Schott) that number grows to 12.9 GW. Looking ahead, the 2009 end-year production capacity is simply enormous, at 17.2 GW. Is this a problem? Oh, yes, when you look at the demand estimates. Match the year-end 2008 capacity of 12.2GW with 2009 demand: the EPIA optimistic (”policy-driven”) estimate of 2009 world-wide demand is 4.3GW. Lehman calls it 4.8GW. Merrill Lynch has 5.2GW. A Q-cells presentation referred to a UBS number of 8GW. Even if you de-rate the 12.2GW number to account for “actual” vs. “nameplate” capacity; even if you attempt to adjust for “press-release” vs. “actually built” capacity, the numbers are still very out of balance. Even the most optimistic 2009 demand guesses fall far short of what the industry intends to produce.

Aside from the article itself the sheer capacity of solar panel makers emerging as shown in this entry [PV Supply/Demand data] should alarm you to at least some degree. Just imagine, each of these want to be a Suntech Power or at least a Trina Solar (TSL) in a few years. And for each on the list, I am sure there is another capitalist in China forming a new one to break ground in the next 6-12 months. This will shake out much like the semiconductor industry and in the long run I believe there will be 5-7 major giants who will be quite profitable companies. But where does that leave the other 50-70-90 (and more coming each quarter online?)

Now as I always repeat in these posts about solar, the counter argument is always, solar is 0.000001% of all energy use and will explode over the coming decades. I don't dispute that. My argument is timing. Timing of supply vs demand. It would only take 4-8 quarters where demand and supply are misaligned (way too much supply vs current demand) and this would crush pricing.... many companies will go from printing money to being major losers.

Now I don't know if (latter) 2008 will be the time of the great 'shake out', but this is something to keep on the radar and with the clarity of the post I wanted to highlight it to readers of this blog as well. He essentially explained what I did in my post above in much greater detail and with an Excel sheet full of companies in the supply chain. Worth the time so you see both sides of the story. Until then, enjoy your DSTI's and ASTI's of the world... ;)

Long Suntech Power, Trina Solar in fund; long both in personal account

Infrastructure Stocks Really Moving

Haven't seen this type of movement in a while from this group

Shaw Group (SGR) +7.5%
KBR (KBR) +7.0%
Fluor (FLR) +6.0%
Jacobs Engineering (JEC) +6.0%
McDermott (MDR) +5.0%
Foster Wheeler (FWLT) +4.5%
Chicago Bridge & Iron (CBI) +3.5%

Not sure what is driving the group but I am not complaining - might be the last push before a correction? ;)

Long all names except Fluor in fund; long Foster Wheeler in personal account

Bookkeeping: Adding to Illumina (ILMN)

One of my two stocks in the healthcare field, Illumina (ILMN) is pulling back today, from recent highs so I am taking this opportunity to build this position. I've outlined the fundamental story in the past but from a technical perspective after shooting up to a recent high of mid $62s the stock has retraced and now is back near $58. With support of the 20 day moving average just below that, and the 50 day moving average at $57, we should have a decent floor under the stock.

However, just like Huron Consulting (HURN), which I discussed yesterday the stock has been unable to reach new highs and has stalled at levels seen in October, forming a double top pattern, which is not bullish. So I am going to watch how both these stocks react, as a pattern of lower highs would be the next logical step. I am starting to see a lot of these situations even in strong sectors - stocks unable to burst through their October highs - this is considered to be negative, and when more and more stocks are exhibiting the same behavior it strikes me as worrisome for overall underlying health of the market.

With that said, I am trying to increase my exposure in "non agriculture, energy, or infrastructure" areas so that when those areas invariably fall I will have something not tied in to that part of the market. However the pickings are slim out there in terms of what has growth and what is technically a relatively sound chart once you leave these areas of the markets. And that pretty much summarizes the difficulty of being a bull in this market. Very few areas show strength and those areas are very overcrowded with a lot of people... so if you are not in these very narrow slices of the market you are not able to get any real serious return. Hence they become more and more crowded. Until they tip over...

I am adding 125 shares of Illumina just above $58 to take this position from 1.8% to 2.35% of the fund.

Long Illumina and Huron Consulting in fund; long Illumina in personal account

Interesting Divergence Among Sectors

As mentioned yesterday [Who Will Be the Last to Fall], the pattern we had when stocks free fell in November was 4 sectors held up while everything else started getting hit: teflon tech (Apple, Research in Motion, Baidu.com, Google), solar, agriculture and infrastructure. Then in order, teflon tech fell, solar fell the next day, and finally a massive 1 day raid on the agriculture and infrastructure names.

Today and yesterday we had some weakness in the teflon tech stocks - in fact Baidu.com (BIDU) approaches its 50 day moving average - as does Google (GOOG) - as does Research in Motion (RIMM) - only Apple (AAPL) sits far away - anticipating a monster good quarter I assume.

Solar leaders are still 'flat' but not showing the fervor of recent weeks - the stuff that is flying now is the most speculative and simply daytraders hungry for any sub $20 stock to run up.

And agriculture and infrastructure continue to ramp up - TRA +8%, CF +6%, MON +6%, MOS +5%, SGR +4%, KBR +4%, FWLT +4%, AG +4%, etc

If not for this exact same pattern playing out last time I'd be very heartened by the rally in the latter two groups. It would seem way too easy for things to play out in text book repeat fashion as in November but thus far most of the market stinks, a few select sectors have held up, but now we are seeing the leading edge weakness (save Apple) in 'teflon' tech stocks (for new readers that is my term for stocks that in summer/fall 2007 held up as if nothing was wrong with the market). And solar might or might not be in transition....

If we fall through this S&P 1440 level which, as always, is defended - we might see this transition back downward and these last groups standing fall, but so far so good as these 2 groups I have been stressing in the fund since day 1 (either infrastructure or agriculture has been the biggest weighting for 90% of the time), and the areas I view with the most pricing power, visibility, and backlogs for the next 2-4 years continues to show amazing strength. Even previously strong areas like coal are taking some hits today, so I continue to watch these 4 sectors to see where the market is potentially going...

Meanwhile defensive stocks like MedcoHealth Solutions (MHS) show some strength of late...

In general this is not a great mix. But let's see what the market has in store for us. Tomorrow we have a jobs report... a gov't figure which is essentially useless as its a theoretical model that can be manipulated by the birth/death estimates and its margin for error is well over 100K... yet the market trades off this faulty figure as if it's some Holy Grail so even if one dismisses the accuracy of the reporting, one must be cognizant that it moves markets. For now the market seems on hold until this report comes out. What I find amusing is you just never know what the market 'hopes for'. A bad employment number means the economy is heading for the tank (which stinks), but hey we could get 50 basis point Fed cut or an intrameeting cut (cheers!). Quite ridiculous in many ways, but this is the market.

Contracts for FMC Technologies (FTI) and Cameron International (CAM)

Well this happens to all of us; as if right on cue - after I exit a position I held for 5 months in FMC Technologies (FTI) yesterday [Some Changes in the Energy Patch], the company announces a nearly $1 billion contract. To add insult to injury, FTI also got an analyst upgrade this morning. Must you mock me FMC Tech? Bah and Humbug to you, sir. This was a sub 1% position so the 7% gain in the stock today would not of affected the portfolio that much but it's still a stinker of timing. But I continue to like this space in the long run, because crude at $60, $80, $100, or $120 really doesn't matter - the services and equipment they provide is needed at any price.

Cameron, FMC Win Subsea Contracts

• Oilfield equipment and services companies Cameron International (CAM) and FMC Technologies Inc (FTI) on Wednesday announced big contract wins to provide undersea oil and gas production equipment. After the market close, FMC Technologies Inc (FTI) said it won an award with revenue value of $980 million to supply deepwater subsea processing and production systems to Total SA's (TOTF.PA) exploration and production unit in Angola.
• Earlier, Cameron said it won a $190 million contract to provide undersea equipment to Venezuelan national oil company Petroleos De Venezuela SA.
• "The PDVSA award is the first sign of continued strength in the subsea market as we move into the new year," Mark Urness, analyst at Calyon Securities, wrote in a note to clients. "By our estimate, the number of trees ordered in 2008 could be as high as 600."
• Under the contract, Cameron will provide 10 trees, used to control gas flow in a completed well, engineering and project management services and other equipment used in undersea natural gas production for PDVSA's Dragon and Patao development projects.
• FMC said its Total deliveries will be completed over a multi-year period and are expected to begin in 2009. Revenue on the project will be recognized beginning in early 2008. Under the Total contract, FMC will supply 49 undersea trees and wellhead systems and other equipment.

No positions

Monsanto (MON) - Very Good Earnings and Raised Guidance

Well the agricultural boom just continues as seed/herbicide company Monsanto (MON) shows this AM with a big beat on earnings and sizable increase in guidance. While they did lowball guidance at last quarter conference call this was quite a mashing of those estimates.

• Agricultural company Monsanto Co (NYSE:MON - News) said on Thursday its quarterly profit nearly tripled, helped by strength in its corn seed and herbicide businesses, and raised its 2008 forecast.
• Net income rose to $256 million, or 46 cents per share, in the first quarter ended November 30 from $90 million, or 16 cents per share, a year earlier. That profit beat both the company's and analysts' forecasts for earnings of 35 cents per share, according to Reuters Estimates.
• The St. Louis, Missouri-based company reported net sales of $2.1 billion, up 36 percent from a year earlier.
• Sales of corn seed and traits during the quarter jumped to $467 million from $360 million a year ago, while sales of its Roundup and other glyphosate-based herbicides climbed to $1.0 billion from $649 million.
• The company raised its forecast for 2008 earnings to between $2.50 and $2.60 per share from its November forecast of $2.20 to $2.40 per share.

Even with this increased guidance, Monsanto trades at nearly 45x 2008 estimates, which is part of my beef with starting a position. But as I wrote yesterday, this seems like an expensive stock that will just remain expensive as its one of the few non fertilizer, non tractor ways to play agriculture. The chart speaks for itself. Impressive stuff and I expect much of the same in the fertilizers in a few weeks.

No position

Let me Stress this Post Again

Back in mid December I wrote 'Who Will Be the Last to Fall'

Let me bring that post back since a lot of new readers seem to have joined of late - also because today we see relative strength in infrastructure, agriculture, the teflon tech stocks (Google, Research in Motion) and solar (again). Everytime we have these swoons these groups hold up best. Generally only when the swoon is quite horrific do they fall (August, November). So until then they hold up (which is the current stage). I am remaining patient and we shall see if they too shall fall. Generally markets this bad generally end on a bad note in the last 30 minutes, but shorts have been burned repeatedly by "Fed actions" overnight, so each time the market looks ready to fall off the cliff we get an 'intervention'. So some light short covering etc might be in store as well, as many bears have been burnt by a Fed which seems to time things to inflict the most pain to people holding short positions overnight. (fair and balanced eh?) But as I wrote last Friday, the trend is set - we keep making lower highs and each week that passes more denial of the situation erodes (very slowly). We did test S&P 1442 and had some bounce. Again a key area - 1440. If that breaks, I think some of these sectors holding up will fall.

Myself I am hoping to get some panic out there so some of these stocks holding up, break down since I sold off so many in the past two weeks. Again, all my favorite sectors I want to increase exposure (the list above plus energy in the form of oil service and deep sea oil drilling) is holding up very well today....

*************
Here is the post:

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

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

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

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

I have my buying list at the ready.

So Much for that Pullback in Silver Wheaton (SLW)

Well one drawback of taking profits off the table is blow off runs like Silver Wheaton (SLW) is experiencing. The Silver ETF (SLW) is up less than 3% so I am not clear why Silver Wheaton is up 11%, but it is quite amazing to watch this sleepy little stock go. I do think as central banks across the world try to 're-inflate' the world with more worthless paper money to help the USA out, these hard assets gain value (as I mentioned I thought gold is going to $1000+ this year) but I am a bit taken aback by this move today :) Can't complain though - 90% of the trick is finding the right companies....

As I wrote when I first bought Silver Wheaton [Adding 2 Weak Dollar Plays]

Instead of buying the gold or silver ETF I bought Silver Wheaton (SLW) which is a company I have traded in the past - very interesting small company, which trades with more volatility than the silver ETF. Earnings are not something I am too interested with; they are profitable but the value of their company simply rises and falls with the value of silver.

With that said, I didn't expect *THIS* level of volatility i.e. silver up 3%, SLW up 11%. I assume the market is telegraphing to us to expect the (predicted) flood of liquidty of paper money coming to a theater near you, as the credit crunch intensifies into 2008. Remember M3 growth (which the Fed started to hide from us about 2 years ago) is booming; which in layman's terms means every dollar you own becomes a bit more worthless as more is printed. Can't wait for the day the peso trades at par with the US dollar. Barry Ritholtz talks about this all the time as well [Money Supply Growth? It's Much Worse than That]

Long Silver Wheaton (but not enough) in fund; no personal position

Bookkeeping: Adding Back to Huron Consulting (HURN)

Some fortunate timing in this name. I mentioned a week ago, I was taking some profits on consulting company Huron Consulting (HURN) as the stock ramped from $72 to $83 (15%) in 7 sessions. The stock was not near any support levels on the chart - so that was the simple reasoning to take some off the table. Well today we are seeing quite a nice pullback and the stock is now near the 50 day moving average of $75.50. So I am adding some shares here near $77, or 7% lower then where I sold them just last week.

I am just taking this position back to where it was before I took a portion of the table to lock in some profits and am back up to 500 shares or a 3.1% position. I am hoping for similar experiences in some other areas I want to add exposure to such as the deep sea oil drillers and fertilizer stocks, which remain stubbornly high (as crude just hits $100, and Bernanke continues to profess it doesn't matter because it's not part of core inflation anyhow - time to drop some more helicopters of money). I tried to explain to the gas station attendent this morning that I shouldn't be paying $3 for gas since its not part of core - he did not buy it. Perhaps Bernanke has a special gas station where inflation does not occur. (anyhow I digress, forgive me)

I do continue to expect Huron Consulting to perform on expectations of an increase in need for this company's 'restructuring' consulting services in a "slowing economy". (but not a recession mind you, nope, no way, no how, not in an election year). Unfortunately, we might of just formed a double top in this name as well - see late October peak and peak from last week. Could spell some trouble...

Long Huron Consulting in fund; no personal position

Continuing to Catch the Knife that is Blue Coat Systems (BCSI)

Blue Coat Systems (BCSI) is the case study in "don't catch a falling knife". Despite tremendous fundamentals, solid guidance and anything you could ask for [A Damn Shame - Blue Coat Systems] from the day Riverbed Technology (RVBD) warned and Cisco (CSCO) said financial enterprise spending was a bit weak, this stock has been pole axed [Networking peers keep hitting Blue Coat Systems]. The way these stocks are acting, corporate spending on WAN optimization is going to fall off the cliff in the next 2-3 quarters. Maybe they are correct, and I am wrong.

This is typically not the type of chart I buy because the stock is trending below major resistance (50 day moving average) and what looks like a "cheap" $31 can turn into "cheaper" $27 next week, but this company, based on growth rate, is now appearing quite cheap, so as we approach November 2007 lows I am going to stick my hand out again to get chopped and add another layer of Blue Coat Systems to the fund. The 200 day moving average is in the $29s and it appears this is going to be BCSI's near term fate, if this retest of November lows does not hold.

This takes my exposure up to 2.3% of the fund, and if you see some blood near your monitor - no worries, those are just my hands! Amazingly this was one of my biggest winners in fall 2007 :) luckily I took a lot off the table and locked in those gains but that doesn't mean this drop is not concerning in it's scope and persistance. This is now a 40% drop from its highs... breathtaking.

Long Blue Coat Systems in fund and in personal account

Some Changes to the Energy Patch - Closing Position in FMC Technologies (FTI) For Now

I've been a bull on the oil services patch since fund inception and will remain so. The 3 stocks I have been involved in have been National Oilwell Varco (NOV), Core Laboratories (CLB), and FMC Technologies (FTI).


Much like Frontier Oil (FTO) which I sold Friday, I have held these since day 1 of the fund. Today I am letting go of what remains of FMC Technologies (FTI) with a smallish gain, about 6% since August 6th - I am selling just north of $57. The stock has been listless of late, in a very narrow range. I am open to adding it back in the future but for now will look for greener pastures. A move back above $60 would indicate FMC Technologies is ready to move, so I will wait for that move.


This was down to a sub 1% position, and I am going to turn my attention in the near term to either Smith International (SII) or Cameron International (CAM) [which signed a nice contract this morning], to get some more oil service exposure. I like this area and I like the deep sea oil drillers - simply waiting for some of those names to pull back a bit more. I am a bit underweight in this whole arena as I have been focusing on solar and coal of late, but want to increase exposure if the right price hits. I like the price behavior of the two stocks above much more at this time, so will look for an entry point to replace FTI's spot in the portfolio.

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

S&P 500 Looks Headed to 1440

As detailed last week [Like a Moth to a Flame = S&P 500 and 1490], after cracking 1490, we now reside in that floor of the house called 1440 through 1490. In December, the last time we fell to this level it was defended pretty strongly [S&P 1440 Will be Defended] with some buying so we shall see how it works out this time. My working assumption is a similar defense will be put up again.

Now the open question is does it hold up or do we break through? If you listen to all the economic news and believe (as I do) economic profit guidance in the coming January earnings period is going to disappoint the raging bulls (i.e. it's not a slowdown!), then we could be breaking through, if not this first time than over the coming weeks. Then the real test begins as we head to S&P 1400.

Most of the stocks I am most interested in are still holding up pretty strongly, so I am hoping they get knocked in the knees so I can add to these positions. Otherwise I am still holding with my 20% or so Ultrashort - I'd like to see some fear sap into the market - we still seem in denial stage. Normally when we get to a level like the S&P 1440 which has provided support in the past I'd lighten up on the short exposure but with my thesis that earnings guidance is going to really surprise some people (on the bad side) who still think this is a raging economy or one that will recover in a "few months", I am hesitant to do so this time around, especially with 70%+ long exposure. Hence this short exposure is my only insurance to offset the potential drop in my long positions...

So all in all this is a long way to write, I am not doing much. I want to see how the market handles S&P 1440. I would expect some bounce there, but if we fail we could set up for a stronger move down. This might takes a few days, or weeks.

As an aside, seed company Monsanto (MON) reports tomorrow - I have never bought this stock for the fund, because although I love the agriculture sector, Monsanto has always been very pricey and >40x earnings. I can get fertilizer stocks for sometimes half that multiple - and get double the growth of Monsanto. So the stock performance of the fertilizer names has been much higher than the relatively conservative and richly valued Monsanto. With that said, Monsanto is the type of stock every fund manager in America put on its book in late December to say "hey look at me, I'm smart - I held Monsanto all year!". So it should have a floor underneath it. Personally I am hoping for some kind of disappointment from the company so investors cut bait with the fertilizer companies (so I can buy at lower prices).

No position

University of Michigan - Fight Song

Before I forget, a very important message: Go Blue! :)

Doug Kass' 20 Predictions for 2008

Here is Doug Kass' list of 20 Predictions for 2008 courtesy of TheStreet.com - as with my list [13 Outlier 2008 Predictions] these are less conventional ideas that are not on mainstream radar of the financial press. So if they do come true, one can make a good amount of money. As I wrote in my list, I wanted to get my predictions out before he did his list so his views wouldn't color mine, but in retrospect the similarities are quite striking - even down to the McCain Republican nomination (but really Kerry as VP? Kerry!?), the Yahoo merger with Ebay (I said buyout from News Corp) and which specific homebuilders will go bust. The only major difference I see below is he sees a doubling in the Chinese stock market while I called for 30% down. I guess either would be shock and awe events.

In late December in each of the past five years, I have taken a page from former Morgan Stanley strategist Byron Wien -- and now the chief investment strategist at Pequot Capital Management -- and prepared a list of possible surprises for the coming year.

These are not intended to be predictions but rather events that have a reasonable chance of occurring despite the general perception that the odds are very long. I call these "possible improbable" events.

The real purpose of this endeavor is to consider positioning a portion of my portfolio in accordance with outlier events -- with the potential for large payoffs. After all, Wall Street research is still very conventional and based on "groupthink," despite the reforms over the past several years.

Mainstream and consensus expectations are just that, and in most cases they are deeply embedded into today's stock prices. If I succeed in at least making you think about outlier events, then the exercise has been worthwhile.

Almost half of last year's predicted surprises actually transpired, up from one-third in 2006 and from 20% in 2005. Nearly one-half of the prognostications proved prescient in 2004 and about one-third in the first year of surprises in 2003.

But it wasn't the quantity of the correctly predicted surprises that made 2007's list a remarkable success, it was the quality, as I hit on nearly every major variant theme: the severity of the housing depression, the turmoil and writedowns in the credit markets, the curtailing of private-equity deals and the reawakening of equity market volatility.
Consider just a couple of these quotes from our Surprise List for 2007 :

"A fractured mortgage market leads to a standstill in deal-making as the capital markets (and underwriting activity) seize up."

In early 2007, "evidence of cracks in subprime credits are ignored, with housing-related equities soaring to new 52-week highs by March 1. However, a dumping of homes on the market in the spring serves to result in a quantum increase in the months of unsold housing inventory and a dramatic drop in the average home price. ... Sales of existing and new homes take another sharp leg lower as we enter what I've dubbed the Great Housing Depression of 2007. Importantly, the financial intermediaries that source mortgage financing/origination begin to feel the financial brunt of the Great Mortgage Bubble of 2000-06 after years of creative but nonsensical lending behavior."

It will be hard to do it again and beat last year's surprises, but without further ado, here is my Surprise List for 2008.

1. The Housing Depression of 2007 morphs into the Retail Spending Depression of 2008. Stubbornly high inflation coupled with a deceleration in the rate of job growth, which turns into job losses by midyear, and an absence of innovation (a creativity void in consumer electronic products and apparel), leads to an unprecedented and abrupt drop in personal consumption expenditures.

The Retail HOLDRs (RTH) exchange-traded fund declines to $80 from $94. Despite their apparent "value" today, retail stocks, especially women's apparel, are among the worst-performing stocks in the first half of 2008.

2. Under pressure from slowing consumer spending, disappointing capital spending and higher commodities, corporate profits drop 10% in 2008. Importantly, the pattern of economic activity grows increasingly inconsistent and lumpy, providing a difficult backdrop for corporate managers and investment managers to navigate.

3. The S&P 500 Index falls by 5%-10% in 2008, and 2007's laggards and leaders continue to be the same laggards and leaders in the coming year.

4. With a continuation of the credit and liquidity crises and an increased recognition that financial retrenchment will take years (not months), volatility pushes even higher. Daily moves of 1%-2% become more commonplace, serving to further alienate the individual investor.

5. The Federal Reserve embarks upon a series of moves to ease monetary policy in 2008. Nearly every meeting is accompanied by a 25-basis-point decrease in the federal funds rate even despite continued inflationary pressures.

Nevertheless the economy fails to revive as the Fed pushes on a string.

6. Growth in the Western European economies deteriorates throughout the year, and the markets in England and France drop at twice the rate of the U.S. market.

7. The Chinese juggernaut continues apace and, despite continued protestations of a market bubble, the Chinese market doubles again in 2008.

8. The Japanese market puts on a surprising resurgence as the world's investors respond to compressed valuations (vis-à-vis peer regions), reasonable multiples (absolutely and against Japanese bond yields), accelerated M&A activity, share buybacks and relative strong corporate profit growth.

9. The administration's proposal to revive the housing market falls on its face (as the housing bust accelerates), and President Bush enlists a well-placed Democrat and former cabinet member to become the U.S. housing czar, who has the primary charge to propose and administer a massive Marshall Plan for housing.

Several high-profile housing-related bankruptcies occur in 2008, including Countrywide Financial (CFC) , Beazer Homes (BZH) , Hovnanian (HOV) , Standard Pacific (SPF) , WCI Communities (WCI) and Radian Group (RDN) .

10. Financial stocks fail to recover. No financial company is immune to the eroding market conditions, the spike in market volatility, the uneven direction in commodities and currency prices. Even the leader of the pack, Goldman Sachs (GS) , makes several bad bets in the derivative, currency and commodity markets, and its shares begin to underperform its peers as profit forecasts move lower.

Citigroup (C) halves its dividend, and the shares briefly trade in the mid-$20s. Asset sales and writedowns leave the bank crippled, and in late 2008 (after another capital infusion by Abu Dhabi), Citi is merged with Bank of America (BAC) . Its new name is its old name: CitiBank!
Bear Stearns (BSC) is acquired by HSBC (HBC) in a take-under (well below today's price) -- as investor Joe Lewis loses nearly $350 million on his near-10% position in the brokerage firm.
Mutual fund outflows and uncertainty regarding the integrity of money market funds result in the asset-management stocks being among the worst-performing sectors in 2008. With private-equity deals at a standstill, Blackstone (BX) shares trade down close to $10 a share. Late in the year, CEO Stephen Schwarzman and his management group take the company private.

11. With the economy weakening and corporate profits tumbling, investors pay up -- real up -- for growth. The three horsemen -- Research In Motion (RIMM) , Apple Computer (AAPL) and Google (GOOG) -- move into bubble status, and short interest triples as the naysayers increase their bets. Their shares double in 2008 even as most equities decline.

Technology disappoints as it becomes clear by the beginning of the second quarter that "double ordering" inflated recent revenue gains as the weakening consumers' appetite for electronics founders. Rapidly growing biotech names are embraced as their P/Es grow high into the sky and they become the New Big Thing, and market leaders. Housing-centric equities continue to deflate and mop up the rear.

12. Although private-equity M&A activity remains moribund, 2008 is highlighted by numerous mergers of equals as a weak U.S. economy necessitates the need for a strategy that produces synergies and cuts costs. Yahoo! (YHOO) and eBay (EBAY) merge. So do Amazon (AMZN) and Overstock.com (OSTK) .

13. A weakening economy will also hasten a number of divestitures. General Electric (GE) will sell NBC Universal to Time Warner (TWX) , which will not sell or spin off AOL.

14. Reversing its recent strength, the U.S. dollar's value falls by over 10% in 2008 (and gold rises to over $1,000 an ounce). Despite the weak domestic economy, foreign reserve diversification efforts and the demand for higher interest rates cause the yield on the 10-year U.S. note to move higher throughout the year.

15. The price of crude oil, insensitive to a weakening world economy, eclipses $135 per barrel after an "exogenous" event of terrorism, supply disruptions or political upheaval. The $100 level becomes the new $70! Surprisingly, energy stocks react in a muted fashion to the rip in price as, by midyear, the Democratic Party's populist view of a windfall tax on energy companies gains increased acceptance.

16. The Internet becomes the tactical nuke of the digital age. The Web is invaded on many levels as governments, consumers and investors freak out. First, an act of cyberterrorism occurs that compromises the security of a major government (similar to the attacks this year emanating from the Chinese military aimed at the German Chancellery) or uses DoS against media and e-commerce sites.

Second, a major data center will fail and will be far worse than the 1988 Cornell student incident that infected about 5% of the Unix boxes on the early Internet.

Third, cybercrime explodes exponentially in 2008. Financial markets will be exposed to hackers using elaborate fraud schemes (like liquidating and sweeping online brokerage accounts and shorting stocks, then employing a denial of service attack against the company). Fourth, Storm Trojan reappears.

17. The hedge fund community (especially of a quant kind) is disintermediated in 2008. Outflows accelerate, abetting an already conspicuous trend of rising volatility in a market that behaves more like a commodity than ever.

18. There are several major Enron-like accounting scandals in 2008, causing investor confidence to plummet. These will come in some large financial and industrial (rollup) companies in Europe and the U.S.

19. Democrats Clinton/Kerrey and Republicans McCain/Crist represent their parties in the presidential/vice presidential contest in November. Ron Paul becomes the Libertarian candidate. In a remarkably close election (reminiscent of the Bush/Gore battle of 2000), the Democrats grab the White House.

20. The politics of trade become more fractious (even in the Republican Party) as angst about globalization escalates in the U.S., reflecting inequalities and a cyclical contraction in our domestic economy. Doha dies. And the new Big Things (and the source of liquidity for the capital markets) -- Sovereign Wealth Funds -- become targets of American politicians (and suppress U.S. equities further).

LDK Solar (LDK) Publishes Preliminary 2008 and 2009 Guidance

LDK Solar (LDK) is out this morning with preliminary guidance for 2008 and 2009. As mentioned repeatedly in the blog, margin pressure will be an issue for the entire sector, but at this point all investors seem to care about is revenue growth. With that said, by putting some firm numbers out, instead of analysts speculation, this helps give us a more firm outlook on the company. However, I still find the 2009 margin guidance to be aggressive (analysts are in same boat as me, with assumption of sub 30% for 2009), but I would not complain if gross margins would show such an increase by that year. My working assumption is LDK Solar can get back to mid 30s by 2009 as the benefits of the polysilicon plant slowly accrue, but anything over that is just icing on the cake. As for 2008, a 5% gross margin variance is still huge, but if 26% is indeed the floor (with 31% being the ceiling) that at least puts a downside parameter in the numbers and in theory avoids fears of gross margins falling down below 25%.

2008 Financial Outlook:
* Revenue: Between $960 million and $1 billion.
* Wafer shipments: Between 510 MW to 530 MW
* Polysilicon production: 100 metric tons to 350 metric tons
* Gross margin: Between 26% to 31%

2009 Preliminary Business Outlook:
* Wafer shipments: 1,050 MW to 1,150 MW
* Polysilicon Production: 5,000 metric tons to 7,000 metric tons
* Gross margin: Between 42% to 50%

Again, even a 40% gross margin in 2009 would mean a massive explosion in profitability - this would be due to the polysilicon plant LDK is breaking ground on being operational and cutting out a lot of cost. With a very aggressive timetable, and the pitfalls that always befall a company breaking into a new business, we shall see how it plays out, but as always any news (even bad) is better than uncertainty on the Street.

Some old analyst reaction with typical boo hoo from the Goldman analyst

• LDK Solar Co. said Wednesday it expects profit margins to remain under pressure over the next two years, though its outlook topped Wall Street expectations. The solar-wafer maker expects margins between 26 percent and 31 percent in 2008 and between 42 percent and 50 percent in 2009. Analysts polled by Thomson Financial forecast gross margins of 25 percent for 2008 and 28 percent for 2009, on average.
• LDK's third-quarter profit margins fell to 30.8 percent from 35.2 percent in the second quarter, because of higher costs for polysilicon. Prices for the solar product component have surged amid increased demand. Some analysts and investors were disappointed in the results and expected profits to continue to be strained in coming quarters.
• "We believe the Street may have a higher expectation for LDK's margin retention capability and that potential consensus earning downgrades could trigger profit-taking in the stock," Goldman Sachs analyst Cheryl Tang said in a note to investors last month. She has a "Sell" rating on LDK.

Needless to say the revenue growth is there, and it is priced into the stock. Until polysilicon pricing falls back to more sensible levels (as more supply comes online, especially from Chinese producers) over the coming 18+ months, these companies will still struggle with margins across the board, but the nexy 6 quarters should identify the real winners in the group. And I don't mean stock winners, as speculators seem to run up the 'cheapest' (i.e. most risky) - but I mean the real business winners.

EDIT 10:10 AM: I sold about 10% of my LDK Solar position into this 6-7% spike, relieving some of the shares I bought around $45, north of $50. At this point LDK Solar is marking time - we want to see a nice uptrend through $53+ before we know the investors are jumping back on the bandwagon. Until then LDK Solar is probably in a relatively tight trading range of $45-$51. This reduces my exposure from 4.1% of fund to 3.7%.

Long LDK Solar in fund and in personal account

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 Realmoney.com. 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. Baidu.com 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 Baidu.com 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.