Bookkeeping: 'Rising Tide' Performance Week 23

Week 23 performance of the mutual fund

Comments: Another interesting week all around - the indexes actually held up relatively well but did NOT tell the story underneath. As I wrote earlier this week, the average stock is now down 30% from October peaks although the indexes are off around 10%. So the sledding is beyond tough right now - even stalwart "safety" blue chips like McDonald's (MCD) and (egads) Procter & Gamble (PG) are being taken to the woodshed (the latter down 3% and broke below its 50 day moving average). The only thing that is left appears to be Altria (MO). The Dow was down a lot worse than it looked today due to 2 components really being awful - MCD and American Express (AXP). So today was the day, even the big cap blue chips outside of financial got their come uppance. The S&P 500 held up reasonably well this week (all things being relative) and closed above all important 1400 (by a thread). But there just seems to be a total absence of buyers and if its not one thing its another. A perfect storm of bad news all at once. Hours after Countrywide is eliminated as a problem, American Express hits us with bad news... or a home builder heads to $0. A lot of things I have been forecasting are coming true - I just did not expect all of them to start hitting within a 2 week period. The news flow is just awful, but as I keep saying - the more we hear it, the more it gets priced into the market. But it's still not fun to go through it from the long side.

I wrote last week:

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.

Sometimes, I really hate when I am correct! :) We beat the indexes by a supernatural 3.5% last week (annualizes to >180% outperformance). Well that was all taken back in a snap of a finger this week as we had a complete reversal of last week's gains vs indexes. Neither last week, nor this week is normal - volatility is extreme at this point. Hopefully we get back to a more consistent pace of good solid outperformance here soon.

As stated (and it is hard to believe) but the S&P 500 was only down 0.75%, and the Russell 1000 down 0.93% for the week. Rising Tide Growth Fund was down 4.37% and had its first underperformance since week 15 (2 months ago). Since I started tracking the weekly performance in week 10, we've only underperformed 3 weeks (of 13) but this one took the cake @ 3.5% behind the indexes (reversing last week's gains off the map). The other 2 weeks we trailed the market (back in November), we were behind only by -0.7% in week 14, and -1.7% in week 15. So we are back to where we were 2 weeks ago, in week 21, in relation to outperforming the indexes.

Much of the damage this week came Monday when the agriculture, solar and infrastructure sectors took a severe beating - combined with my selling off of most of the insurance/hedges (Ultrashort ETF positions). That said on a day like today the Ultrashort Financial ETF (SKF) was down nearly 4% (so it would not of helped), and the Ultrashort Real Estate (SRS) was flat (and far lower @ $127 then where I sold off mid week @ $140). So there is not much room to hide this week; even the index shorts would of not worked very well as the indexes held up much better than the average stock. It seems financials finally found a floor and that helped the indexes stay up, relatively speaking. Needless to say, you will have weeks like this every so often when the best sectors are hit, and the worst sectors do ok since they are completely washed out. In the long run I still think this is an opportunity like August and November to load up on the best merchandise while the market is in free fall. To wit, top position Mosaic (MOS) was up 6% in this awful tape today, and up over 20% since it fell to $80 in the panic selling earlier this week. Unfortunately I have 60 other positions in the fund :).

Price of Rising Tide Growth: $11.833
Lifetime Performance to date (vs Aug 3, 2007): +18.33%

Comparable S&P 500: 1,401.0 (-4.38%)
Comparable Russell 1000: 761.1 (-4.40%)

Fund return vs S&P 500: +22.71%
Fund return vs Russell 1000: +22.73%

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

Standard Pacific (SPF) - The First Major Homebuilder to Go?

Well one of my '13 Outlier Predictions' could be starting quicker than I imagined - what are we in, week 2 of the year?

#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.

Standard Pacific (SPF) was one of the 3 I was targeting (and in fact the easiest to identify), but the folks over at Minyanville.com have a good view (by looking at the bond action for each company) whom the next 2 should be - another on the probable list rhymes with Teaser. So I am just incorporating their work into my framework (remember I own 2 companies very involved in 'restructurings' in the fund now). Keep in mind folks, 3-4 of these home builders are technically bankrupt already - they are only "alive" because the banks keep changing the terms of their lines of credit and covenants. These are all great short candidates as well (there is no homebuilder short ETF either) and this time I'd ride a few of these to $0. Because that's where they are heading, short of some white knight acquisition.

TheStreet.com weighs in

• Liquidity worries continue to circle homebuilder Standard Pacific (SPF). Shares were plunging 33% Friday to $1.79 after Debtwire reported that Standard Pacific hired Miller Buckfire -- a restructuring and bankruptcy specialist -- as financial adviser. The story cited unnamed sources.
• Standard Pacific, I believe, is one of the prime homebuilding candidates for a restructuring or bankruptcy this year. The builder carries some of the largest joint-venture risk of any other homebuilder, with significant exposure to the California housing market (one of the worst in the country).
• Already, Standard Pacific has been forced in recent quarters to supply capital to weak joint ventures in California. The builder is on the hook for $500 million of recourse exposure to joint venture debt, according to the company's regulatory filings.
• The company remains at the mercy of its banks, as it has already violated several debt covenants. The final piece of the puzzle is whether Standard Pacific is actually solvent -- can its assets cover its liabilities?

While this is bad for the humans involved, especially the innocent ones not working in the management suite who made dumb decisions to overbuild and overextend themselves, these are the steps necessary to make a bottom. When the first builders officially go I will move us forward from the bottom of the 1st inning to perhaps the bottom of the 2nd or top of the 3rd inning in the 'correction'. (TV pundits already telling us the bottom is here and to start buying this spring - oh boy). Other positive steps:

1. We also have been seeing homebuilders finally start "giving away" homes at cost [What Happens When New Home Prices are $100K less than Existing Homes?]
2. Sell land to investment banks @ 60% off for cash flow [How Overpriced is Land in the US? 60%?]
3. And finally begin to curtail future building plans.
   

All good things. Unfortunately median home prices still remain high [What Should Median Home Prices Be Today?] and the real problem is current home owners - they still live in fantasy world of 2005/2006 prices and think they can sell their homes for "5% off" peak values. When those prices on existing homes start wooshing down we can begin to really move through the middle innings. We are already seeing reports of new homes priced 20-30% below existing homes a neighborhood over in CA. But at this point existing home owners still seem to think its a short term issue and these "new home discounts" will go away in a few months. Kool Aid. Maybe this spring when people are out in force and refusing to pay bubble prices, will bring a reality to current home owners in these states that saw massive bubble price increases. Median Home prices, by my analysis above probably need to fall 20% in many parts of the country who enjoyed the bubble. Then we bring in the relief pitcher/closer.

Position? Short if I could

No Safety, Even in McDonald's (MCD)

I have to believe the slowing consumer is being priced across the market at this point, when I see McDonald's (MCD) nose diving. This was my concern going into earnings season - that estimates for 2008 will need to be driven down as analysts are way too optimistic and companies will be reducing estimates. It looks like it has happened even in advance of the actual earnings season which is just beginning in earnest next week. This is actually a good thing - leaves less room for disappointment.

Let me say, after just posting how much I dislike restaurants I disagree with this call on McDonald's (MCD). I do not follow it closely (not a high growth story per se, nor a sector I like) but with the stock approaching its 200 day moving average this is a blue chip stock hitting on all cylinders, and in my opinion will be a WINNER in a slow growth economy. This is something the analyst out today has wrong. Just like I wrote 'Target (TGT) Shoppers Turning into Walmart (WMT) Shoppers' there will be winners in a slow growth economy. Those with low prices. Just like Costco (COST) is winning the high end consumer, I can see Walmart benefiting, and I can see the exact same parallel in McDonald's (MCD) as casual dining loses some customers who instead of eating out once or twice a week will instead be going fast food ('substitution')....

The stock is in the $53s, down from $63 a month ago... I'd be very interested here if this were the sector of the market (mega cap stocks) I was focusing on. More importantly, we are now reaching the point where analysts are just being simplistic and saying "well it lives, and breathes, it must be downgraded since the consumer is slowing". Not rational thinking - things are a bit more complex than that. Not to mention the international growth, not to mention the baristas, not to mention the dominance in "on the run" breakfasts.

• Shares of McDonald's Corp (MCD) fell nearly 7 percent on Friday, leading a downturn in many other U.S. restaurant stocks, amid concerns a U.S. recession could hurt even lower-priced restaurants.
• "With gas (gasoline) prices at all-time highs, the discretionary income of the consumer is shrinking," said William Lefkowitz, options strategist at vFinance Investments. "Companies that depend on the consumer to spend money will get hurt."
• Coming into Friday, the stock traded at a multiple of 20 times estimated 2008 earnings, the third highest multiple in the Dow Jones Industrial average (^DJI - News). It trailed only Coca-Cola Co (KO) and Procter & Gamble (PG), two stocks that have been boosted by their defensive status as consumers generally buy things like soap and soft drinks even during a recession.
• "The P/E (price-to-earnings ratio) is back to a level where for me it's a little bit expensive," Janna Sampson, co-chief investment officer at Oakbrook Investments in Lisle, Illinois, said. "That said, relative to some of its competitors, I'd have to say its P/E still looks reasonable." Sampson's company holds about 205,000 McDonald's shares.
• On Friday, Friedman, Billings, Ramsey restarted coverage of McDonald's at a "market perform" rating with a 12-month price target of $53. But analyst Howard Penney said McDonald's should be able to sustain U.S. same-store-sales growth in the first half of 2008. "We believe that McDonald's premium valuation reflects the company's ability to post continued positive same-store-sales trends," Penney wrote in a research note.
• Some analysts were also skeptical of the notion that consumers would stop eating at McDonald's in a down economy. "For the most part, fast food seems to be becoming more of a consumer staple," Morningstar analyst John Owens said. "That was the case in previous downturns in the consumer cycle.

On that last point... I agree. Now that it's cool to say everything stinks because the consumer is dead, doesn't mean it's correct in every piece of the economy. Once again HERD MENTALITY at it's best on the Street. I'd be more concerned with the valuation in P & G at this point. Or is the slowing consumer going to stop buying toilet paper and switch to tree leaves?

I'll check back in a year to see how things worked out and if this was a decent entry point ($53) for those so inclined. For our view point, the good thing is now perception and reality are aligning. Perception all fall and most of the early winter was this is nothing to be worried about; it's all contained. Now we've swung to another extreme.... everything must be worried about. Good; all part of the process.

No position

Infrastructure Companies Cleaning Up on Contracts

While the market is pricing everything to implode and the End of Days, let's look at the real world that people will be analyzing once they realize the whole world does not end just because our financial institutions are a lightly regulated, financial innovating joke.

The Infrastructure Group is locking up contracts left and right - I don't currently hold Fluor (FLR) but based on this week alone you have to be impressed.

Fluor
5 year, $334M Contract in Kuwait
5 year, $4B Contract with US Dept of Energy to maintain nuclear stockpile; potentially Renewable to 10 year, $8B

Foster Wheeler
Company making entries into China energy market

Jacobs Engineering Group
3 year, $480M Air Force Contract

*********************
I keep coming back to this group - pricing power, visibility (huge backlogs), and most important customers flush with cash - (a) petrodollars in the Middle East, (b) countries with huge trade surpluses and (c) another group with unlimited cash due to printing presses running 24/7 - The U.S. Gov't.

One day these facts will again be recognized and cherished, and investors will continue to flock to this group as these companies mint profits for years and years to come. But for today, and last week, and the week before we can fret that they will be losing profits, are terrible, stink, and don't deserve to be priced higher than $10 - because of the US consumer and a subprime US financial system. I've been saying for months - agriculture and infrastructure. If you, reader, plan to stick around this blog in the future.... well I am going to bore you to tears since I'll keep saying the same for quarters to come. [12 New Stocks to Buy on a Pullback]

Long Foster Wheeler and Jacobs Engineering in fund; long Foster Wheeler in personal account (and I'd be long Fluor as well if I had room in the fund)

3 Months Later Let's Look Again @ Ruby Tuesday (RT)

I don't follow the restaurant sector closely since there is little growth there (except for something like Chipotle (CMG)), but I like to keep my eye on a few. Ruby Tuesday's (RT) is one since its a run of the mill casual dining company.

Back in September, I said this group was toast but since I cannot short individual names, and there is not an ETF to short them, I could not do much except say "well this group is done" [Tough Times Ahead: Restaurants?] A very simple thesis that is "now" conventional wisdom but back in September we were still in the "subprime is all contained" media hype period

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

I was wondering how the heck Chipotle was holding up at the time since last I checked it also has to buy the same inputs as everyone else, and is not immune to cost inflation. Evidence of this inflation was hitting by October [Food Inflation Starting to Hit Restaurants]

In mid October we saw Ruby Tuesday (RT) report a bad quarter [Let's Check in on Ruby Tuesday's] The stock fell from $19 to $17s..

My analysis was simple "I have never digged into the stock, but I know it serves food and it serves US consumers and is not at the very low end of fast food. So therefore its a good short (if I could)"

Well now we have another report out of this lovely company and lo and behold, more pain

• Shares of restaurant chain Ruby Tuesday Inc. fell to their lowest levels in a decade Thursday after the company cut its fiscal 2008 profit forecast. Ruby Tuesday now expects to earn between 40 cents per share and 60 cents per share in the fiscal year ending May 30, far below the company's previous forecast of $1.01 to $1.13 per share. Analysts polled by Thomson Financial already expected the company to report a profit of 51 cents per share.
• The company also predicted a larger decrease in same-store sales, or sales at outlets open at least one year.

This is now a $6 stock. Even shorting it in October around the last bad report would of netted us a profit of 67%. (not to mention in July it was $26). Obviously I would of cut back as this name fell and not netted the full 67%, but the return would of been nice and certainly more than 0% which is what I am able to do now. This is why in the "real fund" I hope to launch I will be able to short. And why performance would be better if I was allowed to short individual names. Coach (COH) was another great example. So while I am happy with results of the fund, it could of been far better with individual shorting. This is a great way to "pair trade" longs with shorts and make even more money - wish I could do it in the Marketocracy.com fund but I can't. But some day.

I'd cover this short here as my theories are now mostly priced into the stock; much like I said I'd cover Coach @ $30, at this time it is just being greedy to remain short but the thesis was dead on. As were the thesis on financials and commercial real estate (but at least I have some ETFs to take advantage of those to some degree). I do expect to see some bounce in these names on a rally but at best we are going to have sideway action on many of these stocks in these sectors for many quarters to come. I'd also check any of your mutual funds and if you have a manager with restaurant stocks (other than Chipotle or McDonalds) in his top 20 holdings the past year, I'd seriously be calling to ask why :) (while pulling my money out!) At this point some value investors will start scurrying into these names, but for those holding these stocks last spring, summer, and fall - I can only ask why?

No positions but wishing I could of

Another Myth Falling Flat - Exports Will Save the Economy

Exports are 15% of the economy
Consumer Spending is (take your pick) 65% to 75%

The myth propagated in past half year is the ever weakening dollar is somehow good (or 'great!' depending on the pundit) because it will drive exports. In a country that is exporting less and less by the year. (but we still have coal) We are a SERVICE economy now - worse - a CREDIT BASED SERVICE economy. We've outsourced MUCH of the things we used to export in the 70s, 60s, et al. So I am unclear how 15% of the economy will make up for the other 65% but that is the myth. Maybe in the 1970s it would of been a different story.

But another myth that is getting debunked. Lost in today's news is (a) record trade gap and (b) import inflation. I talked about point (b) in December [Real Inflation Showing in Reports Not called CPI/PPI]. I cannot stress how important this is, since it feeds into my whole notion of "a new era of inflation" due to worldwide shortages. While the useless traditional government reports insist inflation is 3%ish, the real world figures are showing we are importing (and don't blame it all on oil - although it is a huge problem) products at a 10-11%+ higher price point than a year ago. December's figures were just as bad as Novembers. And this is why the consumer is feeling pinched. Wages cannot continue to go up 3-4% a year with "real world costs" going up 10-13% a year for things we "need" (food, energy) and cannot stop buying, without it causing problems. Serious ones. Especially for the "70%" of us who live paycheck to paycheck. The longer we put our head in the sand and continue down this path of believing 3% is 'real inflation' the longer it will take before we address the issue. Stagflation. I keep repeating it. And even when the economy recovers in a few years we are going to be in a permanent high inflation environment.

More worrisome is another theme I promoted in the fall, the export of inflation out of China. For a long time, the flood of products from China has been keeping a lid on prices. For the first time I have seen, we are now seeing costs rise (0.1%) out of China. 0.1% sounds like nothing but in years past it was a negative number and a large negative number at times. So as costs rise in China, its slowly going to begin to be passed on to the countries they export to. So yet another factor working against the US consumer.

We really need this Manhattan Project to try to move 20-30% of our energy source to renewables within a decade. And we needed to start it yesterday; basic supply and demand economics. The global demands on energy from emerging markets are not going to reverse even if the US goes into recession for a year or two. Even if oil "dips" to $75 temporarily this is not enough. Not when 2.5 billion people are coming into the industrialized world in the next 2-3 decades. If you don't believe in it as an environmental issue, you need to believe in it as an economic issue. And I don't mean corn ethanol, which is a disaster and in fact adding to the problems. Amazingly the only candidate talking about this from an economic standpoint was essentially laughed off the stage in last night's debate in SC. "It's just too complicated". Sad.

Trade Gap Widens on Surge of Oil Imports

• A record increase in imported oil prices in November sent the U.S. trade deficit to its highest level in more than a year, the Commerce Department reported Friday.
• The seasonally adjusted trade gap widened 9.3% to $63.1 billion in November, the largest deficit since September 2006. (despite a weak dollar helping exports) Economists surveyed by MarketWatch expected the trade deficit to widen in November to $59.5 billion
• "The trade picture is almost grim for a country whose exchange rate has dropped as much as the greenback's has," wrote Robert Brusca of FAO Economics. "Any more dropping and they may have to rename it the 'yellow-back' for cowardliness."
• Imports rose 3% to a record $205.4 billion, while exports increased 0.4% to a record $142.3 billion. Most of the increase was simply a matter of higher prices, however. In inflation-adjusted terms, the real trade gap widened by 4.2%, as real imports rose 1.3% and real exports fell 0.3%. It was the second straight decline in real exports, a troubling sign for an economy that's relying on export growth to offset weakness in housing, capital spending and consumer spending. (folks, that's important - exports are DECLINING in inflation adjusted dollars despite a dollar that is in a death spiral)
  
• Jay Bryson, global economist for Wachovia, wrote that real net exports "likely made very little contribution" to the fourth quarter's overall rate of GDP growth. "Looking forward, exports should generally grow faster than imports, which should help to prop up overall GDP growth over the next few quarters," he wrote. (right, with the dollar at record lows it hasn't helped, but GOING FORWARD it should start to help - got it)
• But the real trade gap widened 3% in November, even excluding petroleum. (don't blame it on oil, folks)
• At the same time, imports have slowed because of sagging growth in the U.S. and because imports are relatively more expensive. The U.S. can't cut its demand for petroleum quickly in response to higher prices, however. (it's an addiction)

So that's the story on the trade gap but the story on inflation is here

• In the past year, import prices have now risen by 10.9%.
• Prices of imported goods from China rose 0.1% in December

So in a few weeks when everyone focuses on CPI, and PPI, both severely flawed reports... ignore the numbers (although you cannot ignore the fact the market reacts to those reports) and remember these numbers. We are importing 11% inflation. Even though the market chooses not to focus on this very important report.

Bookkeeping: Adding New Oriental Education (EDU)

Since my cash is nil, I have been forced to sell down the last of my Ultrashorts to essentially zilch, to buy Mastercard (MA) and now New Oriental Education (EDU) this morning. Going forward, I will have to sell one long position position to fund another (like I did yesterday with Illumina (ILMN)) At this point, the market is the market; it stinks. I am just continuing to buy the best merchandise I can find at reduced prices when offered the opportunities.

I am going to break another cardinal rule and that is add to a stock before earnings. There is a lot of risk going into any company's earnings report. One wrong sneeze by an executive in a conference call and the stock drops 30% instantly for no logical reason. However, I like this quasi monopoly Chinese company and the 'price action' has been very good of late. The stock has held up in a serious downturn in the markets, and continues to sit above the 50 day moving average (upper $78s). It is down nicely today to the low $79s (down 5%) on less than 100,000 shares and is sitting right above its support level.

Again, always a risk going into earnings season but the price action seems to tell us, things should be good. Here is an earlier pieces I wrote on New Oriental Education (EDU) for those new to the blog [Cutting Back on New Oriental Education & Technology (EDU)]. This is a very pricey stock, but it always has been. I am not sure what price you can put on a near monopoly in a country hungry for education. At some point in the future it will miss a quarter, investors will drive it down 30% for no good reason and it will provide a once every 5 year type of opportunity. But until then I will continue to stick with this name, and buy on the smaller dips.

Long New Oriental Education in fund and in personal account

Bookkeeping: Adding Mastercard (MA)

I think people still do not understand the Mastercard (MA) story [Rebuilding Mastercard]

3 themes:

1. A world increasingly going to plastic, especially foreign markets which are where the US was 20 years ago
2. A cash strapped consumer now paying for necessities of life with credit - groceries, gasoline. Did you notice a few years ago even McDonald's (MCD) started taking credit?
   
3. No credit risk - they do not issue the cards - they do not take the credit risk; the banks issuing the cards take the risk of a faulty consumer.

One cannot talk sense to the market, but I am going to break my rule here of buying a stock busting below its 50 day moving average ($195) and take this opportunity to add even more to Mastercard. Investors are lumping this name in with the credit card issuers and putting "baby with bathwater" logic together. Once again, this won't be a stock that puts on a 20% move in a week, but this is a core type of holding that to me, has a business model that is (ahem) priceless. Every incremental credit transaction is revenue to Mastercard. Even it the consumer defaults on paying the bill 30 days later. Simple. My contrary call is the worse the economy gets the MORE credit cards will be used.... not less!

Adding in the $185s.

p.s. With that said the American Express (AXP) news is another nail in the coffin for the US consumer, and another "myth" hyped by the financial press all fall and early winter is DEBUNKED. That is, decoupling of "upper class" from "the rest of us". Just like the myth that is decoupling of foreign emerging markets from the Western world will be debunked in a few quarters. But until the proof is in the pudding, people will continue to argue otherwise.

Long Mastercard in fund and in personal account

Countrwide (CFC) "Contained", WaMu (WM) Next

Miracles do happen.

The Plunge Protection Team errr, The President's Working Group on Financial Markets meets, and not a week later we have a bid for Countrywide (CFC). It is almost amazing in the timing, eh? Oh, to be the fly on the wall during that conversation...

I wrote this on a message board last night

Call me a conspirasist but I think the govt is doing this
Citi can't do it, so BAC is 2nd largest, absorb this piece of (edited for language! haha) and we'll make sure you are ok on the other side.

Now we need to find someone to buy WaMu and then we have about 40% of the US mortgage market "saved".

******
Here is the reality, a Republican administration does not want to be seen bailing out a leading financial institution with tax dollars. Further, a CFC bankruptcy would of caused serious panic as I believe they do about 20% of the country's mortgages. It would kill confidence. Rightly or wrongly, the sharks have been circling Countrywide and many bankruptcies are accelerated by lack of confidence... i.e. vendors stop sending product to a mfg because they are afraid of not getting paid back, bank lines of credit dry up, etc. So it feeds on itself. This is the scenario that has been playing out with Countrywide.

Not to mention the facts on the ground i.e. 7% of Countrywide loans are now delinquent up from 5% a year ago. Foreclosures almost doubled. And that's coming off a "great" 2007 in the economy. These don't sound like huge numbers, but again we are just ENTERING the real credit mess, most of these 2 year ARMs are just now jumping (and will be continuing to do so throughout 2008). People will try their best to pay for a few quarters (or use credit cards to pay mortgages) and then eventually succumb in due time. So the height of defaults will probably hit about a year from now and into 2009. Countrywide won't last that long. 9%, 11%, 13% delinquency rates a year from now would be a nail in the coffin of Countrywide.... they are dependent on new funding and their lines of credit would dry up. (one could argue they still have their bank deposits, but did you see the lines at Northern Rock once panic hits?) [Northern Rock Drops 30% Today]

So what do we have here instead? We have one of our stronger banks, Bank of America (BAC) buying a company on life support. With the government implicit backing. And trust me the government will be helping Bank of America on the back end, "behind closed doors". Because these loans are like asbestos. They have huge future unknown liabilities. Would anyone buy a company with asbestos exposure in the 1990s, knowing the huge future liabilities? No. But if you have the government doing a behind the scenes bailout for you, it gives you entry into the mortgage market, a 20% share, and you have a good enough balance sheet to live through the next few years, and then when we come out of this in 3-4 years you have a dominant position in a great long term business (mortgages). Countrywide alone wouldn't make it through another year, not to mention the 3-4 years. And keep in mind Bank of America was in talks to potentially acquire CFC in the $40s a year ago. And then they paid $2 billion around $18 just in August. So to get the franchise for under $7, and a $4 billion price tag is nothing. $4 billion? Companies write that off every month nowadays in the financial world.

Next? The other dog, Washington Mutual (WM). I am sure the same arrangement will be made for implicit government behind the scenes bailout of whomever takes over WM. It won't be Citigroup since they themselves are in such a bad situation but it will be one of these top 5-7 banks like a Wells Fargo (WFC) type who actually ran their business reasonably well (again it's all relative) and has no SIVs or off balance sheet junk. And in the long run it will strengthen their business just like the situation with Bank of America. But you need to be strong enough financially to weather the next 1-2 years to get out "the other side". Maybe its next week, maybe its next month, but within 6 months I would expect WM to be taken out. And as investors we won't have to hear about this issue day in and day out. So it's 'containable' from that perspective. And about 35%+ of our mortgage market will go from "weak hands" to "strong hands" (those who can handle asbestos exposure for the next few years), and the needed write downs on this portfolio can continue in the background - and your US tax dollars can make sure it all works out well in the end.

From a stock market perspective, this is a win as these 2 dogs won't be the underpinnings of angst on a daily basis. From a "free market" perspective - well it's laughable.

Credit Card Warnings Here, Credit Card Warnings There

In case you missed it, we had a double punch today in the credit card business: both the common man (Capital One Financial (COF) before the bell) and the upper class man (American Express (AXP) after the bell) are out with warnings.

Shocker?

Not so much

1. Aug 28, 07 - Getting More Short ETFs
2. Sep 15, 07 - Consumer Spending Continues, Where is the Money Coming From? Credit Cards
3. Dec 10, 07 - Consumers Increasingly Turning to Credit Cards
   
4. Dec 23, 07 - Unpaid Credit Cards Bedevil Americans

To be blunt, much like housing I've stopped writing the warnings about this stuff because I thought it was obvious. But I guess not.... as people are 'surprised'. I remember sitting there in late August through October wondering why the market was ramping up on Fed cuts instead of asking why the Fed had to cut. Why the market was plainly ignoring all the mounting (and plain to the naked eye) evidence and continues to take stocks up (as my Ultrashort positions splattered against the windshield mind you). That's the danger in thinking in the stock market - by analyzing things ahead of time you can find good opportunities, but if you are too early you will be left as road kill on the side of the road as the stampeding herd of bulls drunk on kool aid laughs mockingly singing "We got a rate cut! We got a rate cut!". I guess until the hard evidence is starting them in the face in the cloak of an earnings warning is the only time they face reality.

I'll keep it short - just like I did on my last missive on housing [New Home Sales Plunge] and we'll let it rest.

1. This is just starting, this is the leading wave
2. This will happen again, quarter after quarter
3. It won't just be houses ; it won't just be credit cards, it will be every loan - car, student, name it, it will be stressed
4. Every time these stocks announce, something will happen and you will be told this is the bottom; it cannot get worse. You will ignore this nonsense.
5. The stocks will occasionally bounce up 25% off horrific falls - that's called dead cat, unless you are an apt short term trader ignore that as well - especially when they tell you this is the bottom; it cannot get worse (again) Step aside, let these bounces happen and you short again after these occasional bouts of hope (what? credit card delinquencies at 20 year highs? That means more rate cuts - woo hoo!) interfere with reality. Rinse, wash, repeat, for a few years.
   
6. Interventions of some sort will be announced by the politicos (hey $500 to every credit card holder in America! Free! Hot off the printing presses!)
7. This is happening as we come off a 4.9% GDP quarter, with 4.7% (at the time) or less unemployment (last Q), median home prices only just starting to fall nationwide, and happy faces from all involved ("it's only a subprime issue", "housing is only 4.5% of GDP")

Now ask what happens in the coming year. What is unemployment goes to 5.5%? 6%? GDP falls to 1%? Dare I say negative? Home prices really begin to fall? Say 10% nationwide? Dare I say 15%? What then?

Do you really think this is the bottom? This is more like the top. Or tip. Of an iceberg.

It's a shell game folks - we need to adjust to a new reality as consumers. Especially non apartment dwellers. Those living in condos and homes who used to run to the house ATM and are used to living paycheck to paycheck need to adjust. All in the face of what I contend to be a new era of inflation. Living paycheck to paycheck (and I'm not talking the 'working poor', this is much of our middle class and upper middle class), denotes you have no leeway in your budget. Nor planning/budgeting skills. Why would you need too? Anytime things get tight you call Charlie at the mortgage office and *boom* $10K headed your way. But unfortunately Charlie is out of work now. And Sally in collections for the credit card office is one chick you don't want to mess with. Oh yeh did I mention when you are late your rate goes to 29% (if you're lucky), along with late fees tacked on? No, it doesn't stay at 6% like your mortgage... or heck 1.5% of you did real well and got in on the new Paulson/Bush plan to freeze rates. It is punitive. Credit card companies are not so sweet as Paulson.

So it's a shell game. The shell is debt. The nut has been passed from mortgages to credit cards for the past 12+ months. Now what? This has been happening in a low unemployment, high GDP environment. Just try to forecast the year ahead and see if you think those conditions will continue. Even when 'they' tell us "It's all contained".

Maybe the politicians can assign each debtor American with their own personal sovereign wealth fund - you know an exchange program - set up a drowning US consumer with a Chinese, Arab, or Singaporian (?) friend. A human being on the other side of the world who actually understands the concept of spending less than earned.... and has money to blow. And is willing to shore up the American's personal balance sheet. All in exchange for say a part ownership in their home. Or part ownership of their 401k or future Social Security benefits. I mean it works in the banking industry. Why not bring this 'innovative' solution to the masses? The new friends could talk online through MySpace (that's a real friend!) ... the American can tell his friend from UAE how "oops" I know you sent me money last month, but I just had to get that new 52" LCD TV. And the kitchen floor really needed new tile. And well even groceries had to be paid for with the cash infusion since we are busy burning corn for fuel. This would bring the world closer together. Kumbaya..

Last food for thought folks - credit card debt is securitized just like mortgages are. Do you know where it's all sitting today? I don't. Because none of it has blown up yet. We will know within 2 years. Iceberg.

Positions? Seriously?

Portfolio by Sector January 2008

I try to look at the portfolio by sector monthly, a bit late on this iteration but you can see earlier results here:
Nov 27, 07: here
Oct 23, 07: here

Overall, obviously with the market swoon, I have very low (nil) cash exposure and very low hedging going on (short exposure) - so its a bit of an atypical time to look at things. Other major differences by sector since late November.

Agriculture (then) 15.9% (now) 12.3%
Technology (then) 10.3% (now) 13.0%
Financial (then) 5.0% (now) 10.2%
Solar (then) 5.5% (now) 9.9%
Coal (then) 4.7% (now) 7.0%
Oil Related (then) 7.2% (now) 9.3%
Retail (then) 4.6% (now) 2.0%
India (then) 4.0% (now) 2.8%
Healthcare (then) 0.0% (now) 2.5%
Steel (then) 0.0% (now) 2.3%

Here are the explanations

1. I've cut back some agriculture exposure, mostly by reducing some of the equipment names i.e. Agco (AG), CNH Global (CNH) the latter of which is based in Europe so I am a bit concerned about currency strength hurting exports vs say Deere (DE)
2. Technology I've added here in the last week heavily to Apple (AAPL) and Research in Motion (RIMM)
3. Financial, I've added Mastercard (MA) as it's pulled back and added to my 2 (sorta financial) names - the two consultants Huron Consulting (HURN), and FTI Consulting (FCN); the former had a nice run but has pulled quite a bit here - but again these are more 2009 plays as their earnings should increase as more and more companies are 'restructuring' in a slow growth USA. If I were in trading mode, I'd actually be buying some of the investment banks like a Goldman Sachs (GS) since they are due for a bounce
4. Solar, I've upped this sector - but tried to do it smartly, 10% is actually a lot in my view to allocate to this group but we've seen a heck of a pullback in my favorite name Suntech Power (STP); and Trina Solar (TSL) another major position, is a 'value' play that might not work out in the near term but should have a good back half of 2008. However, value plays in solar never seem to work out.
5. Coal is one of my favorite sectors, and my exposure is purely a condition of price. 2 weeks ago at this time I had about a 3% exposure... as I cut back some very big winners. Now as these stocks have pulled back I have been buying heavily in the past 48 hours.
6. Oil related - these are drillers and service names. I put Petrobras (PBR) in this group as opposed to "Foreign", and I also have been adding exposure to deep sea oil drillers on their pullback. Last time I did this sector analysis I was actually completely out of the deep sea oil space.
7. Retail - on previous look in this space I had added Best Buy (BBY) for a short term trade that worked out decently. Obviously I cut that position as it was a short time horizon and all that sits here is Crocs (CROX). I still do like names like Costco (COST), Gamestop (GME) and eventually Under Armour (UA), and this washed out group is another 'trader's area' in my opinion after this wash out.
8. India has been very good to me. The Indian market (SENSEX) is near all time highs, and not missing a blink. I was very bullish on India vs China in the fall after China was getting all the attention and it worked out great as Chinese stocks faltered and Indian stocks flew. I am almost at the opposite conclusion at this time; perhaps both groups will go but I have been seeing some good strength in Chinese names of late. So I am shading a bit away from India for now as my favorite names have done very well and probably need to pull back and consolidate for a while - plus I am always wary of the "emerging growth is not immune" shoe to fall.
9. Healthcare - I have been adding healthcare with 2 names: MedcoHealth Solutions (MHS) as a defensive stock and Illumina (ILMN) as a growth stock. Both worked very well. I was nearly at 5% exposure coming into the day but with the large move in ILMN this morning I cut back a lot.
10. Steel - this is a trade in US Steel (X) I outlined a few days ago...

Overall I like the mix I have now - cash and shorts are obviously almost nowhere to be found simply as a condition of large sell off in the market. The main thing I want to change is reduce that solar exposure - I still think the majority of the sector is over valued and prone to a serious correction when they report (most in February) but you can never tell with this sector as it is full of momentum chasers instead of (a lot) of fundamental investors. I do expect to lighten up if we can some nice rebounds in some of the names I am in. If/when? we get a bounce I of course need to get some insurance (Ultrashorts) as I still think we have more pain ahead.

I also have a low exposure to silver now, but this is a condition of a great run in Silver Wheaton (SLW) - in which I took profits. With continued cuts coming from the US, and the printing presses worldwide creating more fiat money I do expect hard assets to continue to increase in value as paper money devalues and inflation continues... Europe is trying to act as a buffer but I expect they will eventually cut rates more (England and Canada already started their campaigns, although England did not follow up with a 2nd cut today). The UK is US-lite, so I expect as they contract into 2008 they will follow our campaign... despite inflation risks.

Two notes:
(1) I break up foreign holdings into (a) China (b) Indian (c) Other and
(2) I break up energy into (a) Crude related i.e. deep sea oil drilling, oil service, refining, seismic, etc (b) Coal and (c) Solar as the latter two are not directly related to crude oil.

Bookkeeping: Closing General Cable (BGC)

I am closing the last of smaller position General Cable (BGC) today. I am going to place this in the same category as Cummins Engine (CMI), a position I closed in mid November on worries that the stock will be hit by slow US growth, despite liking the actual business prospects and increasing global exposure (of both companies). For now, perception is reality... and the perception is slower worldwide growth will hurt these type of companies. I sold a few other similar type of companies in the fall, and have avoided the dry bulk shippers and those types for the same reasons. Even if reality ultimately proves the thesis to be untrue (the thesis being that these companies cannot do well in a slower growth economy), it really doesn't pay to be intellectually correct, when the stock prices fall due to 'perception'. At some point in the future I will be moving back to these industrial type names (BGC could be classified as an infrastructure play in many ways), but it appears it will need to be at some point later in the business cycle.

I do expect these types of stocks to bounce simply because they are oversold, but at this point what isn't. And I'd rather have cash in stocks that don't have this overhang of bad perception, even if its unjust in my opinion. I have a few other names suffering a similar fate in the networking sector as well. When the market gets back to normal, everything will bounce - but I think some other names will have more pop than BGC. In terms of General Cable, it is a 0.7% type of position in the fund - if everything else were holding up I'd be adding to this type of name but with other stocks I have more confidence that perception won't ruin a good story, also falling, I might as well focus my cash and energies on those names. The stock has also fallen below its 50 day moving average but then again, mostly everything has. :)

I am closing out this position with a $2200 type of gain (which means it contributed about 0.2% to the fund's performance since inception). It was never a large holding for the fund (nor a fast mover, but solid), and I've held it since day 1 of the fund - usually with a 1-1.5% type of holding. I really do like the long term prospects, especially with its purchase in September which made it a more global brand. This is really a pure play on global growth and rebuild of infrastructure in many ways, so I expect to return to the stock at some point in the future. Ironically if the "global economy/emerging markets" won't be affected by the US slowdown, I am unclear why these industrial names levered in large part to international markets are taking such hits. Shows a clear discrepency - either US investors are overreacting to the downside or there is a lot of kool aid in the belief that emerging markets are impervious (I am betting on the latter, but as I said yesterday it took 6 months before US investors faced the music of slow growth so it could take that long or longer before 'emerging markets' are seen as NOT immune).

I believe with this sale, I am completely out of the 'industrial' type names...
This also brings the total # of long positions back down to 56.

No positions

Thanks Uncle Ben

Bernanke Speaks - Market Jumps

• Federal Reserve Board Chairman Ben S. Bernanke said ``additional policy easing may well be necessary'' to offset ``downside risks'' to growth.
• ``In light of the recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary,'' Bernanke said in his first speech on the economy since the Fed's Dec. 11 meeting. ``We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.''
• Bernanke's comments suggest the Federal Open Market Committee will cut interest rates further this month to reduce the risk of a recession. Wall Street analysts increasingly predict the economy will contract, and traders increased their rate-cut expectations after a report showing unemployment jumped in December.
• ``Incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced,'' Bernanke said in the text of his remarks to Women in Housing and Finance and Exchequer Club in Washington. ``A number of factors, including higher oil prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008.''

Looks like the markets are just happy that the 'academics' at the Fed realize its "bad out there". Probably just short covering at this time; unfortunately we need actual buyers, not just shorts covering. I think Uncle Ben just stated the obvious (?) was any of it a surprise, but it appears the Street is so down on the Fed they have doubts they will even cut.

Maybe the NYTimes calling him a weanie got him revved up today.

Just a Tough Market - Let's Look at Gamestop (GME)

First, as I wrote in one of my comments earlier today in response to a reader - I heard last night on one of the TV shows that the average stock is down 30% since October highs. So this market is much harder than the indexes sharp (but relatively modest) losses are showing. This essentially means small caps and mid caps are being shredded and the mega and large caps (which dominate the indexes, are holding up 'relatively' well - remember a lot of flight to safety stocks like a Procter & Gamble or Altria are mega caps)

Very tough sledding... Gamestop (GME) today is a great example. I have opined in the past that the last thing consumers will give us is electronics - whether it be gadgets, video games, etc. To show how hard it is to invest in any form of retail right now, all this company did was post a blow out quarter, raise guidance, perform... perform... perform... and the stock is down 5%. AFTER dropping from $62 to $55 in the past week. Just trecherous out there, and anything within 6 degrees of any consumer is being shot. If so many other names I like were not "on sale", I would be heading into Gamestop which is a de facto monopoly on video game retail sales... gamers will cut back on eating before they give up their games! But that doesn't matter in this type of market. This reminds me of Research in Motion (RIMM) - the stock just reported 2 weeks ago, and provided great guidance and said they see no slowing. Not a week later, the stock is crushed on fears of slowing! Which means guidance is not even worthwhile after a week, because fears are so high out there. Toss out what the company said, literally 10 days ago, because the End of Days is approaching. This seems to be the approach.

I always find it interesting that investors want companies to beat earnings... if they don't beat them, they crush a stock... BUT when a company issues conservative guidance (that it knows it can beat), it still gets crushed. There is no winning and that's the part of earnings season I really hate. I love the "information acquisition" part; I hate the investor reaction part.

• GameStop Corp (GME), the largest U.S. video game retailer, raised its quarterly earnings estimate on Thursday after holiday season sales rose sharply on blockbuster games like "Guitar Hero."
• But shares of GameStop fell 6 percent even after the announcement as analysts, while bullish on the stock, cited concerns that video game sales could not maintain their momentum over the short term.
• "First of all, the numbers were lights out," said Mike Hickey, an analyst with Janco Partners Inc. "But the concern is that their same-store sales guidance was raised to 15.5 percent to 16.5 percent, which is measurably below the 20 percent they just produced for the holiday period." (notice the word RAISED... they RAISED guidance but since it was not as high as the holiday period its 'bad'. Don't people realize this is a RETAILER? RETAILERS have HIGHER sales during the HOLIDAY PERIOD - hello?)
• "But I will say this is a conservative management team, and we continue to like the name. They appear to be doing all the right things."
• GameStop's comparable store sales for the holiday period increased 20 percent, while total store sales for the period rose 34.7 percent, it said. Given the rise, the retailer increased its fiscal fourth quarter 2007 comparable-store sales estimate from a range of 7 percent to 9 percent to a range of 15.5 percent to 16.5 percent. (last I checked, that was a good thing.... but apparently not anymore)
• GameStop also boosted its fourth-quarter diluted earnings per share estimate to a range of $1.09 to $1.10. Full-year earnings per diluted share are now estimated to be in a range of $1.75 to $1.76, or 13 cents per share higher than guidance issued in November. (not good enough... because video games may slow in 2014 - sell!)
• Another analyst, Arvind Bhatia of Sterne Agee, reiterated his buy rating on the stock and said the pullback marked a ripe time to buy shares. "We think even though the stock is down today on the 'sell on news phenomenon,' we were fundamentally more impressed after the release than before the release," Bhatia said. (sell the news? what have they been selling each day of the past week? sell the pre-news?)

And this is why this market is completely trechorous right now - logic does not apply, and good stocks are thrown out with bad. Stock picking is rather useless as 'baby bathwater' theory is now upon us. How long it lasts is the open question and if anyone has that crystal ball, drop me a line. :) But when I see action like this, the contrarian in me wants to get very very long this market. Oh wait, already am...

Long Research in Motion in fund and in personal account

Bookkeeping: Illumina (ILMN) Is up 20%, I am Cutting Back

I just noticed Illumnia (ILMN) is up 20%.... not too shabby. It was up yesterday in a bad tape, so I guess today's news about settling its patent dispute leaked out... shocker that the stock was up the day ahead of public release, eh?

I wrote a few weeks ago [Nice Write up on Illumina]

Illumina has some of the very high growth component to it, that I really like. The main risk here is patent based risk...

Well that is taken care of now! Even better no future royalty payments to Affymetrix, just a one time pay off of $90M. Fantastic.

I am going to cut back my position quite a bit here, to raise some cash and take advantage of this big spike. This was a top 10 position going into the day at 3% of the portfolio (up to 3.5% after the spike), and I am cutting 375 of the 575 shares I own to move Illumina down to a 1.25% position. These sales are in the $72s (I was not around when it spiked to $75s this morning) I'll look to add in the future on any pullback. The stock closed at $60.50 yesterday so we have a huge "gap" in the chart. Hopefully it gets "filled" and I can buy this stock back in the low $60s. Or maybe it just continues straight up for all I know, but in this market I will take gains when I can get them.

• Shares of gene-testing system maker Illumina Inc. jumped Thursday, while shares of rival Affymetrix Inc. fell, after Illumina agreed to pay Affymetrix $90 million, ending a series of patent lawsuits between the two companies.
• Affymetrix was suing Illumina in the U.S., U.K. and Germany, alleging that Illumina's scanners, software and others products violated its patents. A Delaware jury ruled in Affymetrix's favor in October, awarding the company $16.7 million for five counts of patent infringement.
• Affymetrix filed several new patent claims in October. All the suits have been dismissed with prejudice in return for the one-time payment, in which Illumina acknowledges no liability.
• Un Kwon-Casado of Pacific Growth Equities said in a note that she expected Affymetrix investors to be disappointed with the settlement, as the company will not receive royalties on sales of any Illumina products. She estimated the suit would be worth more than $400 million for Affymetrix, including royalties.
• Kwon-Casado decreased her price target on Affymetrix to $20 from $26, and raised her target on Illumina stock to $76 per share from $69.

Long Illumina in fund; no longer long in personal account!

Our Banks Are Like the US Consumer - Tapping the ATM

For years, the US consumer has been tapping the house ATM. Now our banks are essentially doing the same behavior, tapping the foreign fund ATM. What a subprime nation.

Merrill and Citigroup are back at it again. Surprised? You shouldn't be. This was discussed on the very first cash infusion in November [Citibank Sells Stake to Abu Dabi]... the media trumpets, "the bottom is in!", "smart money is buying!" blah blah blah and blah. Meanwhile I was writing:

For those who have been reading along for a while, you know this is something I have been calling for (not specific to Citibank but large parts of our economy) as has Cramer. With strengthening currencies worldwide versus ours, acquisitions are 'cheap' in their currencies, and faltering stock prices make acquisitions and sizeable stakes even cheaper for foreign entities.

I truly think this is only the beginning - if it is a good, bad, or indifferent thing I will let someone argue that. We have undertaken bad policies, and our compensation system in this country is based on short term risk taking (try to generate outsized performance in a short time frame 2-4 years, get rewarded handsomely and ride off into the sunset with massive compensation gains, even if fired, while someone else is left to clear up the mess). Since this is our system, this is the playbook we have to live by. And the 'free market' will take care of things in the long run. Weakened institutions will be taken over. Remember China took a stake in Bear Stearns already and in the financial system I believe by late 2008, most of those that are left standing will have major foreign equity stakes. I also see this in many other industries as major macro economic forces work against the US and our dollar continues to crater.

But in the coming few years I expect to see a flood of Canadian, Australian, Middle Eastern, and Far East acquisitions. If nothing else this will put a floor on the value of US assets. Sovereign funds are going to be the next "big thing", and their buying power is going to make private equity and hedge funds look like minnows.

**********
Heck Merrill was just going hat to hand to Singapore not even 2 WEEKS AGO [Merrill Lynch Tapped Signapore - next China and Middle East] A writer on Minyanville.com has used the term 'reverse colonization' which I have been using as well - great wording and how accurate. Truly we are a debtor nation from top to bottom - from individual to corporation. We should just be thankful that people worldwide continue to extend us 'credit' and not call us for our debts to be paid.

As for the money center banks its a sickening cycle. As they write off more, their balance sheet assets erode and they fall below capital requirements... so they need new capital. So far its been mostly mortgage backed securities (of the worst loans), but if this cycle truly plays out in a wave of defaults by consumers on the higher grade loans (alt A, prime) then auto loans, then credit cards, then student loans... well these companies just have to continue writing off assets and going hat in hands to foreign countries asking for more money. It is quite pathetic. And no I don't bemoan foreign ownership but a stake out of sheer necessity to stay afloat (with gosh awful terms and/or large dilution to current shareholders) is different from a typical normal market stake. Example: Citigroup is borrowing money from Abu Dabi at an effective rate of 11%...this is rate equivalent to junk bonds. So they are BORROWING @ 11% so they can invest @ 5%. Sounds like a great business. Keep in mind it's a little different for the 5 investment banks, at some point they should have written all this junk off their books and can go back to normal business - its the money center banks that are in for years of problems.

I just really wish all these people who came blaring on TV and in blogs, and on financial sites would fess up and say "look we were wrong when we told you that after the first wave of write offs that this was the kitchen sink quarter" or "look we were wrong when we urged you to buy financials since schrewd foreign buyers were finally finding value" or "look we were wrong to encourage you into Countrywide Financial because Bank of America bought in the upper teens (now nearly $5)". Instead they conveniently don't mention it anymore. And keep repeating the same mantra. If I had a nickel for all "the bottom is in, in financials" calls I'd be able to start this fund on my own.

• Cash-strapped Citigroup (C ) and Merrill Lynch (MER) are reportedly ready to again tap foreign government-run funds to shore up their balance sheets, according to The Wall Street Journal.
• The two firms, hammered last year by writedowns related to mortgage-backed securities that led to ousters of their respective CEOs, already have reaped billions in investments from so-called sovereign wealth funds. Now Merrill is expected to pick up as much as another $4 billion from a Middle Eastern government investment fund and Citi could get as much as $10 billion from foreign sources in the Middle East and Asia, the Journal reported.
• Merrill already tapped $6.2 billion from fund firm Davis Selected Advisors and Temasek Holdings, a Singaporean state-owned investment company, on Christmas Eve. Citi sold a $7.5 billion stake to the Abu Dhabi Investment Authority, representing about 5% of the bank's shares.
• While both banks have said they expect massive writedowns, analysts have jostled to predict even greater losses. Citi, right before ousting CEO Charles Prince, said it expected to write down $11 billion, but Goldman Sachs analyst William Tanona predicted nearly $19 billion.
• Tanoma also estimates fourth-quarter writedowns at Merrill could hit $11.5 billion -- about $5 billion more than he initially anticipated.

Long Ultrashort Financial in fund; no personal position

An Amazingly Blunt Commentary on the Plunge Protection Team

I was a bit taken aback to see this quite blunt commentary about the Plunge Protection team in the UK Telegraph (you see me source articles from them quite a bit since they have a different view than most stateside papers - a more pragmatic view I'd say). The American press never really talks about this group - or at least I have not found a lot of articles (try googling for it), most of my stories about them come through the British press. Interesting....

I half sarcastically discuss this group as the "invisible hand", and a lot of things you see over time (especially the last 6 months) seem to be more and more blatant attempts at 'propping things up'. But the more you see of it, the less conspiracy theorist it sounds and the more grounded in reality it becomes. But rarely do I see an article like this - I will be curious if this 'rebate check' scheme (remember Bush tried this once before) is announced at or before the State of the Union. Usually politicos like to float things ahead of the actual speech as a trial balloon so let's see if we hear anything about it in the coming weeks. If not, well then we can just call this article nonsense ;)

• Bears beware. The New Deal of 2008 is in the works. The US Treasury is about to shower households with rebate cheques to head off a full-blown slump, and save the Bush presidency. On Friday, Mr Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit - officially the President's Working Group on Financial Markets - was created after the 1987 crash.
• It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry "short" traders in the hottest of oils.
• The team is led by Treasury chief Hank Paulson, ex-Goldman Sachs, a man with a nose for market psychology, and includes Fed chairman Ben Bernanke and the key exchange regulators.
• Judging by a well-briefed report in the Washington Post, a mood of deep alarm has taken hold in the upper echelons of the administration. "What everyone's looking at is what is the fastest way to get money out there," said a Bush aide.
• Emergency measures are now clearly on the agenda, apparently consisting of a mix of tax cuts for businesses and bungs for consumers. Fiscal action all too appropriate, regrettably. We face a version of Keynes's "extreme liquidity preference" in the 1930s - banks are hoarding money, and the main credit arteries of the financial system remain blocked after five months.
• "In terms of any stimulus package, we're considering all options," said Mr Bush. This should be interesting to watch. The president is not one for half measures. He has already shown in Iraq and on biofuels that he will pursue policies a l'outrance once he gets the bit between his teeth. The only question is what the president can manage to push through a Democrat Congress.
• The Plunge Protection Team - long kept secret - was last mobilised to calm the markets after 9/11. It then went into hibernation during the long boom. Mr Paulson reactivated it last year, asking the staff to examine "systemic risk posed by hedge funds and derivatives, and the government's ability to respond to a financial crisis", he said. It seems he failed to spot the immediate threat from mortgage securities and the implosion of the commercial paper market. But never mind.
• The White House certainly has grounds for alarm. The global picture is darkening by the day. The Baltic Dry Index has been falling hard for seven weeks, signalling a downturn in bulk shipments. Singapore's economy contracted 3.2pc in the final quarter of last year, led by a slump in electronics and semiconductors.
• The Bank of Japan has been the biggest single source of liquidity for the global asset boom over the last five years. An army of investors - Japanese insurers and pension funds, housewives and hedge funds borrowing at near zero rates in Tokyo - have sprayed money across the Antipodes, South Africa, Brazil, Turkey, Iceland, Latvia, the US commercial paper market and the City of London. The Japanese are now bringing the money home, as they always do when the cycle turns. The yen has risen 13pc against the dollar and 12pc against sterling since the summer. We are witnessing the long-feared unwind of the "carry trade", valued by BNP Paribas in all its forms at $1.4 trillion.
• Sovereign wealth funds stand ready to rescue banks, as they have already rescued Citigroup and UBS. But as Moody's pointed out this week, the estimated $2,500bn in lost wealth from the US house price crash is more than the entire net worth of all the sovereign wealth funds in the world.
• Add fresh losses as the property bubbles pop in Britain, Ireland, Australia, Spain, Greece, The Netherlands, Scandinavia and Eastern Europe, as they surely must unless central banks opt for inflation (which would annihilate bonds instead, with equal damage), and you can discount $1,500bn in further attrition.
• Not even a Bush New Deal can hold back the post-bubble tide that is drawing in across the globe. What it can do is buy time. Fortunately for America - and the world - the US budget deficit is a healthy 1.2pc of GDP ($163bn). Washington has the wherewithal to fund a fiscal blitz.

Interesting. Very.

EDIT: Ok I guess it's not just a rumor (the tax rebates)

• The White House is preparing to grant tax rebates for individuals and businesses in an attempt to boost the American economy as Goldman Sachs yesterday became the latest bank to give warning that recession is going to hit the United States this year.
• Although the proposals are at an early stage, the White House is expected to return up to $100 billion (£51 billion) to individuals and companies. One option would mean that people in certain tax bands would receive cheques of about $500 in the hope that they would spend it and stimulate the economy. Companies could be able to deduct from taxes a substantial portion of investments in equipment over a given period.
• However, analysts believe that any tax rebate that could be afforded would have a negligible impact on the economy and have suggested that the move could be designed merely to appeal to voters in an election year. (nah.... never)
• Lou Crandall, chief economist at Wrightson ICAP, a research firm, said: “A one-off tax rebate of, say, $75 billion would have a negligible impact, since it represents just a shade over 0.5 per cent of GDP. A permanent tax cut of that amount would be much more effective. For a one-off payment, the rebate would need to be far higher than the Government could possibly contemplate.”
• Mr Crandall added that an earlier tax rebate, of about $40 billion, implemented by the Bush Administration during the 2001 recession, “made no difference”. (bingo!)

Well folks, with a political year upon us, this massive influx (cough cough) of cash could actually pass Congress. I mean who wants to be seen as voting down $500 to help the middle class. $500, should pay for 2 fill ups of gas and a trip or two to the grocery for Joe Average, family of 4-5. Or 1/10th of 1 one mortgage payment for some of those poor subprime folks in CA.

Classic! It didn't work in 2001, let's try it again. Sounds like politics at its best. But a great way to get out ahead of the issue and say "we do care about the middle class" (after ignoring your situation the past half decade). But its political season again, so once again we care...

The Smartest Guys in the Room are Saying Recession is Coming

Goldman Sachs (GS) aka "the smartest guys in the room" finally are coming around to a recession scenario.

• Goldman Sachs has become the second Wall Street bank this week to declare that the US economy is headed for recession this year. The bank's chief US economist, Jan Hatzius, argues that the latest economic data shows recession has now arrived in the world's biggest economy - or will shortly.
• Hatzius, whose warning comes a day after economists at Merrill Lynch issued a US recession alert, added that the Federal Reserve will now cut interest rates from the current 4.25pc to as low as 2.5pc by the end of this year.
• In a research note distributed to the bank's clients, Mr Hatzius real gross domestic product would contract by 1pc on an annualised basis in both the second and third quarters.
• His comments echo those of Merrill Lynch's chief North American economist, David Rosenberg, who rarlier this week said that a weakening employment picture and declining retail sales signal the economy has tipped into its first month of recession.
• Additionally, Goldman believes the domestic unemployment rate will increase to 6.5% next year, up from the 5% the Labor Department reported last week.

********
Hmm higher unemployment, Fed slashing rates 3% or lower, US heading to recession... sounds vaguely familiar....can't place exactly where I have been reading such thoughts.... hmm, some random blog back in August I believe [Et tu, September?].... exact url.... hard to recall...

Well, I am not part of the "smartest guys in the room" crowd, but I'll claim the smartest blogger in my own room distinction. Not your room. But at least my room, where I am the only one sitting. Welcome aboard the recession train Goldman! Pull up a chair, you're about half a year late.... This is sort of like downgrading the banking sector 2 weeks ago. Gee thanks for the heads up.

Kass Says Fed Cut Coming Soon

Will be interesting to see if this comes to fruition.... I just think being short at this time is being greedy. The easy fruit has been picked and bears are acting like bulls were at times earlier this fall and winter when pickings were easy. :)

Nothing goes straight down... nothing goes straight up. Here is what Doug Kass is saying:

I have friends.

I have friends in Washington D.C.

I have friends who are very close to the Administration.

I have friends who are very close to members of the Fed.

This morning, several of those friends gave me an indication of heightened concerns regarding the domestic economy -- far more than what has been expressed by the President, the Secretary of the Treasury, and the Federal Reserve in various platforms over the last week.

And they say that the Fed will ease momentarily.

Enough said.

******************
More interesting than the news, will be the reaction by the markets (if it happens)

Popcorn at hand...

CNOOC (CEO) Moves into the Refinery Business

I really like the stock action (of late) and prospects (longer term) for CNOOC (CEO) - the portfolio is just busting to the gills with positions; this is the only reason I have not added this name. (I have been adding to Petrobas (PBR) instead) Some news out earlier this week, as this company is turning very much into a "major" with its expansion from pure E&P type of company to refining. Unfortunately with the fuel price caps in China, refining margins stink so I am not that bullish on this move overall - I was hoping they'd stick as a pure play exploration and production company, which I why I like them more than PetroChina (PTR) and China Petro & Chem (SNP). [Chinese Oil is Flying] But for the "very very" long run, it could be considered a good move.

• CNOOC's first oil refinery is on track to start operating in October and the Chinese state oil firm plans to add more processing facilities to establish itself as the country's third-largest refiner, company officials said.
• The parent of listed CNOOC Ltd (CEO) has also signed a preliminary deal to invest in eastern Shandong province and has set its eyes on acquiring some of China's remaining independent plants, which are clustered there.
• CNOOC, China's main offshore oil firm, is sticking to its schedule for the 240,000 barrels per day (bpd) Huizhou refinery in the south, even as severe weather and slow equipment delivery are set to delay the opening of a refinery in northwest China being built by rival PetroChina.
• After China suffered a serious fuel crunch late last year, Chinese oil firms are being closely watched for signs they can deliver planned refining facilities to a country expected to log a near 6 percent growth in fuel demand this year.
• CNOOC's Huizhou plant, which is set to supply the thriving Guangdong market, and the company's plans to acquire independent oil plants, put it firmly on the road to becoming a fully integrated oil firm to take on the country's oil duopoly of Sinopec Corp (SNP) and PetroChina (PTR).
• CNOOC is also quietly quadrupling capacity at a plant to produce bitumen in the booming eastern city of Ningbo to 160,000 bpd, and could eventually turn the facility into a refinery for transportation fuels, officials familiar with the project said.
• CNOOC may also seek to take over the smaller independent refiners that have managed to stave off government moves to close them down but are now struggling to turn a profit because domestic oil prices are capped while crude values have soared above $100 a barrel.

No positions, but very interested in CNOOC

Bookkeeping: Ratcheting Back Ultrashort Real Estate (SRS) Severely

I've taken down my Ultrashort on commercial Real Estate (SRS) down to just a holding position (meaning its still in the portfolio but down to about 0.10% of the fund)

This ETF which bets against commercial real estate topped $140 today, I am taking my profits and running like a thief into the night. The chart below shows you why - this was my #1 position as of two weeks ago... I did lighten up a bit too early with the first part of my position, but at this time I am feeling very piggish.

None of my worries about the commercial real estate market have changed, but at this price for the ETF the risk/reward (easy low hanging fruit) is gone. We will look for some rally point in the coming weeks and get back to a larger position later as the economy continues to slow. But this is far too much profit (27% in 1 week) and 36% in just over 2 weeks. If you wonder how the fund only lost 1% last week when the market tanked 4.5%, positions like that will do the trick. I didn't have much left going into this week, but as of today's action I am taking just about all of it off the table. In a perfect world I would of held it all until today, but again my strategy is always to layer in, and out of positions. This is my last layer out.

I am as "long" overall in the fund as I've been in many months... not trying to catch a bottom, but many of my favored names finally hit levels I was hoping for so I am buying at these sale prices, and will just hold on for the ride from here. For most of this correction up to this week we've held up well, as I wrote this past weekend, we can expect to give back some of these outsized gains in the near term, but in return I think we were able to buy some of the highest quality merchandise in the market at some great prices. From here, I'll just sit back and grab some popcorn and wait it out. Again, we are still at risk of one of those "moments" where EVERYTHING drops 10-15% for a few hours (baby, bathwater). This should put in the "bottom".

Long Ultrashort Real Estate in fund; no personal position as of 10 minutes ago

Bookkeeping: What I am Buying

I am buying these names here

1. A lot of Mosaic (MOS) near $80 (fertilizer)
   
2. Foster Wheeler (FWLT) - $135s, $136s (infrastructure)
   
3. Suntech Power (STP) - $66s, $67s (solar leader, highest quality)
   
4. Chicago Bridge & Iron (CBI) - $55s (infrastructure)
5. Peabody Energy (BTU) - $52s, $53s (coal)
6. Mercadolibre (MELI) - $56s, $57s (South American internet)
   

These are some of my favorite names, and favorite ideas, trading at levels I had hoped - I outlined most in my buying list [12 New Stocks to Buy on a Pullback]. Well the (first?) pullback is here, so I am going to push them to higher exposures in the fund. Long time readers will recognize some of these names as former top holdings which I cut back exposure to over time as they ran far away from any reasonable technical support and locked in some profits - now we can rebuild them at much lower prices. It will hurt short term performance as these stocks are taking a licking but in a few months the reward will hit. But be aware that fund performance this week will stink as we absorb these losses and buying into major downturns... but the same happened in August and November and it worked out over time very well.

I am also adding a new name to the portfolio which I will write about in further detail at a later date. It is a small cap Chinese stock (not typical of the fund) - down 12% - Chinese pork producer Zhongpin (HOGS). A reader turned me onto this stock a long time ago after I mentioned the boom in meat consumption in China, and trying to find a way to play it [Is Pork the next Chinese Boom Play?]. I was looking at Smithfield Foods (SFD) at the time and the reader turned me onto Zhongpin which at the time was an over the counter stock with symbol ZNHP [Further Analysis on Smithfield Foods]. Since then it has moved to NASDAQ, I've been reading up on it, watching how the stock trades, it has a cool new ticker, but with the same mind blowing growth. I started a 1500 share position here since this is more of a speculative stock due to small market cap so thats about $18K or a 1.5% type of position. If this stock works out it could be a multi baggers over the coming years (decade?). Only a $300M market cap.

Could the market fall further? Certainly. But gosh 8 straight down days on the NASDAQ, CFC bankruptcy rumors, unemployment popping 0.3% in 1 month, lions, tigers, bears... what else is left to throw at this market? I suppose a rocket strike on Iran could do the trick.

Long all names above in fund; long Mosaic, Zhongpin, Foster Wheeler, Suntech Power in personal account

Here it Is...

Well the indexes are holding up relatively well but finally the solar stocks and agricultural stocks are breaking down. This is what was needed... and we finally are seeing it.

Mosaic is quickly approaching that $79 target I mentioned this morning. I am going to slowly layer into some positions here but will be very incremental as panic selling can take stocks far lower than anticipated. But these buys made here will be the positions that make the fund the most money in Quarter 2 of 2008 :) (I think) :)

Remember the pattern, we were anticipating this - now that it's here we need to begin to get bullish on those names we have been hoping would correct and we took profits on at far higher levels - teflon tech, solar, infrastructure, and agriculture.

Quick Comment on the Market

I still don't trust it, and we still have not seen the serious panic selling in either solar or agricultural stocks. When things are down 15% for an hour across the board for no good reason - that would be more of a "panic" bottom we can trust.

This market cannot even bounce back to S&P 1400; extremely poor behavior. The market has stunk but it has not been true fear like we saw in August at the worst of it. Makes me think we have more to come unfortunately. I hope to be wrong this time around.

I am going to be doing some trimming in some names across the portfolio here, to raise cash, nothing major in any 1 name, but I want to have cash at the ready to buy a panic dip low if we get one. In fact I am going to be trimming some of the things that have held up the best - Indian stocks for example seem as if they are in their own vacuum of bullishness. This type of "panic dip low" lasts for a few hours at most but when it happens, stocks drop massively and without any rhyme or reason (baby with bathwater). No guarantee that we get such a moment, but I want to have cash at the ready. The total inability to mount any move upward is quite striking to me....

I will note again, as I have been saying for the past week, Chinese stocks are holding up very well all things considering (see CNOOC (CEO)) which is a name I am very interested in adding to the fund)... in fact most emerging market stocks are. Interesting. One could argue they should fall too (next) OR one could argue assets are fleeing for "safe haven" of emerging markets. Not sure which line of thinking to be more worried about.

Right now the world's investors are drinking the kool aid that emerging markets are decoupled from the US/Western Europe slowdown. These are (or were) the same people telling us there is no slowdown coming in the US, or at most it will be "light", "shallow" and "a quarter or 2" at most. And that housing is 4.5% of GDP - nothing to worry about - exports will fix all that. They will be wrong about the emerging markets as well, but it could take time. Just like the US market held up since July 2007 when the writing was on the wall. It has taken 6 months for people to face reality in the US markets. It might take just as long for emerging markets to fall when people realize when 3/4 of the buying power in the world (W Europe, Japan, USA) is DOA that emerging markets won't escape unscathed. But for now, the belief is it doesn't matter and until it does matter, it won't. Funny I was typing those same words in October when the market was flying high in the US on Fed cuts... as I kept asking "why?". All in good time friends.

Garmin (GRMN) in Free Fall - Why you Need to Understand the Big Picture

Garmin (GRMN) is in total free fall at this moment, down 13% this morning, to $69 on an analyst downgrade.

• Shares of Garmin Ltd. fell in premarket trading Wednesday after a Deutsche Bank analyst downgraded the navigation device maker's stock, saying competition is likely to increase and rival TomTom NV may cut prices to take market share.
• Jonathan Goldberg downgraded the stock to "Hold" from "Buy," and cut his price target to $90 per share from $125. Based on conversations with Garmin and TomTom representatives at the annual International Consumer Electronics Show, Goldberg said Garmin's future is less certain than it has been in recent years.
• "TomTom management came across as being more aggressive about their plans in the U.S. this year, causing us to question the pricing discipline displayed so far," he said.
• Although its results in the next few quarters should be good, Goldberg said Garmin is reporting slower growth in some European Union markets, including Germany.
• Under current market conditions, he said, the uncertainty about prices and sales means the stock no longer deserves its prices from late last year, and should stay around its present levels.

Folks, I have to agree 100% with this assessment, although the current move is probably a bit overdone. I did hold Garmin (GRMN) ever briefly in the fund during the Navteq/Nokia situation, but this was more of a short term trade due to Christmas and I have never been a big believer in this type of commodity situation. During a secular growth story that GPS has been (going from nil to a cool "must have" consumer want), you can really make a lot of money when you get in the earlier stages. But eventually the story ends (by end I mean "growth slows" - and again perception is reality - even if perception is growth is slowing thats when the party ends). I wrote in [Restarting Position in Garmin (GRMN) in Selloff]

Takeaway: Garmin is not my favorite name - in the end its a hardware stock whose gross margins will come under attack as it becomes commoditized (in due time). It's a matter of when with this stock.

Again, at some point the party for Garmin ends, and margins will compress so this stock should trade at some discount to growth rates - but at this level it seems the discount is too great. At least in my eyes; and especially with the holiday season approaching.

I have never held this stock in my personal account for this reason and in fact have watched with a bit of awe and wonder and how this stock is treated so "well" over the past few years - as if it is an Apple (AAPL) type. Again, hardware companies are commodities and price competition will eventually ruin margins. It was just playing Russian Roulette with this type of name, eventually the "bad day" will come. Yes, Apple is in many ways a hardware company but as I keep repeating it is has a cache, design, and style that allows it to charge premium pricing [Apple the Cultural Icon], along with new businesses (phone subscription, iTunes) that have non hardware qualities.

If you have a portfolio of 10 names and this is one of them, a move like Garmin is putting on now can ruin a good year very quickly. People are very apt to throw all "technology" together in 1 bucket, or even "technology gadgets" all together - you can't do that or you will lose money sooner or later. I actually hold very few technology names as it is hard to find a defensible moat in this sector - but in general the ones I do hold have such a thing, or at least are in much earlier stages of their life cycle. My last sale of Garmin was $95 in mid November, not 2 months later the stock is down nearly 30%. Compare that to a performance of Apple for example... even with all the market strife, it was $160s in mid November, and $170s today.

Again let me repeat, perhaps this move is overdone, and Garmin will eventually retrace and make some gains. But in the long run with so many good stocks, in so many safer sectors (compare this situation to fertilizer), why bother? This is why I dropped Akamai Technologies (AKAM) very early in the fund life - why bother with this level of risk? There probably is some good value to AKAM as well, but why battle it out with voracious shorts on this position when there are so many sectors and companies with 'relative' clear sailing.

Long Apple in fund and in personal account

Mosaic (MOS) with another Excellent Quarter

And the hits just keep coming from fertilizer stock Mosaic (MOS). This is essentially going to be a carbon copy post to the comments I made in October during the last round of earnings [Mosaic Off to a Strong Start this AM Based on Earnings] AND [More Color on Mosaic Earnings]

• The Mosaic Company (NYSE: MOS - News) announced today net earnings of $394.0 million, or $0.89 per share, for the second quarter ended November 30, 2007. These results compare with net earnings of $65.9 million, or $0.15 per share, for the same period a year ago.
• Net sales in the second quarter of fiscal 2008 were $2.2 billion, an increase of $673.4 million, or 44% compared with the same period a year ago.
  
• Mosaic's gross margin for the fiscal 2008 second quarter was $623.1 million, or 28.4% of net sales, compared with $160.5 million, or 10.5% of net sales a year ago.
• The increases in gross margin and operating earnings were primarily the result of higher selling prices for phosphates and potash and realizing the benefit of favorable industry conditions in the Offshore segment.
• "Our unprecedented operating cash flows have allowed us to prepay $1 billion of long-term debt over an eight-month period and we are on track to deliver strong results in fiscal 2008 and beyond," Prokopanko added.

Not much to add here folks from what I keep repeating with this group - beat analysts estimates of $0.73 by $0.16, tremendous revenue growth year over year, a fixed cost model where almost every dollar in increased price goes to the bottom line, hence explosion upward in gross margins, cash flow massive, debt being reduced at a rapid pace, etc etc etc.

Some more details by product line

Phosphates

• Net sales in the Phosphates segment were $1.2 billion for the second quarter, a 61% increase compared to a year ago. The second quarter gross margin was $397.6 million, or 32.3% of net sales, compared with $35.9 million, or 4.7% of net sales, for the same period a year ago. Operating earnings were $346.8 million compared with $5.1 million for the same period last year. The sales, gross margin and operating earnings increases were primarily due to the significant increase in selling prices partially offset by higher costs for sulfur and ammonia.
• The average second quarter DAP price, FOB plant, was $417 per tonne, which is a $174 per tonne increase compared with a year ago and a $10 per tonne increase compared with the first quarter of fiscal 2008. Fertilizer and feed sales in the Phosphates segment were 2.3 million tonnes for the second quarter, comparable with volumes of a year ago. Sales volumes to North American customers increased 70% during the second quarter as this region exhibited strong demand recovery and growth from year ago levels. Sales volumes to international customers declined approximately 25%, principally due to the increased volumes sold in North America.

Potash

• Net sales in the Potash segment totaled $431.6 million for the second quarter, an increase of 23% compared with a year ago. The Potash business' gross margin increased to $175.2 million in the second quarter, or 40.6% of net sales, compared with $88.4 million a year ago, or 25.1% of net sales. Operating earnings were $161.2 million during the second quarter, an increase of $83.0 million, or 106%, compared to the same period last year. Sales, gross margin and operating earnings increased primarily as a result of the higher selling prices, partially offset by additional costs this year to manage the brine inflow at the Esterhazy potash mine.
• The average realized potash price, FOB plant, increased to $171 per tonne in the second quarter, up $29 per tonne compared with a year ago and $11 per tonne compared with the first quarter of fiscal 2008. The Potash segment's total sales volumes of 2.0 million tonnes during the second quarter were 3% higher than last year's second quarter volumes.

Outlook

• Phosphate and potash fundamentals remain exceptionally strong. Phosphate and potash prices increased to even higher record levels at the end of 2007 and this momentum is anticipated to continue into 2008. Further increases in grain and oilseed prices during the last several weeks have bolstered farm economics worldwide and solidify strong nutrient demand prospects for 2008.
• In the case of potash, supply continues to struggle to keep up with accelerating demand as evidenced by the extremely low stocks held by North American producers at the end of the fall season. This situation likely will persist until additional capacity comes on line during the next few years. Market prices are continuing to increase significantly for shipments into all major markets during the first half of 2008.
• The phosphate situation is similar to that of potash. U.S. producers reported holding the lowest inventories of DAP/MAP in modern history at the end of the North American fall season. More importantly, large increases in market prices for phosphate rock and phosphoric acid in 2008 will dramatically boost costs for non-integrated producers who likely account for almost one-third of global phosphate production. These increases, plus substantially higher sulfur costs underpin higher phosphate selling prices. Finally, phosphate exports from China likely will drop this year due to government policies to make more product available for local farmers.
• "The market environment remains extraordinary. Agricultural commodity prices continue to increase to unprecedented levels, resulting in robust farm economics and nutrient demand prospects," said Jim Prokopanko. "Mosaic's leadership position in Phosphates, combined with our exceptional Potash business and our focus on effective operational execution, offers a unique value proposition for crop nutrition customers and investors."

If those last 4 data points don't convince investors, then I give up. With the stock market so putrid, there is no need to rush into the name right here as it is sitting right near its 20 day moving average. But if the market goes into free fall, this is the name I will be loading up and if we get a drop to the 50 day moving average $79), I see Mosaic going right back to the top position in the fund where it has sat for most of the previous quarter. General market weakness which cuts down the price of the "best stocks in the market" is exactly the opportunity that leads to outsized gains over the long run. Any weakness in this name is a result of the market, nothing to do with the company's fundamentals - we have everything we want, a wonderful macro theme for the company, strong pricing, future strong pricing, a constrained potash market (inability to expand production) etc etc etc. Go team Mosaic. Expect a carbon copy from Potash (POT). And expect me to keep pushing fertilizer for a long time. At SOME point in the future analysts will push up expectations much too far and one of these companies will miss, and investors will flee en masse in a short sighted move... that of course is always the danger. But it won't mean the fundamentals have changed... remember, 3 nutrients in fertilizer; one being potash which must be mined and takes a long long time to bring new supply online [Potash Expands Mine for $2 Billion] - only 3 companies in the world are "investable" choices for US investors. This is the type of situation we hope for - a major shortage with no easy or quick or cheap solution. While I think these ethanol bills are a total outrage and political pandering at its worst, at least as investors we can make some money off this ridiculous situation.

I've added more Mosaic here around $90 to add to yesterday's buys in the high $80s. This takes the position back up to 3.3% of the fund. If we are fortunate enough to see a fall to $79 or so, I will make this a 6-8% type of position. Analysts estimates for next year are now up to $5.40, up from $3.55 90 days ago. I think it's still too low. I wrote in October [Analysts Still Doubting the Fertilizer Stocks] and showed how wrong they have been... and I contend continue to be. These estimates are going up, and once the market returns out of panic mode, so will these stocks. Folks, this is 17x next year's earnings for the type of secular growth we have in almost no other sector in the market. Still dirt cheap despite a massive run in 2007. That doesn't mean the stock can't fall $10 tomorrow or next week, but again this will be a function of a panicky market and it will be an opportunity to take advantage of.

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

It's All Fun & Games Until...

....Someone pokes you in the eye with a sharp stick, while you trip over a black cat, as you walk under a ladder, on Friday the 13th.... and oh yeh the S&P 500 breaks 1400.

Ok that shows me for being away from the computer for a few hours. What an ugly close. On the plus side, agricultural stocks (the last safe haven) finally took some beating today (not a huge one) but finally we got some sellers there. So all sectors have now been at least shown the door to the woodshed.

Ironically today was a far better day for the fund (with the markets down around 2%) than yesterday was (with the markets flat) - many of the holdings did worse yesterday and today we had some stalwarts like (ahem) LDK Solar (LDK) and (cough) Crocs (CROX).

Everytime I think financials are oversold and ready for "some" bounce some hedge fund whispers to his friend in the financial press of an impeding bankruptcy. It's a pretty good gig if you can find the work and have the right friends in the financial press. Countrywide Financial (CFC) falters nearly 30% today and is now under $6. "Smart money" (aka Bank of America) was buying a stake in this company for $18 just a few short months ago. But what's a few billion lost amongst friends - they will just "write it off", the Fed will print more money for them to shore up their balance sheet and we won't have to worry about it. Now if only the Fed would do that for us when we make bad investments.

The 2 insurers, MBIA (MBI) and Ambac (ABK) which should be out of business by the time Warren Buffet gets his competitor up and running make a perfect trio. Two insurers who need bad mortgages to insure to stay in business, and a company, CFC who specializes in making bad mortgages. What a perfect fit - they all deserve each other. Now if they could all hurry and file bankruptcy together on 1 day, we can move on with the rest of the market.

Well as we move into the worst opening week in the indexes since... 1932. We have now lost all of 2007 gain's (as of YESTERDAY not to mention today) in the S&P 500 for 2007. We are now working on erasing 2006 gain's. Did I mention anyone buying the S&P 500 on Dec 31, 1999 was down 8 years later... as of 2 DAYS ago. Now we are working on erasing 1999 :)

Yada Yada Yada ... (and you know which show I am talking about if you are over age 25)... anyhow we still have solar up today and not a true "fear" selling in agriculture. But we are inching ever close to panic levels by the day. It appears all that gain in the last week of December was just the hedge fund and mutual fund games working hard to window dress and keep performance up, to lock in bonuses and such. Now the reality hit as the ball fell in Times Square. I kept asking why this was not happening during September and October - I guess being early is a key theme here. :)

Back to the well tomorrow.... looks like AT&T (T) is now out with some not so great comments as well. I guess my only question is why are statements like this ""We're experiencing softness on the consumer side of the house from the economy," AT&T Chief Executive Randall Stephenson told a Citigroup investor conference in a presentation that was broadcast over the Web." a surprise to anyone? Really? Consumer slowing? Shocker. Maybe if all the financial press did not deny these facts for months on end (remember housing is only 4.5% of GDP!) we would of come to the realization a bit earlier. Anyhow, eventually this will be priced in, but for now emotions rule the day on the Street. As usual.

Anyhow, we have Mosaic (MOS) reporting tomorrow AM. Once again, expect great earnings - only question is will the increasingly heightened expectation of the new breed of investor flooding into fertilizer stocks be happy with them... (I did add a bit today as the stock finally fell to its 20 day moving average and a limit order of mine filled)

Perini (PCR) - Talk About an Underperforming Infrastructure Stock

I am watching in amazement a stock that used to sit in the portfolio, infrastructure name Perini (PCR). I bought this name in early August to complete my "basket approach" to buying infrastructure exposure.

I (very) quickly cut out URS (URS) from this basket, then AECOM Technology (ACM) - a Cramer favorite in August, had a brief flirting with Fluor (FLR) before sending her packing, and focused on some of the other names. One name that confounded me was Perini (PCR) - it's valuation is so cheap yet it's stock never acted very well.... I closed the position in November (more as a cash raising exercise) but the timing was very fortunate.

I'm a big believer in the stock action telling us a lot - as small investors we have no information advantage - the only thing we have is stock action. A stock acting weak for no apparent reason and especially in the fact of "good fundamentals" is probably telling us something stinks in the back kitchen. In fact, this might be happening to me in Crocs (CROX) as we speak. But this is part of the reason I like to buy stocks above major moving averages - the 'smart money' (ahem those in the know) are generally buying, so the price action confirms the fundamentals. (granted that can change at a moment's notice during an earnings season or conference call).

Back to Perini... again, a stock that is supposed to earn $3.44 this year... and is trading at 10x earnings at these prices, yet continues to implode. My main strike against it was, while it is technically an infrastructure stock it is not like the others I own in that it is (mostly) based on domestic and non energy projects (i.e. casinos, schools and the like) so a slowing US economy could hurt it more... versus say a Foster Wheeler (FWLT) or Chicago Bridge & Iron (CBI). However, I never expected this sort of putrid performance. The stock is now in the mid $30s or fully $20 below where I last sold... despite being in the 'right sector'. I don't really know "why" it is, but the technical action in the stock would of told us to sell, as it was constantly telling us to sell in the mid $50s as it broke its support throughout November, and even as late as early December (when it still traded in the mid $50s). So the small lesson here is sometimes your sales are just as important as your buys.

I assume something will come to the surface sooner or later to explain the Perini weakness, but again this is why I think every investor should at least have some very basic technical analysis in their toolbox. Does selling every stock when it breaks a key technical moving average (50 day or 200 day) work out? Certainly not. Nothing works all the times. And many times a stock will temporarily break one of these averages and then bounce right back (these are stocks I sometimes reduce exposure to when they break support, and then buy right back a week or two later when they close higher than a moving average). But by having this conviction and being relatively consistent you can save yourself some losses. The few stocks I have broken that conviction with are some of the bigger losers in the fund!

As for Perini, SmartMoney has some theories on why its been such a loser. It appears earnings visibility and backlog (esp in 2009), which I harp on constantly on why I like most infrastructure stocks, is not there for Perini.

• Perini specializes in casinos, and has also made good money in recent years in hospitals and civic infrastructure in Iraq and Afghanistan. The stock has performed miserably of late, falling by nearly a third in three months.
• I like the low-down stock valuation of 11 times this year's earnings forecast, a discount of more than 30% to the broad market. I'm impressed that Perini has topped Wall Street's earnings expectations by an average of 65% over its past four quarters. And I like all the business the company is writing up, which earned it a spot recently on a search for accelerating sales growth.
• But there are worrisome signs, too. While bookings have been strong over the past year, more than half of them are for add-ons to current projects, and not for new projects. Some major projects will be completed this year, and so sales and profits this year are seen increasing 13% and 7%, respectively, but 2009 looks less certain. Analysts, whose sales and earnings forecasts are far more useful than their "buy" recommendations and price targets, don't yet have much to say about 2009.
• Company insiders sold an astonishing number of shares last year. Chief Executive Ronald Tutor unloaded much of his stake by early December, most recently at $55 and change per share.

Long Foster Wheeler, Chicago Bridge & Iron, Crocs in fund; long Foster Wheeler in personal account

Still Looks like a Market Wanting to Go Down

When these opening bounces fail so miserably it just saps the strength of the bulls. Quite pathetic action to be blunt.

So I keep talking about S&P 1400. If this breaks what are the next support levels?

Looks like 1365-1370 which were the panic lows in August and March 2007. After that? Not very good - 1325 and below.

Unfortunately every computer in every quant hedge fund in NYC and Conn. is set to sell their holdings and go short if we break that 1400 :)

That's why this is gripping action.... as in white knuckle gripping. If that is all the bounce we get, the bulls are in serious trouble. This is like a shootout in the old West... everyone has their hand on their holster and waiting... I just can't imagine the "invisible hand" giving up 1400 so easily, but it takes some other people to help them out and do some actual buying out there. So far, very few volunteers.

So for now, we wait, watch and see who walks out of the saloon.

Interesting Comments from Fed Officials

It appears these folks are (beginning?) to realize they are in between a rock (global inflation) and a hard place (US recession). If only they had read the blog 5 months ago... however this is a backward looking 'data dependent' Fed and by not forecasting and only relying on old data it will make the problems we are facing that much worse. And I am talking Main Street, not Wall Street.

At this point I think their only path is to cut rates vigorously and try to stimulate (read inflate) a rapidly weakening economy, since they are (in my opinion) powerless to fight this form of inflation which is based on world emerging middle class demand on all resources (vs finite supplies). So if you can't fight inflation effectively you might as well tackle the absolute lack of growth that is 'coming around the mountain as she comes'....

If this were just a plain old recession that's 1 thing, but with housing bubble, and credit bust we have a lot of ills hitting at once... still looking for 3% or lower Fed funds rate by end of year. And look for all that fiat money to inflate assets (even eventually the stock market), but first commodities appear to the next big bubble. Gold to $1K in '08 looks less and less like an Outlier Prediction by the day.

Lockhart Says 'Negative' Signals on the Economy

• Federal Reserve Bank of Atlanta President Dennis Lockhart said that ``negative'' signals on the economy are increasing and that he expects ``weak'' growth in the first half of the year.
• ``The pivotal question'' for this year ``is the extent of current and future spillover from housing and financial markets to the general economy,'' Lockhart said in a speech to the Rotary Club of Atlanta. ``The negatives in our economy may be gaining momentum,'' he added, requiring policy makers to ``respond pragmatically to whatever developments arise.''
• Lockhart's comments may reaffirm traders' convictions that Fed officials will cut interest rates at least a quarter-point when they meet this month. Anticipation of a bigger, half-point move rose last week after reports showing unemployment rose to a two-year high and a contraction in manufacturing in December.
• ``Lockhart's remarks do nothing to upset the view that the Fed will provide further policy accommodation,'' said Michael Feroli, economist at JPMorgan Chase & Co. in New York.
• Federal funds futures show a 62 percent probability of a half-point reduction in the federal funds rate to 3.75 percent at the Jan. 30 meeting, up from a 4 percent probability a month ago.
• Lockhart told reporters after his speech that ``he wouldn't foreclose'' the possibility of another rate cut because he is ``equally or more concerned'' about risks to growth than inflation.
• ``There may have been in some respects some slowness to recognize all the signs'' of a slowing economy, Lockhart said. ``But starting in August, I feel strongly that the Fed has been attentive and been making appropriate policy actions.''
• ``I think we are at a time of heightened uncertainty,'' Lockhart said. He said his baseline forecast anticipates ``a weak first half of 2008 -- but one of modest growth -- with gradual improvement'' starting in the second half and into 2009. ``This outcome assumes the housing situation doesn't' deteriorate more than expected and financial markets stabilize,'' he said. (oh boy, those are some seriously bad assumptions)

Fed's Plosser Says Economy Might Need more Rate Cuts

• Federal Reserve Bank of Philadelphia President Charles Plosser said further interest-rate cuts may be needed should the outlook for U.S. economic growth become ``substantially weaker'' than already projected.
• ``A substantially weaker outlook than expected, particularly if that weakness is projected to be more prolonged than anticipated, may require further adjustments to policy,'' Plosser said in a speech in Gladwyne, Pennsylvania. He said he already expects several ``sluggish'' quarters of growth.
• ``I see more worrisome signs of underlying price pressures,'' Plosser said in prepared remarks to the Main Line Chamber of Commerce. He said he also senses that ``inflation expectations are more fragile now than they were six months ago.''
• ``If inflation expectations continue to rise, it will be difficult and costly to the economy to deliver on our goal of price stability and puts at risk the Fed's credibility for maintaining low and stable inflation,'' Plosser said today. (Bingo!)
• Plosser said the Fed, in lowering its benchmark interest rate 1 percentage point last year, was responding to changes in its economic outlook, yet there's ``limited'' evidence backing concern that the ``strains in financial markets might have ramifications for the broader economy.'' (Not Bingo!)
• The increase in the unemployment rate to 5 percent in December marked a ``somewhat sour note,'' Plosser said. The rate ``may rise somewhat above 5 percent'' this year, he said, with slower job growth for two to three quarters. (again, this insistence that it's only a 2-3 quarters issue is astounding to me - I guess by Halloween 2008 this will all be a bad dream?)
• Plosser said he expects the housing recession to ``bottom out near the middle of the year,'' then the industry should ``turn slightly positive in the latter part of 2008.'' He didn't anticipate ``significant improvement'' until 2009. (It appears Plosser is aiming for work as an economist with the National Association of Realtors)
• ``Recent data suggest that inflation is becoming more broad-based,'' he said. ``Recent increases do not appear to be solely related to the rise in energy prices.''

When I read this it appears Lockhart has a much more realistic view than Plosser, but both seem a bit lost - I think if they sat in a room with a normal American not making $100K+ living in NYC or Washington they would get a better picture. Poor Ben.... rock, hard place. Somewhere Uncle Al is smiling realizing he got out at just the right time.... however, I do miss Al in some respects... you know we would of had a 50 basis point cut 10 minutes after that employment report came out last Friday. These guys? Nothing... the guys on Wall Street must be aghast.

Bookkeeping: Reducing Exposure to LDK Solar (LDK) Further

LDK Solar (LDK) continues to flummox me....[Top 10 Winners and Losers so Far]

flummox \FLUM-uhks\, transitive verb:
To confuse; to perplex.

Following a decent earnings report, a disappointed investor base sent the stock free falling to the mid $40s from the $70s, I built a quite sizeable position. [LDK Solar Hits Targets]

We did a get decent bounce last week when the company announced preliminary guidance for 2008 and 2009... however it was not a very awe inspiring move considering the company is guiding for 42%+ gross margins in 09. I did take some off the table there, and mentioned:

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.

Unfortunately even my 2 value plays, LDK Solar (LDK) and Trina Solar (TSL) were marking time because the entire sector has been in mania. My hope was these 2 would hold up better then the names flying 25% a day for no good reason other than momentum, but during yesterday's correction these stocks were hammered just as hard as the stocks trading at far higher multiples. So it's sort of a lose lose situation.

With yesterday's sell off in my favorite name in the group, leader Suntech Power (STP) as it fell to its 50 day moving average of $72, I was able to add to that name at a price I wanted. To keep my solar exposure consistent (I don't want to be overexposed to a sector I consider in general overvalued), I am cutting back more LDK Solar today. Again, my exposure to the names I consider overvalued is nil, but when the sector sells off, investors are not interested in valuation - they just sell anything. So my thesis that those which had already been hit hard would hold up relatively well was proven wrong and if we continue a selloff in this sector (many names are still way too expensive) I don't want to have so much exposure in the fund to this sector. As I stated earlier, this sector is full of people who are performance chasers - they push stocks up much farther than makes any sense, and then they flee en masse. Hence I have had trouble assessing the stocks in this sector as most are way above my "fair value", and the ones that are "cheap" appear to simply be "value traps" as momentum traders could care less about valuation and just buy whatever went up the most yesterday, or last week. Not my style, so it's constantly making me miss entry points as movement in this sector is random and the most speculative companies are making the largest moves - not those companies that will actually be around in 5 years.

I do like LDK Solar for its position as an 'arms supplier' to the army of PV panel makers coming in from Taiwan and China [The Long Term in Solar], but now that we've broken below the 50 day moving average ($46) I don't want to be overexposed and with my dearth of cash I am going to sell these stocks breaking down below their moving averages. I will wait to build this name in scale once the market warms up to it again. I think this company needs to build a good long base, and get some 'strong hands' on board and then perhaps we can see a sustainable move.

With the 6%+ gain today, I am going to cut this position by half, book some loss and raise some cash. I am taking this down from a 2.3% position to 1.0% position by selling here in the $43s.

If the solar sector sees a "true" correction, these stocks will be far lower and provide better entry points. If (no guarantee) that does happen I'd rather be in a leadership stock like Suntech Power. And yes to use the political term of the day, I am a "flip flopper" on LDK Solar.

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

Right on Schedule Comes the Rally

As I wrote last night:

Now if you were a conspiracy theoriest you would notice just like in August and in November when we sat on the edge of the cliff today near 1400, and near the end of the day under 1410 things "perked up" all the sudden and we bounced a bit into the close. A conspiracy theorist would opine that tomorrow premarket we get some heavy futures buying and the market will look all spiffy again. Let's see how it plays out - the action in financials, retails etc suggest a very washed out condition and to break S&P 1400 on the first or second try would be atypical. Hence why I still think odds favor some sort of bounce (however brief) before the next round of weakness. This is at least my short term thinking - correct or not.

Amazingly how convenient this all worked out. Paulson was on CNBC this morning to boot. :) Futures ramped up ahead of the bell... and away we go. Not that I am a conspiracy theorist ;).

I will be looking to take some profits and start raising a little bit of cash - my cash position is far too low as are my Ultrashort positions. However, as I mentioned last night I am hoping to see a few days of strength first... remember we have Mosaic (MOS) reporting tomorrow. I expect blockbuster earnings - the question is are investor expectations too high? A part of me wishes they are so this stock has a correction and I can buy at far lower prices.

Other than that let's see if this bounce has any legs and if we quickly move from fear to greed (again). Investment banks report next week which also should be quite a circus - but as I stated yesterday these names are so washed out, and I expect they will be announcing some layoffs - so perversely they might do better than we think at least in the very near term.

Long Mosaic in fund and in personal account

Bookkeeping: Closing Ciena (CIEN)

I am closing the fund's position in Ciena (CIEN). This was the fund's 2nd smallest position for most of the past month at 0.30% or $3500, post earnings mid December [Ciena (CIEN) Reports Ok Earnings, Guidance Light, SIV Exposure?] At the time I wrote

I did sell half of my smallish position in Ciena - not so much on that bad guidance or even the SIV exposure but near term perception about the stock. Again its a small position and I have some decent gains in this name - when I have more time to read into the earnings report and guidance I will decide if I will hold the remaining 125 shares.

This is a case study in locking in profits - for a short time (September) Ciena was the #1 position in the fund - we benefited from a great run from $37/$38 to near $48+ in just a few weeks [Selling more Ciena to Raise Cash]. I took a lot of profits at the time as I felt the valuation was getting full. Since November, the stock has fallen from $48 to $28. However, I have a realized gain of about $8350 on the stock. So for all those stocks that you sell only to watch ramp on to make even larger gains and you grit your teeth, you have to remind yourself of one like this.

Why sell now? In fact, I find the valuation very compelling here. I just have too many names in the fund (trying to remain around 55 long positions), so I am selling off some of the sub 1% positions. Despite what I consider to be a very good valuation - again a nice technology company growing 20% long term, now trading at 17x forward 2008 earnings of $1.62. I'd call that cheap in fact. If I were running a "value" fund, in fact Ciena is a name I'd probably be loading up on at this time, and waiting patiently for the market to see the error in it's ways. But with so many nice bargains created on the 'stock sale' rack the past few days, I have bigger fish to fry.

Ciena's customer base is not the same "slowing enterprise market" , it is telco companies. So unless the AT&T's of the world's cut back spending severely (and in their cut throat competition with the cable companies it's hard to see that) I just don't see the fears of severe cutbacks playing out. But the stock is in free fall, and due to portfolio management I am going to cut back and revisit this name later in the year. Right now there seems to be a pervasive fear that all things technology are going to die a quick death (see Intel (INTC) and Hewlett Packard (HPQ) charts the past week) - you'd think these were women's clothing retail stocks, the way they are acting of late.

Further this is an example, this is why I do not hold 250 positions... I don't think a non concentrated attack works. For example if I owned 250 companies, most would hold 0.3% or 0.4% positions in the portfolio. Then if my thesis is correct, and the stock ramps up 25%, I made 25% on 0.3% of the fund. That doesn't help much. So even if Ciena reversed and made a +40% move here, I don't hold enough that it will matter. Once again, why I say most mutual funds are simply index funds in disguise. I have seen the rare few over the years which can hold 100s of stocks and do well, but at some point you start to basically look like "the market" if you hold too many stocks. And really why buy your 221st best idea, instead of more of your 16th best idea? Are there even 221 stocks worth owning out there? :)

No position

Is Starbucks (SBUX) a Buy?

One of the stocks hardest hit by the consumer slowdown has been Starbucks (SBUX). After all, when people are faced with choices in their budgets, one of the first things to cut back on is $5 lattes. This is the "common man's" version of Coach (COH), with all its stock struggles of late. Last night, after a relentless sell off, news came out that the original founder Howard Schultz was returning to the helm as CEO. The stock gapped up in after hours and is printing up nearly 9% in premarket this morning.

Should a person buy now that the founder is back? I say no.

1. Schultz has been the Chairman all along; it is not like he left the company and was not involved in the strategic decision
2. The saturated market in the USA for coffee shop chains did not change last night
3. In fact, McDonalds (MCD) which has hurt Starbucks with their low cost coffee made an announcement yesterday afternoon that they are expanding their coffee initiative - in fact they are hiring their own baristas in a show of how serious they are.
4. $5 coffee is a luxury not a necessity, especially when the most visited food chain in the nation is rolling out similar offering for far lower costs.
5. Milk costs, and coffee bean costs are rising as with every commodity in this world as we continue into a 'World of Shortages'
6. One need only look almost a year ago to this date at Dell Computer (DELL) - CEO Michael Dell returned like a white knight... overnight the stock jumped from $25 to $28, and then it promptly fell to $22 within a few months... a year later? $21.26.

Upshot - if you missed this move (i.e. you didn't own the stock yesterday at 3:59 PM) you most likely missed at least 2/3rd of the move up. Once the hype wears off, and the reality hits the stock will resume its "dead money" persona. Maybe it won't continue straight down as it has for a long time, but former growth stocks are not a place one wants to be, despite the claims of "future growth in international markets". By the way, today's "pop" takes the stock all the way up to where it was... 4 days ago.

No positions

Reader 'Pledges' Towards Mutual Fund Launch

Readers, first of all thanks for your 'business' and participation on the blog. As I like to say, I realize there are many financial focused web site choices out there for your time and interest, so I feel very pleased that this blog has grown so quickly in just 5 months from a dead start to a very healthy number.

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

There is an end goal to this site - and that is to launch a real mutual fund. Over the years I have helped many people with their work 401ks and part of my motivation, aside from passion for investing, is just being sickened by seeing so many "me too" mutual funds out there, full of large cap stocks of identical mix over and over in fund after fund - full of stocks like GE, Microsoft, Exxon, Citigroup, Bank of America, Merck, Pfizer - all charging 1.0%+ annual fees on billions of assets to get investors nothing more than a S&P 500 index fund could do for far less in fees and almost always better performance. That's the dirty secret; the vast majority of funds cannot even beat the S&P 500. That's essentially "much" of the mutual fund system; a system of under achievers. Now, one day I might prove to be an under achiever as well, but you will see it day by day, week by week, each decision and thought process and I think this could be a unique concept, especially for this staid industry. An industry where performance does not mean much; only marketing. Obviously I need to perform - or I don't win readers trust. So far so good as readers who have been following along can see.

As the title bar indicates I have a goal of raising $7 million (note this amount might fall as I gather more information and talk to more people who have started small funds). If its from 2000 people, 500 people, or 6000 people is abstract - the amount is important. Why $7 million? Essentially, mutual funds are expensive things to maintain on an annual basis due to audits, SEC documenation, system support, paperwork and the like. From the firm I am working with something in the range of $100K- $125K should be expected (depending on how many states you are registered in) on an annual basis so to break even with some leeway, a $7 million asset base with a 1.75% annual expense fee would generate $100K-$125K a year and should allow me to at least break even. So I need to have 'committments' for investment near this area to have confidence the fund can exist at break even levels, hence why $7 million is the initial goal.

Of course it goes without saying this would be a NO LOAD mutual fund (i.e. some mutual funds charge a fee under the fancy term 'load' i.e. if there is a 6% load you send $10,000 to the fund and they take $600 away to their pocket for the honor of investing in their fund. So you start 6% down and have only $9,400 to invest. Nonsense.)

Aside from that there is about (approx) $50K in startup fees/registrations just to launch the fund in the first place. So it is not a cheap production, and in fact running a hedge fund (both in start up and in annual maintenance) is far cheaper. But you limit the people who can invest in your fund to people of high net worth (certain annual income requirements and household worth). Perhaps that will be a future adventure.

EDIT: One question asked is the process once the fund is up and running - it would be no different than any other mutual fund out there - you'd get an application, prospectus, send the check to a 3rd party clearing house and away you go. Retirement and normal accounts both available, etc - nothing different than all the other mutual funds out there, other than the most transparency in terms of manager decisions and daily feedback. So that's down the road once the fund is created - for now I just need a clear amount of commitments/pledges so I can hit the ground running.

Since many readers have contacted me with early interest I've decided use this blog post and readers can "respond" with comments (or email me directly) and we will use that as a "pledge meter" if you will.

Again, my timetable is open ended, my original goal was to build a track record of 3 years, surpassing the indexes I track by 15% a year. As I write this, we are only near the end of quarter 2 of a 12 quarter marathon but if things progress quicker than that, it would be wonderful as well. I would ask if the readers who are interested please add a comment to this post (or email me) with the following information in this format:

Amount 'pledging', First name, Last initial (for privacy sake), City, State

For example:
$5000, George B., Washington D.C.

Please keep in mind $2500 is the minimum (record keeping for accounts smaller than that becomes onerous and expensive) and both IRA and regular accounts will be offered, as with any mutual fund offering. Essentially any type of account you use to open a mutual fund or brokerage account will be available.

New NEWS: Foreign Investors are now eligible. You will need to fund your investment with a bank wire (easier) or if you have access to a US dollar check account you can do that too. And you will need to fill out this form when you invest - it creates a US tax number for you. IRS W-8. Everything else will be the same as any normal investor.

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

And yes, I will be investing my own money (another thing all mutual fund managers should be required to do)... So let me get this rolling...

$75K, Mark H, Royal Oak, Michigan

Now I only need $6.925M more :)

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

Last, if you are making a larger pledge say $20K or more, in addition to adding a comment to this the bottom of this message, please send me an email so I have your email address (and place the same data in the email as you put in the comment). Obviously 1 large pledge takes the place of many smaller ones, and gets to the ultimate goal much quicker so I'd like to have that group ready and on hand, and easy to communicate with so when ready to begin the next steps I can confirm they are still committed. But even the smallest pledge is of course appreciated; and those of you who just are here for sake of reading the blog with no intent of investing are always welcome.

So we'll check over the course of the next 12 months and see how we progress... hopefully we find an easier way to track things down the road! I'll track progress monthly. (p.s. if you prefer to just email me with amount and info, please do)

Totals
January 7, 2008 = $75K total raised
February 19, 2008 (click here for full post): $766K total raised
March 18, 2008 (click here for full post): $994K raised
April 16, 2008 (click here for full post): $1.2M raised
May 15, 2008 (click here for full post): $1.6M raised
June 17, 2008 (click here for full post): $2.5M raised
July 17, 2008 (click here for full post): $3.3M raised
August 18, 2008 (click here for full post): $3.9M raised
Mid September ....

Today was a Blah Day

I try not to focus on any one day but today certainly was one of the weaker ones for the fund. Essentially all the groups we are bullish on finally got their turn behind the woodshed, and further even groups we have been short (which were lightened up significantly on Friday and this morning) rallied, so being short those groups would not of helped in any manner. There was a day like this in November (actually far worse as shown by the huge spike down in the Marketocracy.com graph), and a few days (a week or two in fact) like this in August. It is inevitable especially considering the out performance of late - we all have to pay the piper eventually. Aside from a strategy of buying healtcare, retailers and a few financials @ 3:55 PM Friday there was no avoiding bad performance on a day like today.

I am however disappointed in some of the action in solar stocks - top holding Trina Solar (TSL) really stunk despite being a "value stock" i.e. it trades at a far lower valuation than its peers and did not participate in the mania that had hit the sector of late - hence the hope was it would hold up better than most when the inevitable correction happened. But it did not, and it fell just like the rest of them.

Agriculture held up relatively well, and Indian stocks were the main outperformers. New Oriental Education (EDU) continues to ramp ahead of earnings in mid January - it appears something positive is 'leaking'. As I mentioned Friday the stock is acting very abnormal in what was a very down day Friday and a down day for most Chinese smaller or mid cap stocks today. Interesting.

Overall as you can see from the chart we are at an important test area, an area we have been pointing to for weeks as the "do or die" spot. S&P 1400. While the chart looks like a 'double bottom' (2 lows at almost the exact same spot) this is only a 3 month chart - if you go back 6 months you will see the 3rd bottom in August. So we are playing Russian Roulette each time we get to this level - as eventually it should fall, and when (if) it does a lot of institutional traders will be heading for the exits and we will most likely see some extensive selling. It could be tomorrow or it could be next week or a month from now or never. But we play with fire each time we get here. For the focus of the fund I am finally seeing some nice prices/values in stocks I like and want to be holding for a long time so I am glad to get some opportunity to buy stocks near support levels as opposed to chasing them at 52 week highs.

In a perfect scenario for the fund, we would see a pop up here in the S&P 500 to at least 1440, but preferably something like 1460-1480, which would align with where 'resistance' is - both the 50 and 200 day moving averages are converging around 1480. Also as we create this series of lower highs since Oct 9th, it would work out very well for 1470-1480 to be the next lower peak. Could it be that simple? Somehow I doubt it, but I would not complain if this is the path we took. At that point I'd be lightening up long exposure again, re-acquainting myself with heavy Ultrashort exposure and wait for the next tide down. As I have said in the past we are range bound now, in a wide range that is narrowing over time - 1400 on the bottom and at the top a lower and lower high (1510, 1500, 1490 somewhere in that area). Eventually we will either break out above this range (bullish) or break down below it (bearish). But until it happens we will keep repeating this pattern and trying to profit from it.

On the plus side I mentioned this weekend that I would not be looking for any sort of bottom until agriculture (full of institutions hiding out) and solar (full of retail traders hiding out) started correcting - the latter finally started happening today. With Mosaic (MOS) reporting later this week maybe that will be a catalyst for a correction in agriculture or maybe this is the next area that will be essentially bulletproof - at least until the S&P 500 breaks that 1400 level. Now if you were a conspiracy theoriest you would notice just like in August and in November when we sat on the edge of the cliff today near 1400, and near the end of the day under 1410 things "perked up" all the sudden and we bounced a bit into the close. A conspiracy theorist would opine that tomorrow premarket we get some heavy futures buying and the market will look all spiffy again. Let's see how it plays out - the action in financials, retails etc suggest a very washed out condition and to break S&P 1400 on the first or second try would be atypical. Hence why I still think odds favor some sort of bounce (however brief) before the next round of weakness. This is at least my short term thinking - correct or not.

Long Mosaic, Trina Solar, New Oriental Education in fund; long Mosaic, Trina Solar in personal account

Washed Out Sectors....

If this indeed a bounce that lasts more than a few hours I would not be surprised to see the sectors totally terrorized take the lead... financials, restaurants, retailers, and even (yes) homebuilders.

If you are an active trader these are areas you might want to play in; not suitable for what this fund is based on, but just wanted to mention that. Also I will say when they do bounce you will hear (YET AGAIN) this is the bottom, smart money is buying financials - therefore they have bottomed (they said that about 15-20% higher a few weeks ago), the Fed fund cuts coming means this is the bottom (they said that about 15-205% higher a few weeks ago), homebuilders will bounce from spring sales, blah blah blah, etc. Don't buy any of it. If you are trading these names, treat them like the trades they are. Myself, I have cut back my short exposure (through the Ultrashorts) for now as these areas are just despised. I am not sure if they can even go lower without the End of Days approaching. :) I plan to let hope come back to these sectors and then if we get a nice bounce, re-apply my Ultrashorts down the road in larger scale.

If I had to buy any of these groups I'd actually poke around a few retail names such as Under Armour (UA)... Costco (COST) etc. The homebuilders are in a long term secular death spiral and a few need to go out of business by the end of this year. The restaurants are locked in between twin trouble of rising food inflation (killing their costs) and a slowing consumer. I talked about this in September, but the 'savvy experts' are now just realizing the reality. The banks, while eventually being helpd by lower interest rates, are still not fully disclosing their issues and worse - their balance sheets will erode further as consumers start defaulting more on credit cards, personal loans, auto loans, student loans, and higher quality mortgages (alt A, prime, etc) over the coming year(s).

On the other hand while I do expect retail to slow down people are not going to stop shopping - just ratchet down from where it has been for the past few years. Electronic gadgets, "cool teenage stuff", Costco warehouse items, will still do good enough. So unlike the areas above, I see some light there, especially at these valuations. But more for short term opportunities. As unemployment ratchets up, these stocks will continue falling after some bounces along the way.

Also as I stated in my 13 Outlier Predictions for 2008, I do think the investment banks will in fact be a good investment in the latter half of the year - unlike the traditional banks who hold all this junk on their books, the investment banks are more like 'enablers' - they did hold some of this junk in their trading desks but as they write down quarter after quarter, the value will eventually be marked down appropriately and then they are good to go - no real exposure to the consumer. That said, part of their businesses are gone forever (or if not forever, until the next time the Fed cuts rates to 1% and hedge funds decide buying mortages is a great thing), but they are the middle men of all the world's major financial transactions and M&A activity will continue, foreign cash rich companies will continue to buy up assets of our subprime nation, new IPOs will continue to be brought to market, all good and lucrative things. Aside from Bear Stearns (BSC), the other 4 investment banks will come out of this fine in the end. While the group is due for a bounce soon enough, I do expect some more pain in the first half of the year, but unlike the money center banks, I do expect the back half of the year to be quite fruitful for some of these players.... I do think it is useless to lump all financials together as good or bad, just as people do with tech - a semiconductor company is not a consumer gadget company just like an asset manager is not an investment bank is not a money center bank. Opportunities will abound over time, if you pick the right slice of each sector.

p.s. Speaking of my 13 Outlier Predictions, I want to rescind my guess that Hillary wins the Democratic nomination - she is falling much farther than I anticipated and Obama seems to be the man. Already. After he wins New Hampshire, he will win South Carolina and then it's over. I still think the McCain / Huckabee case plays out although Obama is drawing away the Independents in New Hampshire as his vortex of love is running so hot right now. But I want to remind readers I have been saying for months that Iraq will fall to the wayside and the economy will be the #1, #2, and #3 issue. I find no Republicans other than Huckabee talking about the economy and I think this is why he has a real chance. He sounds like John Edwards out there.... I really think in their cocoon in Washington and NYC these political strategists have no idea how this issue should be discussed every day, all day if they want their candidate to connect. Interestingly I heard that neither Huckabee and Obama use the traditional political strategists and hence you see the results. Anyhow, I digress. ;)

No positions

Bookkeeping: Morning Transactions

In lieu of this selloff in names I have patiently been waiting to be tossed to the curb, instead of buying Crocs (CROX) I did the following

Sales - I sold down more of my Ultrashort Positions, and I sold HALF of my MedcoHealth Solutions (MHS) which is almost like buying an Ultrashort - this stock has been as strong as a rock, but I want to raise cash now that the market is finally creating some panic selling.

Purchases

1. Apple (AAPL)
2. Research in Motion (RIMM)
3. Atwood Oceanics (ATW) - deep sea oil driller finally falling to 20 day moving average
4. Smith International (SII) - oil service name I just added to the portfolio Friday, falling to 50 day moving average
5. Suntech Power (STP) - my favorite 'safe' solar stock, falling to 50 day moving average
6. Solarfun Power (SOLF) - my more speculative solar stock, falling 15% to "near" 20 day moving average (could fall further) but this was the smallest position in the portfolio so I wanted to begin adding back
7. Foster Wheeler (FWLT) - buying back infrastructure position sold just last Thursday at $167 range for $151
8. Chicago Bridge & Iron (CBI) - buying back infrastructure position sold last week to lock in profits near $58
9. Mastercard (MA) - as it falls under its 50 day moving average
10. Potash (POT) -fertilizer name falling to its 20 day moving average
11. CF Industries (CF) - fertilizer name falling to its 20 day moving average

I would of bought Mosaic (MOS) but the darn thing barely fell, so instead I bought other fertilizer names - I think this indicates earnings this week are going to blow us away.

I started a new position in Latin America Ebay clone MercadoLibre (MELI). Folks this is a very expensive stock, but think of Baidu.com (BIDU) of Latin America. I asked Marketocracy.com to add this to their portfolio of choices when this was under $40, it has since doubled to $80. Now that is available for me to buy, I am forced to buy it at 50% of where I wanted to, in the $58s. But I started a position here in this name - if this was a real mutual fund we would of owned this around $38. (grumble to self) I bought a 300 share position here to start (1.5% of fund). Still peeved I could not buy it under $40.

S&P500 is now at 1400-1405 level. This is our bottom of August and November. I expect the Plunge Protection Team to do their thing soon.... (and at least a tradeable bounce)

Emotional Selling Appears to be Here Now...

Finally the agriculture and solar names are selling off

Remember the pattern... teflon tech, solar, infrastructure and agriculture. We are now in the last stage where nothing is sacred. Finally.

I am going to work (buying)

Crocs (CROX) in Absolute Freefall - Apparently on European Union Patent News

Crocs (CROX) is on another free fall, down nearly 10% this morning. The main news, appears to be a story on Forbes.com Friday after the close of the market of dispute of their patent in Europe. While if this held up it would not be great for the long run in Europe, Crocs is already being 'copied' all over the world with cheap knock offs as it is. This does not appear to be the first dispute between the companies mentioned, but legal disputes can take a long time to resolve and sentiment has been poor around this name, so news like this only adds to consternation. And the next logical step is the US patent is also useless. I suppose the whole idea of brand name means nothing here, but you can't talk logic in panic.

With the valuation as it is, I am interested in buying more but am going to wait a bit to see where the stock bottoms out. With the heavy volume in the early going we might get a capitulation type day in the stock which would create a nice entry. When I look at a 1 year chart on this name, you see in early May 2007 a 'gap' in the chart - where it opened 1 day substantially higher than the previous day close. This appears to be in the $28+ range and this is right where the stock is now. On most stocks gaps in the chart are generally "filled", meaning a stock will at some point go back to fall and fill in this 'gap' (this is a controversial theory among chartists) - if it is correct or not, really is not the issue - it just happens a "lot". So we might get some support there. I will be adding more today as I see where the stock settles - Crocs is not going out of business, but this free fall is not a fun thing - that's for sure. This is a stock many bears have been betting against for a long time, hence why I don't want to get any further in front of the freight train. But based on analyst estimates we have a company trading at half its growth rate. Doesn't mean it could not go to a third of its growth rate but at some point logic must follow...

• Crocs Inc. (nasdaq: CROX - news - people ) may be famous for its holed, foam-like shoes, but the European Union's Office for Harmonization in the International Market ruled in December that Crocs' Registered Community Design, the E.U equivalent of a patent, is invalid. According to the ruling, Crocs' Beach model shoes "lack individual character" compared with other similar brands.
• Holey Soles Holdings, located in the Vancouver, Canada, filed the complaint against Crocs in the E.U. claiming the Niwot, Colo.-based company should not be allowed to forbid other shoe manufacturers from producing similar designs. Crocs plans to appeal the ruling, though the dispute is not the first between this pair of shoemakers.
• Holey Soles and Crocs, formerly known as Western Brands, had been selling essentially the same shoes between 2001 and 2005. In early 2005, Western Brands reorganized to become Crocs, and became aggressively ambitious in its growth strategy and in its attempts to push competitors out of the game. Crocs filed a lawsuit in 2005 against Holey Soles in the Federal Court of Canada, and Holey Soles fired back by filing for a declaratory judgment from a New York court stating that Holey Soles' designs do not infringe on Crocs' intellectual property. The issue is currently pending.

Long Crocs in fund and plan to be long Crocs in personal account soon

Indian Bank ICICI Bank (IBN) Up 10% on Potential for Brokerage Arm IPO

With the stock of Indian bank ICICI Bank (IBN) up 10% on the news of the potential IPO of its brokerage arm, I am going to take this opportunity to sell 125 of the 375 shares (1/3rd) owned; cash is running low so in a market like this 10% gains are not to be ignored. This takes my stake down to 1.25% of fund.

While this is good news from the perspective of long term value it doesn't change business much today. Further, it's a rumor not a fact - but I do like this powerhouse of banking either way. I believe I read in the recent past that they are opening their first branches in North America relatively soon.

• India's most-valuable lender, ICICI Bank (IBN), may be planning an initial public offer in its investment banking and broking unit, traders and analysts said on Monday, sending its shares soaring more than 6 percent.
• "There is a belief in some circles that if the subsidiaries are valued separately, the sum-of-the-parts business that is the listed entity ICICI Bank would have a far higher valuation than what the market currently reflects," said Arun Kejriwal, director at KRIS.
• ICICI Securities offers services in corporate finance, fixed income and equities and operates out of Mumbai with offices in New Delhi, Chennai, Kolkata, New York, London and Singapore, according to its Web site.

Long ICICI Bank in fund; no personal position

40 Stocks Returning 4%+ Last Week

As always I like to see where relative strength is in the market. A week like last week is particularly instructive. What does it show this week? Gold, gold, gold, energy, gold, gold, gold at the top with a few other things mixed in lower on the list.

Below we have the list of only 40 stocks with:

1. average trading volume of 100K
2. stock price >$10
3. Market capitalization >$2 billion
4. Stock return of 4%+

In order from best to worst (I've highlighted names in green we own, and in blue those of interest or discussed in the past) Note, I sold FTI this week right before it exploded up - blech.

Symbol	Company Name	1 Week %
SPN	Superior Energy Services Inc	25.2
PZE	Petrobras Energia ADR	19.3
ABX	BARRICK GOLD CORP	19.0
AUY	Yamana Gold Inc	16.9
KGC	KINROSS GOLD CORP	14.6
AEM	Agnico-Eagle Mines Ltd	12.6
GFI	Gold Fields ADR	12.3
GG	GOLDCORP INC	12.1
BVN	Buenaventura ADR	10.7
HMY	Harmony Gold Mining ADR	9.5
NEM	Newmont Mining Ord Shs	9.3
LIHR	Lihir Gold Sponsored ADR	9.2
FTI	FMC Technologies Inc	9.1
ACGY	Acergy ADR	8.4
AMCN	AirMedia Group Inc	8.2
GA	Giant Interactive Group Inc	8.0
GSF	GlobalSantaFe Corp	7.3
SGR	Shaw Group Inc	7.1
AU	AngloGold Ashanti ADR	6.7
MON	Monsanto Co	6.4
TTM	Tata Motors ADR	6.3
SLT	Sterlite Industries ADR	6.2
HCR	Manor Care Inc	6.1
UNT	Unit Corp	5.8
DNR	Denbury Resources Inc	5.7
SYT	Syngenta ADR reprsntg	5.5
CELG	Celgene Corp	5.3
OII	Oceaneering International Inc	5.3
HUM	Humana Inc	5.1
TSS*	Total System Services Inc	5.1
ME	Mariner Energy Ord Shs	5.1
BMRN	Biomarin Pharmaceutical Inc	5.0
HTE	Harvest Energy Units	5.0
XMSR	XM Satellite Radio Holdings Inc	4.7
TNH	Terra Nitrogen Co LP	4.7
MHS	Medco Health Solutions Inc	4.4
SLW	Silver Wheaton Corp	4.4
UPL	Ultra Petroleum Corp	4.2
ECA	EnCana Ord Shs	4.1
ELN	Elan Depository Receipt	4.1

Slim pickings indeed....

Bookkeeping: Weekly Changes to Fund Positions Week 22

Week 22 Major Position Changes

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

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

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

Cash: 2.7% (vs 7.4% last week)
56 long bias: 88.1% (vs 73.6% last week)
5 short bias: 9.2% (vs 19.0% last week)

61 positions (vs 59 last week)
Additions: US Steel (X), Petrobras, Diamond Offshore (DO), Smith International (SII)
Removals: FMC Technologies (FTI), NII Holdings (NIHD)

Top 10 positions = 30.3% of fund (vs 36.6% last week)
43 of the 61 positions are at least 1% of the fund's overall holdings (70.5%)

Major changes and weekly thoughts
Well as discussed in the weekly performance post there was not much to say about this week other than it was ugly. Luckily I was at near maximum short exposure (I set a self limit of about 20% maximum short exposure to maintain the "long biased" mutual fund thesis) I run this fund with, along with a decent cash position. I held this bias most of the week, and then Friday started reversing course as we started getting whiffs of panic selling. This does not mean we are at any sort of bottom or we could not have a tremendous sell off next week. It simply means I was positioned as well as I could be for this week, and am now seeing some buying opportunities in sectors/stocks I like so I am beginning to take advantage of them. I also fear getting caught with my pants down by some government announced interventions which seem to always come at times the shorts get most aggressive. It's been a good run of late, and you know times are good when even stocks you are selling off or cutting out of the portfolio are continuing to ramp higher - see Silver Wheaton (SLW), FMC Technologies (FTI), and the entire agriculture complex. With that said, I continue the strategy of rolling profits out of areas that are doing well and pushing the gains into areas that have pulled back.

In a general sense I remain negative, but just as I cull long positions after they make large runs, I cull short positions after they make large runs. Some of my short positions such as Ultrashort Real Estate (SRS) have made a near 20% gain in just over a week so to simply sit here without cutting back strikes me as greedy. Further certain sectors, such as financials and retail (while I remain bearish on) have been hit with shock and awe selling. If the playbook still exists, it would make sense for them to rebound at least a bit. Remember, the emotions of fear and greed are not too far away. The same people two weeks ago who were claiming the bottom is in with financials since foreign sovereign funds (i.e. smart money) were buying are now saying financials will go down another 50%. Neither is true, it's just emotional action. Will there be a "big one"? The "big correction" bears have been waiting on for years? Always possible. However, betting that way has proven to be incorrect for years. Eventually it will be correct, and buying dips will be "wrong". But if you can store up enough gains during the opportunities we do NOT have the "big one", then you should be somewhat ok when the big one "does" happen. Further keep in mind the various parts of the government (and governments across the globe) are working together to fight any "big one" from happening. One could argue the problem is bigger than the governments. Could be true. We shall see. Interesting times at the least.

My working thesis is we get some sort of bounce in the next week (maybe not Monday) after testing S&P 1400, and then yet ANOTHER lower high will be created. And then we will continue down as earnings season reveals a slew of earnings warning. Further the layoffs that are going to be announced in the financial system (and I suspect outside the financial companies) are going to spook people even further. Now that year end bonuses are secure in NYC, and the "man at the top" has his loads of million, look for "man on the street" to get the swift boot. In fact the next two weeks should begin these "notices" - Happy Holidays. I think January - June 2008 will be job cuts central. And the last "pillar" of a "short and swift" slowdown theory, will get its knees buckled. Remember, ignore the government reports and listen to the companies themselves. However.... perverse as it is, Wall Street loves layoffs because it means lower costs. Hence, once these layoffs are announced and the fear factor relents, the layoffs will be seen as good, as long as they are not overwhelming to the system (otherwise who will be left to buy anything?) I have already gone on record mentioning this will be the worst year in auto sales in decades, and I expect a lot of other areas to be hit as well - anything outside of consumer gadgets I would be worried about. But with that said, the retail stocks are starting to price that in.

I don't think we can put in any ultimate tradeable bottom until the two "holy grail" sectors fall - those being agriculture and solar. These are the 2 favorites of the 2 classes of investors - agriculture with the institutional class, and solar with the retail class. When I see those thrown to the curb in relentless fashion in panic selling then I will feel more comfortable that we are near a panic type of low. That might happen Monday or Tuesday for all I know, or not for a few weeks. But notice in all my buying Friday (except for a small addition to Suntech Power (STP)), I added nothing in those sectors. While 2 of my larger positions are in solar stocks, these two names have actually already taken larger hits in the past few months, so I am trying to stay with either leaders in the sector OR "value" names (hopefully not value traps). Not stuff sailing along at near 52 week highs. It is hard to find good value in most other names in this sector which have run up tremendously on "hope". A misguided hope in my book [The Long Term in Solar] To be blunt, the type of investors who have piled into solar stocks in the last month are the same piling into dry bulk shipping stocks 2 months ago, Chinese small cap stocks 3 months ago, Macau gaming stocks before that, etc. Hence the whole sector has me worried - these are not 'strong hand' investors - they flee at a moment's notice and are notorious for buying at the top.

Due to the nature of this week I am breaking my weekly summary of transactions into 2 pieces - Monday thru Thursday, and then Friday (which was an extremely busy day)

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

Some of the larger changes (chronologically) Monday - Thursday to the fund below:

1. Monday, I took some profits in Honk Kong Infrastructure stock KHD Humboldt Wedag (KHD) as it bounced off a near term low, and I was able to make a nice short term trade around an existing position.
2. Tuesday, the University of Michigan football team romped over Florida in their bowl game. Ok, that wasn't really a financial transaction but I just wanted to make sure you knew. ;)
3. Wednesday, I mentioned despite the substantial morning pullback in stocks in the first hour, we had more to come with a test of S&P 1440 (which the market held Wednesday and Thursday), and then a retest of S&P 1400. Needless to say I did not anticipate it coming in such a fast and furious fashion but the market seems to go down much quicker than it works its way upward. I did not cut back on my Ultrashorts Wednesday, holding out for further losses. I also gave a heads up on Monsanto (MON) in that post (not a fund holding) but the strong performance continued to elevate the agriculture sector; one of my favored sectors for the next few years.
4. LDK Solar (LDK) gave some guidance on 2008 and 2009; I took the opportunity to take some profits in this name over $50, mentioning the stock is probably range bound for a while in the $45-$51 range. As the week closed the stock went back to its lower support near $45.
5. I closed my position in oil service name FMC Technologies (FTI) after 5 months of holding the stock. Needless to say within hours the company announced a $1 billion contract and the stock was promptly up 13% the next day. Needless to say I bounced my head off the wall. :) I did mention I was interested in replacing this name with either Cameron International (CAM) and/or Smith International (SII) - with the late day selloff Friday I did add a beginner position in the latter.
6. I continued building my position in WAN optimization/security name Blue Coat Systems (BCSI) as the stock hit the $31s; I mentioned the 200 day moving average was $28 and the stock looked headed for it - needless to say this level was reached the very next day as the stock went into freefall - I continued to add to my position there, and Friday the stock actually held up well until the last hour or two of emotional selling when not much was spared. At this point I have a technology company growing 30% over the coming 3-5 years, trading at 24x this year's earnings (whose fiscal year ends in April 08). And 20x next year's estimates. While I don't advise catching falling knives since they can fall much farther than we assume, we are starting to see some silly valuations out there.
7. I was able to buy back some of my Huron Consulting (HURN) position that I took profits on last week, at a 7% lower price, in the $77s - I mentioned there is some support at $75, which is where the name fell to in the emotional selling late Friday. If the US is hit with a wave of restructuring the profit potential for a name like this should increase substantially in 2009.
8. I sold about 350 shares of top position Trina Solar (TSL) both Wednesday and Thursday in the $54s and $55s - this was simply to lock in some short term gains as they were bought in the $52s, and also as I mentioned continuously of late if the pattern of the November sell off is repeated, after the teflon tech stocks fell, the next to go would be solar, infrastructure, and agriculture. So with the tech stocks weak Thursday, and agriculture and infrastructure making a strange massive rally, I wanted to cut back some solar exposure with hopes of getting back in lower.
9. I added some Illumina (ILMN) on a pullback Thursday to the $58s area, and mentioned support at $57 as the next level of a pullback - which is where it fell Friday - I added more Friday as well. My purchases in Illumina and MedcoHealth Solutions (MHS) - the latter of which was rallying hard this week, are in an attempt to get some diversification away from the the main sectors the fund holds. MHS is a 'recession' play and 'flight to safety' play, so in a way we don't really want to see this stock making such strong moves upward.
10. I sold some Foster Wheeler (FWLT) Thursday in the $167s, taking advantage of the huge ramp in infrastructure. Still among my favorite infrastructure names but I'd like to add more at lower prices.

So it was a pretty normal week until Friday - then with the fireworks going off I went from a more bearish stance back to a more neutral to bullish as individual names started getting thrown to the curb Friday. It was an extremely busy day and the portfolio exposure changed quite significantly within those 6.5 hours.

1. With the bad jobs numbers, I began paring back some of my larger than normal Ultrashort exposure as my expectation that the drumbeat of 50 basis point cut (despite inflation) starts ringing very loudly and the market could begin to rally (Pavlov dog) off this, even though earlier cuts have done nothing. As an aside lost in the carnage Friday was news that the Fed is increasing the size of its auctions from $15M each to $30M (and they will continue indefinitely). I did another round of paring late in the day, and my Ultrashort exposure went from about 19% to 9% Friday. 9% is still a bit higher than usual. Again I use these as my insurance policy and/or strategic bets against certain sectors (i.e. commercial real estate). Worked to perfection this week.
2. In the morning I made a series of buys, with my 2 favorite consumer gadget stocks - Apple (AAPL) and Research in Motion (RIMM), started a new position in Petrobras (PBR), a Brazilian oil major who actually will be increasing oil production in the coming decade - along with a big sugar cane ethanol play, started rebuilding some coal exposure in Consol Energy (CNX) a position I pared back on a huge move in December, an addition to New Oriential Education (EDU) which was showing tremendous strength ahead of earnings, infrastructure name McDermott (MDR) on a pullback, and Crocs (CROX) in the $34s... Crocs ($32s), and Apple (low $180s) swooned even further later in the day and I added more there as well. Along with Research in Motion late in the day.
   
3. I started 2 new positions, one an old name to the fund and one brand news. Diamond Offshore Drilling (DO) is a deep sea oil driller I've had my eyes on for weeks - it finally has pulled back some so I started a position. I am hoping for more pullback to build an even larger position. US Steel (X) is more of a trade for the fund, and it has pulled back severely in a few short days (13% in 2 days), so I am going to try this one more for a near term swing trade for the fund. (not a typical strategy)
4. Since the # of positions is starting to bloat past 55 on the long side, I cut out long time South American business cell phone name NII Holding (NIHD) with a sizeable loss, but I don't see any near term catalyst aside from earnings, and with the new additions I needed to cut something to stay focused on a select amount of names.
5. I added some Ctrip.com (CTRP) late in the day and took my Ultrashort Xinghau China (FXP) down to a 1% type of position as the Chinese stocks have seemed to do relatively well of late after major haircuts the past 2 months. I still expect more swoon in this area later in 2008, but for now a near term bottom might be being created (unless the US markets begin an implosion of course)
6. I bought some more of asset management firm Blackrock (BLK) late in the day as well and just missed out on Mastercard (MA) under $200 as the market closed before I could get the order in. These are the only 2 financials I hold, and plan to hold for a long time (except VISA). I do expect the financials to be good for a swing trade sooner rather than later here (brokers, banks) as they have been devastated of late - along with retailers) but that is not in the context of this fund. After they bounce here in the coming weeks, I plan to add exposure to Ultrashort Financial (SKF) as the credit unwind (credit cards, auto loans, student loans, and prime mortgage loans) accelerates later in the spring/summer/fall. Perhaps the federal government will bail us all out of all our debt obligations as they are trying to do with subprime loans.
   

So there it was, a quiet week up until Friday. As I mentioned above, certainly we could continue a major swoon next week but "usually" 4.5% type of down weeks are not followed by yet another devastating week down. One day the pattern will break and we will get back to back devastating weeks - when that happens I do expect to underperform for that time frame, but in general I go with higher probability outcomes. The higher probability is either an event or simple selling exhaustion/fear reach a level soon where some near term bounce is created. That does not mean we don't have a few more ugly days ahead before that happens. If we continue down, I will continue lightening on Ultrashort exposure and continue buying stocks whose fundamentals I believe in, and who will bounce once the market regains its (shaky) footing.