Bond Insurers Becoming More Troublesome

This could really put a wrench in things - I didn't realize Ambac (ABK) got downgraded below Triple A Friday. It doesn't sound like much but in this business if you don't have triple A credit you have nothing. As I wrote yesterday, Sword of Damocles. Mr Buffet, is going to be printing money in this business.

• A downgrade of bond insurer Ambac Financial Group Inc. is likely to have far-reaching effects, making it more difficult for cities to issue new bonds and forcing further write-downs at financial services companies, analysts said Friday.
• After Ambac scrapped plans to raise $1 billion in capital, Fitch Ratings cut the company's crucial financial strength rating to "AA" from "AAA."
• The downgrade likely means Ambac will not underwrite any more business, said John Flahive, director of fixed income for BNY Mellon Wealth Management. Market prices of existing bonds insured by Ambac and MBIA Inc. were trading lower before the downgrade, and Flahive suggested any downgrade could accelerate the decline.
• Ambac and chief competitor MBIA together insure $700 billion in municipal bonds, and MBIA's "AAA" rating is also under threat. The company issued $1 billion in bonds this week to preserve the rating, though that may not be enough to satisfy the ratings agencies. MBIA said in a statement Friday it intends to keep working toward maintaining its "AAA" rating.
• Since late last year, when the agencies first raised the prospect, analysts have suggested any move to cut Ambac or MBIA below "AAA" could be disastrous. The concern is that downgrades will lead to a reduction in the value of portfolios at dozens of financial institutions, said Donald Light, a senior analyst at Celent LLC. "Bond insurers are the lynchpin holding together valuations of portfolios of all kinds of financial institutions," Light said.
• Prior to Ambac's downgrade, T.J. Marta, a fixed-income analyst at RBC Capital Markets, said a downgrade of the company would lead to downgrades of all the municipal bonds it insured. Subsequently, it will become more difficult for cities, counties and other local entities to issue debt for building projects, Marta said. (again, the whole credit system is a house of cards - one part is dependent on another - when one domino falls, the ripple effect is felt everywhere - that's what makes this whole situation so frightful)
• At the very minimum the troubles of the insurers will drive up borrowing costs of cities and other local entities at a time when many are strained by weaker tax revenue, said John Atkins, a fixed-income analyst at IDEAGlobal.com.
• Buffett launched a new bond insurance business in December that has a "AAA" credit rating and a solid balance sheet. Buffett's new company also has the benefit of having no questionable loans on its books.

Barron's says....

• THE COLLAPSE OF BOND INSURERS is the latest symptom of the credit crisis that has spread from subprime mortgages to throughout the financial system.
• ... the unraveling of bond insurers, which provided a fig leaf of protection to risky investments in collateralized debt obligations. Indeed, part of Merrill Lynch's stunning writedown and loss for the fourth was the complete writeoff of CDOs insured by ACA, a second-tier insurer.
• The more profound fissure opening is the potential for the loss of the triple-A guarantee rating for market leaders MBIA and Ambac, which would virtually put them out of business. Their business model depends on their ability to put the imprimatur of a triple-A rating, effectively performing the modern-day alchemy of turning leaden credits into gold.
• Reflecting that potential downgrade, shares of Ambac plunged 52% Thursday after Moody's served notice its triple-A rating was in jeopardy. MBIA's shares lost 31% but even more stunning was the loss in its new 14% capital notes, just issued to shore up its capital. This $1 billion issue, which just closed Wednesday, plummeted to 77 cents on the dollar, putting its yield all the way to 21.75%.

TheStreet.com Weighs In:

• Recession is no longer the taboo word on Wall Street. It's being tossed around like confetti. The new phrase that can't be uttered is "systemic risk," and with bond insurer Ambac (ABK) losing its triple-A credit rating from Fitch Ratings on Friday, the real risk of a financial disaster will be widely whispered into the next week amid the possibility of more downgrades for the industry.
• T.J. Marta, fixed income strategist with RBC Capital Markets, estimates that roughly $2.5 trillion in outstanding debt is backed by bond insurers like Ambac and MBIA (MBI), and credit downgrades are a mortal threat to their business models.
• If the bond insurers fail, that raises the specter of a massive wave of wealth destruction in a global financial system that is flooded with illiquid and opaque derivative securities of which there is little understanding, except that their value is connected to credit ratings on structured finance securities
• "This is going to be worse than anybody thinks," says Marta. "What I heard from Ambac [on Friday] is that they're throwing back the lifeline and saying, 'We're not going to make it.' On a fixed income trading floor, that means the world truly is upside down."
• "Next week, we'll be waiting for not just the next shoe but many more shoes to drop," he says. "That's the bottom line here. The subprime slime was the first to go because those are loans to the least credit-worthy borrowers -- the most vulnerable. But you had plenty of speculation in commercial real estate, emerging market debt and equities, commodities, leveraged loans, junk bonds and a whole host of areas that are extremely vulnerable." (sounds vaguely familiar)
• Many investors are looking abroad to places like China for healthy investments in light of the troubles at home, but Shilling calls this idea "nonsense." He says the next shoe to drop in the downturn he's predicting could be a major sell-off in China. "China really relies on U.S. consumers to buy their exports and those exports are absolutely critical for their continued growth," says Shilling. "They don't have a big enough middle-class yet to be able to sustain the economy with domestic spending." (sounds vaguely familiar)

Cramer, Kass, and the guys over at Minyanville have been pointing out these bond insurers as a systematic risk for months on end. Apparently the academics at the Fed don't read either website. I guess they will react after the implosion.

Even Altria (MO) is Getting Hit & Some Walmart Commentary

After looking at the list of stocks in 'What Safety Sectors are Really Working? And Which are Hoaxes', and commenting Altria (MO) is one of the few actually holding up, I see even this name has now broken below its 50 day moving average. Even the safe havens are being 'smoked out' (couldn't resist) - quite interesting. MedcoHealth Solutions (MHS) has been an absolute rock and with the change in character in this market now that the technical condition has deteriorated [S&P500 in Worst Condition in Half Decade], this is the type of name I will begin to focus on more. The problem with most of these save haven consumer based stocks is (a) they still rely on a consumer who is weakening and (b) they are impacted by raw goods inflation. So I don't know why people consider them to be safe havens - this is 1990s thinking; not thinking of a World of Shortages. (I need to trademark that term).

That said nothing but cash really works in a true bear.... ask Sprint (S) or Intel (INTC) shareholders.

I also (cannot believe I am saying this) am intrigued by this Walmart (WMT) [Will There be Anywhere Left to Shop in 2010?]. If the economy is truly going to pot and we start going to a 6,7,8% unemployment rate in the coming 2 years, Walmart should benefit greatly - I outlined this in 'Target Shoppers Turning into Walmart Shoppers'. So instead of being so facetious we might have an opportunity here. A lot depends on just "how bad" things get out there. As I've outlined I think it can get very bad - but I could be wrong. I always under estimate the US consumer. But I truly think the house ATM was a large reason for continued strength and impervious attitude (towards spending above their means) of this group. Anyhow Walmart reports Feb 18th - if we see an uptick in earnings/same store sales combined with a downtick in Target, it looks like what was a hunch will become a true trend. Now with that said the whole retail group has imploded, and the next time we rally (and we will one of these days) it will be a hectic and straight shot up for most names in this sector - a rally which should be sold. Home builders have been doing the same action for well over a year. So once we get past that stage we need to continue to find true buys in this market... hence why Walmart might hold some appeal.

Back to Altria (MO) after poking around this name (I'll be the first to admit I haven't looked at Altria since the late 90s - slow growth companies open to constant litigation is just not my thing), I do see a very interesting situation developing. While US consumption of cigarettes is dropping (slightly), as with everything we want to focus on the long term international consumption factor. And in that light we have an opportunity - Altria is spinning off Philip Morris International this spring (ding ding!).

• Shares of Altria Group Inc. rose Monday as an analyst lifted her price target, saying the upcoming spinoff of Philip Morris International Inc. will enhance the company's value.
• "We see the stock trading up in the coming weeks as the company formally approves the Philip Morris International spinoff on Jan. 30, announces a share buyback and cost restructuring around mid-February and embarks on an investor road-show in early March," Judy Hong wrote in a client note.

Now I have to give props to Cramer as he has nailed this one - MO Ain't Just Blowing Smoke

• This “is among the most treacherous markets I have ever seen in 29 years of trading,” Cramer told viewers Wednesday night. At this point, the Fed is irrelevant, he said. Even if the central bank moved to cut rates aggressively, “there’s so much damage done that Bernanke may have missed his chance.”
• What’s exciting, though, is that Cramer said Altria should announce its break-up plans in two weeks. The split into Philip Morris International and Philip Morris USA has been expected, but Cramer’s prediction is that it could happen as early as this quarter. That will leave a fast-growing international stock and a slower domestic growth company with a nice dividend.

So this increases my interest in Altria as I'd love to get my hands on a secular growth story combined with recession proof theme, combined in one. Interesting story on Reuters I just found (One of the top 10 stories)

Customers Desert Smoke Free Restaurant

• Beijing's first smoke-free restaurant chain faces going out of business after its customers deserted it in droves after the ban was enforced, state media reported on Friday.
• The Chinese are the world's most enthusiastic smokers, with a growing market of more than 350 million, making it a magnet for cigarette companies and a focus of international health concerns.
• The occupancy rate at Meizhou Dongpo, a chain serving the spicy fare of southwest Sichuan province, had dropped to "about 80 percent of that enjoyed by other restaurants across the street" after it banned smoking in October, the China Daily quoted its manager as saying.
• Meizhou Dongpo had trained its waitresses how to discourage people from lighting up, but met resistance from customers who would lock staff out of private dining rooms to sneak a quick puff, Guo said.
• Beijing authorities had written to 30,000 restaurants asking them to put smoking bans in place, but not a single one had taken up the suggestion, the paper said.

Well that's just a trend I have to get behind. Philip Morris International, I await you.

Walmart and Altria - who knew? That said, after this "washout fear low" I am hoping for I do expect a nice bounce coming. We are so far away from any major resistance levels now, since we broke down so badly in such a short time span, that a decent rally should be in the offing. Further, I can only imagine the ire Uncle Ben is receiving so we might see a real surprise - 75 basis? Who knows.

In an overall sense though folks, as I wrote in my piece midweek on the S&P 500 breaking down, we have to change the midset of the past 5 years at this point where buying every dip is the way to go. Now we sell every rally. For how long? Until the market tells us differently. When the S&P 500 begins to make new highs (not all time highs but highs above the previous high point) is when we change attitude. It could be in 3 weeks, 3 months, or 3 years. I don't have an idea. Much of it depends on how bad this recession gets and how "immune" the rest of the world is. I think the US and UK are done for. Spain is a housing addicted country worst than us. And we will see a lot of griping in the European Union as some countries are doing ok whereas others need rate cuts. So that central bank authority is really going to be in a tight spot. Japan hasn't recovered in 15 years. Etc. So as I've been saying, 75% of the world is going into a consumer recession. Whatever growth we get out of the emerging markets (which are in part benefiting from export growth) won't offset that. But it's all about degree. How bad things will get is an open question. I still contend subprime is just the tip of the iceberg.... and as I've been writing since August the mortgage issues will just continue to climb the chain up to Alt A loans, up to prime loans - and throw in the auto loans, credit card loans, consumer loans, student loans and you have a subprime, debtor nation. It appears the past 3 weeks people are starting to get the picture.

On the other side we will see massive infusions of liquidity (creating a bubble somewhere in 2009-2011), and government bailouts increasing in nature as things get worse. I wrote this on Aug 31, 2007 [Et tu, September?]

Presidential candidates will be jostling to propose bailout after bailout, inciting moral hazard issues up the wazoo.

I repeated it in December [Et tu, 1st Half 2008?]

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

It's all coming together folks - these folks are shameless, pandering and refuse to address the long term issues in our country or do ANYTHING preventative. Only after the vase is broken do they come together from their respective corners in "bipartisan" fashion, and only when forced to. And their actions will be nearly meaningless. But each of their reactive, meaningless reactionary actions places more burden on our kids, grand kids, and great grand kids. I am only wondering at what point the electorate gets truly outraged at these people. Upper 20% approval rating for Congress and low 30% for President. These people in their ivory tower in Washington just don't get it.

However, I do believe if the market continues to degrade at some point this (below) will be our "saving grace" - if you consider selling off your soul due to terrible decision making a saving grace.

Foreign buyers will be flooding the US market by spring summer 2008- specifically sovereign foreign funds - it has already begun. But this is just the first steps - many US assets will be taken over. This time it is "for real", unlike the fears of Japan taking over in late 80s - petro dollars and massive trade imbalances make for very rich counter parties. In fact this is going to be an issue for many years as we have taken no steps to shore up our systematic issues of unfunded long term liabilities, trade imbalances, and petrol dependence.

But at least it will prop up the stock market... yee haw.

Long MedcoHealth Solutions in fund; no personal position

China Discovers $119 Billion Banking `Irregularities'

Yesterday in 'China Taking More Steps to Curb Food Inflation' I wrote:

But I think China is setting up for a very similar fall to the US - in fact it might be striking in parallels - bad financial controls (if you think our banks are bad...), an out of control real estate market driven by massive liquidity, and striking inflation hitting the middle and lower classes. We shall see how it turns out, but it's starting to all sound very familiar.

Today in Bloomberg we have this classic headline 'China Discovers $119 Billion Banking Irregularities'. Folks, I've had people argue with me, how everything is so perfect in China - I don't understand the story. Trust me, greed is a universal human trait (this I understand clearly) and the financial controls (from all I've read from sources in multiple countries) are poor. So it is hard to trust any numbers coming from this country. But again, they are taking a very very very similar path to the US. Just more evidence. $119 Billion would make even US banks blush - thats a huge sum. More fallout as we go through this year, I am sure. In the rush to accelerate all facets of growth small things like say, product safety or financial controls get left behind. Cockroaches... everywhere.

• China discovered 860 billion yuan ($119 billion) in banking ``irregularities'' last year, almost triple the profits by Industrial & Commercial Bank of China Ltd. and other ``major'' Chinese commercial banks, the regulator said.
  
• ``We must strengthen our regulatory capacity and nip these risks in the bud,'' Liu Mingkang, chairman of the China Banking Regulatory Commission, said at the watchdog's annual planning meeting, according to a statement posted on its Web site today.
• China's ``major'' commercial banks posted combined profits of 299 billion yuan in 2007, the statement said, without providing a year-earlier figure. A July 5 report said the banks earned an aggregate pretax profit of 240.9 billion yuan in 2006. Assets at Chinese banks totaled 52.6 trillion yuan at the end of last year, today's release said.
  

Thanks to Minyanville.com for that heads up - keep in mind 'irregularities' outbid 'profits' by 3 to 1. Laughable. Or scary; depending on your perspective. Bubble of epic proportions building.

Earnings Early next Week

Now that we are hot in heavy into earnings season I will break out some of the more interesting reports into smaller parcels. Keep in mind markets are closed Monday, before we resume our race to 0.00 on the Dow Tuesday.

Monday
Fund Holding: Indian bank HDFC (HDB) - I expect more good, solid growth without 'financial innovation' that appears necessary for US banks to manufacture fake earnings so their CEOs can get $150M pay packages and yearly $20M-$30M bonuses. HDFC and ICICI Bank (IBN) will be powerhouses over the coming decades, and one day can overpay their intellectually corrupt CEOs as well. Can't wait; it's worked wonders in the US. If they can only convince Indian regulators to stop watching over them, since "we will police ourselves!" - that also has worked great in the US. I hold very little of either right now since I took some profits while they were holding up and rolled the money into other names that have been pole axed.

Indian IT source and Business Process Outsourcing Satyam (SAY) - this group was a darling in 2004-2006 and is a classic example of why, with the changing pace of industry, it is very hard to buy and "hold" anything for 5 years anymore. This group has been at best dead money and a loser for most in the past year - the sharply rising Indian currency along with rising labor costs is squeezing profits. Heck in a few years, US white collar workers are going to be cheaper than Indian white collar workers. Cheap dollar! Always a silver lining!

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

Tuesday
Ambac (ABK) - Dive! Dive! Dive!

Fund Holding: Apple (AAPL) - Alleluia! (insert Cramer sound effect here). I expect a massive Christmas season and a lot of analysts saying "I don't care if you beat by $0.30! No one can afford anything anymore!" I still think this is a $250+ stock by end of 2008*.

* Please note the above price target assumes the Dow Jones Industrial Average is > 2000 by Dec 31 2008.

Ok back to your regularly scheduled earnings outlook

Americredit (ACF) - auto finance company serving subprime customers. Need I say more?

Railroads Canadian National (CNI), CSX Corp (CSX), Norfolk Southern (NSC) - more talk of slowing economy

More banks, Bank of America (BAC), Fifth Third (FITB), Keycorp (KEY), National City (NCC), Wachovia (WB)

Fund Holding: Jacobs Engineering (JEC) - a great infrastructure company, but surely some analyst will claim they are double counting sales and that their backlog only grew at a 46.5% year over year rate, well below the analysts expectation of 46.387531254%. This will drop the stock at least 90% on fears of US slowdown and subprime exposure. CEO will ask, flabbergasted - "What subprime exposure??" - analysts will answer "It must be there somewhere, no company can do well in the coming 'End of Days' I've now modeled after missing the slowdown the past 9 months. Now 'fess up!"

Johnson & Johnson (JNJ) - after reporting a solid quarter some analyst will find a line item somewhere deep in appendix 13.2.1B showing dandruff shampoo fell off the cliff, dropping from an annualized growth rate of 10.87% last year to 10.75% this year. They will claim people cannot buy shampoo anymore and the "consumer is dead". The stock will drop 0.009% since it's still a safe haven.

Precision Castparts (PCP) - a former (ahem) safe haven aerospace industrial name - darling of 2007

Texas Instruments (TXN) - a slower growth semi name.

UAL (UAUA) - hey its an airline stock. These are the growth stocks of 2008!

Bookkeeping: 'Rising Tide' Performance Week 24

Week 24 performance of the mutual fund

Comments: Well there is no way to dress up this week. To call it putrid would be an affront to the word putrid. This was the week (as they say) the "generals" (the leaders) were taken out to the back and beaten, one by one. Every good sector I've been invested in was decimated - agriculture, infrastructure, solar, oil service, oil driller, coal, you name - it was trashed. Avoiding the bad sectors as I've done from last summer through last week did not help 1 bit this week. The sectors that held up "relatively best" were areas that investors have been fleeing in droves the past few months - airlines, a few financials, a few retailers and... well that's about it. A few beaten down healthcare stocks did well but even the leaders in that group took a hit. Truly the week where there was nowhere to hide. Unless you were an airline ETF.

This week the S&P 500 and Russell 2000 (indexes for gosh sakes) were both down 5.4% (half of a 10% correction in 5 days). Rising Tide Growth Fund had an awful week led by losses in... well everything.... down 10.45%. Truly a jarring week, lagging the indexes by 5%. While we are giving back positive performance and not in the hole, it is still a massive under performance compared to indexes. This takes us all the way back to week 17 in terms of beating the indexes, as we are now only +15.5% since inception. Still on track for my goal of beating them by 15% each year, but compared to where we were the past few weeks it's a big drop.

There is nothing good to say other than the positions now stocked at the top of the fund are among the market leaders in their respective sectors - and one day when fundamentals are again respected I do expect to see these beat the markets. But until then, fundamentals are meaningless. I am a bit upset that after waiting all fall for a true correction that never came I was caught without more cash/short exposure the time it finally happens. That comes from being too cute in trying to time the market. Lesson learned on that one. This is now the 3rd 10%+ correction we've had (August, November, January) since starting the fund - great timing I've had. :) Two more weeks until "my 2nd quarter" is over; we ended quarter 1 beating the indexes by about 16%. So after all this work the past 3 months fighting upstream against two separate 10%+ corrections in November and January, we are right back where we started the quarter. Trout. Upstream. Swimming.

Going forward I was truly hoping for a wash out event today - a horrific type sell off in the indexes right from the morning bell. We need to break the pattern of opening up in the morning, providing hope - and then selling off all day. I was hoping today would be that day, but then we had some good earnings reports from GE and IBM and it ruined the plan as the market opened up. At this point I'd like to see Dow 12,000 broken and SP 1300 broken to incite a panic. Which in turn will create a (near term) bottom. I had hoped for a tradeable bottom (as stated) last week, as we held above the August and November 2007 lows, but once that was broken this week, our fate was sealed. And the lack of short exposure and cash in the fund exaggerated the fall. Again, sentiment is awful, from such bad moods comes rallies, however brief - but I still think we need a major swoosh down to wash out the last vestiges of hope before I get confident in a bounce. We do have a lot more quality companies reporting next week that can move the market in the right direction ala Apple (AAPL) as opposed to the steady drumbeat of failed financial institutions this week. Unfortunately, we also have the bond insurers such as Ambac (ABK) - a very boring sector but one in which a failure could have massive boomerang effect throughout the credit world as without insurance we have nothing. Just when we thought we were coming out of the woods with Countrywide (CFC) being taken out by acquisition we have these monoline insurance companies hanging over our heads like the Sword of Damocles. Buffet is supposed to be starting his own company in this area - it cannot come soon enough.

Price of Rising Tide Growth: $10.597
Lifetime Performance to date (vs Aug 3, 2007): +5.97%

Comparable S&P 500: 1,325.2 (-9.56%)
Comparable Russell 1000: 719.6 (-9.62%)

Fund return vs S&P 500: +15.53%
Fund return vs Russell 1000: +15.59%

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

Bear Market? This is Nothing Kids!

Yes the action stinks. Its been dramatic in how short of a time frame it has happened (I guess after months of denial, once acceptance begins, it happens fast), but in the big scope of things this is nothing.... Bespoke blog again (notice I love their statistics) with the typical NASDAQ bear market. I'm just glad in 73-74 I was too busy being born to be investing... but 630 days... of this? Ugh.

Meanwhile for those of you who missed the early part of this decade you can see all the carnage those of us "lucky enough" to be around enjoyed aka tuition aka death spiral. You can see how dramatic the drops were in such a short period of time in 00 (when we were still in denial stage - we had a big bounce in summer 00, before a 2nd free fall that year), and then in 01 when we broke down completely, and then the 278 days of 2002 that just killed whomever was left who was a 'growth investor'. Let me frame it for you:

1. After the biggest bubble in decades we had 37% drop in 74 days in early spring 00.
2. The market then put in a mini spike off that low, drawing back in the bulls (I'm raising my hand very high - guilty as charged) Correction over! Not so much. Over the next 169 days we lost 46%
3. Then we had the January effect in 2001 (yee haw) Correction over! Not so much. Over the next 70 days we lost 43%.
4. Then we had another late spring rally in 2001 (is this the end?) Correction over? No. Not over. We lost 38% over 122 days
   
5. Then the market sucked us in with a 3 month + Santa Claus rally. Finally the bottom was reached... party time. Oops.
6. Over the first 10 months of 2002 we lost 46%

Again, this was the NASDAQ - the S&P 500 was NASDAQ lite - same direction, but not the same magnitude. But what you can see in true bear markets (if we are entering one) - is you get sucked in a lot, you are given hope, you feel happy, and then the sledge hammer is applied ... over... and over... and over. To a point where you surpress such memories and only talk about it in hushed tones to those who were there with you. :) But I think a whole generation of investors was stuck with JDS Uniphase (JDSU) (down 99%) in their account... :)

So if this is another era we are entering, expect nice counter rallies of some serious magnitude within the greater context of a lot of dips. And on each counter rally we will wonder "was that the bottom?" And we won't know... until we look back 6 months later. By 2003 no one was expecting the market to ever go up again. But it did... and then its been straight up for 5 years. Easy street! Until now. And yes there were stocks that went up, during that time believe it or not (probably not on NASDAQ though). But it is as I've stated like a trout swimming upstream; some tough work to make any progress.

I do want to say... keep in mind, the action early this decade was in reflex to a much much more expensive market - the average NASDAQ stock had PE ratio >50 in early '00. We were nowhere near that valuation in this era. But certainly we could only be halfway through a correction? Or for all we know done. (I doubt that). I do also still think the small cap stocks will (when all is said and done), be the worse off, (this era's NASDAQ) - remember, if you are tied just to the US consumer without any international exposure... your situation is a lot more precarious.

Inside View of a Fed Meeting

Thanks to Bespoke blog again for this great clip. Apparently this is how the Fed works in 'consensus building' - discuss the problem so long that by the time they come to a decision the economy has already choked. How appropriate :)

One Lonely Voice Agrees with Me on Food Inflation

Thanks to a reader for emailing me this story; I've never heard of the website or the strategist but it appears to be a Canadian newspaper and the strategist is from Bank of Montreal - I could not agree with this story more, and verbatim have been espousing the same views. Food will be the future crude oil shortage. Once again while analysts fret over a month over month inventory blip in potash inventories [Morgan Stanley Worried about Fertilizer] , I just have to sit back and say ... my friend, try to look at the big picture... its scary. Call your local food bank if you don't believe me, we are already seeing anecdotal stories of large drops in food donations - after all canned beans hold their value more than our disastrous dollar.

1. Food Bank Shortage in TX
2. Food Bank Shortage in MI
3. Food Bank Shortage in NYC
4. Food Bank Shortage in Washington DC
5. Food Bank Shortage in Pittsburgh
6. Food Bank Shortage in New Hampshire
7. Food Bank Shortage in Minnestota

Folks, I could do every state if I wanted... you get the picture - go run a check via Google. And it's going to only get worst as the economy worsens.

So whether Mosaic (MOS) and Potash (POT) trade at this price or that, this week or that, as the market frets about this or that - we have one of the biggest secular growth markets I can remember, and VERY few companies who can take advantage of it.

Why people listen to the analysts who have been this wrong on estimates and downgrade financial stocks down 50% is beyond me. Where were the downgrades last summer/spring in ANTICIPATION of the issue? same for RETAIL, same for RESTAURANTS - NOW you downgrade them? Gee thanks! If you only read one post from this blog and you are serious about investing I urge you to read this one [The Games Analysts Play - Why No One Ever Says Sell] And yet their word is taken for gospel - they are herd mentality at its best! (or worst!)

Here is how "accurate" these analysts have been on Mosaic earnings [Mosaic with another Excellent Quarter].

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.

2008 estimates now: $5.94
30 days ago: $4.31 <-- not so much 90 days ago: $3.61 <-- oops Potash reports next week - except the same stellar stuff we saw from Mosaic. Folks, to put in perspective how wrong these analysts have been (that we now agree with that the sky is falling because of a potash inventory number), the difference between $5.94 and $3.61 is 65%. meaning 3 months ago, these analysts (AS A GROUP) were wrong by 65% of the potential earnings power of Mosaic. Yet now when they say the End of Days is approaching we nod our head in agreement and sell the stock off by nearly 30% in a week. Clearly, we are also herd animals.

So I'm taking a big hit this week on these names, maybe next week, maybe another month. Meanwhile Mosaic is now trading at 13x earnings for 2008. Incredible - still much cheaper than Potash and although I've increased stakes in both I am weighted much more into Mosaic due to relative valuation. But a year from now and 3 years from now when the true 'scarcity value' is recognized I think these stocks go far higher - especially the potash producers. Right around 2010, Potash should be able to actually to actually help the demand/supply imbalance in fact... until then....

Forget Oil, the new Global Crisis is Food

• A new crisis is emerging, a global food catastrophe that will reach further and be more crippling than anything the world has ever seen. The credit crunch and the reverberations of soaring oil prices around the world will pale in comparison to what is about to transpire, Donald Coxe, global portfolio strategist at BMO Financial Group said
• "It's not a matter of if, but when," he warned investors. "It's going to hit this year hard."
• Mr. Coxe said the sharp rise in raw food prices in the past year will intensify in the next few years amid increased demand for meat and dairy products from the growing middle classes of countries such as China and India as well as heavy demand from the biofuels industry.
• "The greatest challenge to the world is not US$100 oil; it's getting enough food so that the new middle class can eat the way our middle class does, and that means we've got to expand food output dramatically," he said.
• Mr. Coxe said in an interview that this surge would begin to show in the prices of consumer foods in the next six months. Consumers already paid 6.5% more for food in the past year.
• At the centre of the imminent food catastrophe is corn - the main staple of the ethanol industry. The price of corn has risen about 44% over the past 15 months, closing at US$4.66 a bushel on the CBOT yesterday - its best finish since June 1996.
• "You're going to have real problems in countries that are food short, because we're already getting embargoes on food exports from countries, who were trying desperately to sell their stuff before, but now they're embargoing exports," he said, citing Russia and India as examples.
• With 54% of the world's corn supply grown in America's mid-west, the U.S. is one of those countries with an edge. But Mr. Coxe warned U.S. corn exports were in danger of seizing up in about three years if the country continues to subsidize ethanol production. Biofuels are expected to eat up about a third of America's grain harvest in 2007.
• He said there are about two dozen stocks in the world that are going to redefine the world's food supplies, and "those stocks will have a precious value as we move forward." (keep that in mind)
• Mr. Coxe said crop yields around the world need to increase to something close to what is achieved in the state of Illinois, which produces over 200 corn bushes an acre compared with an average 30 bushes an acre in the rest of the world. "That will be done with more fertilizer, with genetically modified seeds, and with advanced machinery and technology," he said.

Mr. Coxe I salute you. Well that makes 2 of us talking about it now. Which means it should hit CNBC's radar by late 2008 or early 2009. At which time you can say... ah thanks for bringing me this breaking information.

The more I mull over this administration I am wondering which will be seen as the biggest boondoggle - Iraq or the energy policy? This push to corn ethanol might be one of the most far reaching disasters we have seen. And it's the whole Congress cheering it on, so none of them are innocent (I've only seen McCain and Bloomberg come out against it) Everyone else is out there buying votes. Fascinating

Long Mosaic and Potash in fund and in personal account

Bookkeeping: Closing US Steel (X) and Flipping into Ultrashort Russell 2000 (TWM)

I have almost no insurance at all in the portfolio (any short exposure) and while we are down a lot, until we open down massively and get complete and utter surrender it is hard to see a bottom formed.

I opened US Steel (X) as a trade Jan 4th [Two New Positions] - this was not a long term hold but a shorter term trade.

While I am not a secular bull on steel, I keep a small part of the portfolio for cyclical companies (short term moves) like the refiners, or just some shorter term trades, so I am going to try one here with US Steel (X).

50 day moving average is $106 so this is where I enter. Now, since this is more of a trade instead of a long term position I am taking a different tact than normal. Usually I build up a position over time but I am doing a quick 2.6% exposure (300 shares) - if X strengthens I will add to this position and then if I can get a 10% or so move I will flip out. If this 50 day moving average fails, then I will set a stop loss somewhere near $100, take the loss and move on. Let me stress again, this is not a typical position but I try to keep a small portion of the fund for opportunities like this. I have avoided this whole area (metals, mining, steel, dry bulk) the past few months due to the inevitable time when people realize emerging markets can't decouple from their export markets, and it has worked out well thus far.

All in all, considering how bad the market has been, this stock has held up very well. I bought in around $106 and am selling in the $102s for a smallish loss. Keep in mind, however, I entered after the stock had fallen from $122 just a week earlier, so my good entry point is keeping my head above water in this position. The stock has since traded in a range of $96 - $112, and still sits very near its 50 day moving average.

I am going to put this cash raised (along with Crocs) into Ultrashort Russell 2000 (TWM) so I have at least SOMETHING that goes up, if we continue to sell off. It won't offset the huge drops we have been seeing in individual names of late but it is something.

Again I have been mighty impressed with the strength in US Steel (X) and based on how well it has held up in this massive sell off, I might need to change my tune on the steel sector. Cleveland Cliffs (CLF) the iron producer I also considered at the time, has also held up very well. But I'd rather sell something that is holding up its value, as opposed to selling off stocks that are being unfairly hit 20-25% down for no reason other than panic and "lock in losses". So this is why I decided to sell this name. When the market regains it's feet I do believe US Steel should do very well considering how well it has held up.

As for the market, I do think the risks of recession are now being priced in. Everywhere I go I hear recession talk - not 1 month ago, no one was talking about it. I am shocked at how much of a 180 this market has taken in terms of "change of consensus". All fall, everyone was denying a recession could happen. Now you would be hard pressed to find anyone, except our Fed Chief or CNBC talking heads, who deny one. I can't recall a time since I've been involved in the markets when consensus literally changed on a dime like this. Usually it is a very wretching process when people "deny deny deny" like we had all fall, and early winter. Then in a span of 3 weeks we seem to have given up the ghost. In the big picture this is a good thing, because the closer we get to 'reality' the closer we get to pricing assets correctly. So we seem to have passed the denial stage and now are going through the recognition phase. As for the market - this is historic type of action and I am reading a lot of data such as "% of stocks below 200 day moving average at 2002 levels". 2002 was gosh awful. Putrid. Terrible. So knowing we are approaching those levels, makes me more bullish for at least some bounce (soon). But first it appears we need a "close your eyes and throw up" moment. Going below Dow 12,000 could provide such an opportunity... can you imagine - we were just below Dow 14K on Dec 11th. 5 weeks later we are talking of hitting the 11,000s. The compression of time, space, and volatility in this market is amazing. [Note, I will be very happy to be wrong on this theory, and see a +6-8% move up straight from here!]

No positions

We Need to Open Lower

The worst thing is these markets opening up day after day, and then selling off all day. After yesterday's carnage the best thing would of been to open down in a large way, in a wipeout type of selling, have people "give up", and from that level we can make some sort of bottom.

I don't know how the rest of today plays out, but this pattern of continuing to open up, and then sliding just tears away at people's constitution. Chinese water torture. Better to rip all the hair out in 1 quick band aid pull, make people want to turn off the computer screen, and stop dip buying (I'm raising my hand as guilty), etc. Dow down 200 right off the bat would of made me more constructive. Now we have to just hold our breath while people sell off into strength and wait for the (what appears to be) inevitable sell off.

Bookkeeping: Closing Crocs (CROX)

And on that Under Armour (UA) note, I am going to close Crocs (CROX).

I will be looking a sizable loss here, about $8700 (roughly 0.8% of fund profit) and selling my 2% positions (700 shares) of Crocs in the mid $30.00s range. This stock was actually an early winner for the fund, but since it's last earnings report the stock has been in a death spiral, and catching the falling knife has been a useless endeavor. My rationale for holding is the "value" in the name, with $2.00 EPS in 2007 and $2.70 projected in 2008. Meaning at $30, it trades at 11x 2008 estimates. But as we just saw with Under Armour (UA) no price is cheap enough as no earnings are safe in retail. I actually like Under Armour far more as a long term franchise (3+ years out) so the magnitude of this miss in UA really has to make me reconsider the landscape in retail. I thought it was bad in retail... I've been negative on retail since the get go in August, but I thought certain franchises were above the fray due to their secular growth i.e. Under Armour. Now it appears things are so bad, nothing will be spared. So I have to change my views.

I will place this sale under a 'better to be safe than sorry'. Looking at a chart the stock has bounced off $26 multiple times in the past few weeks which shows decent relative strength considering how bad the market has been, but any sort of news akin to UA will make $26 floor useless. In the mid $30.00s range Crocs is 17% higher than it was during the bottoms it has been hitting the past few weeks so at least this appears to be a slightly better sell point than panicking on any of the patent news or other rumors passed along of late.

The upside for Crocs is probably upper $30s so I am going to foresake a potential gain of 20%+ to protect against a loss of 20%+ if we see similar issues to Under Armour. That said Crocs is far cheaper than Under Armour, but in a market full of fear, valuation arguements are moot.

Again, let me say I could very easily be wrong with this call, as Crocs is very "cheap", and even mildly good news with a stock so beaten down will push this type of stock up very fast. But safety first. And I am not officially out of all retail. I do expect on any rally for retail stocks (which have been obliterated - Will There be Anywhere Left to Shop in 2010?) to see huge % gains, but at this point they are like buying home builders. A long secular down market interspersed with massive short covering rallies. Not my cup of tea. Sometime a year or two from now this group will be a great buy - but until then it appears outside of Gamestop (GME), Costco (COST), Walmart (WMT), and Best Buy (BBY), consumers are done.

No positions

Under Armour (UA) - Case Example for SEC Investigation

I have to say I see this over and over in the market. Yesterday morning when the market was actually up (in the first 30 minutes) Under Armour (UA) opened significantly down - on the order of >10%. Since this stock interests me to the long side at some point/value - even though I've been negative on it since it's inventory snafu [Under Armour series of articles] - I have been watching it with a close eye. After searching for news myself, and not finding any, I scratched my head.

Now as the market degraded UA's large loss yesterday got lost in the mix; as everything was down. But in fact we had a major drop first thing in the morning on "no news". Well "no news" turned out to be real news released after the bell; someone in the know was getting out and tipping off others to get out. While the small guy sits wondering... and promptly after hours we have a warning, and a stock down nearly 20% more today. You see this time after time - large put buying ahead of an earnings downfall; large call buying ahead of a buyout; a stock dipping ahead of bad news.... yet I never hear the SEC investigating this stuff. What exactly this toothless institution seems to do is beyond me. Only when it is so egregious and widespread across the entire market (like the shenanigans in early '00s) does something seem to happen. Now I will say the government has too many important things to spending money on (cough cough), so they can't spend money on simple things like financial regulation (that worked really well in our banking industry as well), so I am sure this is one of the few gov't sponsored institutions that is under staffed, but I have to say when seeing this happen year after year, for well over a decade and never seeing anyone get prosecuted for "front running" you just have to throw your arms up in the air. Just like a huge swath of call buying in the hours ahead of Countrywide Financial (CFC) buyout offer from Bank of America [Unusual Trades in Countrywide Calls Raise Eyebrows - Reuters]. Just like 1000 other examples I've seen in the past 10+ years. Yes, it's not an urban myth that the game is rigged for the big boys, like it or not.

As an aside Under Armour (UA) execs are not innocent bystanders either - last quarter they were touting their inventory build as a "good thing" (which was laughable as I pointed out), all the while unloading stock onto the masses via insider sales.

Seeing this sort of news from UA makes me quite a bit more nervous on Crocs (CROX) even with its "value" price today... as cheap as it is now, it could certainly become a lot more cheap with similar news. I probably will now be looking to reduce this position on any decent bounce, just to be safe.

• Athletic apparel and footwear company Under Armour Inc. on Thursday provided a profit forecast for the first half of 2008 well under Wall Street's expectations, as a major footwear launch will cause it to shift "substantial" marketing expenses to the first half of the year.
• Based on the timing of the Performance Training footwear launch, the company anticipates earnings per share in the first half of 2008 between 3 cents per share and 5 cents per share. The company did not break down its projection for the first and second quarters.
• Analysts had expected earnings of 25 cents a share for the first quarter and 13 cents for the second quarter, according to Reuters Estimates, though it was not immediately clear if the company's first-half forecast was comparable to those.
• However, despite the marketing shift, the company still expects 2008 net income and revenue will exceed its long-term annual growth targets of 20 to 25 percent .

Long Crocs in fund; no personal position

China Taking More Steps to Curb Food Inflation

I was talking about the implications of food inflation in China back in September [Chinese Inflation Highest in 11 Years - Why Do You Care?]

Remember, our "everything will be ok thesis" is once we pull through this 'minor credit issue' the world's economies will pull us through that 'minor consumer slowdown' we are going to experience. But with the growing Chinese middle class spending more on food - this cuts into their spending habits

Also, remember we import so much from this country of "CHEAP" labor. What happens when they demand higher wages so they can do minor things like... EAT. Chinese companies are already skimping in quality control since they are trying to outdo each other on pricing - and you see the results in dog food, kids toys, and I am sure I already forgot a few others in the near weekly recall news. So increased safety regulations, increased wages for their workers - and suddenly Chinese goods become more expensive.... and who pays? The US consumer - in the form of potential inflation.

As we discussed last week [Another Myth Falling Flat - Exports Will Save the Economy]

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.

Growing evidence is mounting it's becoming a serious issue [China's Food Price Curbs Signal Increased Inflation Worry - WSJ].

The more I listen to myself, the more I wonder why the heck I am not always at maximum cash position and short position in the fund. Duh. It really does not help to be intellectually correct but not benefit financially. But in a bigger scale - this is why the world we are entering is becoming more interesting by the year - everything is connected. A pin drop on the other side of the globe can have a global effect. And why we have to keep our eye out for things all over the globe. But I think China is setting up for a very similar fall to the US - in fact it might be striking in parallels - bad financial controls (if you think our banks are bad...), an out of control real estate market driven by massive liquidity, and striking inflation hitting the middle and lower classes. We shall see how it turns out, but it's starting to all sound very familiar. Wasn't Carter the last one who put in price controls (a bit before my time, but I heard that did not turn out too well).

Remember, (and I am not an expert in China, I just play one on the internet) but the vast majority of people are rural poor - not the "middle class" excited Wall Street types will hyperventilate about. And most of their income is spent on food. And when you get close to 1B people unhappy; it doesn't turn out too well. (social unrest) Even if 200M are enjoying the high life with their new Buicks and Apple iPods in the major cities.

Interesting times folks. Inflation is going to be such an interesting catalyst for so many actions in the coming decade. Already China is controlling the price of energy, and now food. This actually will stoke demand artificially, actually making the problem worse in the long run - until it implodes. (But not until after the Olympics in August mind you)

• China's government moved to exert more control over increases in some food prices, signaling heightened concern over the high inflation that is threatening to erode the meager incomes of the nation's rural majority.
• Under temporary measures announced yesterday, large producers of some food products -- including dairy, pork, mutton and eggs -- now must seek government approval before increasing prices. Wholesalers and retailers don't have to seek permission to raise prices, but must notify the government when the gains cross certain thresholds.
• China's government has voiced increasing worry in recent months about inflation, more severe bouts of which have in the past triggered instability in the country. Inflation this time has been mainly the result of rising food prices, especially those of cooking oils and meat -- which have pushed China's inflation rate to an 11-year high of 6.9% in November. China has longstanding price controls for gasoline and other energy products, and last week it reiterated it would hold those prices steady.
• The government has been trying to encourage more production of food staples to reduce prices, but the results haven't been quick enough to ease widening social unease. The public named inflation as the top concern in a survey released this month by an official think tank.
• The latest move, which takes effect immediately, "is an understandable reaction to political concerns about overall consumer-price index inflation," UBS economist Jonathan Anderson wrote in a report. Mr. Anderson said he expects headline inflation rates to decline in coming months as prices of meat and eggs level off.
• Economists tend to see price controls as, at best, a short-term solution and, at worst, a counterproductive way of combating inflation. "If strictly implemented, price controls could lead to shortages, forcing shoppers into highly visible queues. They could also prolong the problem by further discouraging producers from increasing output," said Mark Williams of Capital Economics in London.

We Need some Levity

In times like this, we need some levity... and when we need levity there is only one man we can call on.

That man is Chuck Norris.

I realize the guy has a full time gig working for Huckabee nowadays, but that doesn't mean we cannot bring out some old lists pre-Huckster. [Chuck Norris Market Facts] I realize the only people who probably laugh at these are you hard core economist types but they are still funny to me. Sadly these are mostly all the more appropriate now than in September!

Chuck Norris doesn't target inflation. He roundhouse-kicks it until it begs for mercy.

The Chuck Norris dollar buys 3 Canadian dollars, and trades at parity with the euro.

Chuck Norris doesn't supply collateral, only collateral damage.

The tears of Chuck Norris would supply enough liquidity to solve the credit crisis. Too bad he never cries.

When the yield on a Chuck Norris bond goes up, the price also rises.

Chuck Norris trades on fear and greed simultaneously.

Alan Greenspan calls Chuck Norris ``The Maestro.''

Chuck Norris has already banked his dividend payment from Northern Rock Plc.

Chuck Norris funds at Libor flat.

Chuck Norris Asset Management made 50 percent on its subprime mortgage-backed bond fund last month.

Chuck Norris doesn't borrow at the Fed's discount window. Chuck Norris LENDS at the Fed's discount window.

Chuck Norris's curves never invert.

Net income at Goldman Sachs Group Inc. rose 79 percent in the third quarter; profit at Chuck Norris Securities Inc. climbed 80 percent.

There is no market regulator. Just a list of securities Chuck Norris allows to be traded.

Chuck's iPhone never needs recharging.

Chuck Norris doesn't buy gold to hedge against inflation. Gold buys Chuck Norris to hedge against inflation.

Chuck Norris charges the Bank of England a penalty rate for borrowing. And guarantees its deposits.

Chuck Norris is the pilot Ben Bernanke calls when he wants to shower the economy with dollar bills. Sometimes, Chuck refuses to fly.

Chuck Norris gets ALL of his funding from the asset-backed commercial paper market.

Chuck Norris doesn't mark-to-market. The market marks to Chuck Norris.

When the U.S. economy sneezes, the world catches a cold. When Chuck Norris sneezes, the U.S. economy catches pneumonia.

When Chuck Norris makes you a price, it isn't an offer; it's an obligation to buy.

Chuck Norris isn't a market maker; he IS the market.

Chuck Norris can still get a 125 percent mortgage on a $2 million condo without providing proof of earnings.

Chuck Norris subprime collateralized debt obligations still trade at 100 percent of face value.

Chuck completed Halo 3 on his Microsoft Corp. Xbox 360 on the day before the computer game went on sale.

Chuck Norris has a trade surplus with China.

28 Stocks Up 9%+ In the Past Week

Here is the opposite of the previous entry, all the same conditions except trying to find at least 30 stocks doing well. Here are 28 names - strong sectors? Airlines (airlines!), healthcare and of all things financials. The ironic thing is even within healthcare these are not the quality names, most have suffered huge selloffs and are simply rebounding this week from very oversold conditions. The meek shall inherit the stock market?

This is making it even harder this week - the washed out sectors, which I indicated last week seem exhausted of sellers are actually hanging in there. So a paired trade strategy of being short the worst and long the best (very effective over most of the past half year) would actually work against you on BOTH ends in weeks like this. Not only are the good companies imploding but then your short exposure to the bad sectors would hurt you as well. Double jeopardy.

Sort of like investing in a parallel universe where the worst lead and the best suffer...

Symbol	Company Name	% Price 1 Wk
NWA	Northwest Airlines Ord Shs	45.10
UAUA	UAL Ord Shs	33.10
CAL	Continental Airlines Inc	29.00
BEAS	BEA Systems Inc	24.60
DAL	Delta Air Lines Inc	18.30
WCG	WellCare Health Plans Inc	17.50
FAF	First American Corp	15.60
FRE	Freddie Mac Ord Shs	15.50
AMR	AMR Corp	15.00
FHN	First Horizon National Corp	14.70
ILMN	Illumina Inc	14.40
FNM	Fannie Mae Ord Shs	14.00
R	Ryder System Inc	12.80
LEAP	Leap Wireless International Inc	12.30
ROST	Ross Stores Inc	12.00
OCR	Omnicare Ord Shs	11.50
IAR	Idearc Inc	10.80
LBTYA	Liberty Global Class A Ord Shs	10.80
SRCL	Stericycle Inc	10.10
MCO	Moody's Corp	10.00
BSX	Boston Scientific Corp	9.70
IMCL	ImClone Systems Inc	9.50
DHI	D.R. Horton Inc	9.30
WEN	Wendys International Inc	9.30
SIG	Signet Group ADR	9.20
VRTX	Vertex Pharmaceuticals Inc	9.20
MER	Merrill Lynch Ord Shs	9.10
JCP	JC Penney Co Inc	9.00

92 Stocks Down 10% or More in Past Week

After many months of out performance I have to say I feel like I own all 92 of these :) Green we own; blue we've owned or discussed. Truly a week the "leaders" of the market the past year have been decimated - not sure how fertilizer stocks did not make the list but I assume the huge pushes up early in the week are offsetting the last 48 hours.

Conditions:

1. Market cap >$2 Billion
2. Stock Price > $10
3. Average Volume >100K
4. Performance -10% or Worse

Symbol	Company Name	% Price 1 Wk
HAR	Harman International Industries Inc	-41.50
CISG	CNinsure Inc	-32.20
BRP	Brasil Telecom Participacoes ADR	-23.60
FSLR	First Solar Inc	-22.50
SNP	China Petroleum and Chemical (Sinopec) ADR	-22.40
EDU	New Oriental Education & Technology Group	-21.50
STP	Suntech Power Holdings Co Ltd	-21.00
LDK	LDK Solar Co Ltd	-20.40
YGE	Yingli Green Energy Holding Co Ltd	-19.00
GRMN	Garmin Ltd	-18.50
BTM	Brasil Telecom ADR	-18.30
NVDA	NVIDIA Corp	-17.90
SPWR	SunPower Corp	-17.50
ACH	Aluminum Corporation of China ADR	-17.00
SLT	Sterlite Industries ADR Repstg One Ord Shs	-16.70
PTR	Petrochina Depository Receipt	-15.90
CHL	China Mobile ADR	-15.70
CTSH	Cognizant Technology Solutions Corp	-15.60
CBI	Chicago Bridge & Iron Co NV	-15.40
VIP	VympelKom OAO	-15.10
LFC	China Life Insurance ADR Rep 15 H Ord	-15.00
BIDU	Baidu.com Inc	-14.80
ACGY	Acergy ADR	-14.50
AB	AllianceBernstein Holding LP	-14.40
HNP	Huaneng Power International ADR	-14.30
FRO	Frontline Ord Shs	-14.30
CEO	CNOOC ADR representing 100 Class H Shares	-14.30
SGP	Schering-Plough Ord Shs	-14.10
ADS	Alliance Data Systems Corp	-14.10
PBR	Petroleo Brasileiro ADR Reptg 2 Ord Shs	-14.10
WSM	Williams-Sonoma Inc	-13.90
FOSL	Fossil Inc	-13.90
ATW	Atwood Oceanics Inc	-13.60
JASO	JA Solar Holdings Co Ltd	-13.40
NMR	Nomura Holdings ADR Reptg One Ord Shs	-13.20
G	Genpact Ltd	-13.10
SAY	Satyam Computer Services ADR	-13.00
NIHD	NII Holdings Inc	-13.00
SSL	Sasol Level II ADR	-13.00
VLO	Valero Energy Ord Shs	-13.00
FMCN	Focus Media Holding Ltd	-12.90
SLB	SCHLUMBERGER	-12.90
WBD	Wimm-Bill-Dann OAO	-12.90
INTC	Intel Corp	-12.60
SU	SUNCOR ENERGY INC	-12.60
NMX	NYMEX Holdings Inc	-12.60
SJR	Shaw Communications Ord Shs Class B	-12.50
TLK	Telkom Indonesia ADR	-12.30
OEH	Orient Express Hotels Ltd	-12.30
DNR	Denbury Resources Inc	-12.20
CTRP	Ctrip.com	-12.20
AWC	Alumina Ltd Depository Receipt	-12.10
CY	Cypress Semiconductor Corp	-12.00
PXD	Pioneer Natural Resources Co	-12.00
GIL	GILDAN ACTIVEWEAR INC	-11.90
MRO	Marathon Oil Ord Shs	-11.90
NOV	National Oilwell Varco Inc	-11.90
WFR	MEMC Electronic Materials Inc	-11.80
EXPE	Expedia Inc	-11.70
BEAV	BE Aerospace Inc	-11.70
MDR	McDermott International Inc	-11.70
DRQ	Dril-Quip, Inc	-11.70
REP	Repsol YPF Depository Receipt	-11.60
BUCY	Bucyrus International Inc	-11.60
STO	StatoilHydro ADR Rep 1 Ord Shs	-11.50
CMI	Cummins Inc	-11.50
AKAM	Akamai Technologies Inc	-11.40
SYT	Syngenta ADR reprsntg One fifth of an Ord Shs	-11.40
CERN	Cerner Corp	-11.20
RRI	Reliant Energy Inc	-11.10
JNPR	Juniper Networks Inc	-11.10
KBR	KBR Inc	-11.10
JEC	Jacobs Engineering Group Inc	-11.10
AAPL	Apple Inc	-11.00
ARA	Aracruz Celulose ADR	-10.90
PCU	Southern Copper Corp	-10.90
MEOH	METHANEX CORPORATION	-10.80
DRC	Dresser-Rand Group Inc	-10.80
YUM	YUM! BRANDS INC	-10.80
TSO	Tesoro Ord Shs	-10.80
FTI	FMC Technologies Inc	-10.70
MA	MasterCard Inc	-10.70
BKD	Brookdale Senior Living Inc	-10.60
MELI	Mercadolibre Inc	-10.60
AMG	Affiliated Managers Group Inc	-10.60
HRS	Harris Corp	-10.50
NE	Noble Corp	-10.40
BGC	General Cable Ord Shs	-10.40
DO	Diamond Offshore Drilling Inc	-10.30
WIT	Wipro Ltd	-10.10
SII	Smith International Inc	-10.10
OII	Oceaneering International Inc	-10.10

Continued Ugly Action

Again, feels like groundhog day but for the first time it just feels like a total vacuum out there. Total lack of buying interest as every sector is shown its time behind the woodshed. This is a "rotational" correction if I've ever seen one. In a backwards way as of 3:27 PM, I'd say the most healthy thing for us would be a total breakdown here in the last 30 minutes, instead of Dow -250, maybe Dow -400

While it would stink, it would create conditions that would lead to finally a tradeable bounce as people just give up the ghost. You can almost hear people turning off the computers across America in disgust and not wanting to look at their Etrade accounts.

Last, I cannot remember a time when the Fed Chief's words were so ineffective. Last week when we basically were assured of a big cut or series of cuts by Ben, we rallied for a whole 10 minutes before sinking. Today, whatever Ben said, was essentially ignored. Crisis of confidence in leadership. From top to bottom.

What Safety Sectors are Really Working? And Which are Hoaxes?

It is interesting to see what stocks thought of as safe havens are truly working when the "time" comes versus what are not. Anything that has broken down below its 50 day moving average, in my mind - has not been up to task of being a safety valve in an awful market. As you will see below, most common safe havens have failed.

Let's look at some common sectors/names considered 'safe' - the only one I own of this group of 'safety stocks' is MedcoHealth Solutions (MHS), which along with Express Scripts (ESRX) are drug delivery companies. [2 New Positions in Healthcare Field]

Drugs never go out of style and the charts confirm this. I like these names because you get the benefit of drugs without the FDA risk.





Speaking of drugs they are supposed to be a safe haven - I find that to be very risky considering FDA decisions move these stocks, and big pharma is lacking a lot of new drugs coming down the pipeline, along with drugs coming off patent AND a most likely Democratic Congress and President (as the economy worsens more blame goes to GOP, rightly or wrongly). I don't see much "safety here" in some of these names - here are 3 of the 4 biggest (by market cap) drug companies, along with SGP.









We do see safety in Johnson & Johnson (JNJ) which is now more of a hybrid - a consumer name mixed with some drug exposure.



Then we move to consumer non discretionary which means stuff we need - toiletries and stuff like that. I don't see much safety in Procter & Gamble (PG) or Unilever (UN). But Colgate (CG) seems to be holding very well (more international exposure than PG). The problem with this area is inflation eats away at their raw costs (higher costs = less margins) - and they are not immune to slowing consumer despite the hype.







What about the 2 big names in food/beverage that were supposed to be immune due to their rapid international growth and exposure? Not so good of late.





But Coke (KO) is holding up ok....



Then we have what appears to be one impervious stock - big MO.



Long MedcoHealth Solutions in fund; no personal position

New Home Construction Implodes

I would argue this report (see below) while causing angst, is actually part of the long term healing process. As I've said in the past, we all know there is too much inventory. Until we stop building more and more inventory, the supply/demand equation will never correct. Economics 101. So these type of historic drops in new home construction are the beginning of the fix. But just the beginning (as I said in the recent past - we're now in the 2nd/3rd inning since we finally see home builders give up the ghost) . And why the housing stocks are in a lot of trouble. Many are only surviving due to banks keeping them alive by extending credit and by cash flow from continuing to build homes. That no one needs.

Home Construction Drops 25%

• The prolonged slump in housing pushed construction of new homes in 2007 down by the largest amount in 27 years with the expectation that the downturn has further to go.
• The Commerce Department reported Thursday that construction was started on 1.353 million new homes and apartments last year, down 24.8 percent from 2006. It was the second biggest annual decline on record, exceeded only by a 26 percent plunge in 1980, a period when the Federal Reserve was pushing interest rates to post-World War II records in an effort to combat an entrenched inflation problem.
• Many economists believe that the current slump in housing will rival the dive in the late 1970s and early 1980s when housing construction fell for four straight years before beginning to recover after the severe 1981-82 recession. (oh really? I did not hear that last summer by "many economists" - I heard "the prices of home has never fallen nationwide in history - nothing to worry about)
• The drop in construction in December was bigger than economists had been expecting and reflected weakness in all parts of the country. Housing construction fell by 30.8 percent in the Midwest and was down 25.8 percent in the Northeast and 19.6 percent in the West. The decline in the South was a smaller 3.3 percent.
• "Builders have finally thrown in the towel," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "This is a precondition for recovery as it will eventually reduce the inventory overhang. But there is a long way to go." (Bingo!)
• In an ominous sign for the future, applications for building permits fell by 8.1 percent to an annual rate of 1.068 million units. That marked the seventh consecutive monthly decline and reflected the fact that builders have been slashing production plans in an effort to deal with a glut of unsold homes.
• Many economists believe the housing sector will remain weak through this year before starting to stage a rebound in 2009. (maybe Dec 31, 2009! Those silly "many economists" are at it again - a year from now they will be saying "...before starting to stage a rebound in 2010)") :)

So it looks like the writing is finally on the wall and "the majority" are starting to figure out what us in the minority were saying for quite a while. Much like the Fed it appears "forecasting" skills in this country are quite poor and unless the data stares us in the face, we do not accept the new reality. I think this Spring during the height of housing sales, we will see a lot more reality.

But remember folks, last summer we were told nothing to worry about - after all housing is only "4.5% of GDP". And all the problems were contained to subprime. Blah, blah... and blah.

LDK Solar (LDK) Pre Announces Some Very Good Numbers

Lost in the panic of the market are fundamentals. Here are some nice fundamentals from LDK Solar (LDK). Despite a gross margin degradation (expected), due to a large ramp up in volumes, the company should be putting in mid 30%s type of growth in 2008 over 2007 levels. The open question is 2009 - if indeed their polysilicon plant is functional and effective, gross margins should spike in that year.

• Solar wafer maker LDK Solar Co Ltd (LDK) expects its net profit to exceed $200 million this year, about a third higher than the company's forecast for net profit of more than $150 million in 2007, its chief financial officer said on Thursday.
• The company, based in China's central province of Jiangxi, aims to quadruple its wafer production capacity to 1,600 megawatts by 2009 from 400 megawatts now to meet robust demand.
• LDK is likely to overtake Norway's Renewable Energy Corporation ASA (REC) to become the world's largest wafer maker in terms of shipment in three years' time, Jack Lai, chief financial officer told Reuters on the sidelines of a solar technology conference in the southern city of Shenzhen, near Hong Kong. "We are growing faster than REC, although REC is growing very aggressively. There is a chance that we could exceed it in three years' time."
• LDK has forecast wafer shipments of 510 megawatts to 530 megawatts in 2008, and 1,050 megawatts to 1,150 megawatts in 2009.
• Thanks to such contracts, LDK has essentially sold out all of its shipments in 2008 and 90 percent of shipment next year, Lai added. "We aim to sell to the top 20 solar cell makers in the world."
• The company's gross margin has been declining due to a tight supply environment for polysilicon, a key raw material which accounted for 80 percent of LDK's costs. Polysilicon prices have shot up recently as solar cell and semiconductor companies scramble to secure supplies of it.
• To better secure the raw material, LDK plans to spend $1.2 billion to build two polysilicon plants in Jiangxi, with a total capacity of 16,000 tonnes by 2009, Lai said. Their combined polysilicon output is expected to be 5,000 to 7,000 tonnes in 2009.
• Some analysts are worried that polysilicon prices will have eased by the time the plants start production, but Lai shrugged it off, saying there was no sign that the price will fall significantly in the near future.
• The company has forecast gross margins between 26 percent to 31 percent in 2008, rising to 42 percent to 50 percent in 2009.
• To match its ambitious expansion plan, LDK will boost its headcount by more than 50 percent to 10,000 by the end of this year from 6,500 now, he added.

Those are some nice growth numbers, but hey they are probably "over-ordering in light of tight supply and rapid price increases" - I mean that is the only way to explain any secular bull market these days, right fertilizer stocks? All good growth stories must now be questioned and it can all be explained away by double counting of orders. ;)

LDK Solar (LDK) is an example of a "battleground" stock - a major war between bulls and bears - much like a Crocs (CROX). While I am worried about gross margins across the entire industry, as I wrote a few weeks ago [LDK Solar Publishes Preliminary 2008 and 2009 Guidance] if the company can even reach 40% gross margin, the profit potential will be explosive. But again, much like infrastructure and agriculture we have companies with multi year backlogs and 'visibility'. (LDK has all of 2008 sold out already) Granted, the market is doubting everything right now and saying it's all false and will disappear so you can't really argue with fear. You just have to wait it out.

However, specific to LDK Solar, with so many moving parts and a lot of uncertainty (accounting, polysilicon plant, etc) the stock has not been reacting. I do like the value at these levels, but my cash is spoken for at this time so I won't add more. LDK Solar strikes me as a stock that could be $40 in 2 years or $180. We shall see how management follows through in the coming quarters. Gross margins are everything to me, in this story (and industry)

Meanwhile, back to the fallout shelter...

Long LDK Solar, Crocs in fund; long LDK Solar in personal account

Morgan Stanley Worried About Fertilizer

Aha! Finally we found a way to worry about even the bulletproof fertilizer stocks. Not even a week after stellar earnings from Mosaic (MOS) we now can find a way to even begin to worry about the biggest secular story out there. :) Classic action here. Nothing is deemed safe anymore since the sky is falling.

If you look close enough you can find a wart on anything - for example, with the economy slowing won't nicotine addicted smokers finally begin to quit since they are running out of cash? Won't they cut back on toiletries (bad hygiene makes a rise as people are too poor to buy the basics)? Won't we stop flying on airlines (why are they going up as oil falls and mergers are announced - people will be too poor to fly anyhow)? Etc etc. Won't people make less visits to the doctor (who can make those co-pays - the great depression is upon us)?

As with McDonald's last week[No Safety, even in McDonald's] where the thesis is people will be so poor they will cut back to visiting the cheapest restaurant in America; we are now officially in over reaction / paranoia mode. When will we bottom? Perhaps when we see the analyst come out with the 'rigorous' analysis that Walmart (WMT) must be sold because people are too poor to shop there as well. This is classic move from bullish to bearish and from 1 extreme to another. Where were these analysts 6 months ago? We went from an immune consumer 6 months ago to a consumer who will abandon even McDonald's (and next Walmart). All in 180 days. As I wrote last week - keep in mind these newly minted MBA's who have never lived through even a 20% market correction or any sort of recession (2001 was a recession on paper only) - and any slowdown will seem to be the "End of Days". It seems to be starting with the commentary and "analysis" I am reading the past week :) And yes I am negative on the economy, but it is all relative. Some of the ideas I am seeing tossed around by analysts are harking to 1930-1939. :) Perhaps, but I am not ready to really go that far.

Thanks to Notable Calls on Fertilizer

Morgan Stanley notes yesterday’s declines in fertilizer shares seem to be largely due to a somewhat surprising gain in potash inventory. While the bulls would argue that this inventory build is seasonal, the firm notes that historically inventory build generally starts in August or September and not in December. If the potash market is so strong, how could inventory have risen so sharply in the month of December? Firm believes the issue may go a bit deeper and may turn out to be a bit more ominous as customers may be over-ordering in light of tight supply and rapid price increases. This would distort what producers see as “demand.” While producers continue to maintain that they are unable to keep up with orders and sales are on allocation or some degree of restriction, the inventory gain may have shown otherwise. The potash inventory gain may only be a small “hiccup” in the perfect stream of data we have been seeing, but points to a certain degree of vulnerability in the shares if the data turns less buoyant.

Firm maintains Cautious industry stance but does not have enough data to call for a sustained downturn. Maintains Underweight rating on PotashCorp (NYSE:POT) and Agrium (NYSE:AGU) and are currently Equal-weight on Mosai (NYSE:MOS).

*******
Just like with McDonald's I think if we look back in a year we will see these as great buying opportunities. But for now, we live in fear and every shadow lurking around every corner is the beginning of the end for every secular growth market we have. They are all suddenly just "gone". After Apple (AAPL) reports the quarter of the century next week, you will see the same commentary I am sure - yes, it was a blockbuster quarter but with the consumer unable to even buy a Big Mac how will he ever buy a new laptop? Look I could be wrong on all my theories and in fact fertilizer stocks are done, Apple is done, Petrobras (PBR) is done (who needs oil anymore anyhow?), etc etc. But you will at least know why the NAV of the fund is $0 if every great secular story ended last week. And please send me pictures of your fallout shelters as we move to this Mad Max world. :)

Folks, these analysts have moved the US down from our top spot in world GDP to Kiribati [World GDP by Country] levels of consumerism in the past 3 weeks. How quickly we've fallen. Look at Togo just pass us by in the still of the night. Katy bar the door. It's over for the USA.

Long Mosaic, Apple, Petrobras, and Potash in fund and in personal account

Just in Total Freefall

Not much to say here - August and February 2007 lows are now broken on the S&P and much just seems in total free fall. Now all of Wall Street's quant computers are set to sell at the same time, and in the past week we've turned to selling "winners" - meaning stocks with good fundamentals.

Everything appears to be oversold, but that does not mean it cannot get more oversold as people flee the burning building...

As I wrote yesterday, the technical damage now is just enormous [S&P 500 in Worst Condition in Half a Decade] and under these conditions the leadership stocks get sold just like the crummy stocks without any good prospects. It's all one and the same.

Ironically, I like the holdings and weightings in the top of the fund more than any time since starting the fund/blog. I have a lot of leadership type stocks scattered throughout the top 15; some of the strongest and best within their sectors. Not that it matters at this point; and the past week the fund has lost a lot of gains. But selling into this sort of nonsensical indiscriminate panic is to lock in some losses in some of the best stocks out there, so at this point, attach crash helmet and just hold on and eventually sense will return and "winners" will be separated from "losers". When the market does turn (some day), those companies who actually have great prospects should lead us higher. Today and yesterday the agricultural names - who have the best fundamentals of any group out there for the next few years - are being destroyed. Make sense? No. Reality? Yes.

As I've said lately, a market led by gold, healthcare, airlines (once again, airlines??), and cigarettes is not something we want to be too happy about.

Position: strapped in with seat belt

Blackrock (BLK) Continues to Be a Safe Haven in Financials

Blackrock (BLK) simply continues to impress me. Another stellar earnings out this morning.

• BlackRock Inc.'s fourth-quarter earnings surged as investors shifted money to safer harbors and increasingly sought financial advice amid the ongoing credit crisis, the investment management firm said Thursday.
• Adjusted earnings rose to $2.52 per share from $1.61 per share last year. Analysts, whose estimates typically exclude items, expected $2.15 per share, according to Thomson Financial. (now, that's a BEAT!)
• Revenue surged 42 percent to $1.44 billion from $1.02 billion last year. Analysts forecast $1.31 billion. Investment and advisory fees rose 34 percent to $1.16 billion, and advisory performance fees nearly quadrupled to $152.7 million.
• For the year, net income surged to $995.3 million, or $7.53 per share, from $322.6 million, or $3.87 per share at the end of 2006. Revenue more than doubled to $4.85 billion.
• BlackRock had $1.36 trillion in assets under management at the end of the year, up $57.1 billion from Sept. 31. Investors shifted money to the firm and investments considered to be safe as the crisis on the debt markets started taking out value on the equities market.

The other good news is Merrill Lynch (MER) which is struggling and constantly looking for foreign handouts, is *NOT* selling any portion of it's 49% stake in Blackrock. Considering how putrid their cash situation is, that speaks a lot.

• Merrill Lynch CEO John Thain said Thursday that the firm's stake in asset manager BlackRock is worth about $13 billion, but it is not for sale. "It (BlackRock) remains a strategic asset from my perspective. It is not something we would look to sell," Thain said on a conference call with analysts on Thursday. As Merrill, like other banks, continues to raise much-needed capital following bad debt investments, many have speculated that it sell assets like BlackRock.

Now, all this growth is not organic due to acquisitions but in a sea of pain in financials, Blackrock is simply stellar. A rock. I only hope they can hold onto their CEO as this type of performance should have other financial firms knocking over the door to get to Mr Fink. [Blackrock Might Lose CEO to Merrill Lynch]

Look at this chart below and overlay it over any financial company in the USA - even Goldman Sachs (GS) the "rock star" on Wall Street. Talk about divergence.

Long Blackrock in fund; no personal position

Perini (PCR) Shows Collateral Damage of Tightening Credit + Slowing Economy

I found this random news for Perini (PCR) [not a fund holding], as I saw the stock down 10% today.

• Construction company Perini Corp (PCR) said Deutsche Bank on Wednesday delivered a notice of loan default to the developer of the Cosmopolitan Resort and Casino project under construction in Las Vegas, Nevada.
• Perini said it is unable to determine financial impact of the action at this time, pending discussions with the developer and lender, and that all current amounts due to Perini have been paid.

Shows you the growing collateral damage that a (a) slowing economy + (b) tightening credit market will have. And how you can be just an innocent bystander minding your own investing business and then boom, down 10% due to a situation like this. In [Perini (PCR) Talk About an Underperforming Infrastructure Stock] I mentioned:

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).

And here is proof positive. Now in a panic market as we have now, they are selling anything and everything and no distinction is being made. However, the customer base of the infrastructure stocks I am focusing on are rich Middle Easterners, flush with cash Asians, and the US government. Can all those customer bases slow down as well? Surely. But that would be a world where Asian exports dried up, oil went back down to $40 due to worldwide depression, and the US government stopped printing dollars to inflate the economy (haha). Surely we can build a scenario where this would happen but again if we go down this road, you are talking the D word, not the R word.

But "perception is reality" and for now, perception is infrastructure projects could be cancelled since the world is slowing and 2 year backlogs with rich customers mean nothing. This is why it is hard to invest on the other side of perception. You can be correct, but will only be proven correct once every 3 months (during earnings season), the other 12 of the 13 weeks of a quarter you have to deal with constant hand wringing. We've seen this with Blue Coat Systems (BCSI) a networking company that has done nothing but beat numbers, raise future numbers, talk about the rosy future [A Damn Shame - Blue Coat Systems (BCSI)] yet the stock is down 40% because of "future worries". Can't win for losing once perception turns against you - ask the dry bulk shipping fans.

The other thing I wrote in that piece was:

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.

And once again, this is why I try to sell most stocks when they break down below key moving averages - "someone knows something" behind the scenes and "big boys" usually will know before the small fry. So once again, a very weak stock was signaling to us "get out" before news begins to actually hit. Perini in fact just signed a slew of contracts Monday, showing you how treacherous this market is. Suck you in with contracts; than spit you out 3 days later.

But bigger picture, this is the type of fallout with Perini (PCR) that is only beginning and makes investing so much more difficult - anything tied to the US economy that isn't tied to drugs or cigarettes is open to perception or fear of slowing. (as an aside - isn't that ironic, 2 things that are diametrically exposes - smoking and health care - are both immune and 'safe havens')

Long Blue Coat Sytems, Foster Wheeler, Chicago Bridge & Iron in fund; long Foster Wheeler in personal account

Speaking of a World of Shortages

Looks like the mainstream press is finally starting to catch on...

.. it really is different this time (the most dangerous words ever said) ... too many humans wanting to live a modern (read: urban) lifestyle. As I've written before 2006 was the first year more humans lived in urban settings than rural. If this urban residence rate ever gets to 60-65% I truly wonder how the world will cope. In economic theory, prices will shoot up (far more than they have now), but short of telling people to "go back to how they lived 20 years ago" in these emerging markets I am unclear how it will play out from there. But these are long term trends that will take years/decades to play out; in the near term (3-7 years) we seem to have some major issues coming and a US recession is not going to stop them (slow them temporarily maybe, but not stop the direction or magnitude). I do also expect China to slow down building to some degree in the coming 2 years as they grapple with overproduction of "everything", but these issues will re-accelrate in the early 2010s, as China and India's own middle class begin to emerge in self sufficient manner Keep in mind there is the equivalent of 5 USAs in China, and 4 USAs in India - and India is growing far faster than China (and projected to pass them in population within next 25 years- so we will have the equivalent of 10 USAs wanting to live a good consumption lifestyle - if only 4 of those USAs reach middle class (assume 4-5 of these USAs among 'Chindia' will remain rural poor) - well imagine a world of 4 more countries like us, created from scratch - and tell me where we will find the resources for them. So I expect a mini slowdown in commodity inflation at some point (in which people will say, whew problem solved!) only to see the real era of inflation to arise after that. This is why I say Bernanke is helpless on the inflation front, he might as well put the pedal to the medal to stoke growth.

In the long run, my hope is some technological revolutions happen between now and the ultimate "then" (imagine if instead of 3.5 billion people living in cities we have 4.5 billion in 20 years?).... if not, as I've stated in the past, I do expect at some point for 'major conflicts' to arise among countries over natural resources (not named oil) in the future i.e. water. But other than that.. have a nice day! :)

As you read this keep in mind the government (yet again today with CPI figures) is telling us inflation is a moot point and going up 2-3% a year (well it jumped to 4% this year but before this year it was almost invisible). Seriously....

• The price of copper has tripled in five years. Zinc has doubled. Wheat and soybeans rose 70 percent in 2007. Futures prices of crude oil, gold, silver, lead, uranium, cattle, cocoa and corn are all at or near records.
• A global boom in the cost of commodities, the staple ingredients of a modern economy, is entering its sixth year with no end in sight. Commodities have always been subject to boom-and-bust cycles, but many economists see a fundamental shift driving the markets these days.
• As development rolls across once-destitute countries at a breakneck pace, lifting billions out of poverty, demand for food, metals and fuel is red-hot, and suppliers are struggling to meet it. Prices are spiraling, and Americans find themselves in what amounts to a bidding war with overseas buyers for products as diverse as milk and gasoline.
• “It is absolutely a fundamental change in the global economic structure,” said Bart Melek, global commodities strategist for BMO Capital Markets, an investment firm based in Toronto. “Global commodities ranging from oil to base metals to grains are moving higher as billions of people in China and around the world get wealthier and are consuming more as they produce products for us, and increasingly for themselves.”
• Now, with the United States economy slowing, the question is what happens next. One possibility is that a recession in this country, should it occur, would suppress demand enough that commodity prices would fall substantially for the first time in several years. But many economists argue that demand overseas would keep prices high even with a recession in the United States. That would compound the economic pain for Americans, forcing them to continue paying a premium at the meat counter and the gas pump even as their paychecks suffered.
• These economists say it will be hard to stop the ascent in commodity prices because it is connected more than at any other time in recent years to events beyond the United States, particularly the industrialization of China, and to a lesser extent of India, and in booming oil economies like Saudi Arabia and Russia.
• Meeting that demand is becoming more difficult. Oil is no longer easy to find, and the cost of producing it is escalating. Droughts and in places excessive rain have produced sporadic grain shortages
• The biggest single factor increasing commodity prices is China’s rush to construct factories, other buildings and roads to satisfy a growing, increasingly middle-class urban population with a taste for cars and other consumer goods.
• China today has 7,000 steel factories, double the number in 2002. Every new factory needs electricity, which means that power plants must be built. More diesel-powered trains are required to get the coal to the power plants, and more trucks and expanded ports are needed to move the steel to market.
• China’s industrial revolution caused an increase in crude oil consumption to 7.5 million barrels a day last year from 5.5 million barrels in 2003, according to the International Energy Agency, representing 31 percent of the total rise in global demand. Over the same period, China was responsible for 64 percent of the increased global demand for copper, 70 percent of that for aluminum and 82 percent for zinc.
• The International Energy Agency projects that China and India combined may increase their oil consumption to 23.1 million barrels in 2030 from 9.3 million a day in 2005. The demand for oil is also growing in big developing countries like Russia and Mexico, where car ownership is rapidly rising.
• That global demand lifts both metals and food prices. Vast construction projects to dig up oil sands in Canada and drill for conventional oil across the Middle East and Africa are under way, driving up the price of steel.
• As fuel costs go up, countries like the United States and Brazil look for alternatives like biofuels. The ethanol boom in the Midwest has driven up the price of corn. Since corn is a vital feed product for animals, the prices of meat and milk have followed. The prices of other grains are going up as their acreage is supplanted by corn. “You are trying to feed people, cattle and cars, so you have this global fight between food and energy,” said Michael Lewis, global head of commodities research at Deutsche Bank. He noted that the United States was responsible for 60 percent of the increase in the global demand for corn last year, which he said resulted primarily from the rapid expansion of ethanol production.
• The rise in commodity prices is accompanying a broadening of the middle class in many countries, but recent protests in Mexico after a steep climb in tortilla prices showed that not everyone stands to gain. The world’s poor spend a large percentage of their income on food, so higher grain prices tend to hit them hard.
• Economists and some others say the continuing boom in commodities prices may slow this year, if for no other reason than the 2007 pace for many crucial commodities — up 57 percent for crude oil and more than 70 percent for wheat and soybeans — was so stunning. Since the 2001 recession, the Commodity Research Bureau’s broad price index has risen by 100 percent.
• Nevertheless, Mr. Robinson said commodities prices would probably remain steady in 2008 and possibly slide in 2009. The prices of many, if not most, major commodities — including nickel, copper, sugar, silver, cocoa and coffee — have continued their climb so far this year. “Demand will be very difficult to slow down unless you take a very bearish view on the long-term global economy,” Mr. Robinson added.

Anyhow, something to contemplate for yourself why we bemoan why Apple is $160 instead of $175. ;) Big picture stuff is always interesting...

Interesting Human Economic Toll Piece in NY Times

I found NY Times story to be quite interesting. Nothing new, coming from Michigan, but perhaps of interest to some readers in booming states. It also puts a human face on "statistics". As an economist at heart I truly am interested to see this great US experiment play out the next 2 decades - an economy which creates less and less to sell to others (outside the country) each decade, but instead is reliant on credit and transferring of the same dollars amongst ourselves through the "service" economy. Much of the past decade's growth has been through "home construction", and "credit creation", but I wonder at what point passing around the same dollars (or more dollars if you look at what the Fed is creating each year through M3) starts losing it's effect.

While many might dismiss this story as a "Rust Belt" issue, again we are losing more 'production' each decade - you could repeat this story for steel makers in PA in the 70s, textile makers in NC in the 80s, and now the auto industry in the '00s. Yes we are moving to a knowledge based society but I am unclear if there are enough jobs for 200M in that society. Hopefully some advent of alternative energy or some other thing we have not thought of yet creates a new boom. It cannot be healthcare causing the boom because while it creates a plethora of jobs, each new jobs add a layer of cost - which is paid for by the same Americans.

Further this story is just a simple example of why I find the "unemployment" rate to be laughable - here in the Rust Belt we have many very educated types with college degrees working the night shift in retail... so they are "employed" per the jobs reports... but underemployed in a massive way. Short of a massive migration to other states (to do what?) I don't know what the solution is. I suppose we can all work in the oil industry or coal mining.

Once again, this will take many years to play out but the equalization of wages on a global scale for the blue collar, combined with persistent inflation in a 'world of shortages'... if it plays out as I envision... does not bode well for many in the country. If this is an outlier event or a canary in the coal mine... I will let you make the determination. However, more and more of this country seems reliant solely on service jobs and I don't know if bartenders, cashiers, bank clerks, and Walmart greeters are going to be paying quite the same for the many who once held very different jobs. But, I suppose my views are biased by where I live as well, so I could be over exaggerating the national scope. I'll check back on this thesis in 2028. :)

• After 30 years at a factory making truck parts, Jeffrey Evans was earning $14.55 an hour in what he called “one of the better-paying jobs in the area.” ...he recently described how astonished and betrayed he felt when the plant was shut down in August after a labor dispute. Despite sporadic construction work, Mr. Evans has seen his income reduced by half.
• So he was astonished yet again to find himself, at age 49, selling off his cherished Harley and most of his apartment furniture and moving in with his mother.
• Middle-aged men moving in with parents, wives taking two jobs, veteran workers taking overnight shifts at half their former pay, families moving West — these are signs of the turmoil and stresses emerging in the little towns and backwoods mobile homes of southeast Ohio, where dozens of factories and several coal mines have closed over the last decade, and small businesses are giving way to big-box retailers and fast-food outlets.
• Here, where the northern swells of the Appalachians lap the southern fringe of the Rust Belt, thousands of people who long had tough but sustainable lives are being wrenched into the working poor.
• Slammed by the continued decline in the automobile and steel businesses, Ohio never recovered from the recession of 2001-2, and blue-collar families who had made it partway up the economic ladder find themselves slipping back, with chaotic effects on families and dreams.
• “These younger workers should be the backbone of the economy,” said Shiloh Turner, study director for the Health Foundation of Greater Cincinnati, which conducted the surveys. But in parts of Ohio, Ms. Turner said, half or more “are barely making ends meet.”
• One consequence is an upending of the traditional pattern, in which middle-aged children take in an elderly parent. As $15-an-hour factory jobs are replaced by $7- or $8-an-hour retail jobs, more men in their 30s and 40s are moving in with their parents or grandparents.
• “A lot of major employers have left, and the town is drying up,” Ms. Thiessen said of Jackson. “We’re starting to lose small shops, too — Hallmark, the jewelry and shoe stores, the movie theater and most of the grocery stores.” Shari Joos, 45, a married mother of four boys in nearby Wellston, said, “If you don’t work at Wal-Mart, the only job you can get around here is in fast food.”
• In late December her husband landed a new job, driving a fork lift at a Wal-Mart distribution center, a shift that ends at 2:30 a.m. It pays a little less than he used to make and is an hour’s drive away, so gasoline soaks up a painful share of his wages.
• Darrel McKenzie, 44, was also a maintenance man at Meridian and grossed more than $60,000 a year. Now he has restarted at the bottom as a union pipe-fitting apprentice and expects to make $20,000 this year. His family just “does less,” Mr. McKenzie said. His mother, Shirley Sheline, 73, had worked 28 years at the same auto parts plant, and shares his dismay. “Can you believe it, a grown man forced to move back with his mother,” she said.

Myth Busters: Technology is a Safe Haven

Back in the fall and early winter when the same 4-6 stocks made new highs each week (I called them the 'teflon stocks') the media coverage purported yet another myth - tech is a safe haven for the coming slowdown. Another laughable (if not dangerous) theory to one's portfolio. First, as I have said in the past, technology is not a monolith, just like "energy" is not a monolith (ask ethanol stock owners, ask natural gas drillers, etc). Second, consumer slowdown will affect business - and technology companies catering to businesses. But as these very narrow leadership stocks gathered more and more assets it was simply a case of everyone running out of ideas to invest in, and the same stocks getting more money. This was a problem with the whole market most of the fall, even during the best of times (October) and something I remember complaining about. Very little to invest in out there, and everyone is flooding into the same names. And those who were not in those names were basically already in a bear market.

Bespoke Blog has a great table pointing out the fallacy of this arguement about technology as a safe haven. It shows all 71 technology stocks in the S&P 500. All 71 are below a key technical trend line; the 50 day moving average. That's a bear market in a sector if I ever saw one. Only 1 stock was up (as of earlier this week) for 2008 out of the 71 stocks... Yahoo (YHOO) and that's only due to a buyout rumor. Another bear market in a sector.

This is yet another case of why you should ignore the babbling on most financial media outlets (and hey maybe even my babbling!) and think on your own. I've been saying outside of consumer gadgets (video games, Apple products, Research in Motion products) and some portions of networking the rest of "technology" is highly cyclical and not secular at all. Hence I don't see how it is a safe haven at all, when it is so tied to corporate spending which eventually ties back to the greater economy. While foreign purchases will offset weakness in US (and next W Europe) for a while, that won't last forever either.

This sector is oversold, and due for a bounce - but really you could apply that saying to everything outside of gold, silver, healthcare, utilities and airlines (airlines!). But the complete and utter disaster that is technology with no relative strength, even in the best names is yet another worrisome sign for the mid term...

S&P 500 in Worst Condition in Half a Decade

First, let me start this post off by saying I am a big "reversion to mean" investor - or "rubber band" theory. Meaning, the further a stock, or index gets away from support the more nervous I get and the more I expect some "reversion to mean" or a correction back down. This is why I cut back on stocks making large moves. Now, a popular investment methodology since the late 90s is pure momentum investing - that is buy the stocks making the strongest moves, or new 52 week highs and sell to the next person down the pike. Buy high, sell higher. I can't criticize that because when it works, it works very well - and as long as there are a lot of people willing to engage in this game, it can work for a long time. I have been surprised over the years how much farther a stock can run from its support levels - much farther than I ever think possible - especially in sectors dominated by retail investors (home "gamers"). But I attribute it to the "sell to the greater fool" mentality of buying a stock at its peak and hope someone comes in tomorrow and takes it off your hands... i.e. small cap solar stocks some days are up 30% and more than enough people are willing to come in the next day and buy a stock up 30% a day earlier, with hopes it goes up the next day. Seems like online poker to me, but there are many different strategies that work in the market, and whatever works for you. So while I miss out on those 'opportunities' by not playing that game, I find other strategies to be more conservative (in terms of limiting downside) and hence why I like to buy strong stocks on pullbacks to support levels (20 day or 50 day moving averages in particular).

I think one lesson people in the market for a long time learn is that only half the battle is making money. The other half is limiting losses. And these strategies of buying stocks up 30% to sell to the greater fool seem fraught with opportunity to lose a lot of money very quickly, especially if one is not a very able and rapid trader. It works.... until it no longer works. And then it implodes a portfolio if one does not sell quickly.

I mentioned this 'reversion to mean' because I want to point out the 5 year chart on the S&P 500. The 200 day moving average (for those new to technical analysis, all a moving average is, is simply the average price over a period of times - calculated daily it can provide a trend line that many investors swear by or indeed trade solely on) for the S&P 500 is now about 1479. The index is over 100 points lower or a 6.7% spread. Within the context of the past half decade this is an extreme - in fact as the chart below shows (click on it to enlarge), this is the worst level we've seen Spring 2003.

Meaning we have not traded below the 200 day moving average to this degree in almost 5 years. Hence why my "call" for a near term bounce back of some fashion. Hopefully lasting for more than 10 hours. This would be a probable event, but not a guarantee. There are always outlier events, such as 1987. The problem with rubber band theory is it works a lot better when a stock is trading above a trend line... when a stock breaks below a trend line the drop can be precipitous. See any home builder or restaurant or retailer or most financials to see what I mean. But again, an index is different from an individual name as its an entire complex of industries, and stocks so it should behave more in line with theory - outside of pure emotional panic periods.

However, a more troubling pattern has developed which makes me quite bearish. This chart shows we have been on "easy street" for the better part of 4.5 years. If you've only been investing to that time - well you have had quite the golden era. To see the opposite of a golden era look at Spring 2001 through Winter 2002/2003. But looking at this 5 year chart if you draw a line connecting the peak bottoms in

1. August 2004
2. April 2005
3. October 2005
4. July 2006
5. August 2007

You can see a support pattern created by these 5 peak bottoms - this is a "floor" on the market. If you continue that line to "today" you can see we are now trading below where that imaginary line would be placed - that happened in the past week to 10 days. And it is not a harbinger of good things, from this viewpoint at least. If I saw this in a long term chart of an individual stock, I'd flee for the hills. So I have to say at this point this deserves a change in character for the market as a whole. While I've been bearish on the coming economy for a long time, here we finally have a major index confirming economic theory for the first time. So the "masses" are finally listening; keep in mind one of the 13 Outlier Predictions is a 20% drop from peak (Oct 9th) to a bottom; this would be takes us down roughly 320 S&P points from the 1576 peak. Meaning S&P 1250ish. That's just a random number pulled out of thin air (20%), but it certainly would not be atypical by historical standards and it portends more weakness in the future.

Now, this could reverse and perception could be changed quickly but on a go forward basis as long as the indexes trade below this major trend line we have to assume bad things for the market in the mid term (until the markets break back above this imaginary line). But again, this does not mean we can not have a snap back rally but at this point this pattern would indicate on these rallies we want to lighten up, build short exposure along with cash - especially as we scrape against this (now) resistance level.

This does not mean individual stocks cannot rally, or specific sectors cannot do well. But it will be more like taking on the persona of a trout. We are going to be swimming upstream against some raging currents. And gains appear to be much harder to obtain.

For those who don't use technical averages or believe it is just hocus pocus feel free to ignore this post. I just find it a useful supplemental tool, and ignoring it would be like a carpenter saying I don't need the hammer in my tool kit. 90% of my work is fundamental analysis (thinking through macro themes, finding sectors that can benefit, finding the best stocks within those sectors) but knowing that so many people either use technical analysis solely, or in large part, I think it is prudent to keep aware of what is going on, if for nothing else to see things as how they are seeing things. And for those who focus on technicals, this is a very bearish set up.

Reversal of Fortune

Interesting action today. Financials up, commercial real estate up, retail up, homebuilders up - and for the first time in a while it looks like it could actually be "buying" instead of short covering. Meanwhile all the popular sectors (read: stuff I own) is down, quite severely.

Generally this might mark the potential for a reversal and short term bottom, but I have been early on that call for the last week so let's hold off on a conclusion. But I actually like this action from a market sense (if not for the fund performance today).

JP Mogran (JPM) and Wells Fargo (WFC) earnings today showed just how terrible of a company Citigroup (C) has been. They all have problems but Citigroup is about 10 iterations worse than what I am seeing in the former 2 names. Maybe 20 times. I do expect to see some people sent to jail in a few years on the mortgage side - the government will want a scapegoat just like they did in the Worldcom, Enron days of the early '00s. Especially as the economy worsens into 2008. Someone must take the fall - certainly in cannot be politicans who pushed for total deregulation in the mortgage industry and allowed off balance sheet accounting (which was the bane of Enron) to pervade our financial system. In the long run, free markets do correct ills, but the path from "problem" to "solution" is quite painful. If we threw 10 common sense people into a room for 8 hours I am sure they could of came up with some guidelines that would of at least mitigated much of this outcome. But alas, 'financial innovation' rules. And it will repeat again, in some form in 6-7 years. It always does.

Bookkeeping: Selling iShares Brazil (EWZ) and Rolling the Funds into Petrobras (PBR)

I am selling my smaller position in iShares Brazil (EWZ) for a mild loss. I never really had a chance to build up this position and once Petrobras started weakening I chose to focus on that name instead. I bought this stake back in early November, but truth be told this ETF is essentially 2 names - Petrobras (PBR) and CVRD (RIO) (a mining company), which dominate the weighting of the holdings. With Petrobras the crown jewel in my eyes (one of the few oil companies with ability to expand reserves, you can click on the label at the bottom of this entry to see some news they have announced the past few months) I am simply going to flip my ownership of this name through the ETF and reduce 1 position by selling the country ETF and owning the actual stock I want. That being PBR. I am adding in the $98s. Ken Heebner also appears to be a big fan of this name so I am in good company.

I also added a bit to First Solar (FSLR) @ $184s and finally took this position to >1% in the fund. Due to valuation I only had a very small stake, but in the $180s I find it more compelling than in the $270s. For the first time in a long time, I am seeing some value in solar stocks other than Trina Solar (TSL) and LDK Solar (LDK). I had been warning the past month that the valuations were ridiculous. This doesn't mean this is the bottom in solar, but at least I can justify some of these stocks valuations. Suntech Power (STP) in the $52s, to me, is an outright steal - unlike much of the junk that speculators have run up 80% in 2 weeks, this is a quality franchise.

Ironically I see some retail and financial stocks doing well today :)

Long Petrobras, First Solar, Suntech Power in fund; long Suntech Power, Petrobras in personal account

Bookkeeping: Transactions

This is the type of selling we saw in August - "liquidation selling" - when hedge funds (full of growth names) blowing up behind the surface and are simply selling because they have to, due to redemptions. I remember a few days like this in August, when CF Industries (CF) was moving 15-20% a day.

Here are my changes - I took the cash I raised yesterday morning by selling Mosaic (MOS) and the coal names, and sold the names holding up the best today, and bought stocks down 10-15%

Sales
MedcoHealth Solutions (MHS)
FTI Consulting (FCN)
ICICI Bank (IBN)

Purchases
Mosaic (MOS) in $88s
Potash (POT) in $128s
CF Industries (CF) in $101s
Suntech Power (STP) in $52s
Mercadolibre (MELI) in $51s
Consol Energy (CNX) in $63s

These are names on my "want list" so when the market gives them to me at such values, I will take it hand over fist. It won't help near term performance but in a few months these will be the bedrock of any out performance the fund has.

The volatility in Mosaic has been historic. Unbelievable. I am simply buying back what I sold the past 2 days, (I sold 10% of position Monday @ $104, and 15% of position Tuesday @ $107) - now getting them back in the upper $80s. I am doing the same in Consol Energy on a smaller scale - I sold down the position yesterday in the strange strength and today it was down 9%. Times like this actually work very well with my strategy to cut back when stocks move quickly and then repurchase the shares on a downfall. Usually it takes weeks for this to happen - lately its been happening in 48 hour periods. But I always keep a core position and in fact held 75% of my Mosaic through both the huge upswing and now this 2nd correction in a week.

This is capitulation selling. I will update/edit this post if I make any more transfers. I chose to go with fertilizer instead of infrastructure because in 'bear case' one could say with China and world slowing the need for projects will stall. I find that to be nonsense but 'perception is reality'. So one could at least argue that. The agriculture case - I can find no bullets so thats why I am putting more and more of my portfolio in that direction. The only thing I don't like about agriculture at this moment is it is a crowded trade meaning last summer I was one of the few in it; now everyone is on the bandwagon. But today's action should shake some off.

I am trying to find funds to buy Petrobras (PBR) and First Solar (FSLR)...

Also please notice the 10% moves in both the foreign Ultrashorts I highlighted (EEV/FXP) yesterday.

Edit @ 11:26 AM - I added Apple (AAPL) at $160. And sold HDFC Bank (HDB) to fund that purchase. My ownership in the 2 Indian Banks is now around 0.2%. Not because I don't like them, but with the bargains being created elsewhere the near term upside in other names is far greater.

Long all names mentioned in fund; long Mosaic, Potash, CF Industries, Apple, Petrobras, Mercadolibre, Suntech Power in personal account

A Quick Look at Earnings Today

Just some quick comments

#1 Intel (INTC) was "ok" but in this environment "ok" is categorized as "end of the world". They came out with a bombshell, stating they had some concerns about the US in 2008. This was a bombshell to the 25 people in the country working at Fox Business News who still think everything is fine (and the market is only going down because Democrats look headed for the White House), but otherwise it's not much of news. But we can still sell this same old news, down 15% after hours. Why not? There are times good news is bad news, average news is bad news, and bad news is bad news. This is one of those times.

#2 US Banncorp (USB), which I see Guy Adami tout every night on "Fast Money" (Eric Bolling, come back!) looks very solid. I don't follow the banks that closely (other than to shun them) but this is apparently the 7th largest bank in America. They are deciding not to buy back shares to maintain capital - which is a decision most banks don't even have an option of mulling so they must be doing something right.

#3 California Pizza Kitchen (CPKI) which is just another random restaurant stock, so I wanted to keep an eye on it's earnings... down 20% in after hours after cutting back estimates for 2008. Along with retailers, it appears we will be losing most of our restaurants as well, based on stock price action. Folks we are not going to have any place to spend our money in 2 years after all the retailers AND restaurants (save Walmart, Target, Best Buy, McDonald's, and Costco close). CPKI is now down below $10. Six months ago? $25. Ouch.

#4 Forest Labs (FRX) is a healthcare stock (do I need to go any further - of course it did not fall), drug development company with solid earnings. Ironic to see this sector (safe haven) perform so well, considering all the drugs coming off patent in this group, and very good odds for a Democratic President in the fall, but none of that matters as fear takes over the market and people can't cut back on drugs.

#5 State Street (STT) - this is a financial company that is probably most like fund holding Blackrock (BLK). However it is not as much of a pure play on asset management. Earnings dropped nearly 30% based on mortgages. I don't follow it closely but I assume they are holding some mortgage backed securities (these cockroaches are everywhere). Let's see what Blackrock has to say Thursday. BLK has a great CEO so I doubt they would hold this junk but nothing would surprise me anymore - heck, little towns in Norway have been discovered to have subprime exposure.

Tomorrow AM aside from Intel fallout we have JP Morgan (JPM) and Wells Fargo (WFC) earnings - supposedly 2 of the better run banks in America. One fact lost in Citigroup's (C) mega billions mortgage writeoff is the $4 BILLION extra in provisions for write offs in their CONSUMER loans divisions.

• "We had losses in our U.S. consumer business, up over $4 billion, and these numbers completely overwhelmed record performance in many, many of our other large businesses," Chief Executive Vikram Pandit said on a conference call.
• Analysts, noting that Citigroup's bread-and-butter consumer business provides more than one-third of the firm's recent profits, said keeping that side of the company strong -- and its capital reserves healthy -- is a must if the bank has any hope of riding out current turmoil in the markets and the economy.
• "The reserve build signals that tougher times are ahead in the U.S. consumer channel, which has accounted for 30%-40% of Citi's recent profits," Goldman Sachs analyst William Tanona wrote in a research report.

A totally different area and one of the things I highlighted last summer & fall that will be the long term issue for banks as the economy weakens. As we work through this mortgage situation in the first half of the year, I expect the failing consumer and his inability to pay off all other types of consumer loans to take over the reigns as an issue in the back half of the year. We are seeing these banks already start to take write offs for this - last week COF, AXP. This is why I don't see why people even bother with this niche of financial stocks or try to call a bottom - they will be at best (in between dead cat bounces) sideways money for a long while, even if you call the bottom. That doesn't mean they won't have bouts of 25% increases off dramatic drops, but those gains will be given up as more and more consumer weakness is exposed on their balance sheet.

I did have to say I was bemused to see early AM a headline on CNBC: "Citibank's kitchen sink quarter". I believe I saw that headline in August... and October. They can just keep using the same graphic.... every 3 months. And eventually it will be the kitchen sink. But not yet.

Anyhow, another day where nothing much is working outside of Altria (MO), healthcare, utilities, gold, and coal stocks for some odd reason. Even safety stocks like McDonald's, Pepsi etc are beginning to falter. Just a tough environment and stock selection in any sector outside of "safety" sectors is meaningless. They are all being sold.

With the Intel news it appears now we are destined to break August 2007 lows tomorrow AM on the S&P 500. It closed at 1380, and below 1370 we break new ground. With all the "quant" computers in NYC set to sell concurrently the minute that happens, tomorrow should be another "interesting" day. By interesting I mean painful. Next would come March 2007 lows = 1360. Next comes a lot of thin air. But an early morning painful heavy selloff, could set up conditions finally for a trade-able bottom as people throw up their hands and just give up. Let's see if the Plunge Protection Team comes up with a solution in premarket tomorrow.

Oh yeh... almost forgot; the useless CPI will be out tomorrow. As if a "hot" (i.e. high) figure will stop the Fed from cutting... but another thing to hand wring over :)

Apple's Macbook Air

[13 Outlier Predictions]

As worldwide laptop sales burst past desk tops, Apple unveils a new consumer convergence product, something bigger than an iPod but smaller than a laptop, but something so good, so sexy, so necessary, people will want to have it surgically attached to their arms.

Not too shabby Jobs... not too shabby... larger than iPod, smaller than laptop - good call Mark.

Apple Introduces MacBook Air

• During his Macworld Expo keynote address on Tuesday morning, Apple CEO Steve Jobs introduced the MacBook Air Tuesday, a computer that the company billed as the world's thinnest notebook -- small enough to fit inside an interoffice mailing envelope. It's priced starting at $1,799 and will be available within two weeks.
• Sporting a silvery finish, the MacBook Air features a 13.3-inch LED-backlit widescreen display that has a 1280 x 800 pixel resolution. The backlighting saves power and provides "instant on" response from the moment you turn it on, according to Jobs. The device has a slightly wedge-shaped profile. It weighs about 3 pounds, and sports a thickness of 0.16-0.76 inches. It's 12.8 inches wide and 8.95 inches deep.

Steve Jobs puts his pinkie to his lips and cackles like Dr. Evil as he quickly positions Apple to be THE consumer electronic convergence BRAND of our lifetime.

--> Apple has cut deals with every major studio, including 20th Century Fox, Paramount, Sony, MGM and Universal, to offer movie rentals through its iTunes online music store. They can be played not just on the Air, but also on iPods, other PCs, and televisions attached to an Apple TV digital entertainment device.
--> Prices are $2.99 for an older movie, or $3.99 for a new one. High-definition versions are offered for a dollar more. More than 1,000 titles will be available by the end of February. Customers have 30 days to view their rental, although they only have 24 hours to complete the film once they start watching it.

Slowly...surely... taking over the world. You heard it first... in 2007. :) Apple will be a brand, a lifestyle, a word toddlers today use in lieu of TV set or CD players or computer. A verb. To Apple. (much like To Google)

Long Apple in fund and in personal account

I've Never Been so Interested in an Intel Earnings Report or Conference Call in my Life

I really don't follow Intel (INTC) since its slower growth, somewhat cyclical tech but I will be very interested in what we hear today.

I think guidance could move the market - the stock action has been horrendous so one would think this is signaling something bad.... or it could "already be priced in".

Hopefully for the bull side we hear something along the lines of "business is strong, no slowdowns in Asia and Europe surprisingly strong, Vista cycle driving sales etc etc"

not

"First signs of slowdown in Asia blah blah"

IBM seemed to indicate things were still strong overseas so it would seem a bit surprising that Intel would say something completely different. But all it took last quarter was one seemingly innocent about "some slowdown" in financials buying Cisco (CSCO) product and the whole tech sector took a bath. Literally every phrase means something with a market so nervous.

The stock *is* up today... hmm....

Popcorn ready and waiting...

Will There Be Anywhere Left to Shop in 2010?

Judging by the stock charts, the answer is no - not really. (I knew there had to be some solution to making Americans stop over spending!)

I wrote a piece in early November [Are Department Stores Signaling a Recession?] with the charts of Kohls (KSS), JcPenney (JCP), and Nordstrom (JWN), all in free fall. But compared to where they are now, these were great prices to get out at.

Where are we going to have left to shop? All these stocks are being priced as if on the way to $0 (but there is 1 winner left standing, seen at the bottom of this post)

*** High End Consumers, no place will be left for you...








*** Middle End Consumers, no place will be left for you...








*** Lower end? Not at Sears or Kmart




*** We can't even buy drugs...






*** or Home improvement products






*** Not even Office products?




*** But at least we can rely on women to shop for clothes right?? Not so much....





BUT - there is ALWAYS a bull market SOMEWHERE. With middle class being squeezed away by all time income inequality [Do the Bottom 80% of Americans Stand a Chance?]- smitten by job losses and inflation (I know, I know folks - the solution is cutting corporate tax rates - that always helps the middle class!), who can we rely on? Who will stand there ready to help?

There must be 1 retailer left standing which like a cockroach will survive after every other retailer goes out of business.... whose stock holding up great (what correction?) and is telling us they will be doing well in the economic tsunami... as they say stocks predict 6 months in advance, right?... so who will do well in the economy we will have in 6 months+, in this "pooring" of America scenario... where will all these formerly upward middle class and upper middle class with their knock off Gucci bags be shopping.... hmmmm...

Horrific Fall in New Oriental Education (EDU)

Just an amazing fall in New Oriental Education (EDU) today, down 30%. Again "what have you done for me lately" - yes you beat estimates on both the top and bottom line, but you didn't beat expectations for future guidance. Away goes nearly $1 billion in market cap in 1 afternoon. It is now not only below the 50 day moving average but the 200 day moving average.

Well I could be setting myself up for a "Croc's" moment (catch falling knife, get fingers ripped off), but at $56 I just have to pull the trigger. Again I am buying in layers... $4000-$6000 tranches. I am already down $14 on the last layer bought at $70 this morning when it was down 12%. Just incredible action... most foreign stocks are seeing no mercy.

I can only imagine what penalty would hit this stock if it had missed. Next year's earnings are $1.80ish so a 30x multiple puts us at $54. Again, not a cheap stock, but much like WuXi Pharmatech (WX), a smaller Chinese stock that reported very good growth but didn't raise, beat, smash etc etc (and got hammered) EDU is simply being decimated despite the type of growth which is hard to find in the US market. I'll hold the line here as I don't want to make this position more than 3%. If it's worth $56 it might be worth $26 the way the market is thinking right now. Or I suppose -$6.

All eyes move to Intel earnings tonight. If they can simply say "look the world is not ending" we should get some decent rally but if they are negative we could be in trouble. With IBM reporting good business overseas, I would expect the same from Intel - but that game will probably only last another quarter or two until we start seeing "we noticed weakness in so and so foreign market" type of language. Other than coal, HOGS (of all things), and the 2 healthcare stocks, nothing in the entire watch list is green. Oh wait, all those Ultrashorts I lightened up on 7 days ago are green... blah. I have not really applied much of the cash I raised this morning, but will wait until the last 10 minutes to assess. Usually markets this bad do not end the day well, so we'll see if we can find some 'bargains'.

Long New Oriental Education, WuXi Pharmatech in fund; long New Oriental Education in personal account.

Bookkeeping: Closing iShares Malaysia (EWM)

I am closing my position in iShares Malaysia (EWM) today. I've held this position since day 1 of the fund - it has never been a huge position since its a country index, but I really like this country as a "natural resources" play on Asian growth. I booked about $2700 in gains which is not a huge amount, but contributed about 0.25% to the fund's return over time.

In the fall I owned multiple Asian ETFs, Hong Kong (EWH) as a proxy on China, Singapore (EWS) as a play on the emerging financial capital of Asia, Malaysia, and the closed end India Fund (IFN).

In late October as US investors ran up Chinese stocks like mad without any sense of valuation (and Shanghai also ramped with no sense - those were the days of PetroChina achieving $1 trillion of market cap), I was very nervous about the speculation. A week after the Shanghai IPO of Petrochina, in mid November I exited out of iShares Hong Kong. Then a week later I sold iShares Singapore. At the time I wrote:

While I like Singapore for the long run, its a finance based economy so could be open to some slowdown if we get a global/Asian slowdown. Contrast this to Malaysia (I still am keeping my iShares Malaysia (EWM)) which is more of an export country with natural resources - sort of a mini Brazil.

While Asia markets have corrected along with US markets, the full effect of the US slowdown on their growth probably won't be recognized until 2008. So this is not a short term call, as this index is at a good support area and probably will bounce, but this is more of a long term outlook.

I think that time I called for in November is now fast approaching.

The charts show, selling the Hong Kong and Singapore ETFs was prudent to do in mid November (and you can see the extreme spikes in October as the world was awash in Chinese Kool Aid).





While keeping Malaysia also worked out well (better than I anticipated in fact)



But I don't want to press my bets. A lot of "myths" have been busted of late. A couple of myths still left to be destroyed are "it is safe to buy Chinese stocks until the Olympics" and "emerging markets are safe havens". The latter is especially shocking - if you said that 5 years ago, you'd be laughed out of a room. Now it's conventional wisdom. This ties into another myth - that if 3/4 of the world's GDP is heading to contraction (US, UK, Western Europe, Japan) - especially consumer lead... that somehow the small sliver of middle class in India, China, Brazil will offset that. Hardly. So this leaves these markets a lot of room to fall.

I still have kept my India positions, but unlike the fall when I was very interested in this market since it was being ignored as US investors chased into any Chinese stock and ignored India [China v India the past 2 Months], I have pulled back my Indian exposure as well. Much like Malaysia, India has bucked the trend and its index was at all time highs in past few weeks. While I still like all these markets for 2010+ and believe this area of the world *IS* (and will continue to be) the next great growth engine over the coming decade(s), the very rich valuations more than support this view and once the myth of "decoupling" between emerging markets from developed markets is broken, we could be subject to a large sell off. I don't know when this myth is busted but I believe 2008 will be a year one can make a lot of money with Ultrashort Emerging Markets (EEV) along with Ultrashort Xinghau China 25 (FXP), both introduced in October. [New Ultrashorts Being Introduced for Foreign Markets]That said both are extremely volatile with huge daily swings, and I cut back exposure to these 2 names (after some nice returns the past 2-3 weeks) last week expecting some sort of bounce in the markets... (hello? bounce? where are you?) So I am not participating much in today's huge moves.

Much like the US stock market this fall and early winter I expect a thrashing type of action to take place in these foreign emerging market indexes as "denial" battles with "hope". Just as we denied the slowdown and thought the Fed would fix everything (remember that powerful move off that first Fed cuts post August). So it won't be straight down but Singapore and Hong Kong already seem to be telegraphing what the rest of Asia might be facing. So I am cutting Malaysia here (also will help raise cash) and as stated over the past 2 weeks have cut back Indian exposure to its lowest in a long time. When those markets start pricing in US recession and W Europe slowdown, I'll get more interested. As I've stated before, specific to Malaysia think of it as a mini Brazil - it will be buffeted to a large degree due to its commodity based economy, but in panic people don't differentiate - they just sell everything off (we've seen this lately in the US market), so I expect a sell off there during the next year just like the others.

Long Ultrashort Xinghau China 25, Ultrashort Emerging Markets in fund; long Ultrashort Emerging Markets in personal account

Bookkeeping: Taking Some Profits in Coal

We just discussed the coal names yesterday [New Coal ETF (KOL) Introduced], and the stocks are up (I don't see any specific news) 3-4% across the board this morning in a tough tape, continuing a nice bounce off oversold levels from 5-6 days ago. While this bodes well for the sector (relative strength), I did add quite a bit of exposure from those oversold levels to raise some cash I am going to cut back a bit on this group among Massey Energy (MEE), Consol Energy (CNX) and Peabody Energy (BTU). These are sell offs of about $7000-$8000 each (less on Massey since its the smallest position).

Since my cash position is essentially nil, to buy one long position I need to sell down another. This is the rationale behind selling these names, which are up about 10% from where I added to the positions last week in the height of the selling pressure, so I am just downsizing back to the position size these names were a few weeks ago. More out of necessity due to lack of cash.

I also took a bit more Mosaic (MOS) off the table (about 15% of the position) as the stock put on yet another 10% move yesterday and (again) I need to sell down one long position to add another due to low cash positions. These sales were around $107 (I was buying this in the low $80s last Wednesday). The move has been quite extraordinary in a very short period of time in this name. Hopefully it pulls back and allows a better entry point.

All these sales go under the category of "sell when you can, not when you're forced to."

Unlike a real fund, where people would send fresh cash in, I only work with a fixed amount of money so I cannot rely on "fund inflows" from investors to make new buys. So I'll sell off some of the stronger positions and redeploy into other positions I like just as much, but the market is selling off. However, now that the S&P has broken 1400 yet again I am not to antsy to redeploy cash yet.

It continues to be a very tough market from the long side. It is very reminiscent to middle to late 2001 where we ground downward, interspersed with some hopeful rallies. Hopefully we don't have a repeat of 2002 ahead of us. That was a backbreaking year for many bulls.

Long all names in fund; long Mosaic in personal account

New Oriental Education (EDU) Solid Report, Stock Trashed

A nice solid report from New Oriental Education & Technology (EDU) but since they put their typical conservative guidance out, the market is punishing the stock.

• Revenue up 43% year over year to $32.6M (estimates @ $30.9M)
• Net income up 77% year over year to $2.0M or $0.10 EPS (vs analysts $0.07)
  
• Total operating costs and expenses for the quarter were RMB241.9 million (US$32.8 million), a 43.3% increase year-over-year.
• Cost of revenues increased by 35.2% year-over-year to RMB116.1 million (US$15.7 million), primarily due to the increased number of courses being offered to a larger student base and the greater number of schools and learning centers in operation.
• Selling and marketing expenses increased by 49.9% year-over-year to RMB38.1 million (US$5.2 million), primarily due to brand promotion expenses and headcount increase.
• General and administrative expenses increased by 52.6% year-over-year to RMB87.7 million (US$11.9 million), primarily due to increased headcount as the Company expands its network of schools and learning centers.
• Excluding share-based compensation expenses (non-GAAP), operating margin for the quarter was 5.8%, compared to 4.9% in the corresponding period of the prior year. This increase was primarily due to the improved operating efficiency as revenue growth outpaced the growth in operating costs and expenses.
• Student enrollment up 18.5% year over year to 217,500 (with 1.4 billion people that leaves some room for growth) ;)
• Opened 1 new private kindergarten in Beijing, and 14 new learning centers in the quarter. Total schools now 38, and learning centers 126.

So we have a fast growing company whose expenses are increasing in line with with the rapid growth. Operating margins are still expanding, despite the hectic growth.

• "During the second quarter of fiscal year 2008, we experienced continued strong growth in our student enrollments and net revenues, enabling us to beat our top line guidance," said Michael Yu, New Oriental's Chairman and Chief Executive Officer. "Furthermore, we continue to execute on our strategy of leveraging our leading brand name to enter new areas for growth by establishing our pre-school business with the opening of our first kindergarten in Beijing. To further enhance our content offerings in our educational programs and services, we reached an agreement with ETS to sell their TOEFL Practice Online in our training classes and through our bookstores. We also entered a partnership with Heinle ELT, a part of Cengage Learning, formerly Thomson Learning, to launch a line of custom learning materials tailored to our iEnglish brand conversational English language classes."
• New Oriental's Chief Financial Officer, Louis T. Hsieh, stated, "During our second fiscal quarter, we continued our strategy of foregoing short term profit in favor of rapidly expanding our leading nationwide network by establishing 34 new schools and learning centers in the first half of our fiscal year 2008 compared to 19 new schools and learning centers for the entire fiscal year 2007. In order to staff our rapidly growing physical network, we have added over 900 teachers and other employees in the first half of our fiscal year 2008. In addition to increasing our G&A spending, primarily due to headcount increases, we also increased our marketing expenses in the quarter by approximately 50% year-over-year in order to drive strong student enrollment and revenue growth. We expect to continue benefiting from this rapid expansion strategy in the quarters and years to come. Given the vast potential for growth in China's private education market, we are confident that we are well-positioned to continue capturing this lucrative market opportunity."
• Mr. Hsieh added, "We continue to see surging demand for our educational programs and services, and to the best of our knowledge, we have not as yet been adversely impacted by the economic slowdown and related events in the US, as almost all of our revenues are derived from the China market. We also continue to benefit from a strengthening RMB given that virtually all of our revenues are in RMB and are translated into US dollars for financial reporting convenience." (I love how management has the foresight to even mention that, as if it would be a concern - but they still addressed it)
  
• Mr. Hsieh noted that the second quarter of the Company's fiscal year is typically the slowest in terms of revenues as students are occupied with the beginning of the formal school year.

Again, this is a company with near monopoly status in their niche and now expanding rapidly to establish leadership position and brand in the education market.

Outlook

• New Oriental expects its total net revenues in the third quarter of fiscal year 2008 (December 1, 2007 to February 29, 2008) to be in the range of RMB311.2 million (US$42.1 million) to RMB326.5 million (US$44.2 million), representing year-over-year growth in the range of 22.0% to 28.0%, respectively. [Analysts @ $44.75M]
• New Oriental's third fiscal quarter 2008 revenue growth rate will be especially challenging when compared to the third fiscal quarter of 2007 which showed year-over-year net revenue growth of 51.3%. The Company's third fiscal quarter 2007 benefited from the late timing of Chinese New Year in 2007 which fell in the third week of February 2007 allowing Chinese students an extended winter break and a longer period of time to take language training and test prep courses. This will not be the case in 2008 as Chinese New Year falls in the first week of February, a more typical date for the Lunar New Year holiday. In addition, many schools throughout China, including those in Beijing, have decided to shorten the 2008 winter break for students by one week or more in return for extending the 2008 summer recess by a corresponding length of time, in order to allow students time to study and enjoy the Olympic Games in Beijing this summer.

So as is typical there is an overreaction to a (ahem) "miss" on revenue guidance. As with all smart companies, the job is to under promise and over deliver, so you can play the "beat the estimates" game that is so ridiculous. If the company produces a $45M quarter this "miss on future guidance" will be an afterthought, but today due to guiding the top end of the range down half a million, yes $500,000 (or 1% of revenue) below analysts estimates the stock is down 12%. With a market cap of $3 billion that = $360 million in value of company lost. Due to a $500,000 revenue "miss". (I use the word miss mockingly) And this is the way of the Street - beat revenue estimates, beat earnings estimates and issue conservative guidance and take a big loss; just another reason why I really dislike earnings season for its focus on the wrong things.

I am adding to the fund position here around $70, and will lighten up when it invariably rebounds back to upper $70s. Unfortunately its technically broken its 50 day moving average with this selloff.

Long New Oriental Education in fund and in personal account

Barron's Out with Negative Piece on Foster Wheeler (FWLT)

Thanks to a good reader for pointing out this news that Barron's was out negative on Foster Wheeler (FWLT) this weekend. It seemed to weaken the whole infrastructure group today, but I did add to some Shaw Group (SGR) [which held up quite well] with the Mosaic (MOS) profits today. Technically the charts of these stocks in this group are very similar - (almost) all are sitting right below the 50 day moving average - I'd say they will move with the market. If the market can firm up for even 2 weeks, I would expect many of the stocks in this group to burst through the 50 day moving average (now serving as resistance), and make some nice runs. But we need some confidence first into the market, and some follow through to today.

Fundamentally, to summarize what I wrote in a comment response to the reader earlier, the bear case is these are cyclical companies. Much like with Mastercard (MA), I am taking the opposite to the bear case or "analysts conventional wisdom" for this group - my belief is the customer base for this group is very important - I wrote just last week [Infrastructure Companies Cleaning Up on Contracts] we have 3 sets of customers which are cash rich (a) countries with massive trade surplus (b) countries rich with petrodollars (c) A US government that prints as much money as they need

So I'll take the other side of this "cyclical" trade - I am not saying there are not cycles, but unlike something like dry bulk shipping in which a bevy of ships will be in the seas by 2010, killing that "cycle", I expect quite a long cycle in infrastructure. We have a shortage of companies (and human resources) that can do the engineering and design for power plants, infrastructure projects and the like throughout the world. And a very captive audience flush with cash.

Every 6-8 weeks we get a scare like this in this group i.e. "The End is Near" crowd. And every 6-8 weeks I point to that backlog (slowing or "not") its well over 2 years worth of business for most infrastructure companies. How many business sectors do you know that have pricing power, cash flush customers, and 2 years worth of business already locked in. If you could tell me, feel free to append to this blog entry as a message. Again, the sky is falling crowd is now everywhere as seen by last week's doom and gloom McDonald's downgrade. The world is not ending, there will be winners and losers, even in down market or down economy. I might be correct or incorrect on this call, but this is my rationale so readers (or future investors) would understand why I am high on this group.

Here is Barron's rationale on Foster Wheeler (FWLT) in specific, but what they say for FWLT could apply to all the companies in this sector (and why not a hatchet piece on Fluor which is valued significantly higher, instead of Foster Wheeler? All the same 'issues' apply to Fluor and its valued higher. Hmm...):

• INVESTORS LOOKING FOR A PLAY ON global growth and an escape from U.S. economic doldrums have embraced Foster Wheeler. The company generates about 80% of its revenue outside North America, and its businesses -- designing and constructing industrial plants and equipping power plants -- are thriving. But after a three-year run, we'd suggest taking some money off the table, as the shares no longer appear undervalued.
• At a recent 145, Foster Wheeler's stock had climbed 181% last year and 979% since we first wrote about it ("Survivor," Jan. 31, 2005). Earnings have grown faster than analysts expected as it's enjoyed a boom in new energy projects thanks to the sharp rise in oil prices. And Foster has eliminated the types of cost overruns that almost led to its demise early in this century, dramatically boosting margins.
• Success, however, has made the shares start to look pricey. They trade at 21 times estimated 2008 earnings of $6.96. That's below the 27 multiple sported by competitor Fluor (FLR), but it's slightly higher than Foster's earnings growth of 19%, and substantially above the S&P 500's P/E of 14. Also, this is a cyclical company. Earnings multiples are supposed to contract as profits rise in anticipation of the cycle's downside. But that doesn't appear to be happening. If the cycle runs longer than expected, such exuberance will have been justified. If not, the stock could quickly correct.
• The cycle has at least five more years to run, says CEO Raymond Milchovich. The business isn't affected by the U.S. subprime meltdown, and only a macroeconomic shock in China, the Middle East or India would hurt it. A sharp decline in the price of oil would also bite the company.
• The company still has fans. Vance Brown, a principal at Grisanti, Brown & Partners who was bullish on the stock when it was at $13 a share, remains an enthusiast. He has taken profits to keep his firm's stake from growing too large relative to its portfolio. But Brown remains in the name because he can envision a 2009 where Foster earns $8.50 a share and sports a 25 multiple. That would put the stock just north of $200.
• Still, the company's business backlog may be signaling that the cycle is in the late innings. Investors look to the backlog, though lumpy, to predict future earnings growth. The backlog grew 98% and 47%, respectively, in the third and fourth quarters of '06, and slowed to 25%, 11% and 3% in the first, second and third quarters of '07, notes John Rogers, an analyst at D.A. Davidson & Co. with a Neutral rating on Foster.
• Backlog growth could pop in the fourth quarter, thanks to Foster's new contract to help build a liquefied-natural-gas plant in Australia. But with the backlog at record levels, growth was bound to slow due to the law of large numbers, and that could mean earnings growth will slow, too.

What I highlighted in red is the main concern I'd have with this group. I have mentioned I believe growth WILL slow in China, and India. But down from 11-12% GDP growth to 6% or so; or something reasonable. Crude could drop to $75 or go to $125 - that won't stop projects from continuing.

So if as a bear, one believes China and India are going to negative growth in the coming years, the countries stop their industrialization push, the Middle East countries stop their push, and/or crude is going to $40 again and projects will get cancelled left and right - well then you should be on the opposite side of my trade. I find that scenario a little extreme, and indeed if it does happen, as I wrote this weekend, what exactly can you buy? You can't buy anything in the USA - because last week analysts are saying people will cut back spending at Walmart and McDonald's, and you can't invest in anything overseas because "it's all cyclical and will go to pot" - therefore we have nothing to invest in. Unless there is something between "domestic" and "overseas" I have not discovered. And if indeed this is the scenario as I wrote this weekend, we have a lot worse to worry about than a recession - we are looking at something starting with a D not a R. I am not in that camp - if you are, again I would point you to a 100% gold portfolio because cash will be useless with the type of inflation we will be fighting as the Fed prints money to fight the D word.

As for the 979% return, keep in mind Foster Wheeler (FWLT) was on the verge of bankruptcy a few years ago due to mismanagement (among other things). So it's a bit misleading. I also love how "backlog growth is slowing" but "backlog is at record levels". If you word it one way it sounds "bearish" but I am unclear how one can view "record backlogs" in a bearish light. But I am biased.

Long Foster Wheeler, Shaw Group in fund and in personal account

New Coal ETF (KOL) Introduced from Van Eck Global

From our friends who brought us the agricultural ETF MOO that I highlighted in early September [This MOO for You? An ETF to Play the Global Agricultural Boom], is a new ETF for coal.

The Coal ETF seeks to replicate, before fees and expenses, the total return performance of the Stowe Coal IndexSM. The Index provides targeted exposure to 60 companies worldwide that are engaged in the coal industry. As such, the Fund is subject to the risks of investing in this sector.

While the influx of new ETFs is turning into a tidal wave and some of them are quite useless, the people over at Van Eck are bringing out some interesting things in areas I definitely favor. Long time readers of the blog will know I turned bullish on coal (as the forgotten commodity) in September, despite knowing the coming earnings reports (at the time October earnings season) would be atrocious.... you can see some history on my views on coal through this post.

This is another interesting ETF with a very global mix, much like MOO and a nice 1 stop shop. It is very top weighted with the 5 top names making up 35% of holdings, including a familiar name from China (not available in the US) which debuted as an IPO during the height of China mania in October, went up 90% in its first day and its Chairman reported he was "Disappointed" (China Shenhua Shares Rise 90%; Chairman "Disappointed"). Ah, the height of bubbles....

Well this 'disappointment' is a 8.2% position followed by fund holdings Consol Energy (CNX) and Peabody Energy (BTU) @ 7.5% and 7.3% respectively. Further down the list are two names who deal with the mining equipment end, Joy Global (JOYG) and a name I have been considering adding to the fund multiple times Bucyrus (BUCY) @ 4.6% and 4.3% respectively. Also in this group are Arch Coal (ACI), fund holding Massey Energy (MEE) which focuses on metallurgical coal, and Yanzou Coal (YZC).

The entire index can be found here. The ETF has 60 names, but again in a strategy I find useless the bottom third of the ETF is full of names with 0.1%, 0.2%, or 0.3% exposure. Granted it's trying to replicate a coal index so there is no leeway with buying a lot of tiny positions in the ETF...

By geography the US represents 40%, Hong Kong 24%, Indonesia 11%, and Australia 9%.

Again, another quick and easy way to get exposure on a global basis to a specific sector. If you don't want to pick among individual names, I highly recommend such an offering.... of course until this fund launches ;)

Long Peabody Energy, Massey Energy, Consol Energy in fund; no personal positions

Doug Kass Attracted to Financials

I've been reading Doug Kass for many years over on the TheStreet.com family of sites; but I have to say in all that time I don't recall being more in tune with his economic views as I've been the past 12-15 months. We were both 'early' (but ultimately correct) on views on housing, credit crunch, and the financial fallout - which I think until even 4-8 weeks ago were being dismissed. We both contend the recession will be deeper than the 'shallow, short' scenario, that these new converts are now singing about. My 13 Outlier Predictions for 2008 have a lot of overlap with his 20 Calls for 2008 (p.s. are you hearing the chatter of Yahoo (YHOO) being bought out by Microsoft? I predicted a buyout by News Corp (NWS) in '08, but heck I'll count any buyout as a victory.)

He does have more old school individual picks from traditional sectors and he has a lot more of a short bias than I do (I believe his hedge fund is short focused), but at least from an economic point of view we seem to treading in the very same direction. Today he has an article on 'Buying the Financials' with a very in depth reasoning - I will put the Cliff Notes versions below and you can click on the link to read the whole story. His viewpoint is if he (and I) are wrong and this is just a shallow slowdown this is the time to get into these names. Myself, while I will be warming up to the investment banks later (ex-Bear Stearns whose whole business growth the past few years was based on mortgages), I can't really see this being a great bottom for an investing point of view. But as I wrote this weekend, for a trade...

For example, we are seeing some bottoming action in financials. I've scaled back my Ultrashort Financial (SKF) to almost nil due to this. In fact, for those with very short time frame (say 1-3 weeks), the exact opposite - Ultra Financial (UYG) might be a good trade - it closed Friday @ $36.51 - it would not surprise me to see something like this bounce 20% as we get an oversold bounce in this area. Same with some retail, homebuilder, and restaurant stocks.

For example, Citibank (C) is swirling with rumors of a 20K headcount reduction (as predicted; once management bonuses were secured, time to cut the people), $15B more of foreign capital infusion (as predicted), and a larger than even I expected writedown of "up to $24B". And the stock is up. Hence, my point that much of the bad is 'priced in'. (for now) As an aside I wrote in December that investors apparently were immune to these (yawn) $4B, $5B type of writedowns - I mean what is a few billion among friends. But $20B+? Now that's impressive!

Anyhow, the marketplace is adjusting and while I think the consumer slowdown shoe to fall (which won't be as drastic as the mortgage mess), is still to come - that will affect the traditional banks and lending organizations more than the investment banks. Hence, why I still find the traditional banks to be more of a trade if one is so inclined. Here are Kass' rationalizations:

• On Thursday and Friday, I covered all of my longstanding shorts in the financial sector. That includes positions in brokerages, banks, mortgage originators and mortgage insurers. Last week, I described the most difficult issue that investors face today: To what degree have market prices discounted the emerging fundamental weakness?
• We seem to be moving in the right direction. For the first time (coincident with the recent drop in share prices), a discounted cash-flow model today, based on my consistently below-consensus 2008 S&P 500 profit forecast of $80 and other reasonable assumptions, produces an undervalued market reading.
• Anecdotally, even the formerly "Liebnetzian" mood from Larry Kudlow's band of merry men, to judge by when I appeared on Friday night's "Kudlow & Company," is growing more cautious. And so too is the formidable Ben Stein backing off of his previous and unadulterated optimism.
• Permanent capital is being replenished.
• Government policy will not be standing still.
• The seized-up credit markets will not be a permanent condition.
• Credit writedowns will likely peak in fourth quarter 2007.
• Many managements have been turned over -- and more will be in the near term.
• Business franchises are intact.
• Financials are statistically cheap against sustainable earnings.
• Financials have dramatically underperformed relative to the S&P 500.

I do agree with the above positives although I am not sure these financials are as 'cheap' as they look. Very importantly, the LIBOR rates which were a major problem we discussed in the late fall and early winter have started to act more normally once the Fed starting doing their special TAF auctions (originally there were going to be 4; now its been changed to 'unlimited') and the HALF a TRILLION European Injection [LIBOR Rates Plummet on Half Trillion Infusion by ECB]. So these are net 'positives' for the worldwide (namely US and UK) financial system, all at the small cost of massive devaluation of US dollar, and tremendous inflation. So we save the bacon of the banks at the cost of all our purchasing power being decimated. Sounds like a win win! Ok, well not so much.

No position

Beating a Dead Horse - Fertilizer

First, I have sold 10% of the Mosaic (MOS) position @ $104 simply because we have a 30% gain from the $80 "false bottom" created last week after earnings: $80 -> $104 in 3 days. I won't be selling any more until we go higher - as I stated 2008 estimates are just plain wrong and need to go up for the group. As they do, so will stock prices. I expect a carbon copy with Potash (POT) when it reports earnings - and as I stated this $80 price in Mosaic was simply a shake and bake move and citing "sulfur costs" as a reason to drop the stock for a few hours was just a convenient excuse. If you have confidence in the fundamental story, when the stock price disassociates from reality you have the opportunity for out sized gains.

Further evidence for the bull market in agriculture with Friday's USDA report. So while the media obsesses with crude at $91 or $101 or $111, they need to be looking in the grocery aisle. I continue to believe people are missing the forest for the tree. Tomorrow and Wednesday we will have bogus CPI/PPI inflation figures showing 3-4% price hikes. Meanwhile we'll snicker.

• Soybeans jumped to a record, corn reached an 11-year high and wheat rallied after U.S. government reports showed that production is failing to keep pace with rising global demand for food and biofuels.

• The world soybean harvest will fall 6.5 percent this year, U.S. corn inventories will be 20 percent less than estimated a month ago, and wheat farmers in Kansas and Texas planted less even as the price of the grain doubled, the Department of Agriculture said in separate reports today.

• Tighter supplies will boost the cost of feed for hog processor Smithfield Foods Inc. and poultry producer Pilgrim's Pride Corp. General Mills Inc., the second-biggest U.S. cereal- maker, said today it raised the price of Pillsbury refrigerated dough to offset higher wheat costs. Globally, food prices have doubled on average in the past five years, UN data show.

• ``We can't grow our way out of this grain-shortage hole,'' said Jim Gerlach, president of A/C Trading Inc. in Fowler, Indiana. ``We'll have to price our way out. I'm bullish until furter notice. We'll see ups and downs, but the trend will remain higher.'' (read: even more inflation in the future)
• Soybean futures for March delivery rose 38.5 cents, or 3.1 percent, to $12.9875 a bushel on the Chicago Board of Trade, after earlier reaching a record $13.1025. The last record was in 1973. Futures gained 78 percent last year, after U.S. farmers planted the fewest acres in 12 years and sowed the most corn since 1944.

• Soybean oil, used to make cooking ingredients and biodiesel, also reached a record in Chicago, and soybean meal used as animal feed touched the highest price since June 1973.

• Corn futures for March delivery rose the Chicago exchange's 20-cent daily limit, or 4.2 percent, at $4.95 a bushel, the highest for a most-active contract since June 1996. Prices have surged 44 percent in the past three months, even after the U.S. harvested a record crop.

• Corn supplies on Aug. 31 will total 1.438 billion bushels, down from 1.797 billion forecast in December, the USDA said.
• ``The battle for grain acres is just starting to heat up for the year,'' Credit Suisse Group analyst Robert Moskow said in a note to investors today. ``A precarious situation gets more precarious.''
• Corn is the biggest U.S. crop, valued at a record $33.8 billion in 2006 with soybeans in second place at $19.7 billion, government figures show. Wheat is the fourth-biggest crop, behind hay, with a value of $7.7 billion.

I encourage readers to really read each bullet point; the rate of price increases seem unreal on first glance. There are only so many acres to farm - each acre chasing after subsidized corn, is 1 less acre for minor thing like food we can EAT. Corn ethanol subsidies are the classic case of unintended consequences - unfortunately the costs here will be global and hit those that can least afford it the hardest. Global demand from newly minted middle class (for better foods and meat based products) along with US misguided corn ethanol proposal is just a perfect storm. From a political and societal standpoint, we will see serious fallout from this - think of people on food stamps, people on fixed income, and the effect on food banks. People currently affected don't have much of a "say" in the political process (i.e. they don't contribute money since they are working poor) - but it will move upstream and effect more and more strata of society. Only then will it "matter". Until then? "Let them eat cake". (and more subsidies to corporate farmers)

Long Mosaic and Potash in fund and in personal account

Earnings of Interest This Week

Alcoa (AA) led us into the earnings season last week, but this week is really the first wave. Let's look ahead at some interesting names; financials will dominate the news.

Monday
Nothing too interesting - Genentech (DNA) in biotech is about all

Tuesday
Citigroup (C) - we'll see a large writeoff, news of new foreign cash infusion and possibly a dividend cut; how the stock reacts will be interesting - if we see a nice bounce we probably have put a short term low in as the "bad news is priced into the stock".

Intel (INTC) - this company has been destroyed the past week and a half. I think even if they say something like "the end of the world is not here" the stock could rally. But the stock is acting if a large earnings guide down is in store. Which is going to be the risk this entire next 4-5 weeks as we go through earnings season.

New Oriental Education (EDU) - one of the fund's holdings. I expect good things but as always it's all about results versus expectations i.e. are expectations too high?

State Street (STT) - this is an asset manager like fund holding Blackrock (BLK); pne of the few financial sectors that have held their own

Wednesday
JP Morgan (JPM) - maybe we'll get news of a buyout of Washington Mutual (WM)

Wells Fargo (WFC) - probably the best run big bank, but certainly not immune to all the issues that are and will continue to plague the consumer

Thursday
Various financial names: Ameritrade (AMTD), Bank of NY (BK), CIT Group (CIT), Comerica (CMA), others

Blackrock (BLK) - fund holding, see State Street above

IBM (IBM) - expect to see strength overseas, strength from service but weakness in hardware. This used to be a bellweather but not anymore. However I could certainly envision them saying "seeing some slowdown" blah blah

Merrill Lynch (MER) - one of the 5 investment banks - huge capital inflows, huge writedown; first of job losses might be announced

Novartis (NVS) - one of the larger foreign healthcare companies

Seagate Technologies (STX) - large disk drive maker, might push tech one way or the other

Washington Mutual (WM) - "help, someone buy us"

Friday
General Electric (GE)

Schlumberger (SLB) - large oil service name that surprised to the downside last quarter, catching us by surprise

Wipre (WIT) - Indian Outsource company

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

So those will be the names I will be watching, and many of the larger caps could move the market

Bookkeeping: Weekly Changes to Fund Positions Week 23

Week 23 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: 0.0% (vs 2.7% last week)
56 long bias: 98.7% (vs 88.1% last week)
5 short bias: 1.3% (vs 9.2% last week)

61 positions (vs 61 last week)
Additions: Mercadolibre (MELI), Zhongpin (HOGS)
Removals: Ciena (CIEN), General Cable (BGC)

Top 10 positions = 36.3% of fund (vs 30.3% last week)
41 of the 61 positions are at least 1% of the fund's overall holdings (67.2%)

Major changes and weekly thoughts
Another tough week in the markets, where the indexes performance hid the ugly truth beneath the surface. I've been typing it this week (the average stock is off 30% from October highs), and Bespoke Blog has it in graphical form here. The S&P 500 is off less than 12% from October highs but

1. Average large cap stock: -25.1% off
2. Average mid cap stock: -29.5% off
3. Average small cap stock: -35.2% off

For those who have been around a while you see I have been holding Ultrashort Russell 2000 (TWM), instead of a Ultrashort S&P500 type of ETF - my thesis in the summer was companies tied to the US consumer would be hurt the worst - since they do not have overseas sales to bail them out. Smaller companies generally fit that profile (lack of international exposure). This has proven true as the above figures show - and I will contend will remain true for the years ahead. Further, the worst performers in the fund in the past 90 days have in fact, been the small caps - think Crocs (CROX), Blue Coat Systems (BCSI), Riverbed Technology (RVBD) etc - so I am living it from the long side as well, although I tend to focus on mid caps and large caps overall. Unfortunately there is no Ultrashort ETF that focuses on the smallest stocks; even the Russell 2000 by nature includes the S&P 500 stocks. I'd prefer an instrument that shorted companies from say 1000-3000 only, and avoiding the 1000 largest companies but this is the best we have to work with....

The Bespoke entry also shows how bad each sector is doing - you'd think financials would be worst correct? Well you'd be wrong - its consumer discretionary stocks (read: retail, restaruants) at a whopping -43.4% (on average!) in 3 months. I prefer median to average because average is a bit misleading but it's ugly either way. Financials by the way are on average down -34.7% and the 3rd biggest loser is technology at -33.6%. Remember the common myth in early fall (for those blog readers who were around?)... technology is a "safe haven". A lot of myths have been blown up the past 3 months... and I contend more will blow up in the year to come. (Best sector is Utilities @ -11.4% by the way)

So all in all, this market is far tougher than it looks and the indexes are holding up far better than the average stock. When I see this sort of analysis it makes me feel even better about the fund performance the past 3 months, when the fund has essentially been flat despite being 70-90% long for that time frame.

So that's the past, where to from here? Good question. We go either 2 ways - (1) the more probable bounce, or the once every decade free fall into oblivion. Certainly we must be open to either scenario, but I have to say some stocks in the worst sectors (especially consumer discretionary) are approaching valuations even I am surprised at. That said, valuation is moot in this sector. Why? People are saying "my gosh look at this retailer, it's trading at 5x forward earnings!" Do you really think a stock with any growth component would trade at 5x earnings? No. The reality is forward earnings are still much too high... it is very probable that when we look back in 6 months, we will see (after earnings estimates are slashed for 2008) that the stock that is trading today at "5x forward estimates", will in retrospect have been trading at "15x forward estimates" (today). And the only way to get there is for earnings figures to fall throughout the year. Which was my fear entering January - companies and analysts needing to slash 2008 estimates... I just didn't expect all the *bleep* to hit the fan at once. :) With that said, 15x estimates is pretty fair for some of these stocks getting destroyed, but since we have no way to estimate future estimates of companies tied to the consumer, we have a lot more uncertainty - and the market hates uncertainty more than bad news. So we are in a vague free fall area. These stocks will bounce, they are overdue - but I expect a long period of downward and sideways action mixed in with a few periods of hectic over sold bouncing as we come to grips with a US recession.

This was also the week the "upper middle class" & "lower upper class" got hit, as experienced by the American Express warning and (I missed this at the time) but the Tiffany (TIF) warning. Tiffany showed strength (where else?) overseas... and in their NYC flagship store. Everywhere else in the USA was a major dud. Why did NYC do well (sales up 10%)? Our free falling dollar makes goods very cheap for foreign buyers - many people are now flying in from Europe for a weekend of NYC shopping and going back Sunday night - it is THAT cheap to buy our goods. But when that's your only bright spot you are in trouble. And we only have 1 NYC in this country.

Further, this was the week that people got silly and started saying that even the McDonald's of the world will see a major slowdown due to recession. Folks, if Walmart (WMT) and McDonald's (MCD) start seeing large declines in sales, we are going into something a lot worse than a recession. People still need to buy goods, and eat "something". If they cannot even afford Walmart and McD's, we need to flee for the hills entirely. So as I stated this week [No Safety, Even in McDonald's], I find this logic overdone, BUT you can't argue with fear. We unfortunately have an analyst community chock full of newbie MBA types who were in college in 2001-2002 (during the last 'recession' and stock market correction), so even a halfway decent slowdown is going to scare the lights out of them, as they have known nothing but "good times" the past half decade. So ANYTHING will look like a depression for them, considering what their baseline is. ("Oh my God, earnings growth for the S&P can actually be negative? Let me go check the textbooks for that") Last, this was the week we saw the fingerprints of the Federal government (Countrywide/Bank of America) moving from behind the scenes to out in the open. I expect to see more in the coming week, months, and indeed year as things worsen in this economy.

Looking big picture at the technical aspect of the market, keep in the mind the series of lower highs we discussed in the last few days of December on the blog.



We have a lot of room to the upside, before getting to the next "lower high" - probably roughly 1470-1480. It would not surprise me at all (and I am positioned this way) if we see that "bounce" and make a run back to those levels. At that point I will be lightening up on long positions and reintroducing a heavy exposure with Ultrashorts; concurrent to when CNBC will be telling you the correction is over, recession is avoided, the Fed saved us, and the housing boom will resume this fall. The mood will be euphoric... when you see all that, just remember how you felt the last 2 weeks. At this point until I see this series of lower highs broken, every rally will be a time to lighten up, and reintroduce sizeable short exposure to the fund as portfolio insurance. It would be the time (if I had the ability to short individual names), a time to short the names that are most reliant on the US consumer. Etc. This pattern will continue until it changes.

For the fund, we took some hits this week expecting a washed out bounce sooner or later. Again, it may never come and we continue into freefall but that would be an atypical move... and positioning for something that happens once out of every 50 times is not really a great strategy. I did kept buying into downward moves into the 'best merchandise' and have been able to load up large exposure in some of my favorite names. I do expect this to pay off in the coming weeks (barring free fall and panic selling in the market). The stocks that did move this week were many times sectors I would not touch except for a very short term trade - hence not really in the style of this fund. For example, we are seeing some bottoming action in financials. I've scaled back my Ultrashort Financial (SKF) to almost nil due to this. In fact, for those with very short time frame (say 1-3 weeks), the exact opposite - Ultra Financial (UYG) might be a good trade - it closed Friday @ $36.51 - it would not surprise me to see something like this bounce 20% as we get an oversold bounce in this area. Same with some retail, homebuilder, and restaurant stocks.

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

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

1. Monday, I cut back my exposure to the Indian Banks, ICICI Bank (IBN), and HDFC Bank (HDB) in the face of ICICI Bank's 10% move up, on news of a potential IPO of its brokerage unit
2. I was going to add some Crocs (CROX) as it went into a free fall based on some patent news, but instead other parts of the market starting selling off randomly based on emotional selling, which was a moment I was waiting for, so I sold down my Ultrashort positions quite severely, along with MedcoHealth Solutions (MHS) and added to 11 current positions along with starting a new position in Latin America internet name Mercadolibre (MELI). This name was only recently added to Marketocracy.com database so I was unable to buy this stock when I first identified it in the mid/upper $30s. Since then (only a few months ago) Cramer mentioned it and it hit $80. With this fall back to upper $50s I decided to bite the bullet and begin the position even though its much higher than the price I wanted to start the position at a few months ago.
3. Tuesday, I closed the small position in networking stock Ciena (CIEN) with a tidy profit. This stock, held since the early days of the fund, actually did very well in the fall, at which time I booked the majority of profits. However, right now the perception is all networking stocks are going to zero since all buying will stop of every router, optical switch, et al in the world. Or at least the stocks are trading as if this were true. Since I want to keep the # of positions manageable this was a logical candidate to go, ALTHOUGH I think its value here is very good. But I had cut the position down to such a small exposure and with my favorite stocks finally getting a haircut, I decided to devote more money to those more favored positions.
4. I continued cutting back on LDK Solar (LDK) - anticipating further correction in the sector and with the some of the leadership stocks in the sector, I moved some funds to Suntech Power (STP) during the week instead. I still find LDK Solar and Trina Solar (TSL) to be the 2 value stocks in the sector, but it appears I might be the only one. When the charts shape up better, I will review both these names again, but my overall exposure to this sector which is full of trigger happy investors is already at near maximum for my comfort level.
5. I had cut back my Mosaic (MOS) exposure (my #1 winner in the fund) as it kept moving upward (and away from any key technical support on its chart), while the market corrected - it was actually down to below 2% of the fund last week, after enjoying the top spot for much of the past month or two. When the stock finally corrected to its 20 day moving average (upper $80s) Tuesday, I began buying and after a stellar earnings report, I pushed the position up to 3.3% as the stock was stuck near the 20 day moving average Wednesday morning. I wrote at the time "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." and "If we are fortunate enough to see a fall to $79 or so, I will make this a 6-8% type of position." Lo and behold, not a few hours later on some ridiculous "sulfur cost" excuse to drive down the stock we saw a dip to $80. That was good enough and I moved the position up to 5.5%ish of the fund. I would of added more but I ran out of cash. Since that swoon Wednesday to $80 the stock has returned to nearly $100 or a 2 day return of nearly 25%. This appreciation alone has added about 1% exposure to the fund, as it now sits at 6.5% of the fund. I still contend this name is vastly undervalued at 17x 2008 estimates (which are still too low) and I will be looking for a price target of at least $120. In fact, if not for such a putrid market I think Mosaic would of been up over $100 immediately following the earnings release. Needless to say I found a price point of $90 to be a gift, not to mention $80. I expect Mosaic to claim the top spot in the fund for most of the next 3 months, although if my price target is achieved I will be cutting back. Not due to the stock itself, but due to my assumption the stock market will continue to have a rough first half of the year, and we need to book gains as we get them.
6. Along with a large lot of Mosaic, I added to 5 other names Wednesday during yet another correction in my favored sectors - again I created a list of 12 Stocks to Buy on a Pullback and most of these were names on my list. Hence when the pullback is happening, the gameplan went into effect. Even though it hurts performance in the near term.
   
7. I did add a small cap stock to the fund, Zhongpin (HOGS), a Chinese pork producer who is a niche player in the very fragmented industry; as the stock was down 12% Wednesday. However, as Chinese become more affluent and meat consumption increases; and this company goes about its strategy of consolidating and rolling up a part of the industry (even if its 10-15%) it would be a huge win. If it works. I am willing to put a small stake towards this end as so far the results as a public company have been impressive.
8. I cut back severely the formerly #1 position in the fund, Ultrashort Real Estate (SRS) - I had cut quite a bit last week as well, but with the ETF skyrocketing 27% in a week, and 36% in 2 weeks, it was time to wait for a retrenchment. Already the ETF is back down to $127s. I am hoping for some "hope" to return to the market, and the price for this ETF to be driven down, so we can repeat the same success in a few weeks.
   
9. Thursday, one of my top 10 positions, Illumina (ILMN) announced a settlement to a patent dispute, and the stock rocketed up >20%. Short of cash, and wanting to lock in this large gain, I cut back the position severely moving it from 3% to 1.25% of the fund. I am hoping to buy back this stock in the lower $60s at some point in the future. I am just wary of large gaps in charts (when a stock opens many points above a previous close). Plus as said, I am very short on cash at this time, and I am rolling profits from winners into stocks that have been correcting severely.
   
10. I closed a long term position in General Cable (BGC), another stock I like for the long run. Similar to my sale of Cummins Engine (CMI) in the fall, this is a name I like but "perception is reality" and perception is that these industrial stocks won't be able to do well in a slower growing US economy, and their international exposure won't bail them out. At this point I am not going to argue with the market, but perhaps in back half of 2008 as more of this slow down is priced into the stock market in general and people realize every company in the world won't be going to $0, we can return to these type of names. Again, it was a smaller position, and while I expect it to bounce from its very oversold situation I have a lot of stocks that will bounce from oversold situations that I have more near term believe that "perception" won't ruin their stock performance in the next 2-4 months as much. So I am focusing on those.
11. Friday, I was adding to Mastercard (MA), as the bad news in credit card companies took Mastercard down with them in a "baby thrown out with bathwater" scenario. Without any credit risk, Mastercard is immune. However a bear case against the name could be made to the tune of "as the American consumer is hurt by the economy he will stop spending, even with credit cards". If this indeed true, as I wrote above, we have a lot more to worry about than a 'recession'. If a strapped US consumer gets to the point he stops going to McDonald's, stops shopping at Walmart, and lacking cash stops using credit - well folks, you want to be in gold and bonds. And nothing else. But this is the scenario we've turned too... when 4 weeks ago the same analysts were saying nothing was wrong. Emotional extremes in both cases - the truth is somewhere in the middle.
12. With the last of my cash, I added some to my New Oriental Education (EDU) position ahead of next week's earnings.
    

57 Stocks Returning >8% Last Week

Always some winners out there - as I stated last week the indexes were actually not down that much; but a lot of individual names that had previously been holding up took some serious hits. Below is a list of 57 stocks that returned >8% and also

1. Market capitalization >$2 Billion
2. Average trading volume >100K
3. Stock price >$10

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) - a lot of "safety" or "washed out" (i.e. airlines?) type of stuff moving. Good moves in healthcare stocks (I count at least 17 healthcare related of the 57), Indian stocks, and as mentioned during the past two weeks we are seeing Chinese large cap stocks perk up. And another winning week for... gold.

Again a list dominated by gold, airlines (based on merger rumors), washed out financials making a dead cat bounce, and healthcare (defensive) is not exactly something bulls want to see.

Of the winners we own below, I cut back Illumina (ILMN) [Illlumina Up 20%, I am Cutting Back], after its big spike on news of patent dispute win (this was a 3% type of position ahead of the surprise news), and also cut back on some the Indian exposure - moving funds from "winners" to stocks not doing well at this time and offering better value.

Symbol	Company Name	1 Week %
TNE	Tele Norte Leste ADR	30.3
NWA	Northwest Airlines Ord Shs	24.5
ILMN	Illumina Inc	23.5
SLM	SLM Ord Shs	21.1
GOLD	Randgold Resources ADR	17.4
IBN	ICICI Bank ADR	17.0
CLWR	Clearwire Corp	16.8
HWAY	Healthways Inc	16.4
DAL	Delta Air Lines Inc	15.8
CHU	China Unicom Depository Receipt	15.8
EJ	E House China Holdings Ltd	14.0
PPDI	Pharmaceutical Product Development	13.6
AUY	Yamana Gold Inc	13.5
SEPR	Sepracor Inc	13.1
NETC	Net Servicos de Comunicacao ADR	13.0
DLB	Dolby Laboratories Inc	12.7
MYL	Mylan Ord Shs	12.5
WM	Washington Mut Ord Shs	12.4
KGC	KINROSS GOLD CORP	12.3
CZZ	Cosan Ltd	11.9
VFC	VF Corp	11.9
CIT	CIT Group Ord Shs	11.5
CHA	China Telecom ADR	11.5
APOL	Apollo Group Inc	11.2
FII	Federated Investors, Inc	11.0
CAL	Continental Airlines Inc	10.7
KG	King Pharmaceuticals Inc	10.7
HDB	HDFC Bank Ltd	10.7
STJ	St Jude Medical Ord Shs	10.6
BAX	Baxter International Ord Shs	10.4
RHHBY	Roche Holding 144A ADR	10.0
DV	DeVry Inc	9.7
LLY	Eli Lilly and Co	9.7
TSU	Tele Celular Sul ADR	9.4
SBUX	Starbucks Corp	9.3
CELG	Celgene Corp	9.3
HLF	Herbalife Ltd	9.2
UBB	Unibanco Depository Receipt	9.2
AGN	Allergan Inc	9.0
AZN	AstraZeneca ADR	9.0
CAH	Cardinal Health Inc	8.9
HMY	Harmony Gold Mining ADR	8.8
MER	Merrill Lynch Ord Shs	8.8
BVN	Buenaventura ADR	8.6
AU	AngloGold Ashanti ADR	8.6
IFN	India Fund ETF	8.5
OKE	Oneok Inc	8.5
MLEAY	Millea Holdings ADR	8.5
SGP	Schering-Plough Ord Shs	8.5
ABT	Abbott Laboratories	8.4
SNV	Synovus Ord Shs	8.2
PDS	Precision Drilling Trust	8.1
RPM	RPM International Inc	8.1
HNT	Health Net Inc	8.1
WYE	Wyeth Ord Shs	8.1
STRA	Strayer Education Inc	8.0
ABC	AmerisourceBergen Ord Shs	8.0