Bookkeeping: 'Rising Tide' Performance Week 25

Week 25 performance of the mutual fund

Comments: After a terrible showing last week, we had a nice rebound this week and were able to make up some lost ground. Monday the markets here were closed, but world markets imploded. Premarket Tuesday was ugly ....we had what appeared to be a reversal day Tuesday, after a bad open (despite 'surprise' Fed cuts), but closed down "only" 1%ish. But then we had another ugly start to the day Wednesday... finally, later afternoon we got the true reversal with an intraday swing of 600 points on the Dow. Thursday was a nice day, but these rallies are short lived and Friday things started to sputter despite great earnings from bellweather Microsoft (MSFT).

This week the S&P 500 was up 0.4% and and Russell 2000 up 0.6%. After 2 poor weeks Rising Tide Growth Fund rebounded and finished up approximately 2.5%. (note: I do not know the exact closing price this week because my results do no reflect the 2:1 split in Foster Wheeler accurately - I believe an accurate reflection of Foster Wheeler value would add 0.2% to the fund's return, as the data is only showing half my position). So a return to winning ways after 2 sagging weeks. We have 1 more week to go before my 2nd Quarter closes, in week 26.

In terms of fund positioning, the intraday swings were enormous especially Tuesday and Wednesday. However, once the market found any sort of footing the majority of the fund holdings roared back, led especially by both fertilizer and coal. We did take a sizable hit in Apple (AAPL) however, as guidance was "not up to expectation". However, I do believe we are now within a bear market [S&P 500 in Worst Condition in Half a Decade] and until the technical condition on the indexes reverses I'll continue that stance... so I took this upswing as an opportunity to reposition the fund nearly to how I had it entering the month of January, and made large scale changes today (Friday) to the composition of weightings. I think many of the sectors that rallied best this week (financials, home builders, retail, etc) still have a lot more trouble ahead in the months to come, especially if my recessionary outlook comes true. I believe we have gotten used to short and shallow recessions and assume this one will be the same. But perhaps it won't be. There have been a LOT of government interventions, especially this week to try to help the market / economy. At some point that gets priced into the market, and the reality of what *is*, underneath the interventions, must be considered.

Price of Rising Tide Growth: $10.864*
Lifetime Performance to date (vs Aug 3, 2007): +8.64%*
(does not reflect true value of FWLT holdings)

Comparable S&P 500: 1,330.6 (-9.19%)
Comparable Russell 1000: 724.2 (-9.04%)

Fund return vs S&P 500: +17.83%
Fund return vs Russell 1000: +17.68%

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

Short Exposure Update

As mentioned the past few days, rallies are not to be trusted in bear markets, and "buy and hold" really doesn't work. Each rally will bring you in, and then crush you. Over time this just saps your will. I speak from experience.

I had hoped we'd rally to at least early next week, and then most likely a sell off on the Fed meeting but it looks like we cannot even hold a rally that long. This action in Microsoft (MSFT) is simply troubling - if you cannot buy a company that shot the lights out and expect gains, what can you buy?

Anyhow, I positioned the fund as I had hoped to have it positioned around next Tue-Wed. Since things just don't seem right, I went back to about a 20% short exposure which is how I entered the month of January. However, I cut back these positions much too early about the 2nd week of January and got hit with the brunt of the selloff last week with very little insurance. One misstep like that wasted away about 4 weeks of good work. This time around I plan to just sit with this short exposure to help offset damage to long positions in case of a selloff. Here is how I currently have it set up:

UltraShort Real Estate (commercial) 4.4% of fund
UltraShort Financial 4.3%
UltraShort Russell 2000 4.2%
UltraShort Technology 2.7%
UltraShort Emerging Markets 2.5%
UltraShort China 2.4%

In total about 20.5% exposure. I don't have cash up to the level I was hoping (20%) because we turned direction so promptly, but at least now I have some insurance. It won't offset the type of damage we saw last week (when individual long positions were being hit for 10-12% a day) but it will help. It is just very difficult to be long anything right now as the rallies are very short in duration and unless you time it perfectly (which is nearly impossible) you won't have success.

And if the market goes up? I'll be happy to lag the market upward for now, as I am confidant that when we eventually turn back to a real bull market the type of stocks I own will out perform. I just do not want to give back 6 months of hard work and out performance in a span of a few weeks like we had been doing the past 2 weeks. So hence this positioning which will continue for the foreseeable future.

I am just wondering what the next catalysts are? The government is running out of bullets. What else can we bail out, send checks to, or shelter from? At some point we have to face the music. I think all of Washington just wants to make sure it is after November 2008.

I Can't Believe this Pig... err HOG was Up Today - Harley Davidson

As I wrote yesterday

Harley Davidson (HOG) has been in a tough spot and is the prototypical consumer discretionary stock that this economy will hurt but in "Fed cuts solve everything" thinking we have the past 2 days I guess it might say something people will like (but needs to be shorted on each spike)

Somehow the stock was up early today, from a quick glance the company offered guidance that was not that bad for 2008. Hah! And analysts bought it. Just like they bought the retail, financial, and restaurant guidance about 9-12 months ago. Seriously! The market never ceases to give us gifts like this. ;)

Talk about the prototypical company to short in this recessionary environment where the consumer is getting squeezed. I cannot short individual names, but there was a great opportunity to short this at $42 this morning (it's already down to $38). This is like the men's version of Coach (COH) - any spike, it should be shorted. At least for another year. I can't think of another company that better represents the excesses of credit (house ATM, over spending) we've had over the past decade.

• Harley-Davidson Inc. says riders concerned about the economy are throttling big purchases, like the company's classic motorcycles, sending its profit down 26.3 percent in the fourth quarter.
• Sales in the U.S. were down 14.2 percent in the quarter, the company said Friday. That outpaces the domestic heavyweight motorcycle market's fall of 9 percent.
• CEO Jim Ziemer called the retail environment "challenging" for this year and said dealers report consumers are worried about the direction of the economy. They're holding off on larger purchases, like Harley-Davidson motorcycles, which start at $6,695 but can often cost more than $20,000 fully loaded.
• But the company said it expects moderate growth in both earnings per share and revenue this year. (this is technically called "DREAMING")
• Harley-Davidson's shares rose as much as 5.8 percent to $42.45 (more dreaming) in trading earlier Friday, but by the afternoon they fell $2.18, or 5.4 percent, to $37.94.

I mentioned Harley back in September [Sept 8 - More Retail Tells? Office Depot and Harley Davidson] At the time the company lowered guidance for the year, had bad results, and withdrew guidance for 2009. 35% of purchases are people in subprime category. Ding Ding, we have a winner. The stock dropped from $54 to $50 that day in Sept... still a great time to short :)

Again, I can't short any individual names in this Marketocracy.com account but in a real mutual fund this would be the prototypical short to overlay against long positions. Easy pickings.... and another opportunity today. As I've written, we are going to see very similar charts to the homebuilders in retail, restaurants, and financials - long downswings, punctuated by oversold rallies (short covering) - each of those rallies can be shorted. One day it will stop working, but not for quite a while.

No position but wish I could be short

Some Comments from Caterpillar on Worldwide Growth

As I wrote earlier this week you can learn a lot about macro themes and sectors you are interested in by listening to some of the global conglomerates. Earlier we had United Technologies (UTX)...

United Technologies executives sounded confident that the global infrastructure build-out was on track. In other words, skyscrapers relying on Otis elevators would keep rising over Chinese cities at a rapid rate.

"The trends that are driving growth in Asia do not look to slow down in the near term," Hayes said, pointing to 17 million people per year in China migrating from farms to factories.

"Urbanization is a powerful force, and it is what has been driving the business really for the last five years," both sales of Otis' elevators, Carrier's air conditioning equipment, and aerospace, where India and China are putting in record aircraft orders. "So, Asia looks to remain solid," he says.

Now some more from Caterpillar (CAT)

• The company said it expects overseas sales to drive solid profit growth this year as well, with the United States teetering on recession.
• "Global markets for mining, energy and infrastructure development are booming," he (CEO) said in a statement.
• "We expect the world's robust investment in infrastructure to continue well into the next decade, and we'll need more capacity to serve our customers," he said.
• Peoria-based Caterpillar's sales by region illustrate just how the weakening American economy affected the company. Revenue from the sale of heavy machinery such as bulldozers dropped 7 percent in North America but rose by 40 percent in Asia and the Pacific and 32 percent in Europe, Africa and the Middle East.

*******

Takeaway: I have a lot of global infrastructure stocks in the portfolio. Right now with pervasive fears and "baby in the bathwater" thinking these stocks continue to get punished. So while we can be correct in the fundamentals, the "perception" is the growth in these end markets is coming to an abrupt end, and soon. We've discussed how false this is, in the past on the blog, and we can see evidence to the contrary in what the conglomerates are saying as well. [Honeywell (HON) is another that reported strong global growth today]Doesn't mean investors will care right now, but we can see from various sources that the growth is there, and continuing and will for many years. Will there be slowdowns? Of course; some of these countries are growing at unsustainable paces. But they will continue to grow at a pace we could only hope for here. Those with cash, will eventually rule. And these countries are loaded with cash.

Once the market calms down and comes out this other end of 'adjustment' these infrastructure names should see a very good return. But they certainly could remain under pressure for the foreseeable future. But not due to fundamentals... simply perception.

I will say this however; without the global growth story these US companies would be in much worse condition - and the stock market would be far lower. That is the only thing saving the bacon of most of these companies. And again, while this global growth will continue it will surely moderate - which could be an issue in the next 6-24 months.

Bookkeeping: Starting New Position Ultrashort Technology (REW)

I've been sticking with 5 Ultrashorts - covering commercial real estate, small caps, financials, china, and foreign emerging markets... I am going to add a technology Ultrashort ETF to make my exposure 6 names.

I am starting a position in Ultrashort Technology (REW) which can work as a hedge against my Apple, Research in Motion, etc type of positions. I'm beginning with a simple 300 share exposure (roughly $21K) or 1.9% of the fund but as with all my Ultrashorts I add/decrease these incrementally often. EDIT: Instead purchased 425 shares or 2.7% position. So if the market weakened considerably as the day passes, I'd probably add more here. The current price is $68s/$69s... in the panic lows Tuesday this spiked to low $80s.

Here is a link to the ETF's home page

and it's goal is as follows
UltraShort Technology ProShare seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Technology IndexSM

The Dow Jones US Technology Index is as follows (top 10 names)
MSFT 13%
AAPL 7.6%
CSCO 7.2%
GOOG 7.1%
INTC 6.8%
IBM 6.5%
HPQ 5.7%
ORCL 3.9%
QCOM 2.8%
DELL 2.1%

I actually like many of the names above from the long side, but again if we get some more of that panic selling, at least I have some exposure to the inverse of these positions. The reversal today in Microsoft (MSFT), which is actually down right now, after a stellar earnings report is in a word... troubling. Again, this at least gives me some NASDAQ specific "insurance".

The other name I was considering was Ultrashort QQQ (QID) which is double the inverse of the Nasdaq 100 Index

The top positions there are as follows
AAPL 13.7%
MSFT 6.5%
GOOG 5.6%
QCOM 4.1%
RIMM 3.6%
CSCO 3.3%
INTC 3.1%
ORCL 2.7%
GILD 2.4%
EBAY 1.9%

So its essentially the same theme - I overlayed the performance of the 2 instruments over 3 month and 6 month time frames and they were relatively similar; so I could of picked either one and probably will get a similar result.

Long Ultrashort Technology in fund; no personal position

Walmart (WMT) Gunning for Pharmacy Benefit Managers

A reader noticed the weakness in MedcoHealth Solutions (MHS) - since I had cut this to a measly 10 share position I was not watching it very closely. But it is down from (split adjusted) $106 to $94 in the past week, with no rebounding the past few days. I had bought this stock as a 'safety play' [2 New Positions in the Healthcare Field], but once again news like this from Walmart shows nothing is really safe out there, and very little can you buy and hold for 5-10 years. The competitive landscape seems to change at light speed.

• Wal-Mart Stores Inc. is stepping into the lucrative pharmacy-benefits arena, in a move likely to shake up a field that has been dominated by just a handful of players.
• In a speech yesterday before 7,000 Wal-Mart store managers at a meeting in Kansas City, Mo., Chief Executive Lee Scott said Wal-Mart is initiating a pilot program to help "select employers ... manage how they process and pay prescription claims."
• Pharmacy-benefit managers, or PBMs, are the companies behind the cards that insured patients present at drugstores in order to fill their prescriptions. Most U.S. employers contract with PBMs to provide prescription-drug coverage to their workers, and in exchange, the PBMs promise to negotiate lower prices from retail pharmacies and obtain rebates from drug manufacturers. PBMs also may own their own mail-order pharmacies, and increasingly make much of their profits from big markups on generic drugs.
• A record number of blockbuster drugs are going generic, fueling strong profits and rising revenue among the PBMs. CVS Caremark Corp. is expected to report revenue of $76.13 billion for 2007, while Medco Health Solutions Inc. is expected to post revenue of $44.7 billion and Express Scripts Inc. $18.4 billion, according to Morgan Stanley. Combined, the three companies processed or filled 387 million prescriptions in the third quarter of 2007.
• Wal-Mart could take a chunk of that; the company is already the third-largest pharmacy in the U.S. in terms of sales, after CVS and Walgreen Co.
• "Our conversations with employee-benefit managers suggest they're open to alternative approaches, so there's room in the marketplace for a different type of offering," says David Veal, PBM analyst at Morgan Stanley. "As the U.S. economy gets tougher, employers are going to look for new ways to control costs, and Wal-Mart will find a receptive audience" for new solutions to high drug prices. But, he notes, Wal-Mart will still have convincing to do. "Traditionally, employers are risk-averse; they're hesitant to move just on price."

While any serious steps will take some time to work out, "perception is reality" and if perception is Walmart is gunning for your business, that can hurt the stock. So we can see a situation where investors overreact to the situation on the ground but that doesn't matter to us as investors - if we are in a stock that is unfairly taken down - well we still are sitting on a loss.

So at this point, I am exiting my tiny remaining position in MedcoHealth Solutions (MHS) by selling these last 10 shares. The stock served its purpose as it held up very well while the rest of the market was selling off and since I sold when it was holding up I locked in a decent profit. I'm trying to find some safe havens out there, but after watching the performances in this last selloff, nearly nothing is truly safe. [Even Altria is Getting Hit & Some Walmart Commentary]. I am still considering Altria (MO), although I'd prefer the Philip Morris International IPO... or even Walmart (WMT) itself as people become poorer on an inflation adjusted basis. I'm going to wait until February to assess Walmart when it has its earnings but the relative strength in the stock has been quite impressive (granted it doesn't move up a lot, but it sure doesn't fall either) [What Safety Sectors are Really Working? And Which are Hoaxes?]. What I really want to find is what can still do well as inflation attacks the bottom 80%. It seems like names like Walmart and McDonalds (MCD) are natural selections as people downshift to cheaper fare...

No positions

Bookkeeping: Selling 50% of Solarfun Power (SOLF)

I explained the reasoning for this yesterday in 'Solarfun Power (SOLF) Plunges 15% on Convertible Debt Offering'

I have a 2% or so position in this name - since this stock is now "cheap" and has an earnings report coming out in a month which can move the stock significantly I will await that, but under normal circumstances I cut bait immediately the minute I see convertible debt issued. It's toxic for long common shareholders in my book. That paragraph I highlighted in red explains exactly why. Only the fact this stock has the ability to rise 30% in a day leads me to hold these shares... but I am displeased in a very large way.

This name has been a fan favorite of the retail investor the past few months, so it could certainly rise and ignore the convertible, but if past experience is any gauge, the stock will be under pressure as institutions short common. Convertible debt simply is NOT shareholder friendly so I don't want to stick around in this name.

Instead of selling at the panic lows yesterday around $14, with the stock rebounding to $17 today I am going to take off half my shares and hope for $18-$19 sometime in the next few weeks to get rid of the second half. If it continues downward from here, well then I've at least reduced my exposure. So I'm still taking a heavy loss, but you cannot game a convertible debt offering - it happens out of the blue and you are stuck. So I got stuck here and I am going to pay with a meaningful loss.

I sold 650 of 1300 shares of Solarfun Power near $17. This reduces my exposure to the name from 2% of fund to 1%. Most of my purchases were in the low to mid $20s so I am taking roughly a $3500 loss on this batch. Luckily it is offset by some sales in the $28-$30 range, but it still does not sit well. Hopefully this company reports a blowout earnings and retail investors climb back in and can somehow overpower the institutional shorting, but for now I am going to set a limit order to sell the remaining 650 shares at $18.75 and we'll see it if triggers sometime in the coming weeks.

Long Solarfun Power in fund; no personal position

Bookkeeping: Closing Agco (AG)

I am going to take this opportunity to sell the remaining 200 shares of Agco (AG) as the stock is up nearly 5% today. I initiated this position in mid November [Initiating Agco (AG) Position] and after doing very well in this name as the stock breached $70, gave up all those gains in the past few weeks. I am now exiting with a small gain (under $1000) overall.

Let me give you my thinking. I have been and continue to be an agricultural bull. I had loaded up on the fertilizer names early, and wanted to diversify across agriculture into some equipment names as well. In early October I began a position in CNH Global (CNH) after debating whether to go into Deere (DE), Agco (AG), or CNH Global (CNH). [Still Not Enough Agriculture Exposure - Adding a New Name: CNH Global (CNH)]. Then after yet another great report from Agco (AG) [Agco Reports a Great Quarter and Agricultural Bull Keeps Going] in late October, I decided to add that name a few weeks later. I still believe in this group, but the market seems to be very antsy, and I suppose any fears of global slowdown will push these stocks down, although I've mentioned many times, I believe agriculture is in its own secular bull market. But what I think, and what a panicked market thinks are 2 very different things.

Since the CNH Global report [Closing Last of CNH Global] early this week, Agco has been suffering collateral damage. With earnings 2 weeks from now for Agco, and an antsy market I don't really want to hold this name into an earnings report, and make a small gain turn into a loss. So despite the very good valuations in this group, I am going to stand aside for now and re-assess. I like the fertilizer names far more than the equipment names because equipment has issues such as higher input costs (steel, petrol products, etc) that affect margins negatively, whereas the fertilizer names are simply immune to just about everything. So I might just concentrate on those names even though I like the whole space.

Again, I find nothing wrong with these equipment names, but the market is not treating them very well despite what I'd consider to be low valuations. As you can see, Agco (AG) trades below the 50 day moving average, and has not bounced much the past 2 days when many other names have put on very large moves. So I will put in this in the ever growing pile of "better safe than sorry" moves. Certainly Agco could post a great earnings, make all fears disappate and go up 20% in a blink of an eye in 2 weeks. But it could suffer the same fate as CNH Global as well. With the market being so moody I don't want to suffer the consequences of a 50/50 outcome; so I am exiting at this point and will re-assess at a later date.

I sold my last 200 shares in the mid $57s.

No positions

Bookkeeping: Trimming Some Positions

Well we are having quite a day today - where the action underneath the indexes is far more positive than the indexes indicate. Essentially all we are doing is making up a lot of lost ground... ground that we had no right to lose in many of these names in my opinion. So making up for "panicked" times. But apparently all the fears are gone just like that. What I am essentially doing today is selling down some positions to raise cash; positions bought during the panic lows and now locking in those profits.

At this point, as mentioned yesterday, these long positions have been so unfairly beat down I don't want to liquidate too much since they can rebound quite a bit just to get to fair value - which appears to be happening yesterday and today. If we have 1 more day like this Monday I will become more aggressive. Next week we have aside from Fed meeting the "all important" monthly jobs number Friday - a number that is useless but definitely moves the markets. Jobs are a trailing indicator plus in this specific report the birth/death adjustment can move the report 100-150K in any direction anyhow, so I don't take any stock in it, but since the market does, you have to be cognizant of it.

Again my transaction rate is going to be increasing in the near term as I believe we are simply setting up for another fall, so I am going to simply continue to sell off bits and pieces into these rallies.

I've taken some profits in Mosaic (MOS), Potash (POT), Consol Energy (CNX), Mercadolibre (MELI), Blue Coat Systems (BCSI), Peabody Energy (BTU), Riverbed Technology (RVBD), and Research in Motion (RIMM)

When all is said and done I will still be keeping the fertilizer names at the top of the portfolio, just in smaller scale than they currently are - as we saw this past selloff, nothing is immune in panic - even the best sectors who are recession proof. Hence I don't want to walk into a buzz saw with a 9% allocation in Mosaic (MOS). Last, I am assuming we will sell off - I certainly could be wrong on that too, and the "bottom is in" etc etc. But until we make new highs over previous highs I will continue on this assumption.

I'll continue to look for candidates to trim today through Tuesday.

Long all names in fund; long Mosaic, Potash, Research in Motion in fund

Earnings Update

Quick look through the names yesterday mentioned

Nokia great, Broadcom great, Juniper great, Microsoft great

I thought the world was ending? Hmm... that's what the pundits told me. Strange to see otherwise. Or at least not until 2 weeks from now when we can begin hand wringing and panic cycle all over.

MEMC Electronics should put a spark under the solar names

Drug research outsourcing is just incredibility hot - Parexel (PRXL) is the last to just explode with great earnings. These stocks really interest me, but I've held off due to valuation for the past 8 weeks; they just continue to go up and held up very well in this last selloff.

Tomorrow is a quiet slate, with some companies I am not too hot on, but Microsoft's report should buoy the market.

Caterpillar (CAT) could throw a wrench due to construction business, Harley Davidson (HOG) has been in a tough spot and is the prototypical consumer discretionary stock that this economy will hurt but in "Fed cuts solve everything" thinking we have the past 2 days I guess it might say something people will like (but needs to be shorted on each spike), and then another solid industrial name in Honeywell (HON). Nothing too exciting here but some big names certainly in CAT and HON.

I'm going to stay relatively constructive through the Fed meeting next week but from there will be going to a more cautionary stance. We've used up a lot of catalysts here in the past few days, and within the context of a bear market the spikes will be very violent but still need to be sold. So we'll look to build up the Ultrashort and cash positions more next week, and start being more cautionary. I don't really want to do wholesale selling in the long positions for a bit more since they dropped to such panic levels that valuation are extraordinary (and nonsensical) so they still can make very large moves just to get back to a "fair level" value.

It still will remain a very interesting upcoming months and I think "buy and hold" investing right now is not going to work very well; it surely hasn't since last summer....

How Quickly Fear Turns to Greed

.... 26 hours to be exact...

The same names no one wanted 10-15% lower yesterday are now everyone's favorites again a day later....

.... oh well, at least it's not opposite day again. Was starting to feel like the Twilight Zone yesterday.

p.s. as an aside Foster Wheeler (FWLT) split 2:1 earlier this week and the results are not reflected in my Marketocracy.com performance, so it looks like I am losing quite a bunch on this large position. Hopefully this gets fixed quickly...

Can't Resist Suntech Power (STP) at these Prices

I cannot resist buying the market leader here near $50-$51s. Adding 200 shares at these fire sale prices. This is the price this stock was trading, 2 YEARS ago. :) (and yes it was overvalued then)

BOB - Best of Breed. After all these 2nd and 3rd tier names get wiped out over the next few years, Suntech Power (STP) will be cleaning up the mess. Maybe not as sexy as those 2nd and 3rd tier names, but I am confidant it will be around in 2012, unlike many of the other names. At some point, investors will begin to differentiate between junk and quality in this sector - and when that day comes, STP will benefit. For now, too many junk companies exist in this space sucking up the oxygen. I expect by 2011 a few will be trading on the pink sheets.

Long Suntech Power in fund and in personal account

Bookkeeping: Reducing 2 Names

I am reducing 2 names for different reasons, along with raising some cash

1. Mercadolibre (MELI) - simply because I have a nice quick gain on this very volatile name I want to lock in. It has a very high multiple, and an even higher 'beta'. It dropped as low as $40 in the worst of the selloff Monday and is now up to $56, so I am going to layer out of part of this position.
   
2. Mastercard (MA) - the way Apple (AAPL) has been treated has me wondering if Mastercard could await the same fate. All either company does is execute but both are not 'dirt cheap', and when people want to find an excuse to sell or a fly in the ointment they will find one. Earnings are next week, and I don't want to get "Apple'd" twice in a row here. So I think my current strategy is to ratchet down exposure severely ahead of earnings, and then if the market says "we won't hatchet you" I will just get back into this position (even if I have to pay up from where I am selling today)... all it costs me is trading costs to do this strategy. And if it is hatcheted, then I can buy back post hatchet job at a lower price. The stock has held up remarkably well during the selloff, which makes it a perfect candidate to be slashed for "no good reason"... just like they can take down fertilizer stocks due to "potash inventories", or infrastructure stocks due to "well these good times cannot continue". I am sure we can manufacture a reason to hate Mastercard as well in this environment if we really work hard enough. And earnings season is just the time to manufacture some fear factor. So in an instant MA can go from $190 to $160. Remember we have to fight "shadows" in this environment, not just real risks but those imagined - any shadow could bring death, destruction and pestilence. Again, if the shadow does not appear, well then we can buy back these shares with the risk of earnings behind us. Every earnings season is so very risky because people treat stocks so poorly on any bad line item or phrase not up to satisfaction, but this earnings season is particularly awful. Even good earnings and guidance is trashing some stocks. So with Mastercard, I'd rather pay 10% higher post earnings if necessary to avoid some of the carnage out there. We can see technical resistance for Mastercard is $190 (the 50 day moving average). I'll again place this transaction under "better safe than sorry" - I started the Mastercard positions from day 1 in the fund near $130 (and I plan to hold for a very long time) so I don't want to see all these gains evaporate in 1 week.

So my trades are as follows

MELI Selling 200 of 600 shares (33%) in the $54-$55s

MA Selling 100 of 165 shares (60%) in the $187s (I did just add to this position on Jan 11th @ $185)

This raises a nice batch of cash - well over $30K.

We'll monitor things from here. I remember back in August when we were in a similar situation I was selling a lot of items at "break even" just to get back to some cash since the drop was so frightful, and was piling into a lot of Ultrashorts only to watch the market ramp for 8 weeks on Fed cut Kool Aid. So while we have to be cognizant that we can return to another downturn quickly (fear), we also have to respect greed - a lot can be quickly forgotten in a short time and once a market makes a move up, people sitting on the sideline can quickly pile in and forget their fear as they don't want to miss a move.

At this point the short bucket of 5 ETFs is up to 5.5%, cash up to around 3%, so I am still heavily weighted to long. Will sit tight for now, as I said yesterday I do expect Microsoft (MSFT) to report a very assuring situation (as we saw with Nokia (NOK) this morning) post close, and it doesn't take much to turn human nature 180 degrees from fear to greed. We could see a nice run in the tech names from this, along with happiness on another cut next week from the Fed. When I look at valuations, I see a lot of cheap stocks - does not mean things cannot get cheaper (as we've seen lately) but all my caution has a lot more to do with the overall market than anything wrong with individual names I hold. While negative on the economy, I don't want to get too overbearing on that front like I was in August, only to watch the market to ignore everything in a spate of greed and ignorance. The S&P 500 can go all the way back to 1410 and only be back to where we were last week (current 1346), and up to 1460 and still be in a downtrend....

Long Mastercard, Mercadolibre in fund; no personal positions (just sold Mercadolibre in personal account on this spike as well)

They Said it Could Never Happen. Ever. They Lied.

Median Home Prices Fall Nationally for the Year

• The median price for a single-family home dropped 1.8 percent to $217,000, in 2007.

Folks, they told us it could never happen. It never happened in history (well since 1968 at least), so therefore it could never happen. This is why you have to ignore these pundits.

They also conveniently forget to mention what else has never happened; the median home price rising at levels they did from 2000-2006. I don't know the figure % rise off the top of my head, but I know the median price rise was historic and also "never happened". So when you have a bubble, and something goes up at a rate it has "never done so", a lot of "historical" things can happen on the back end. And I'll place a wager that 2008 will be a repeat - median prices will fall again.

Housing prices are still TOO HIGH for people to afford. [Analysis - What Should Median Housing Prices Be Today?] Even if we get these long rates down to 5% - it is not about mortgage rates - it's about affordability. If you force people (gasp) to come up with 5% down, and have a (gasp) FICO score of 680+, and (gasp) have documented income ... well you've just reduced the pool of potential buyers by a huge amount from "anyone with a heartbeat" in 2003-2005. So the supply/demand dynamic has shifted. Layer on top of that the fact that lenders now actually might care what happens to the loan once its originated and you have yet another limiting factor.

Current home owners are still being unrealistic about their home prices, and that is the only reason home prices have not fallen further. They are stubborn - meanwhile the home builders are slashing the prices of new homes [Builders Slash Prices]. I keep coming back to the fact, that eventually current home owners are going to wake up to the fact that home shoppers are going to go to the brand new house 2 neighborhoods over selling for 20% lower than they have their house on the market...

So a lot of people are negative on housing (finally)... except our favorite economist Mr Yun of the National Association of Realtors [Nov 14 - Housing Will be Flat Next Year! Whew!]. In today's story we get more classic Yun "While Yun said he expected sales to start to rebound this spring"... the guy is always good for a laugh... eventually he is going to be correct, I mean he has been calling for the housing rebound since fall 2006 right?

• Sales of existing homes fell in December, closing out a horrible year for housing in which sales of single-family homes plunged by the largest amount in 25 years. The median home price dropped for the entire year, the first time that has occurred in four decades. (folks its only 4 decades since that's as far back as record keeping goes)
• For the year, sales of single-family homes were down by 13 percent, the biggest drop since a 17.7 percent plunge in 1982.
• That was the first annual price decline on records going back to 1968. Lawrence Yun, the Realtors' chief economist, said it was likely that the country has not experienced a decline in housing prices for an entire year since the Great Depression of the 1930s.
• For December, sales were down in all regions of the country. Sales fell by 4.6 percent in the Northeast, 1.7 percent in the Midwest, 1 percent in the South and 2.1 percent in the West.
• The inventory of unsold homes dropped by 7.4 percent, raising hopes that backlogs that had hit record levels were starting to be reduced, a key factor necessary to prompt a rebound in the market. (yes, one of the bright spots as we have been mentioning)
• While Yun said he expected sales to start to rebound this spring, other analysts said housing is likely to remain in the doldrums throughout most of 2008, reflecting in part the credit crunch, which has caused lenders to tighten their standards, making it harder for prospective buyers to qualify for loans

Now for another myth - housing is only 4.5% of the economy so we shouldn't worry about it...

• The biggest increase (in unemployment claims) occurred in California, up 27,194, an upsurge blamed on higher layoffs in construction and service industries, and Florida, with an increase in layoffs of 8,496, which was attributed in part to higher layoffs in construction. California and Florida have been particularly hard hit by the housing slump.

Again, it's a ripple in a much larger pool. By the time the ripple hits the shore 2 miles away its quite the large sized wave. And with many illegal aliens working in construction the destruction of jobs is far worse than it appears - but of course they cannot apply for unemployment so it doesn't show. But they are consuming just like regular people so their loss of wages hurts shops, restaurants and service industries just the same.

Some people are still holding out for some sort of miracle this spring and a return to good times in the housing market. I say overlay the tech bubble of 98-00 over housing bubble of 02-06. Then realize how long it took to rebound and what a "rebound" actually means... again, not perfect parallels but when the market does come back, we are not going back to bubble levels. Not unless real wages start spiking up 7-10% annually.

Temporary Respite or Beginning of a Larger Bounce?

I don't know the answer to the above question. No one does. What I can see is are some massive short term gains in the financials and commercial real estate names - so this gives some opportunities to build up some exposure on the "insurance" side (buying some Ultrashorts to offset the long exposure). Hopefully, this is the beginning of a decent sized move up (before what I think will be an inevitable move down to follow) but in case it's not I do want to have more short exposure.

While the past few days have seen tremendous moves in the "worst of breed" washed out sectors - retailers, commercial and residential real estate, financials, etc - this is probably just a condition of short covering and dead cat bounce buying, rather than any serious turn back to these sectors for the longer term. We still have a lot to deal with in these groups. To seriously buy these areas you have to believe that financial balance sheets won't continue to degrade due to (a) more mortgage issues not just in subprime but alt A and prime (b) no increase in defaults due to consumer loans, auto loans, credit card debt, student loans, etc and (c) consumer spending will suddenly be coming back in a large way. I find this thesis improbable.

If one looks at a 18 month chart in any homebuilder, even the best of breed (for example a Pulte (PHM)) this is what I can see in store for many of the names in these sectors - a long secular downturn punctuated with huge oversold rallies. On the long side, great for short term spurts but much much easier to play from the short side. One day, one of these rallies will hold and it will be time to change the view, but I don't think this is it. With that said, others like Cramer think it is. :) So I could be wrong and "the bottom is in". Surely many of the government intervention actions we are seeing borne of late (and more to come in the future I am sure) will ameliorate the worst case scenarios but even the "middle case" scenarios does not bode well for these sectors in my book. As discussed yesterday I do think recent actions will allow those who bought homes in 2004 and previous to now recapitalize their debt (back into their homes) as they pull out equity to pay for consumption and current debt, but we still have a large swath of people under water in 2007, 2006, and parts of 2005. Plus we still have those renters and working poor with no shelter from the various storms hitting the economy.

So I will begin to layer in some short exposure here; still hoping for a more sustainable move up (and thus potentially losing money on this layer of short exposure I am adding today), but trying to focus on the big picture. Also keep in mind what has led to the fund success was this paired trading idea - buy good stuff, buy short exposure against bad stuff. This works very well, except in times the market goes haywire and "everything goes down" such as the past 3 weeks. Contrast that to December where "good macro trends" were rewarded (and thus long positions in those areas went up) concurrent with "bad macro trends" were punished (and thus short exposure in those areas went up)... so we had a perfect storm many weeks where even as the market moved sideways or slightly down, the good sectors (which we were long) went up, and the bad sectors (which we were short) went down. This is hopefully an era we can return to. But as we have seen when panic rules, nothing works and everything is sold.

So with that said, and noticing my Mosaic (MOS) exposure is approaching 9% and Potash (POT) 5%, I am going to take some short term gains out on both to raise cash, along with selling a portion of coal play Consol Energy (CNX) which has also bounced nicely. I think true value in all these names is far higher, but since I have been buying these type of names on the dips down I have some good short term gains I can "book" while maintaining sizeable long exposure for potential further moves upward. I will use this cash to start wading into some short exposure - I am buying pieces of all 5 of the Ultrashorts that have done well for me in the past - Financial, Real Estate, Russell 2000, Emerging Markets, and China.

To show how violent the moves have been Ultrashort Real Estate (SRS) peaked over $150 2 days ago and is now below $110. Ultrashort Financial (SKF) peaked around $145 and now is $105, 2 days later. Now these were "panic peaks" but even in the depths of the abyss SRS was trading around $135-$140 and SKF $125-$130. So this is quite a large discount from where they have been trading of late.

If/when the market strengthens I would like to increase this short "bucket" exposure from 5-6% to something closer to 20% (which is what I entered 2008 with), and then also build a cash stake. Again, nothing is guaranteed to us and for all we know the bounce ends here. That would be atypical, but nothing about the market the past 6 months has been typical. However things have sold off so substantially we can make a 10% gain from here in the indexes, and still be within a longer term downtrend. (which I still believe we are in). However the hope is the next move down is not quite so violent and not all stocks are considered evil from the long side. This way, good stock picking can still be rewarded.

Long all names mentioned except Pulte Homes in fund; long Mosaic, Potash, Ultrashort Real Estate in personal account

Interesting Report from Sunpower (SPWR)

Interesting reaction to Sunpower (SPWR) earnings today - I have never been a big fan of this name, because Suntech Power (STP) offers essentially the same proposition (scale/size), with far cheaper labor (Chinese), and has always traded at a large discount to Sunpower so you get a lot more 'value' with Suntech Power. [Sep 21 - Suntech Power Gets an Analyst Upgrade]

So Sunpower, the US counterpart to STP trades at over 70% of its value - both companies have similar market caps and similar growth rates - Suntech Power actually has better margins across the board.

So if this inefficiency is closed, we should see a nice ride up on Suntech Power despite its premium valuation.

I was a bit concerned last quarter with Sunpower's margins as well [Reducing Trina Solar by 2/3 Due to Sunpower] and margins are an ongoing concern in this area for me in the future, but on first glance Sunpower seems to have done very well on the gross margin line this quarter. I'll have to dig in deeper but my assumption for now is the stock is selling off on "good but not good enough future guidance", along with flat sequential revenue. Further it appears they are guiding 2008 revenue below analysts expectations.

I believe investors in this sector expect these companies to ramp up revenue at a break neck pace each and every quarter even though there are supply constraints on expansion in the industry from one 90 day period to another. Not that investors care about such small details. Just looks like a case (again) of too high of expectations. Sunpower has actually fallen so much it might actually be worth a look at some point. This name was $145 in late December; it now trades at $63. Wow.

• SunPower Corp. lifted its 2008 profit and revenue outlook on Thursday and said it expects to have adequate polysilicon supplies to increase production sixfold by 2010.
• The solar-power product maker expects a per-share profit of $1.17 to $1.27, up significantly from its 11 cents per share in 2007. It expects adjusted per-share earnings of $2 to $2.10, compared with $1.35 in 2007.
• The company forecast full-year revenue of $1.2 billion to $1.3 billion and forecast 2009 revenue will grow 40 percent to 50 percent from those levels.
• The company earlier estimated adjusted 2008 earnings of $1.90 per share to $2.05 per share on revenue of $1.1 billion to $1.25 billion. Analysts polled by Thomson Financial expect full-year profit of $2.06 per share, on revenue of $1.54 billion. They expect revenue of $1.9 billion in 2009.

Again the trick in this sector is not revenue growth but profitability. Up until the recent past, all investors have seemed to care about is top line growth, and assuming bottom line growth will just continue unabated on a straightline path. But this assumption is dangerous and misses a lot of sector specific issues we've discussed in the past. Certainly one can envision an environment where revenue growth continues to increase but profitability growth stalls due to a myriad of issues from ASP pressure, polysilicon spot pricing pressure, competition, selling into markets/countries with weaker subsidies and government subsidy reductions in previously "very friendly to solar" countries. [The Long Term in Solar] Lots of moving parts certainly to watch in this sector.

Long Suntech Power in fund and in personal account

Solarfun Power (SOLF) Plunges 15% on Convertible Debt Offering

Ugh. Quite possibly the worst instrument to ever be sitting across the table from - convertible debt. Solarfun Power (SOLF) issued $150M of this stuff today, which is an open invite to short the common shares against the debt. Which means the stock goes down. This happens every time and it appears the conversion price is $19.25. Worse, it tends to provide a ceiling on the shares.

• Solarfun Power Holdings Co., Ltd. ( Solarfun ; NASDAQ: SOLF), an established manufacturer of photovoltaic (PV) cells, modules and ingots in China, today announced the pricing of US$150 million of 3.50% Convertible Senior Notes due 2018 in a private offering
• The notes, in certain circumstances, will be convertible into ADSs representing Solarfun’s ordinary shares (except for any cash in lieu of fractional ADSs). The initial conversion rate, subject to adjustment, is 52.2876 ADSs per US$1,000 principal amount of notes (which represents an initial conversion price of approximately US$19.125 per ADS).
• Solarfun currently expects to use the net proceeds from the note offering for the following purposes: approximately US$60.0 million for wafer and polysilicon pre-payments, US$60.0 million for capital expenditures, US$19.0 million to repay loans from Hong Kong Huaerli Trading Company Limited, a company controlled by Mr. Yonghua Lu, Solarfun’s founder, chairman and chief executive officer, to Solarfun Power Hong Kong Limited, Solarfun’s 100% indirect subsidiary and the remainder for working capital and repayment of Solarfun’s existing bank borrowings.
• Concurrently with this offering of notes, Solarfun is offering, in a separate offering that is registered with the Securities and Exchange Commission, up to 7,843,140 ADSs (or up to 9,019,611 ADSs if the underwriter in such offering exercises its over-allotment option in full), all of which will be effectively lent to an affiliate of Morgan Stanley & Co. Incorporated. This affiliate will sell the ADSs and will use the resulting short position to enable investors in the note offerings to hedge their investment.

I have a 2% or so position in this name - since this stock is now "cheap" and has an earnings report coming out in a month which can move the stock significantly I will await that, but under normal circumstances I cut bait immediately the minute I see convertible debt issued. It's toxic for long common shareholders in my book. That paragraph I highlighted in red explains exactly why. Only the fact this stock has the ability to rise 30% in a day leads me to hold these shares... but I am displeased in a very large way.

Long Solarfun Power in fund; no personal position

Potash (POT) with Slew of Good News

Potash (POT) delivered a bevy of good news; with the stock value dropping by 1/3 in recent weeks, nothing in the business has changed - just the fear in the market and the price in the stock. The business continues to boom.

Potash Announced Quarterly Dividend of $0.10 per share

Potash Announced Plan to Buy Back 5% of Shares Over 1 Year Period

Potash Fourth Quarter Profit More than Doubles

Potash Guides Quarter 1 Profit Above Estimates

• Canadian fertilizer maker Potash Corp. of Saskatchewan Inc. said Thursday its 2007 fourth-quarter profit more than doubled, beating Wall Street's expectations, as strong global demand for fertilizers led to significant price increases.
• The company reported income of $376.8 million, or $1.16 per share, compared with $186 million, or 58 cents per share, in the year-ago period.
• Revenue rose 40 percent to $1.43 billion from $1.02 billion in the fourth quarter of 2006.
• Analysts polled by Thomson Financial, on average, estimated earnings of 98 cents per share on sales of $1.24 billion.
• Agricultural commodity prices continued to rise during the quarter, providing farmers with the ability to increase fertilizer use to achieve higher yields, the company said.
• The growth in demand led to price increases, especially for potash. The phosphate market also saw significant price increases, Saskatoon, Saskatchewan-based Potash Corp. said, in response to tight inventories, strong demand and rising input costs. Global demand for nitrogen also grew, and U.S. prices remained high.
• Canadian fertilizer maker Potash Corp. of Saskatchewan Inc. on Thursday issued first-quarter and full-year 2008 earnings guidance above Wall Street estimates, as robust global demand for agricultural products and fertilizers is expected to continue.
• The company expects first-quarter income between $1.30 and $1.60 per share. Analysts surveyed by Thomson Financial, on average, estimate earnings of $1.20 per share.
• For 2008, Potash Corp. expects profit of $6.25 per share to $7.25 per share. Analysts forecast full-year earnings of $5.87 per share.

Here is the full earnings report and well worth the read

There is not much more to say over what I've said countless times. The massive cash flows are allowing these companies to reduce debt, buy back stock, issue dividends. The analysts have missed the boat, they've been wrong on estimates, and they continue to be wrong on estimates. [Oct 23 - Analysts Still Doubting the Fertilizer Stocks] Each time one of these fertilizer companies report earnings they immediately become cheaper on a P/E basis as they beat, and guide up in the future. The stocks fluctuate wildly and my large position in this space can make the fund performance swoon for short periods of time, but we have no control over day to day pricing. The long term is very clear, and in the long run stock price is a reflection of profit streams. Despite hand wringing about an inventory number here or there that spooks people [Morgan Stanley Worried about Fertilizer], all these companies do is execute and prove they are the protypical secular growth market with the best macro trends behind them out of any I can find. Period.

Long Potash in fund and in personal account

Government Here. Government There. Bond Insurers Up.

I missed this tidbit - wow, something must of really snapped in the Fed this past weekend; look at all these actions coming out in a big bunch - maybe those huge overseas drops finally got some people thinking. We talked about the trouble in bond insurers just last Friday, the so called Sword of Damocles hanging over our every move; but this has been an overhang issue since August.

Now we are hearing inklings Wilbur Ross is sniffing around and might acquire one, and the government is forcing the banks to provide capital to the bond insurers. Truly amazing times. I missed this entirely as I was focused on the Dodd bailout. I cannot keep track of all these bailouts at once!

• Big banks and brokers that are counterparties to bond insurers met with Eric Dinallo, New York's state insurance regulator, said David Neustadt, a spokesman for the agency. He declined to say what was discussed, but reiterated the regulator's goal of restoring stability and injecting more capital into the $2.3 trillion market.
• During afternoon trading, the Financial Times reported that Dinallo pressed the banks to provide $5 billion in immediate capital to support the bond insurers and to ultimately commit up to $15 billion. Neutstadt declined to comment on the report.
• Bond insurers have been under intense pressure amid mounting concerns that mortgage-related losses will undermine their business models. Fitch Ratings cut New York-based Ambac's crucial AAA rating last week, and rival ratings agencies have warned they may have to do the same.
• The stakes remain high because bond insurers are so intertwined with the rest of the financial markets. The companies guarantee billions of dollars of complex mortgage-related securities held by some of the world's largest investment banks and back more than $1 trillion of muni bonds.
• Ambac "is in desperate need of $5 billion or more of capital or a guarantee from a very strong (backer) to preserve market confidence," said Egan-Jones Ratings, a rating agency that's paid by investors rather than issuers. "Some sophisticated investors claim that Ambac and MBIA must be saved or the write-downs and margin postings will be debilitating to most investment and commercial banks."
• Wilbur Ross, highly successful as an investor in so-called distressed businesses, said on Tuesday that he wants to invest in some bond-insurance companies and could pick a candidate within the next week.

Well, while every free market idealist and moral hazard advocate must be keeling over, these are certainly (extraordinary) steps that will help to remove quite a few layers of uncertainty from the market. The stocks reflected this.

ABK +72%

MBI +33%

SCA +76%

ACAH +41%

Again... unprecedented times. And I never....ever... ever want to hear the blather from a free market advocate again - certainly when it comes to the US of A. It's always the mantra until the system spirals onto itself in a tsunami of greed and corruption. "We'll police ourselves" has worked wonders in both the mortgage and bond insurers (and rating agency) world. And now, no one is too big (or small) to fail. Because it will take the whole system with us.

Earnings Preview Thursday

Don't have time (or energy) to do a full run down of tomorrow but looking at the names I cited for today, F5 Networks (FFIV) is ramping +20% in afterhours but it seems to be up more due to a share buyback than results, Ebay (EBAY) good earnings but not good enough guidance (sounds familiar), United Technologies (UTX) continues to kick it - a great industrial boring name, US slowing, int'l strong ....

May I point out a few words from UTX, just because I am sick of hearing the opposite on a daily basis from fear mongerers?

United Technologies executives sounded confident that the global infrastructure build-out was on track. In other words, skyscrapers relying on Otis elevators would keep rising over Chinese cities at a rapid rate.

"The trends that are driving growth in Asia do not look to slow down in the near term," Hayes said, pointing to 17 million people per year in China migrating from farms to factories.

"Urbanization is a powerful force, and it is what has been driving the business really for the last five years," both sales of Otis' elevators, Carrier's air conditioning equipment, and aerospace, where India and China are putting in record aircraft orders. "So, Asia looks to remain solid," he says.

So again, less farmers in the world, more city dwellers. Agriculture and Infrastructure. Short of pushing people back into rural villages I am not clear how this slowdown thesis works. (and yes China GDP could drop in half or 2/3 but the same trend remains)

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

Tomorrow, we have a lot of big names

AT&T (T) - they kicked us off a few weeks ago with the blip about the "slowdown" in consumer so let's say if they give a better update.

Broadcom (BRCM) - former fund holding and chip name...

Danaher (DHR) - see United Technologies (UTX)

Juniper Networks (JNPR) - former fund holding and networking name....

MEMC Electronics (WFR) - solar supplier

Microsoft (MSFT) - big, steady, no super expectations like an Apple (AAPL) - just what we need

Nokia (NOK) - the best in cell phones

Potash (POT) - fund holding - expect repeat of Mosaic (MOS)

Sunpower (SPWR) - one of the "big 3" solar names - will be checking out gross margins closely

That's all that really concerns me one way or the other - so we have 1 holding reporting in fertilizer but 2 names that can affect the solar stocks and a few bellweathers in tech, MSFT and NOK; 2 quality international companies.

We had a nice reversal to end the day, the type of signal many were waiting for so let's hope the bandwagon starts getting filled. I'd like to release some of these long positions into a nice few week rally, and raise some cash and new short positions. Hopefully the market can start playing along.

Long Potash in fund and in personal account

Up Market/Down Market - Let's not Forget the Underlying Economy

Trends like this are what scare the living daylights out of me, both short term (house ATM -> credit card ATM -> 401k ATM) and long term (who is going to be able to retire the way we over consume during our 'working years')?

Making it easier to borrow against your 401k, heck as easy as a debit card just smacks of danger.

• Borrowing against your nest egg is becoming as easy as stopping at an ATM.
• A growing number of companies now offer employees the option of being issued a debit card that taps a 401(k) loan. The card, called ReservePlus, allows workers to withdraw funds from their 401(k)s.
• The immediate concern for consumers is that impulse spending desires could trump their long-term savings needs.
• Here's how it works: After a company adopts the program, employees can transfer their approved loan line into a ReservePlus account online. Later, they receive a debit card that they can use to take out as much or as little as they need of the loan amount -- on average taking out 35% less than they applied for, says David Young, director of Reserve Solutions at The Reserve, the company offering the cards.
• The loan begins only after the money is removed from the account. Instead of a payroll deduction, participants are billed directly, and then pay back the loan through the same mechanisms used to repay a credit card. Depending on the employer, some may also qualify for a revolving loan -- taking out and paying back money as they need it.
• The ReservePlus loan program is growing. The card was first offered in 2003, and Young says employees who have used the debit cards for loans now number in the thousands. "There's a lot of interest in what we're doing," says Young. (yeh I bet)
• Critics contend use of the cards risks depleting already skimpy retirement savings. "Big picture: it just takes us out of the context of a 401(k) loan being a loan of last resort," says Jean Setzfand AARP's Director of Financial Security. "Seeing what we see, [with retirement savings] not quite where we want to see it, we're just afraid that this is going to deplete it further."
• But easy access to money can be a double-edge sword. Employees pay for the convenience: The interest rate on ReservePlus loans is 2.9% higher than the prime rate, which is higher than traditional loans, and employees pay an initial set-up fee
• And critics argue that in some cases debit cards may encourage unnecessary borrowing. "By making it a debit card, you make it sound like the loan that you take on the 401(k) for everyday purchases," says AARP's Setzfand. "In our opinion, a 401(k) loan should only be taken as a loan of last resort, for a dire medical situation, or if there's no other way to get a home loan, not to go shopping."

Borrow from far to pay for near. Seems like this trend permeates from the top to the bottom in this country. Troubling.

Speaking of Opposite Day

As I wrote earlier in the month I slashed 2 long held positions (around 0.3% of portfolio at this time) since they were acting washed out. [Jan 9th - Ratcheting Back Ultrashort Real Estate Severely]

Ultrashort Financial (SKF)
Ultrashort Real Estate (SRS)

Despite the market carnage since, I think these only briefly hit (yesterday) levels seen since I cut back... especially SRS.

Now that we are in opposite mode....

The opposite of these two are
Ultra Financial (UYG)
Ultra Real Estate (URE)

Both up around 13-15% today.

Just fyi if you are interested in an easy way to play "easy money days are back again". I was considering adding UYG for the fund but was too busy staring into the abyss. I did mention this as a "trade" on the 13th of January

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.

Again it did dip in the worst of the carnage, but now is above those levels (in $37s) and if we get the long awaited change in character, confidence, and animal spirits this is one that should run very well. Again, for a trade. I do leave a small portion of the fund for such opportunites but prefer to focus on things that we can hold for the long term. But with these groups so oversold, and the government finally coming around to the 'bailout attitude' (free market capitalism and all), we could see something very nice here.

Long Ultrashort Financial, Ultrashort Real Estate in fund; long Ultra Financial in personal account

Dodd Proposes Mortgage Bailout Plan

And here we are folks... finally the inevitable; instant replay to early 90s S&L bailout: 'Key US Senator Proposes Plan to Buy Mortgages'

• The chairman of the U.S. Senate Banking Committee is proposing to set up a government-sponsored company that would buy distressed mortgages in an effort to save Americans from foreclosure.
• In a letter to Senate Majority Leader Harry Reid released on Wednesday, Sen. Christopher Dodd said he envisioned an entity with an initial capitalization of $10 billion to $20 billion that would buy troubled mortgages, give them a markdown and pass on the "discounts ... to homeowners in the form of new, lower-balance mortgages."
• "Mortgage lenders, investors and other stakeholders would all feel a loss in order to push the home loan value down to a more affordable level," the Connecticut Democrat said in the letter.
• Those new mortgages would either be insured by the Federal Housing Administration or backed by Fannie Mae and Freddie Mac, he said, two government-sponsored enterprises which guarantee mortgages.
• "The new mortgages would be new 30-year fixed-rate mortgages, ensuring long-term stability for homeowners and the housing market," Dodd said of his proposal.

As we said in August... all the king's horses and all the king's men... will find a way to put Humpty Dumpty back together again. But $10B-$20B? Nah, that's only 40K-80K $250K homes. Maybe $200B.

...along with government bailouts by frantic politicos who keep asking why does something like this happen every 5 years

Moral Hazard? Well, we'll discuss that at Dow 13K ;)

So we are going to get 100-125 basis points of cut within a week, home owners bailed out, and if we get the Doug Kass/Jim Cramer proposal to buy the monoline insurers (by the government) we will have created the worst moral hazard of all time, but hey, the market will be up. ;)

Investor Redemptions - How Would it Play Out?

A reader asked a very good question - what would you sell if you got panicked investors calling and selling today. This is probably been happening the past week or so across Wall Street. So people are forced to sell and lock in prices (losses). Hopefully communication on the website would allay this to some degree, but I won't blindly think some portion of investors would just toss their hands up, and say "take me to cash!".

So if this happened, my simple answer is I'd sell things that have held up best. Why? Most of the stuff that is getting pummeled today is in no way reflecting value - just panic.

So here are the names I would sell and in order if "forced to" lock in pricing by panicked investors.

Illumina (ILMN)



Blackrock (BLK)




Mastercard (MA)

1. These 3 names together, represent about 5.8% of the portfolio.
2. If redemptions continued above that level, I'd liquidate the short positions next, another roughly 3.5% amount at this moment. So that would take me up to about 9.3% of the portfolio combined.
3. I have another 2% or so in cash now with the foreign short, and small cap shorts I sold yesterday - so thats about 11.3%.
4. I have another 6 minor positions around 0.2% each so I'd drop those 6 next = +1.2%. Takes me up to 12.5%
5. Then I'd move on to the fertilizer names which are >15% of the portfolio. I have bought some of these in small patches as they have fallen so I'd be redeeming at a bad price, but have good profits (since fund inception) in these 3 names (CF, MOS, POT) in this area and if forced to, this is just a large swath of the fund holdings.
   

So that would cover about 12.5-27.5% of the portfolio (depending on how much of the fertilizers were "forced out")... hopefully it wouldn't get worse than that. ;) I assume probably 5-15% of 'dollars' would panic, but gaming that is a total guess. It depends on the sophistication, trust, and background of the investors of course.

But a great question that made me think through possibilities. Obviously I would hope some people would think "buying opportunity" and send money in to take advantage of blue light special prices (ok, maybe not), but you just never know until you live through it how the investor base would react. Most people probably don't even want to look at their portfolios right now not to mention actually thinking about adding to their holdings...

Interesting, 30 Yr Mortgage Rates Approaching Decade Lows

I mentioned last year, when trying to think of a "solution" to all this credit drama, that the eventual end game will be to try to drive down the 30 year fixed rates to a level people can refinance (yet again), and pull money out, and this will allow (I guess) more spending? Or at least money to apply to some real debts (I hope). [Nov 1 - Small Caps Really Hurt Today - Eventually the Truth Will Be Told] I wrote:

What saddens me is what got us in this mess, is just repeating. The Fed is going to push down rates, and play the same game that we did in 2002-2003 - hope in due time housing rebounds so overstretched consumer can eventually recapitalize their growing debt (which they are now pushing onto credit cards) back into their homes. Its like a drug addict, going back to the same well over and over to scratch that itch. However it will be less effective each time.

This now appears to be happening (Realmoney.com subscribers only); and why I kept saying during the fall, forget the inflation talk - they will keep cutting rates so we can go through "Liquidity Boom 2.0". The problem with this (ahem) "solution" is most who bought in 2006-2007 will find their house now appraised for less than they bought ... and with many people entering housing with 0-5% down, that means they have nothing to refinance. And as each month passes and housing prices continue to fall in many markets, this will extend to more and more people. Further, lending standards have tightened dramatically so fewer people will be able to even qualify, even WITH equity. So with that said, there will be those who bought in 2003-2004 (and earlier) who can refinance, and it will help offset some of the problems. But I think for many it is just too late as the combo of home prices falling below what they already owe + tighter qualification for lending (over and above "you have a heartbeat? You're in for $450k!) will lock them out. However, I do find it ironic (and troubling) that the way to get out of this mess, is to return to what got us in the mess the first time around. But I guess it's the least evil solution, from a drawer of bad solutions. But as I keep repeating, it is much like a drug addict, each iteration of this credit game has less and less effect... but hey, here we go again...

• The average 30-year fixed-rate conventional mortgage rate has probably fallen to about 5.40% or less this week, which marks a big drop compared to just a month ago when it was 6.20%, according to data released each Thursday by Freddie Mac. This puts mortgage rates at their lowest since March 2004, when housing was booming.
• Mortgage rates are now also not far from their low for this decade, which was set in June 2003, when the average 30-year fixed-rate conventional mortgage rate fell to 5.21%. At that time, mortgage refinancing levels soared to unprecedented levels
• At current levels, more than 70% of the mortgage universe is "refinanceable," as the average rate paid in the U.S. is 6.14%, according to data from Bear Stearns. A "refinanceable" mortgage is defined as one that is at least 40 basis points below current mortgage rates. This could mean that as many as 7 million mortgages will be refinanced.
• Increased levels of mortgage refinancing will contribute to an eventual recovery in consumer spending, albeit less so than in the past, owing to the decline in home equity and the current weakness in the economy.
• New data released earlier today by the Mortgage Bankers Association indicate that mortgage refinancing activity soared in the week ended Jan. 18 to its highest level since April 2004.

Again, it's rewarding to see my economic views playing out, even if the actuality is quite ugly. But it is not rewarding to get pole axed in the portfolio as the "necessary" steps are taken to "reliquify" the US consumer (or at least those owning a home pre 2005).

Cramer's Comments on Today's Action

I will post this fully entry from Realmoney.com since it is very pertinent to the "strange" action today. If I read between the lines it makes me think he thinks the bottom is in now that the Fed is on board. Hard to really get behind that thesis, but it is what it is. The rest of the entry makes sense - I do think it is really a manifestation of the computer driven quant models running Wall Street why we get this action. And without the uptick rule for shorting, the moves down are without pause, and cascading in action.

Don't Worry about this Unjust Market - Just Accept It

Suspend justice. Right now. Don't say to yourself, "Wait, Conoco (COP) reports a great quarter, and people sell it and buy Ambac (ABK) ?"

Don't even ponder the notion that you can't believe that Cia Vale do Rio Doce (RIO) is making so much money, and yet people sell that and like Merrill Lynch (MER) .

Recognize that the refinancing that is going on right now, the gigantic financing wave, is reliquefying the American consumer and inspiring people to buy retailers in anticipation of the surge in spending that refinancing always brings in addition to the coming stimulus package.

Do not be angry that Peabody (BTU) is making so much money, yet people are buying Liz Claiborne (LIZ) and Bank of America (BAC) .

XTO Energy (XTO) is going down even though it will beat numbers, and Ralph Lauren (RL) goes up even though it misses? Refis and stimulus. They will work together to justify that buying.

That's what happens during the early cycle shift. Again, the Fed's cuts, combined with the stimulus and the refis, will drive this economy six months from now. Turbocharge it as a way to save Washington Mutual (WM) and Countrywide (CFC) .

It is what happens when people recognize that the worst is over. This is exactly what happened in 1990 when the Fed got engaged. We just can't believe that they are engaged. They are breaking the leadership and finding new leaders even as justice seems very awry.

I think it is obvious that the Fed learned something we don't know, some bank that couldn't make its payments, some recognition that BAC and Wells Fargo (WFC) and Wachovia (WB) and Citigroup (C) and Wamu were going to be so hobbled that the lending system in this country could collapse. When the Fed panics, you have to break out the early cycle playbook.

It is so maddening to go in and buy Whirlpool (WHR) and Black & Decker (BDK) and sell both safety and oil, both of which will print great numbers, but that's the way it goes. That's what people buy when they get money from the Fed, and they get to refinance. It is what happens. Accept it. Stop questioning the justice of it all.

Doesn't mean you have to buy into it. Does mean you have to understand it. Would I rather buy Freeport McMoRan (FCX) down 10 than VF Corp. (VFC) up 10? Yes. But right now that's wrong. Just want to explain it.

At the time of publication, Cramer was long Citigroup, Freeport McMoRan and XTO Energy.

Coach (COH) Earnings Report

I like to follow Coach (COH) closely because, much like say an Under Armour (UA), I could see this returning to the portfolio; plus it's a great tell on the segment of society most strapped - the "wanna be upper class, but not really". But with slowdowns in the US and Japan, it just (aside from deat cat short covering bounces) seems to be in a bad place. Hopefully one day it can expand in a meaningful way into China which will certainly goose earnings. Here are some details from its earnings report (on which of course it rallied), and some comments from the CEO on the US. The data seems to point to the commentaries I have been making about how the US consumer will be forced to move[Target Shoppers Turning into Walmart Shoppers] downstream. In Coach's case, the move is within the chain from retail stores to factory stores. (i.e. outlet stores) Unfortunately, as has been mentioned despite all these accurate economic calls, it has not helped performance one iota the past 3 weeks.

If there is any bifurication it certainly is not in emerging markets vs domestic markets, but its in the upper 3-5% consumer versus the other 95% in America. As an aside, did you see Starbucks (SBUX) is testing $1 coffee now? Of course the stock is up on opposite day since $1 coffee would NOT cannibalize its $4.50 coffee - and after all the US economy will rebound in 6 months since the Fed is cutting, right? Interesting how we can manufacture reasons to push one stock down and another up - here we have a company who looks to be cannibalizing its own profits if they adopt this mainstream across the entire chain, yet people react positively. Because the sector is now back in favor. :) Again, just fascinating.

I also copied an article from Portfolio.com at the bottom; which probably is a verbatim commentary to what I was talking about last summer. But in "opposite day", things that are sheltered from the US consumer are getting destroyed and things tied to the US consumer are ramping. Again, I cannot find the circular logic in this - stocks in quality sectors are being sold down because of fears of US recession impacting them - yet its ok to buy the stocks most tied to the US recession. Huh? :) Darn computers have a mind of their own...

Coach Fiscal Q2 Rises

• Luxury handbag and accessories maker Coach Inc. said Wednesday its fiscal second quarter profit jumped 11 percent, with strong sales at factory stores offsetting weak retail store performance.
• For the quarter ended Dec. 29, net income rose to $252.3 million, or 69 cents per share, from $227.5 million, or 61 cents per share in the 2006 quarter.
• The company said direct-to-consumer sales rose 18 percent, helped by a gain in sales from new and existing stores in North America. North America same-store sales, or sales at stores open at least a year, rose 7 percent with factory same-store sales climbing 17.7 percent.
• Retail same-store sales, though, fell 1.1 percent during the quarter due to a shift by consumers to lower-priced items and weak mall traffic. Upper-end handbags still performed well.
• Coach's gross margin dropped to 75.4% to 77.1%, reflecting a promotional environment in North American and currency fluctuations.

Coach CEO Says US Already in Consumer Recession

• Consumers in the United States are already acting as if they were in a recession despite what economic indicators show and would benefit from a tax stimulus package, Coach Inc's (COH) chief executive said on Wednesday. "My own view is that we're already in a consumer recession," Chief Executive Lew Frankfort told Reuters.

The Not So Affluent Society via Portfolio.com

• The first casualty of the current economic slowdown may be the American bourgeoisie.
• From Williamsburg to the Mall of America, these are the middle-class, educated Americans who have been spending $4 on a cup of coffee and $200 on a pair of jeans.
• Coach, known for its handbags, has become latest American luxury goods maker to sound a warning that Americans are no longer spending on "affordable luxuries."
  
• American consumers are paring their spending amid lower home prices, high energy costs, and tightening credit.
• 'You had a lot of people who graduated to a level of consumption they could not really afford,'' Adrianne Shapira, a retail analyst with Goldman Sachs told the New York Times. ''Two-hundred-dollar pairs of denim were plausible when home values soared, but now $100 jeans are looking more reasonable.''
• Like Tiffany, which also reported a decline in United States sales, Coach was buoyed by overseas gains. Overall, Coach sales rose 21 percent and the company reported an 11 percent increase in fourth-quarter earnings.
• So Starbucks is experimenting with a short (eight-ounce) cup of coffee for $1 in its Seattle-area stores. It is also trying out free refills for brewed coffee. Sarah Gilbert on BloggingStocks hails the move as "a new entry point for the cash-poor masses."
• Can it get any worse for affluent Americans? If they eat sushi, yes. The New York Times is reporting that laboratory tests of tuna sushi taken from 20 Manhattan stores and restaurants found mercury levels so high at most of them that they would exceed what the the Environmental Protection Agency considers acceptable. (oops)

This goes back to the points I have been making about "global equalization" in lifestyles for the bottom 60% across many countries in this world. [Do the Bottom 80% of Americans Stand a Chance?] Great for humans as many of those well below the "mean" will think living as the world mean is the lifestyle of a king. Not so great for those who are used to a better than "mean" lifestyle, and have to adjust downward. I truly think those stuck in apartments the past half decade have been wondering how the other "half" are doing it - but we can clearly see, the house ATM was the biggest piggy bank ever created. This was suspected, but any of us calling it were "wrong" for a long time while the bubble kept inflating and inflating and we wondered how consumers were doing it... And why I think this recession will be far worse than "2 quarters and done".

Now again, I did not expect this all to be priced in, in 3 weeks in the stock market! Considering it was all ignored from Sep to Dec 07. Shame on me for that one. So anyhow, after this fantasy that homes will be flying off the shelf (even at 4.5% 30 year rates if that's how long we can get them), and stores will be teeming with shoppers within 6 months I have to keep coming back to the fact... not without the house ATM. Especially in a world of persistent shortages and inflation and (according to widely quotes stats, who knows "for sure") but 70% of Americans living paycheck to paycheck. But for now we can watch these stocks ramp and say ... wow. They were admittedly "oversold" [Will There Be Anywhere Left to Shop in 2010]

No positions

Another Day for Retailer and Homebuilders to Shine

Amazing action right now. I suppose the thinking is the Fed cuts will lead people back to stores and buying homes. I disagree 100% but this is the only trade working right now. I'm not sure how this cut makes budgets any better or homes more affordable. Rates have been low for a while now and homes are still not moving. People were not shopping even with the last 3 cuts. But this is "the trade" and as I've mentioned in the past 70% of trading is now done by computers, and all the computer seem to be working on the same quant model.

Some financials are also ramping decently.

I do understand stocks are forward looking 6+ months but I just don't see this housing boom next fall or people flooding the shops even if rates go to 0%.

Obviously I don't own these sectors because these stocks will probably move for their 25-35% moves before rolling over again. But you can't be short them as I have been stating for the past 2 weeks, as they seemed to have bottomed out. But watching them take off without any other part of the market participating sure is fascinating. Even more fascinating (aside from the carnage in my holdings) is watching the "recession stocks" aka safety stocks also take a beating. While people run to homebuilders and retailers. Truly the strangest market I've seen in a long time.

% of Stocks Below 200 Day Moving Average Now at Historical Oversold Levels

Grabbed this chart from FinancialSense.com

It shows the % of Stocks Above the Key Support level of the 200 day moving average - a key level for technicians. This looks to be a historical chart going way back (since there are not years labeled on the chart) but it goes back to when the S&P was valued in the 200s. Without exact dates I am not sure exactly which spike down corresponds to each date but it appears we are levels not seen since the worst of 2002, the worst of 2001, and the worst of 1987. EDIT: Reader points out that huge spike early in the chart was 1987 as the S&P 500 was in the upper 200s in early 1987. So it looks like we are still doing better than 1987, and a bit better than the early 90s correction in stocks, but now we are in line (or perhaps a bit worse) than 2002, and 2001.

So in a word it's bad out there. (I assume that huge spike down at the beginning of the chart were during the 1930s - obviously Great Depressions are not times to be investing in stocks)


(click to enlarge)

Essentially 8 out of every 10 stocks are now "broken", below their 200 day moving average. This is a level where you'd typically sell off a stock as its broken all long term support. But obviously this means you'd be left with almost nothing to hold, which for example a mutual fund cannot really do. But for independent traders or hedge funds; they will usually clear out of a stock once it's broken this level. For those who have been reading a while you know I get itchy to sell when a stock breaks even its 50 day moving average as this usually portends further weakness. But within the confines of this fund, selling when a stock breaks this level would of left me with 1 stock, Illumina (ILMN) ; ironically the 3rd most expensive stock I own (P/E Ratio for Portfolio). Just another example of how its hard to game this market - why something of such high value remains impervious is beyond me.

Obviously a 95% cash with 1 stock portfolio would really not work in the confines of running a mutual fund. But for "FundmyHedgefund.com" perhaps.

So I was curious how the % of the portfolio was holding up.. if the overall market is about 20% what % of long positions in the fund are above their 200 day moving average?
Here are the symbols (out of 52 long positions, I am including CNH Global as a position since I held it entering the day)

(note, going into today both AAPL and CNH held this distinction but no longer)

AG
ATW
BIDU
BLK (just under 50 day and holding like a rock)
CBI
CF
CNX
DO
FCN (just under 50 day and holding like a rock)
FSLR
FWLT
HDB
HOGS
IBN
IFN
ILMN (over 50 day)
JEC
MA
MEE
MELI
MHS
MICC
MOS (right near 50 day)
MTL
PBR
POT
RIMM
SLW
SOLF
STP

A few names were too young (recent IPOs) to have 200 day moving averages so I could not tell where they stood. So above we have 30 out of 52 names or a 58% exposure to stocks over the 200 day moving average. Keep in mind aside from AAPL and CNH we also lost GOOG and CLB today - all 4 breaking below this key level in morning trading. So yesterday, this analysis would of shown 34 out of 52 names (65%). How quickly it gets worse...

A half full type of person would say that's a pretty good %, and despite a horrid few weeks, these stocks in the fund have held up better then the market as a whole, by almost 3:1 margin

A half empty type of person would say, well this just gives these stocks more room to fall to catch up to the rest of the market

Bookkeeping: Closing Last of CNH Global (CNH)

I am going to close the last tiny amount of CNH Global (CNH) I own, 25 shares. Thanks to booking some gains along the way up and holding very little at this point, I am leaving this position with a $1800 gain. I started the position in early October, and most of my buys were in the mid $50s to low $60s. Most of my sells were in the mid $50s to mid $60s, so we haven't had much gain in these shares, but coming into earnings I held very little. At this point any scrap of gain is a victory with the market emotional action. If I had a larger position I'd wait for some bounce to sell but with only $1500 or so in the name I am just going to scurry off...

I wrote yesterday

Fund holding CNH Global (CNH) - this is an agricultural equipment name who I've dropped the exposure to quite a bit. Based on what I see on this earnings call, I will make a decision whether to keep holding or not. Going for it is the exposure to big ticket agriculture equipment - think Deere (DE). On the negative side it has a construction business and it is based on Europe; with a strong Euro I am worried about some degradation of exports. This is one benefit Deere (DE) has - with the Fed trashing our dollar to bail out the banking system Deere's products only get cheaper by the month. So this is one I am keeping a close eye on.

After rising 10% yesterday the stock is down 18% today on earnings, so erasing yesterday's gains plus some. Right now, there is nothing a company can say that will make the market happy. It looks like they missed the quarter vs analyst expectations, but even with the stock at cheap valuation the market continues to sell off everything.

2007 total earnings are $2.36
2008 guidance is now $3.30 to $3.60

So if they reach the low end of 08 guidance that is 39% earnings growth, and if they reach the high end it's 53% earnings growth. For a stock currently trading at $50 or a PE ratio (on trailing earnings mind you) of 21. Forward multiple is a range of 14 to 15x earnings. But right now the market could care less. I'm going to simply focus on the fertilizer names at this point even if I find CNH Global (CNH) to be a heck of a value - valuation at this point is meaningless to the market. I do still have Agco (AG) but at this point, if probably is a candidate to sell as well since we can build a bear case for anything at this point on future slowdowns. It appears holding anything into earnings right now is simply a fools game since if you say anything negative you get trashed, and if you say anything positive you are doubted and will get trashed. Hard to win from the long side.

CNH Global is 2/3 agricultural equipment, and 1/3 construction - obviously I own it for the agricultural portion. Here are some comments from their earnings report in terms of 2008 guidance on the farm equipment side.

CNH expects U.S. net farm income in 2008 to be near the record levels of 2007, bolstered by high corn, wheat, soybean, cotton and sugar prices. For the full year, CNH expects North American industry retail sales of over-40 horsepower tractors to be up 5 to 10%, compared with 2007, with sales of over-140 horsepower tractors up about 10%. CNH expects industry retail unit sales of combines in North America to be up 5 to 10% compared with 2007. CNH expects industry retail unit sales of under-40 horsepower tractors, which are more closely aligned with residential construction and overall GDP, to be flat to down 5 %, with the total North American industry flat.

Outside of North America, for the full year, CNH expects industry retail unit sales of tractors to be flat to up slightly, compared with 2007, with industry sales in the Latin American market up 5 to 10%. CNH expects tractor industry unit sales in Western Europe to be flat and in Rest-of-World markets to be flat to up 5% from 2007 levels.

CNH expects the worldwide industry unit retail sales of over-40 horsepower and total agricultural tractors to be up slightly compared with 2007. CNH expects combine sales to be up 20 - 25% compared with 2007, and up in every major market.

Long Agco in fund; no personal position

Apple (AAPL) Beats by $0.14; Issues Typical Conservative Guidance

Apple (AAPL) reported another stellar quarter and their typical conservative guidance. I don't know why I even bother with the results because within 2 seconds they are "old news" and all anyone wants to talk about is next quarter guidance.

Let's talk about the guidance for next quarter first, since that's all anyone cares about. Apple says $0.94. Analysts have them pegged at $1.09. Ohh boo hiss, selloff - take the stock down 30%! Well what did they do last 90 days ago with guidance? [Apple Reports] They gave guidance of $1.42. And today's report came in at $1.76. Again, this company is lowball central.

Let's look at the rest of the earnings report, while people stress about how awful next quarter will be due to "low guidance".

• The Company posted revenue of $9.6 billion and net quarterly profit of $1.58 billion, or $1.76 per diluted share. These results compare to revenue of $7.1 billion and net quarterly profit of $1 billion, or $1.14 per diluted share, in the year-ago quarter.
• Gross margin was 34.7 percent, up from 31.2 percent in the year-ago quarter.
• International sales accounted for 45 percent of the quarter's revenue.

So, we have revenue growth of 35% and profit growth of 54% (expanding margins)
We have gross margins up 3.5% year over year. And up from 33.6% last quarter (+1.1%)
We have a company that almost half of sales are now outside the US.

• Apple shipped 2,319,000 Macintosh® computers, representing and 44 percent unit growth & 47 percent revenue growth over the year-ago quarter.
• The Company sold 22,121,000 iPods during the quarter, representing five percent unit growth and 17 percent revenue growth over the year-ago quarter.
• Quarterly iPhone(TM) sales were 2,315,000.

All the other consumer stuff gets the hype, but the computers are where the most potential long term profit is. Each % of worldwide market share they take is massive amounts of money to the bottom line. Looking at sales sequentially won't make sense due to holiday sales but again we see mid 40%s year over year growth. For a company this size, very impressive.

• Looking ahead to the second quarter of fiscal 2008, we expect revenue of about $6.8 billion and earnings per diluted share of about $.94."

Again, people may obsess over this, but this is the Wall Street game - under promise, over deliver. They say $0.94... which means $1.10 or so in dog years. So the stock will tank. We'll look back in 3 months and see they squashed the $0.94 estimate just like they squashed their $1.42 estimate 3 months ago. But none of that matters now of course as in a nervous market, people will find any excuse to call for End of Days.

I'm not trying to spin it or justify the numbers; if things stink I'll say it. But this is just typical Wall Street gamemanship and in a nervous market you can't win for losing. For "stock performance" it would of been better to beat this quarter's estimates by say only $0.06 and then throw that extra $.08 into next quarter's "estimates" so the wolves on the Street are appeased. And the stock would be up, on a reasonable beat and better guidance.

Looks like Apple should be on target for $5.30-$5.40 for 2008 EPS (analysts currently have them at $5.14 but they beat this quarter by $0.14 which gives us $5.28 and then they'll magically keep beating the next 2 quarters as well).

So at $155 (today's close) it's 29x my 08 estimates. Not cheap, but not many $130B companies grow 40% year over year. At $136 which it is trading now in after hours, it's 25-26x my estimate. Or about 2/3rd of its current growth rate. And roughly in line for what it should be able to (at least) grow the next 3-5 years. For a premium franchise. But not enough to appease this ruthless market.

It appears "buy and hold" investing is going the way of the dodo bird - looking at a 1 year chart of Apple (AAPL) in the span of 3 weeks all gains since July 2007 are now erased. At the pace we are going every stock, even the best franchises, are going to be heading to 2006 levels.

Long Apple in fund; and in personal account

CNH Global (CNH) Acting Very Strong Ahead of Earnings

If you were a conspiracy theorist you'd suspect very nice earnings are coming tomorrow, as CNH Global (CNH) is up 10% today. But then again New Oriental Education (EDU) ramped out of the blue ahead of earnings as well, and that didn't work out too well. :) Just noting it...

As for last hour action, so far so good. Indexes are down 1-2% but I'll take it, if we can hold it. Victory is all relative nowadays. ;) Apple (AAPL) will obviously drive us after hours - unfortunately we also have yet another bad consumer based credit type of stock reporting as well (AmeriCredit (ACF)). I ache for the days when market just goes sideways and good stocks can separate from bad stocks, and companies are priced on their underlying fundamentals. Ah, the good old days...

Long Apple and CNH Global in fund; long Apple in personal account

Soros Says World Faces Worst Financial Crisis Since World War II

Well first we had Robertson [Julian Robertson Calling for "Doozy of Recession"], then Rogers, and now we get Soros. Thankfully, our Fed Chief and our friends at CNBC still say there are no clear signals of recession. Hmm, whom to believe - men who have made billions upon billions managing money or....

• Billionaire investor George Soros said the world was facing the worst financial crisis since World War II and the United States was threatened with recession, according to an interview with the Austrian daily Standard.
• "The situation is much more serious than any other financial crisis since the end of World War II," Soros was quoted as saying.
• He said over the past few years politics had been guided by some basic misunderstandings stemming from something that he called "market fundamentalism" - the belief financial markets tended to act as a balance.
• "This is the wrong idea," he said. "We really do have a serious financial crisis now."
• Asked whether he thought the United States was headed for a recession, he said: "Yes, this is a threat in the United States."
• He added he was surprised how little understanding there had been on how recession was also a threat to Europe.

Quite the triumvirate....

Earnings Preview Wednesday

Companies of note...

Abbott Labs (ABT), St Jude (STJ), Varian Medical (VAR) - big, boring, healthcare; just what the market likes

Alleghenyy Technologies (ATI) - former fund holding in the titanium (and other metals) space - dropped 1/3rd in past 2 months. But what hasn't.

Capital One Financial (COF) - credit card company which already warned. On any spikes due to Fed cuts this one is a short... for years. Direct tie to US consumer.

Fund holding CNH Global (CNH) - this is an agricultural equipment name who I've dropped the exposure to quite a bit. Based on what I see on this earnings call, I will make a decision whether to keep holding or not. Going for it is the exposure to big ticket agriculture equipment - think Deere (DE). On the negative side it has a construction business and it is based on Europe; with a strong Euro I am worried about some degradation of exports. This is one benefit Deere (DE) has - with the Fed trashing our dollar to bail out the banking system Deere's products only get cheaper by the month. So this is one I am keeping a close eye on.

Coach (COH) - I have been on the short case for Coach since August, although I certainly would of covered a few weeks ago. At some point, maybe mid to late 2009 we will like this name from the long side - I'd like to see a big push into China. At this point its a brand heavy into Japan and US. Oops. Still a worldwide brand name. With a potential short term turn in retail it might bounce very nicely here.... Surely it will bounce somewhere along the way as will all the retail names, but aside from a trade I don't see much here as earnings will constantly be under threat.

ConocoPhillips (COP) - don't follow it closely but its a large cap oil name

Delta Airlines (DAL), Southwest Airlines (LUV) - hey it's an airlines - everyone's favorite sector (blah) [note I think this sector is putrid, I am just stating in the past 2 weeks its been the hottest sector due to merger rumors]

Ebay (EBAY) - slaughtered tech name. This is how growth stocks die; but gosh its now under 20x earnings.

F5 Networks (FFIV) - this name started the slaughter in Riverbed Technology (RVBD) and Blue Coat Systems (BCSI) 3 months ago, although it is only remotely related. What can you say for this group - no matter what is said, perception is reality. Perception is enterprise won't spend on networking product so the stocks die. At some point there will be great value in this space.

Freeport-McMoran Copper & Gold (FCX) - former fund holding that I abanonded a few months ago anticipating world slowdown scaring people out of this type of stock. This was an accurate call but world slowdown has scared people out of most every stock. So it's only a 'relative' victory. The name is misleading, 80% of its business is copper, only 10% is gold - hence the gold run has not helped the stock.

General Dynamics (GD) - large defense 'safety' stock. Surprised it has not held up better than it has.

Gilead Science (GILD) - one of the few biotech companies I'd actually consider. It has held up great in this sell off; only problem is valuation - this is exactly the type of high value stock that one wrong word in guidance can drop 20%. But its a company hitting on all cylinders.

Motorola (MOT), Qualcomm (QCOM) - MOT do they ever report a good quarter? QCOM is so 1990s

Noble Energy (NE) - this is a quality oil driller - not quite the deep sea type I prefer but until recent carnage it's been a solid stock.

Parexel (PRXL) - I am a bit peeved I did not go into this group about 2 months ago when I was poking around. Instead I went to their Chinese competitor WuXi PharmaTech (WX), as I thought the US names were pricey. This whole group has been on fire as drug research outsourcing is hot (in the US). I still think over the long run they will be at major risk as this work is outsourced cheaper to China, but for now it does not matter. I highlighted PPDI in an earnings preview for last week - despite "good, not great" type of quarter, the stock ripped higher. This is where investors want to be it appears. Another name in this group is Covance (CVD) - again we get healthcare exposure without drug risk much like MedcoHealth Solutions or Express Scripts (ESRX) - diagnostic companies (which Cramer has been hot on) is the other area that has held up great. The valuations now are very rich as people pile into these same few names as safe havens. Makes me a bit worried at these prices.

United Technologies (UTX) - smaller version of GE and probably one of the best run companies in America. But it's considered an "industrial" and thus tied to economy and thus no love of late.

One Interesting Note

Despite the markets still down quite heavily 2 of the largest contributers to fund performance and best performers over the past 3-4 months Ultrashort Financial (SKF) and Ultrashort Real Estate (SRS) are down 4.5% or so. Meaning the underlying indexes they bet against are up. Meaning if you came into the day with heavy emphasis on these short positions you had insult to injury as these positions are actually working against you in quite a bad tape. So both your long and short positions would be sinking.

However, combined with the retailers I mentioned earlier today, you can see this rotational push into "oversold and beaten" areas of the market. Another note - the Russell 2000 is only down 0.10% while the larger cap indexes are down about 2% as I type this. Another "rotation". Small cap has been (relatively speaking) the worst place to be for the past 4-5 months.

In a general sense these are good things. Without financials (especially) it is very hard to make any sort of sustained move.

Remember, the news flow doesn't need to be great for a market to move up. Markets can go up during periods of bad news (see mid August through mid October). Or down in the face of good news. It's more about sentiment in the short term. And it appears we have the first inkling if you look at some outperformers last week along with today in the areas that were hit the hardest.

We'll see how it goes. As stated earlier, the action the last hour should be very telling. I did cut back on the foreign short exposure as these ETFs were up 12-15% this morning. And since my US index short is focused on small caps (Ultrashort Russell 2000 (TWM)), I am culling that position as well. It just appears the stuff that has been hit the hardest the past half year is now getting a reprieve. We'll return to all these areas after a rebound, but for now they seem (if the market can stabilize) to actually become the first candidates to bounce.

Long all names mentioned in fund; no personal position

Strength in Retailers (again)

These retailers look completely washed out - they are actually up today after a nice week (relatively speaking) last week - exhibiting a complete and utter exhaustion of sellers in this sector.

UA +5%
RL +2.5%
JWN +2.21%
M +2%
KSS +1.75%

With Under Armour (UA) now having all it's bad news priced in, it still looks quite appealing to me at these levels, but with so much other quality merchandise on sale I'll focus on those names. But it would be ironic to see the retailers to lead us back. But it would make a lot of sense as they've been beaten to a pulp for nearly half a year.

Jacobs Engineering (JEC) Stellar Earnings

There has been a lot of fright recently that its the end of days for infrastructure stocks. [Barron's Out With Negative Piece of Foster Wheeler (FWLT)] Myself, I've argued this is one of the last secular bull markets and with the combo of 3 customers flush with cash even in a worldwide slowdown (a) Middle East countries full of petro dollars - whether oil is $65 or $105 (b) Asian export countries - whether GDP is 12% or 6% and (c) the US government, who has its own printing presses and looks antsy to run them on full blast - its an election year after all.

Could I be wrong? Certainly. But at least you'll know my thinking along the way.

Today we have another excellent company, Jacobs Engineering (JEC) reporting an excellent quarter, with an excellent backlog, with excellent pricing power. Exactly the type of company that should sell off 30-40% right along with financials, retailers, and restaurants... that makes sense.

• Engineering and construction services firm Jacobs Engineering Group Inc. said late Monday fiscal first-quarter earnings rose 61 percent.
• Net income in the quarter ended Dec. 31 climbed to $98.4 million, or 79 cents per share, from $61.3 million, or 51 cents per share, in the year-ago period. Excluding a gain of $5.4 million, or 4 cents per share, from the sale of an investment, earnings rose 52 percent to $93 million, or 75 cents per share.
• Analysts, whose estimates typically exclude items, expected profit of 70 cents per share, according to Thomson Financial.
• Sales rose 25 percent to $2.5 billion from $2 billion last year, surpassing Wall Street expectations for $2.44 billion.
• Backlog increased to $15 billion from $10.4 million a year ago. (50% increase)
  

Oh yeh, and they increased guidance for next year

• Engineering and construction services firm Jacobs Engineering Group Inc. on Monday raised its fiscal 2008 earnings target, citing positive business trends.
• The company now expects to earn $2.95 per share to $3.25 per share in the year ending Sept. 30, including a gain of 4 cents per share booked in the first quarter. In November, the company told Wall Street to expect profit between $2.70 and $3.10 per share.
• "Industry trends are generally positive and our new business prospects remain good," President and Chief Executive Craig Martin said. "We expect FY 2008 to be another successful year."

I really don't know more to say. If you can't buy companies that beat estimates every quarter, are growing 25% on top line, and 50% on bottom line (increasing margins anyone?), raise guidance.... etc etc. What can you buy? I'll just continue to acquire these stocks and wait for the market to realize there is still life out there. Backlog is up 50% over last year, and now is 1.5 years worth of business.

Of course people will say well the end is near, this can't continue. Just like they said it last quarter, or 2 quarters ago, or 3 quarters ago. Just like crude can't continue past $40, or gold past $600. After all "it's cyclical". And they'll say it next quarter, or the quarter after. Meanwhile go read that piece about the Middle East and see what is really going on out there in the globe. And yes crude dropped to mid $80s today... cancellations must be coming any second now. Etc and Etc and Etc. (insert sky is falling scenario here)

Long Jacobs Engineering in fund; no personal position

Fed "Surprise' Cuts. More to Come.

We got our "surprise" 75 basis point cut, that should of happened 2 weeks ago.

As I've been calling for last fall, we are headed to 3% on the Fed Funds rate. It has come even faster than I anticipated - I was saying "by spring 2008" - heck it might be by next week. Only 50 basis points to go.

And as more and more contagion spreads I think it's a good assumption we are going lower than 3% eventually. At least now they've dropped all pretenses about "fighting inflation" which was a dishonest attempt at trying to jaw bone us. I've said that at every meeting since they started cutting - watch what they do, not what they say. In the long run we are going to need to increase rates, but for now oil and gold are weakening so "inflation is beat". ;)

The markets after briefly rising a bit off very negative levels in premarket, quickly spiked and then just went back down. This is probably alarming to many, because as we use each "bullet" we have one less bullet in the revolver for the future. And this was a big bullet. However, I am going to take the contrarion side to this arguement and say "we need this waterfall moment" and I am actually more bullish for the "near" term that we are going to get it. As opposed to if we rallied to start the day down 1% and then just sold off all day.

As for today's action, I only have about a 5% short exposure. I do expect Ultrashort Emerging Markets (EEV) and Ultrashort Xinghau China 25 (FXP) - both sub 1% positions unfortunately, to have monster days. I outlined this last week in 'Closing iShares Malaysia (EWM)' - unfortunately it doesn't matter if I conceptually got it right to avoid emerging markets since they were overdue for a selloff - since there is very little shelter even in US markets. Considering how massive the damage has been in the past 2 days overseas I will probably look to sell down these positions.

As for the US market, all that matters to me is the last 90 minutes. It's not how we open, but how we close. If we see a nice rally to finish off the day (even if it's to a negative close), I will be finally willing to think this is the (ever elusive) tradeable bounce. Earnings away from the financials today, thus far, actually look quite good.... and we have Apple (AAPL) out after the bell. Not that earnings matter in this environment but there is good news out there in the right companies and sectors. One day it will matter again. So let's watch the last hour to hour and a half as it should tell the story.

And yes I do expect yet another cut next week at the regular Fed meeting... the most important thing is it appears that Uncle Ben and his crew (outside of Mr Poole who is clueless) finally gets how bad things are. Again, the recession is not the issue here - that's getting priced in; it's the implosion of our entire global shadow banking system. Ask PIMCO's Bill Gross....

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

This Prediction Might Come True Tomorrow

I am looking through my '13 Outlier 2008 Predictions' and so far so good, and at a far quicker pace than I imagined on some of them. Part of #7 might be coming true tomorrow in fact.

After over 2.5 years of not suffering a down 2% day dating through early 2007, volatility in the stock market takes over as the theme of the year, 2% daily increases and drops become a weekly occurrence.

Check!

The market suffers its first 20% drop (from Oct 9, 2007 peak) in the first half of 2007 as consensus emerges that "a major slowdown" (which dared not be called a recession due to elections coming), is happening.

Let's see where we have to hit to get to this 20% prediction among all 4 major indexes

DJIA Oct 9th: 14,280 - 20% off = 11,424 (current 12,099)
S&P 500 Oct 9th: 1576 - 20% off = 1261 (current 1325)
NASDAQ (actually peaked a few weeks later @ 2861) - 20% off = 2289 (current 2340)
Russell 2000 Oct 9th: 856 - 20% off = 685 (current 673) check

Anyhow I expect a woolly day tomorrow short of any surprise interventions. Certainly a 4-5% down day on major indexes could be in store with individual names down far more than that. If history is a precedent (and it hasn't been lately) it would not be surprising if this did not mark a near term bottom and a tradeable low is (finally) created Tuesday or Wednesday. From which we should get a powerful move upward. (which should be sold within a few weeks, after CNBC returns to "the bottom was in, in mid January" coverage)

Remember how my #7 prediction ends ;)

The market ends the year only down 2.78% as economic based bloggers throughout the world wonder what it takes to make the market ever go down?

Allright that portion seems like a work of fiction now, but with the flood of foreign infusions that should be hitting our markets by summer as the US goes on blue light specials, let's see how it plays out. We are not even 1/12th of the way through the year, although it feels like 3 years...

So hold on to your crash helmet tomorrow and remember, traditionally through the emotional selloffs, come some great profit opportunities. Easy to say on paper, but certainly it is something one should experience as well. :)

Food... Food... Food.

We talk about this nearly every week [Only Lonely Voice Agrees with Me on Food Inflation] but it is definitely finally starting to hit the mainstream news - or at least those "darn liberals" at the NYTimes. :) As I keep saying, I think food the next 5 years, will be what crude oil was the past 5. And it is not exactly a product one can cut back on when times get tough - hence my commentary that the potential for social strife if this continues is far far greater than anything crude oil could produce. (Remember those 1 billion rural Chinese)

Want to see something holding up better than gold? Check out Powershares DB Agricultural Fund (DBA) - a product that tracks futures of corn, soybeans, wheat, and sugar. I looked at this name briefly in the September entry 'This MOO for You? An ETF to play the Global Agricultural Boom'

Its only ostensible competitor, the Powershares DB Agriculture Fund (DBA), takes an entirely different approach to the space. DBA invests in agricultural futures contracts, while MOO invests in agriculture-related companies. The two are driven by completely different dynamics, and have performed very differently: DBA is up 9.67% year-to-date, while the index underlying MOO is up 32.40%.

I considered adding this product to the fund at the time, but thought it would probably be a slowly appreciating asset. How wrong I was. Price when I wrote the entry in early Sept? $27. Price now? $36.50. +35%. Food indeed is a 'store of value' - even better than gold (with more use! Can't eat gold).

Now when you see the futures for actual food, and what farmers are getting for food, and try to reconcile this with the 30% drop in fertilizer stocks you must ask - why the divergence? Nothing more than pure panic and "shooting the generals" in the fertilizer stocks. It's all interconnected - prices for food go up, farmers have more money, farmer can spend more on products whether it be fertilizer or equipment. However, the market is in panic mode and is throwing everything out.



We've seen how great gold is running as people flee to safe havens, inflation hedges, and hedge against the world central banks printing money out the wazoo. But look at whom is out performing...



Back to the NY Times piece

• Rising prices for cooking oil are forcing residents of Asia’s largest slum, in Mumbai, India, to ration every drop. Bakeries in the United States are fretting over higher shortening costs. And here in Malaysia, brand-new factories built to convert vegetable oil into diesel sit idle, their owners unable to afford the raw material.
• This is the other oil shock. From India to Indiana, shortages and soaring prices for palm oil, soybean oil and many other types of vegetable oils are the latest, most striking example of a developing global problem: costly food.
• The food price index of the Food and Agriculture Organization of the United Nations, based on export prices for 60 internationally traded foodstuffs, climbed 37 percent last year. That was on top of a 14 percent increase in 2006, and the trend has accelerated this winter.
• In some poor countries, desperation is taking hold. Just in the last week, protests have erupted in Pakistan over wheat shortages, and in Indonesia over soybean shortages. Egypt has banned rice exports to keep food at home, and China has put price controls on cooking oil, grain, meat, milk and eggs.
• According to the F.A.O., food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen.
• “The urban poor, the rural landless and small and marginal farmers stand to lose,” said He Changchui, the agency’s chief representative for Asia and the Pacific.
• A growing middle class in the developing world is demanding more protein, from pork and hamburgers to chicken and ice cream. And all this is happening even as global climate change may be starting to make it harder to grow food in some of the places best equipped to do so, like Australia.
• In the last few years, world demand for crops and meat has been rising sharply. It remains an open question how and when the supply will catch up. For the foreseeable future, that probably means higher prices at the grocery store and fatter paychecks for farmers of major crops like corn, wheat and soybeans.
• There may be worse inflation to come. Food experts say steep increases in commodity prices have not fully made their way to street stalls in the developing world or supermarkets in the West.
• Governments in many poor countries have tried to respond by stepping up food subsidies, imposing or tightening price controls, restricting exports and cutting food import duties. These temporary measures are already breaking down. Across Southeast Asia, for example, families have been hoarding palm oil. Smugglers have been bidding up prices as they move the oil from more subsidized markets, like Malaysia’s, to less subsidized markets, like Singapore’s.
• No category of food prices has risen as quickly this winter as so-called edible oils — with sometimes tragic results. When a Carrefour store in Chongqing, China, announced a limited-time cooking oil promotion in November, a stampede of would-be buyers left 3 people dead and 31 injured.
• Cooking oil may seem a trifling expense in the West. But in the developing world, cooking oil is an important source of calories and represents one of the biggest cash outlays for poor families, which grow much of their own food but have to buy oil in which to cook it.
• American farmers have been planting more corn and less soy because demand for corn-based ethanol has pushed up corn prices. American soybean acreage plunged 19 percent last year, producing a drop in soybean oil output and inventories.
• Chinese farmers also cut back soybean acreage last year, as urban sprawl covered prime farmland and the Chinese government provided more incentives for grain.
• Concerns about nutrition used to hurt palm oil sales, but they are now starting to help. The oil was long regarded in the West as unhealthy, but it has become an attractive option to replace the chemically altered fats known as trans fats, which have lately come to be seen as the least healthy of all fats. “Four years ago, when this whole no-trans issue started, we processed no palm here," said Mark Weyland, a United States product manager for Loders Croklaan, a Dutch company that supplies palm oil. “Now it’s our biggest seller.”

Well I learned a new thing in this article - even the push away from trans fat is having an effect adding to this crisis. And it is a crisis. Even though you never hear about it in the mainstream financial press - as we have angst over stupid financial decisions by our financial innovators or if Ben should cut 25 basis or 50 basis or heck 75. Meanwhile a potential catastrophe is developing in the background... but hey at least we won over the Iowa farmers vote with more subsidies for corn ethanol. I keep saying it... this initiative is one of the biggest and far reaching boondoggles we will ever see. With some of the most far reaching effects and unintended consequences. And I am not sure how it gets reversed... which is the troubling part of it all.

Maybe CNBC will start talking about it by this summer.

No position but considering DBA on a pullback

Worldwide House of Horrors Today

Some very breathtaking action today folks

• Stocks fell sharply worldwide Monday following declines on Wall Street last week amid investor pessimism over the U.S. government's stimulus plan to prevent a recession.
• Britain's benchmark FTSE-100 slumped 5.5 percent
• France's CAC-40 Index tumbled 6.8 percent
• Germany's blue-chip DAX 30 plunged 7.2 percent
• India's benchmark stock index tumbled 7.4 percent
• Hong Kong's blue-chip Hang Seng index plummeted 5.5 percent
• In Brazil, stocks plunged 6.9 percent
• Japan's benchmark Nikkei 225 index slid 3.9 percent to close at 13,325.94 points, its lowest close in more than two years
• China's Shanghai Composite index plunged 5.1 percent, partly on worries about mainland Chinese banks' exposure to risky U.S. mortgage investments.

This is the type of action that will get people selling their mutual funds and going to money markets tomorrow. Probably near a (tradeable) bottom. But one cannot blame them, especially if they came into the market anytime in the last 5 years as they've never seen this action before. Even when you've seen it before, it still is a bit of a shock to the system to see established Western European indexes taking this type of single day carnage. India is one thing; to see Germany lose >7% in 1 session is another.

Tomorrow Shaping up Ugly

As I wrote late last week and this weekend, we need to stop opening up on hope and than selling off all throughout the day. Instead we need a panic open, that drives out all hope. Judging from the news flow today it looks like tomorrow could be that day...

These are some nasty headlines

Economic Fears Cuff Asia; India, Hong Kong Slide - Recession Fears Spark Heavy Selling

Stocks in Europe Crushed on Financial Sector Worries

British Shares in Worst Fall Since Sept 11 Attacks

US Stocks Point to Major Decline on Re-Open

And somewhere Stanley O'Neil is enjoying is $160M "golden parachute" laughing smugly at the US system of compensation [You're Fired! Now Here is $160M to Help Ease the Pain] - you win, you win, you lose ... well you still win. I've said it before, and I'll say it again - before this is all over they will find someone to put in jail. There must be a fall guy, rightly or wrongly. Myself, this is the system's fault - no regulation, off balance sheet accounting in our banking system of all places, and a compensation system built due reward huge risk taking (as long as you do very well as a CEO for 3 years you build enough wealth to take care of generations of your family) no matter what the ultimate fallout is of your decisions. You will be basking with your "separation package" on an island with your umbrella drinks by the time the %#@@ hits the fan. And did I mentioned those who set the compensation are your friends? and fellow CEOs? Fox. Hen house. Anyone?

All these banks were "guilty" of is milking the system for all it was. If anyone should go to jail its the people who allowed all this to go on in Washington with a blind eye. I cannot believe the fact off balance sheet accounting (which was the downfall of Enron) has not raised a massive fuss in Washington - these financial firms must really have some fantastic lobbyists. This is truly a way to hide things from the public shareholders - yet no one has really raised an eyebrow on this - I am blown away. Regulation is a 4 letter word in this country as it "stops innovation" and "stops job creation" (or so we are told nightly), but greedy humans left to their own devices lead to these outcomes. We just saw it not even 7-8 years ago, and now we already repeated it again less than a decade later. Those who fail to learn from history....

If this plays out like the last time, the politicians will raise a fuss, outraged... someone who probably should not go to jail will (hello Martha Stewart), calls for 'real regulation' will ring out in the hallowed halls, a few meaningless laws with massive loopholes will pass to appease the electorate, this will be on the front pages for 6 months, before Americans attention span wanes and we focus yet again on the exploits of Paris Hilton and Brittney Spears... and we'll just go back to status quo (America, for the corporation by the corporation as Cramer says) within 2 years... and build up the next excess, enriching a new generation of flaccid CEOs, until the dam bursts somewhere else in around 2015. And then we'll repeat the whole dog and pony show.

Oops, We Did it Again - We've Infected Another Country with our Subprime Contagion

Remember, emerging markets are (cough) immune and the (cough) great middle class there will offset the other 75% of world GDP that is heading to recession. I mean nothing is more safe than parallel real estate and stock market bubbles... right pundits? But if there is one place that demonstrates safety, tight regulation, and true capitalism, of course we'd like a safe haven like China. [China Discovers $119 B Banking 'Irregularities']

Did I mention they have no subprime exposure? :) [China Bank Shares Fall Sharply]

• Shares in China's banks fell sharply Monday after news reports said its No. 2 lender, Bank of China, might write down holdings of U.S. mortgage securities and two others increased reserves for possible losses.
• The reports were the first indication that Chinese lenders, which have so far avoided damage from the U.S. credit crisis, might face problems due to their holdings of subprime securities.
• Also Monday, China's banking regulator warned that lenders might face risks from fluctuations in fast-rising real estate prices.
• Bank of China is expected to announce a "significant writedown" on its $7.95 billion in U.S. subprime mortgage securities, Hong Kong's South China Morning Post newspaper reported, citing unidentified sources.
• Bank of China shares fell 4.1 percent in Shanghai market and by 6.4 percent in Hong Kong. China's biggest banks are listed in both cities, with shares in Shanghai off-limits to most foreign investors, while Hong Kong is open to global traders.
• The fall in bank stocks helped to drive overall market declines in both cities, with Shanghai's main index sinking 5.1 percent and Hong Kong plunging 5.5 percent -- its biggest percentage drop since 2001.
• Two other major lenders, Industrial & Commercial Bank of China and China Construction Bank, are increasing reserves for possible writedowns on subprime mortgage holdings, the respected Chinese business magazine Caijing reported. ICBC, China's biggest commercial lender, raised reserves to cover 30 percent of its subprime holdings, while Construction Bank's reserves covered 40 percent of its holdings, the magazine said, without citing sources.
• China's banks have seen revenues and profits soar in recent years, driven by a fast-growing economy and rising real estate prices. But the country's industry regulator warned in a report released Monday that they might face higher risks from fluctuating real estate prices and financial conditions.

As I wrote last week when explaining my closing of position in iShares Malaysia (EWM)

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.

... 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]

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.

*****
As we've seen how swiftly the shoe can drop here in the US once "denial" turns to "recognition", as these cockroaches emerge one by one, and the "myth" that is "there is safety in a communist country with poor financial controls and an inflated real estate market, chock full of inflation and a billion peeved rural poor" it should be an interesting time. But hey CNBC told me it's safer than the US.... so it must be true.

Remember, this whole global credit system is like a big web -> our smart guys in NYC have infected the entire globe - Cleveland, California, Florida, UK, Spain, Ireland, Germany, little towns in Scandanavia, now we take over Asia! Our "good work" is everywhere. :)

Who said we are not an export country? We export contagion!

Remember the quote of the century

Emerging markets are being favored in part because "financial innovations are less common in developing countries," said Heidemarie Wieczorek-Zeul, German economics minister, in remarks to the IMF/World Bank Development Committee.

A Tour Through the Middle East...

While we wring our collective hands about how the infrastructure companies are going to lose all their business as crude drops from $100 to $75, and projects will be cancelled due to their rich customers actually giving a rat's behind if crude is $100 or $75 let's take a look at reality. I noticed a story in the NY Times this weekend on Saudi Arabia - so I'd like to overlay that with just a snapshot of what is going on in some of the other countries in this part of the world - the Kuwaits, the Oman's, the Abu Dhabi's, the Qatar's....

... because perhaps I think most of us still are very inward looking as Americans and do not realize what is truly going on in this globe. I keep returning to the theme of this transfer of wealth - each day we become more of a debtor nation and our wealth is being transferred out. Only to return to buy our assets from beneath us (and not just banks). If not with imports (to Asia) than with the "great tax" that is petrol. A "tax" on all of us, and our country as a whole. Instead of devoting resources to stop taxing ourselves, we just give lip service or misguided pushes into corn ethanol of all things. We just don't seem too worried about it, because it's a creeping problem - it's incremental, like erosion (or inflation). I would like to highlight we are in a global economic 'competition', but there seems to be very little awareness of this from 'leadership'. Thankfully, we have some of the most financially innovative institutions to lead us through this.... errr, wait. Never mind that. But that's neither here nor there as an investor; I'll let others argue about the implications - I have my views, but I am just trying to make money off the trends. But I do have to say, it is interesting to see an over reaching national vision proposed by many of these "3rd world" countries 'leadership' - something we used to do here... but I guess you need money to do any large scale projects; along with a government that can actually pass something useful and not only in self interest.

Now as with all good booms (as we see in Asia and the Middle East) there is no clean situation - there will be intermittent booms and mini-busts, but I am speaking to the greater long term trend here. Specific to the Middle East, it appears this go around, as opposed to the 70s, the countries realize that their oil reserves are not unlimited and this time they are reinvesting the monies in ways that can leverage today's riches into future rewards. Maybe they'll succeed, maybe they won't, but they seem intent on trying. A very key point, and why I think the global engineering/infrastructure bull market is here to stay for a long time (again with mini busts along the way as things get overheated from time to time).



So we start in Saudi Arabia (above picture is the new King Abdullah Economic City proposal)

• Amid a forest of cranes, towers and beams rising from the desert, more than 38,000 workers from China, India, Turkey and beyond have been toiling for two years in unforgiving conditions — often in temperatures exceeding 100 degrees — to complete one of the world’s largest petrochemical plants in record time.
• By the end of the year, this massive city of steel at the edge of the Red Sea will take its place as a cog of globalization: plastics produced here will be used to make televisions in Japan, cellphones in China and thousands of other products to be sold in the United States and Europe. Construction costs at the plant, which spreads over eight square miles, have doubled to $10 billion because of shortages in materials and labor. The amount of steel being used is 10 times the weight of the Eiffel Tower.
• “I’ve worked on many big things in my life, but I’ve never worked on anything this big,” an American project manager mused during a bus tour of the project, called Petro Rabigh, a joint venture of the state-run oil company Saudi Aramco and Sumitomo Chemical of Japan.
• Size isn’t the only consideration. The project is Saudi Arabia’s boldest bet yet that this oil-rich kingdom can transform itself into an industrial powerhouse. The plant is part of a $500 billion investment program to build new cities, create millions of jobs and diversify the economy away from petroleum exports over the next two decades.
• “The Saudi economy was in idle mode for 20 years,” said John Sfakianakis, the chief economist at SABB, formerly known as the Saudi British Bank, who is based in Riyadh, the Saudi capital. “Today, the feeling here is, ‘We’ve won the lottery; let’s not waste it.’ ”
• The kingdom’s lofty economic goals would have been unthinkable without the surge in energy prices that has filled the coffers of oil producers. Oil prices have quadrupled since 2002 and reached $100 a barrel in New York this month.
• Persian Gulf countries earned $1.5 trillion in oil revenue from 2002 to 2006, twice as much as in the previous five-year period, according to the Institute of International Finance, a global association of banks that is based in Washington. As the top exporter, Saudi Arabia has been the main beneficiary.
• Despite all the recent headlines about Middle East investors bailing out troubled American banks like Citigroup, a growing share of today’s petrodollars are staying at home to finance megaprojects like Petro Rabigh, analysts say. That money is financing the biggest economic boom in a generation, helping to build not only the high-rises of Dubai, where the world’s tallest tower is going up, but also telecommunications networks, roads and universities throughout the Middle East.
• Abu Dhabi is planning to spend close to $1 billion for a new museum with the help of the Louvre, in Paris. Dubai’s latest grandiose idea is to build a small-scale replica of the French city of Lyon, complete with residential housing, a museum, a culinary school and a soccer club.
• In Saudi Arabia, Riyadh looks like a boom town: sprawling over 40 miles, it is teeming with shopping malls, electronics stores and luxury boutiques. But while times are good today, many Saudis realize that their country is locked in a race against time to create industries that produce more than just oil in order to keep a young and growing population employed.
• TO be sure, the region’s economies are too small to absorb all the oil riches on their own. Too much money is chasing too few assets, analysts say, forcing oil producers to invest some of their revenue abroad and diversify their holdings, either through opaque state-owned investment funds or through direct private investments.
• Last year, for example, a fund controlled by the government of Abu Dhabi bought a stake in Citigroup for $7.5 billion, while another run by Dubai’s ruler bought a large share in Sony, the Japanese consumer electronics giant. Sabic, a major Saudi petrochemical company, bought the plastics division of General Electric for $11.6 billion, and the Kuwait Petroleum Corporation bought half of Dow Chemical’s commodity-plastics unit for $9.5 billion.
• The current level of oil prices has given the country’s industrialization strategy a new spring, allowing the government to improve its finances while investing in large infrastructure projects. The Saudi G.D.P. has doubled in the last five years. Not counting oil, economic growth has been 4 percent to 6 percent a year since 2002.
• The financial turnaround has been spectacular. In 1999, the Saudi government’s debt amounted to 120 percent of G.D.P. That number has dropped to less than 20 percent as the government paid back its obligations and put its finances in order.
• Last year, the government recorded a budget surplus of $48 billion, five times the surplus of 2003. (a government that runs surpluses for half a decade? Interesting concept) This year, it has built its biggest budget to date around a conservative estimate of oil prices of $45 a barrel; that will almost certainly yield a substantial surplus at the end of the year.
• One of the most noticeable illustrations of the industrialization push is a plan championed by King Abdullah, the 83-year-old Saudi monarch, to build six new cities throughout the country — including the King Abdullah Economic City on the western coast, near the city of Rabigh; the Knowledge Economic City, near Medina; and the Prince Abdulaziz bin Mousaed Economic City, in the north. (And surely they will get cancelled the minute crude drops below $66.50, right? That's what the analysts tell me - and Barron's!)
  
• The intent is to create industrial centers that double as housing and commercial hubs for the country’s young and growing population. The Saudi Arabian General Investment Authority, a government agency, expects these cities to add $150 billion to the country’s G.D.P. by 2020, create one million new jobs and be home to as many as five million people.
• According to SABB, these cities together will have four times the geographical area of Hong Kong, three times the population of Dubai, and an economic output equal to Singapore’s. Other plans include building four refineries, two petrochemical plants and a modern graduate-level university with an endowment of $10 billion. (that's not what Barron's implies...you know the story, US recession, leads to China recession, leads to India recession, and next think you know, crude is $38 and the best laid plans....)
  
• THE frenzied growth of the economy has had some serious downsides. Inflation has been rampant in the last year; food prices and rents have risen sharply. Traffic jams in Riyadh and other Saudi cities have become a constant affliction, while real estate values have soared and the construction sector is strained by a lack of workers. (boy sounds familiar; a lot like China without 1/100th the hype - those darn downsides of rampant money creation)

So folks, yes we might get a slowdown in backlog... a quarter here or two in the infrastructure names, and of course the bears will tell you "I told you so"... it's over, its just a cyclical stage and it's coming to an end. And when you hear that, and the stock dips 20% for no good reason, just remember articles like this... and remember this is one of many countries in the region in the same spot. Want to see what you do when you are just loaded with silly money that the rest of the world sends to you because you are sitting on vast quantities of dead dinosaurs?

Well you could dredge up land yourself, and create your own surface area right out of the ocean - to extend your territory. And make it in very cool shapes. For example:

1. Want to create 3 Palm shaped islands out of the clear blue ocean? Yes you can, when your filthy rich and bringing in billions a week. Meet the "Palm Islands". Thanks Dubai!
   
2. Or, how about an entire ecosystem of islands that are shaped to look like a topographic map of the globe? And you'd call it 'The World'. Fun slideshow here - looks like a fun place to visit... or live. Thanks again Dubai!

Or maybe have a forward vision - so out of the box - how about a plan for the first carbon neutral, car free city on Earth? Sounds cool right GWB? Those darn "green" Sheiks. Always focused on the environment. GWB seems to think so, but then again as of 3 years ago global warming was just a myth so probably he wonders what the fuss is all about... :) But at least he got to see the fuss first hand. How convoluted eh? The biggest producers of product that create the problem are planning already for the green movement. But then again so are we - corn ethanol baby!

• President George W. Bush today saw a model of Masdar City - the world's first zero carbon, zero waste, car free city. Plans call for the green, sustainable city to open by 2009 in the desert sands of this federation of Gulf states that have built their wealth on oil and natural gas.
• "I appreciate the commitment to conservation and to the environment, and the leadership you've shown here," the president said before leaving for Dubai and Saudi Arabia on the last leg of his Middle East visit that began January 9 in Israel.
• The electricity for the six square kilometer Masdar City will be generated by photovoltaic panels, while cooling will be provided with concentrated solar power.
• Drinking water will be provided through a solar-powered desalination plant. Landscaping within the city and crops grown outside the city will be irrigated with grey water and treated waste water produced by the city's water treatment plant.
• Sustainable food will be plentiful in Masdar City and retail outlets will meet targets for supplying organic food and sustainable and or fair trade products. The sustainable water target specifies that per capita water consumption will be at least 50 percent less than the national average and all waste water will be re-used.

Well I guess when you have trade surpluses, and a lot of money to blow on crazy ideas you can try such things. I don't understand why GW did not just bring a stalk of corn to Abu Dhabi and say "look you guys are really complicating everything, it really is as simple as corn - it solves everything."

Enough political talk - as I keep saying, its an absence of leadership from both sides of the aisle. Anyhow I now await the analysts finding some absence in growth in some key metric somewhere in each infrastructure company and telling us how with slowing world growth, oil is going to $40 and clearly every major project that has been years in the planning is going to be thrown out the window. Again, their problem is they think like budget constrained, deficit loving Americans... not thinking like the rich (and growing richer by the hour) wealthy in this world.

Long infrastructure stocks, even after the analysts tell us the game is up in a few more quarters, and watching "savvy" investors nod their head in unison like sheep. Yes subprime woes & credit woes will be stopping projects worldwide.... obviously a direct correlation. Even though the capital to prop up our financial system is coming from.... well... we need to make a sky is falling in the Middle East scenario somehow.

P/E Ratio for Portfolio

Using the Marketocracy.com data I don't have easy statistics to pull such as average P/E ratio and the like, so everything has to be done manually. But with the market selling off so strongly I was curious how expensive the items I own are. There are many (many many many) ways to measure value but the simplest is simple Price Earnings ratio - simply a function of stock price divided by earnings stream. But even that is not simple - one can look at trailing earnings, forward earnings, some mixture of the two, etc. And once you have your number what does it mean? What does 18 mean? What does 24 mean? The number alone is relatively useless. But in a big picture sense you want to compare the values of your stocks versus the market overall, and stocks in the same sector in specific. I also like to compare earnings versus growth (sometimes called PEG ratio - or PE to growth ratio). The higher the growth rate, the higher a PE ratio one would allow. But even that has many caveats.

What I've done below is list all the stocks in the fund by broad sector with their forward P/E ratio. I like to go out about 9-12 months since I think the future is a lot more important than the past. For example, if you look at the past you would of missed the entire fertilizer stock run as the stocks always looked 'expensive'. With that said, using forward P/E ratios (vs growth) has it's issues as well

1. It's an educated guess
2. It's an educated guess by people who are very conservative and often wrong (analysts)
3. What is a fair P/E ratio for each sector? the market overall?
4. What are forward growth rates for each company? each sector?
   
5. What should the average stock in each sector be valued at?
6. What should value 1 stock in a sector, higher or lower than another?
   

Etc etc - I listed 6 things, I could list 60. The point is, this is not a science - otherwise statisticians would dominate the stock market. It's part art, part science, part psychology experiment. Which is why I really like the market ... and why most "logical" people quickly find the stock market to be a very frustrating experience. In the "long run" it is said the stock market is a weighing mechanism (reflecting true value) but in the short run its a voting mechanism (reflecting a popularity contest along with sentiment). Trying to gauge all these moving parts, and balancing your voting against the herd is half the battle.

So in summary there is no correct one answer. There is no way to accurately reflect "cheap" versus "expensive" - what appears cheap one month can appear very expensive the next (and vice versa). We have seen this as restaurant stocks or retail stocks slash forward guidance - suddenly they go from "darn cheap" to "darn expensive" in the span of 10 sentences in a presss release. The same goes for book value. The same goes for just about any measuring tool out there.

With that said, here is the list of fund holdings by forward P/E - I have highlighted in green all positions that I have what I consider a heavy stake in (>1.5% of the portfolio) - positions that can affect the fund in a greater manner than my minor positions. I've tried to use forward earnings estimates as close as possible to Dec 31, 2008 to be consistent from 1 company to another

Agriculture - Fertilizer
CF 10.6
MOS 13.4
POT 21.0

Agriculture - Equipment
AG 18.1
CNH 15.3

Infrastructure
CBI 19.7
FWLT 18.7
JEC 24.4
KBR 19.9
KHD 11.7
MDR 15.6
SGR 22.0

Financial/Consulting
BLK 21.4
DHIL n/a
FCN 24.4
HURN 20.9
MA 25.3

Solar
FSLR 88.0
LDK 20.8
STP 27.9
SOLF 16.3
TSL 13.6

Coal
BTU 17.0
CNX 19.8
MEE 16.0

Oil Service
CLB 18.5
NOV 13.0
SII 14.7

Oil Exploration
PBR 12.4

Oil Driller
ATW 8.0
DO 10.3

Healthcare
ILMN 54.8
MHS 23.7

India
HDB 25.2
IBN 22.0
SLT 14.8

Other Foreign
CTRP 43.6
EDU 40.8
GFA 7.2
HOGS 10.7
MICC 16.8
MTL 10.0
WX 35.7

Silver
SLW 32.0

Technology - Networking
BCSI 18.1
RVBD 26.3

Technology - Communication
AAPL 25.1
RIMM 26.5

Technology - Search/Advertising/E-commerce
BIDU - 66.3
GOOG - 28.9
MELI - 87.0

*******
Overall, I like the "value" of the stocks in the fund. Again, these appear "cheaper" than they really are because I use forward earnings instead of trailing earnings for my assessment. But I believe many of the companies in the portfolio have estimates that are understated by analysts for 2008, hence the forward PE ratio today, looks higher (in many cases) than what it will be proven to be when we actually get to Dec 31, 2008.

Three other points
(1) I do like to focus on scarcity value - i.e. when there is a theme but very few stocks to play it, I think that warrants a higher valuation and I am willing to overlook something I'd otherwise avoid - for example in China there is 1 major dominant search engine - Baidu.com (BIDU). I've never had a big stake due to its lofty valuation, but I can at least conceptualize why the extreme valuation exists (keep in mind this stock is down $150 in the past month so it was FAR more expensive mid December). Of course I'd like to see it 30% lower, at which point I'd love to load up but this has been, and will continue to be, an expensive stock for a long time due to scarcity value, in my book. The same would go for Mercadolibre (MELI).

(2) Within each group, all other things being equal I do prefer to buy the cheaper stocks - sometimes this works, sometimes it doesn't. For example, buying the 'cheaper' stocks in the solar sector has worked against me, as this is clearly a momentum based sector where people seem to gravitate simply to what is moving up the fastest without looking at valuations. Hence, First Solar (FSLR) has had an enormous move and has just continued to move up month after month. Does it deserve a premium? Certainly - it has the growth of the solar sector without the limitations of the polysilicon shortage (hence has great gross margins). But how much of a premium does it deserve? And when does it narrow? Those are the questions that are the "art". Hence I've missed much of this company's move as I found it expensive all along the way - but it just continued to go up. But you can see in a general sense, I am trying to overweight the 'cheaper' stocks within each sector in a general sense.

(3) Companies in sectors that are considered "secular" rather than "cyclical" generally have far greater P/E multiples. But sometimes the greater chances for stock price appreciation are finding sectors whose cyclical growth is changing over to secular (or at least a VERY long cycle of growth). So ironically two of the sectors I find as most "insured" from a slow down, fertilizer and deep sea oil drilling have some of the lowest valuations. The reason is these are traditionally cyclical businesses. But a thesis I would propose is that deep sea oil drilling and fertilizers are going into long term secular cycles. For the former oil at $50, $70, or $90 is not an issue - these large deep sea rigs in international waters are in huge demand and this is where the future of oil exploration is. For the latter, well I've outlined the secular changes in the world growth patterns and why fertilizer should benefit countless times. Thus far the market disagrees with me and gives both sectors what I consider poor multiples for their potential growth. For example Mosaic (MOS) is growing faster than 98% of the stocks in the market (folks its earnings have grown 100% this past year), but trades at "market average" multiple (50th percentile). Why? People think its growth will be over very soon. But if this attitude changes (as more evidence surfaces to the contrary of this "growth will be over in a few quarters" scenario), not only will we see earnings expansion but the ever elusive "multiple expansion" - which means the stock price would go up due to both factors. And we'd have some massive gains.

100 Stocks That Made Money This Year

This has been the worst stock market start for US equities in... history. So instead of doing the weekly look at what is winning let's see what has been able to eek out a gain this year. Amazingly out of the entire universe of stocks with market cap of $2 billion or more, only 100 have a return >1%. 100 lonely souls. (and a couple at the top of the list seem like old acquisitions so they could be errors) About 10% of the list is the same theme.... you can see what I've highlighted....

1. Market cap >$2 Billion
2. Average trading volume >100K
3. Stock Price >$10

Symbol	Company Name	% YTD
LYO	Lyondell Chemical Co	86.9
DJ	Dow Jones Ord Shs	57.8
BAY	Bayer ADR Rep 1 Ord Shs	48.9
HCR	Manor Care Inc	42.8
MDG	MERIDIAN GOLD INC	27.7
WCG	WellCare Health Plans Inc	27.0
NHY	Norsk Hydro ADR Rep 1 Ord Shs	22.9
EON	E ON ADR Reptg 1/3 Ord Shs	21.8
AUY	Yamana Gold Inc	20.0
CELG	Celgene Corp	18.5
CKFR	CheckFree Corp	18.4
PPDI	Pharmaceutical Product Development	17.4
NWA	Northwest Airlines Ord Shs	17.2
BEAS	BEA Systems Inc	16.6
PGS	Petroleum Geo Services	16.2
SPN	Superior Energy Services Inc	15.8
GFI	Gold Fields ADR Reptg 1 Ord Shs	15.4
HWAY	Healthways Inc	15.1
TNE	Tele Norte Leste ADR	14.4
ILMN	Illumina Inc	14.4
SEPR	Sepracor Inc	13.8
DV	DeVry Inc	13.3
GOLD	Randgold Resources ADR	13.2
FRX	Forest Laboratories Inc	12.4
HUM	Humana Inc	12.0
EN	Enel ADR Reptg Five Ord Shs	11.9
ABX	BARRICK GOLD CORPORATION	11.1
AHO	Koninklijke Ahold ADR	11.0
KGC	KINROSS GOLD CORP	10.9
APOL	Apollo Group Inc	9.9
CN	China Netcom Depository Receipt	9.3
HTE	Harvest Energy Units	9.1
BVN	Buenaventura ADR	8.8
BAX	Baxter International Ord Shs	8.8
NEM	Newmont Mining Ord Shs	8.3
CAL	Continental Airlines Inc	8.3
RHHBY	Roche Holding 144A ADR	7.9
PHRM	Pharmion Corp	7.9
CZZ	Cosan Ltd	7.9
TRB	Tribune Ord Shs	7.4
MYL	Mylan Ord Shs	7.4
ELN	Elan Depository Receipt	7.4
HMY	Harmony Gold Mining ADR	7.3
AMCN	AirMedia Group Inc	7.3
PDS	Precision Drilling Trust	7.0
BMRN	Biomarin Pharmaceutical Inc	6.8
AZN	AstraZeneca ADR	6.7
AGP	Amerigroup Ord Shs	6.7
CHA	China Telecom ADR	6.3
TSS*	Total System Services Inc	6.1
MLNM	Millennium Pharmaceuticals Inc	6.1
ABT	Abbott Laboratories	5.8
AGN	Allergan Inc	5.7
ME	Mariner Energy Ord Shs	5.6
BIIB	Biogen Idec Inc	5.3
AU	AngloGold Ashanti ADR	5.3
OKE	Oneok Inc	5.2
BDX	Becton Dickinson & Co	4.8
DF	Dean Foods Co	4.3
BSX	Boston Scientific Corp	4.3
PAAS	PAN AMERICAN SILVER CORP	3.9
CVH	Coventry Health Care Inc	3.8
CVD	Covance Inc	3.8
ABC	AmerisourceBergen Ord Shs	3.8
KMP	Kinder Morgan Energy Partners LP	3.7
TEVA	Teva Depository Receipt	3.5
HNT	Health Net Inc	3.5
SNV	Synovus Ord Shs	3.3
GENZ	Genzyme Corp	3.2
CAH	Cardinal Health Inc	3.1
FDP	Fresh Del Monte Produce Inc	2.8
MMC	Marsh & McLennan Companies Inc	2.6
MHS	Medco Health Solutions Inc	2.5
DNA	Genentech Inc	2.5
HSIC	Henry Schein Inc	2.4
PWE	Penn West Energy Trust Units	2.2
NSR	NeuStar Inc	2.2
AMGN	Amgen Inc	2.2
UDR	UDR Ord Shs	2.1
BCR	C.R. Bard Inc	2.0
ZMH	Zimmer Holdings Inc	1.8
OCR	Omnicare Ord Shs	1.8
LIHR	Lihir Gold Sponsored ADR	1.8
DAL	Delta Air Lines Inc	1.7
UST	UST Inc	1.6
SRCL	Stericycle Inc	1.6
GLDN	Golden Telecom, Inc	1.6
GG	GOLDCORP INC	1.6
CVI	CVR Energy Inc	1.6
AMAT	Applied Materials Inc	1.5
IBN	ICICI Bank ADR	1.4
DT	Deutsche Telekom ADR	1.4
ACL	Alcon Inc	1.4
SIE	Sierra Health Services Inc	1.3
PDX	Pediatrix Medical Group Inc	1.3
IVGN	Invitrogen Corp	1.3
FTE	France Telecom ADR	1.3
CHD	Church & Dwight Co Inc	1.3
TI	Telecom Italia ADR rep 10 shs	1.1
EW	Edwards Lifesciences Corp	1.1

Bookkeeping: Weekly Changes to Fund Positions Week 24

Week 24 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 0.0% last week)
52 long bias: 94.7% (vs 98.7% last week)
5 short bias: 5.3% (vs 1.3% last week)

57 positions (vs 61 last week)
Additions: N/A
Removals: iShares Malaysia (EWM), iShares Brazil (EWZ), Crocs (CROX), US Steel (X)

Top 10 positions = 39.3% of fund (vs 36.3% last week)
42 of the 57 positions are at least 1% of the fund's overall holdings (73.7%)

Major changes and weekly thoughts
After outlining last week how the average stock was down 30% since the October highs, masking how poorly the market is "underneath" the indexes, we went on to layer on just an awful week on top of the damage already taken. So I assume now the average stock must be closer to 40% down from the October highs. As mentioned Wednesday, the S&P500 is in the worst technical condition it has been in half a decade, along with being the farthest below the 200 day moving average it has been in half a decade [S&P500 in Worst Condition in Half a Decade]. The majority of stocks now trade below their 200 day moving average (a key support level)... it is even harder to find the few trading above their 50 day moving average. So in a larger sense, if we are in a technical bear market or not (20% down from highs), it is a lot like asking "are we in a technical recession or not" - it all semantics, and it really does not matter what the label is; the reality is apparent. This is essentially a rotational bear market - which has moved from financials to consumer discretionary to (now) everything else.

We had hoped last week to see the stock market bounce off August and November lows of roughly S&P 1385-1405. But as stated, triple bottoms rarely hold and boy did we get reacquainted with that lesson (it's been a long time since we had to pull out that lesson plan). We had bounced off those levels ever briefly but broke down below Wednesday and from there the computers on Wall Street took over, seeking refuge in cash and selling off everything and anything (aside from airlines). Even the safety sector stocks took hits this week. So it's ugly out there.

Once we broke these previous lows (Aug/Nov), the next logical step was to assume a waterfall type of panic selloff. We seemed close Thursday, but then due to some decent earnings from General Electric (GE) and IBM (IBM) we opened higher Friday... only to sell off all week. This was not the preferred course [We Need to Open Lower]; indeed the 'playbook' says once technical support is broken, we'd just prefer to have a wretching finale selloff marked with words 'Abandon Hope all Ye Who Enter Here'. It doesn't have to end this way, but many market participants are waiting for that moment - a very awful open and than an intraday reversal. So it is sort of self fulfilling - until we see that, many people will stay on the sideline with cash.

Specific to the fund, I lightened up cash and short exposure in the last 10 days, expecting some level of oversold bounce. Obviously this hindered performance as we never got this bounce. But with that said, my 'short' focus this late summer/fall/winter have been areas (financials, real estate) that held up "relatively" well this week. So while it would of helped to have more short exposure, nothing short of cash this week would of helped offset the enormous drops in the long positions. Many stocks that had performed well during the past year saw very large selloffs similar to the worst action in August 2007 (they held up much better in the November 2007 selloff). Not much more to say, as there was very little logic or differentiation among winners and losers this week - almost any stock was deemed a loser this week. I checked a database that I run each week and only 126 stocks over $2 Billion market cap returned > 1% this week. Slim pickings indeed considering the universe is so large - again of all things, many on the "winners" list are stocks that had dominated the "worst of" lists in previous weeks - home builders, retailers, airlines. Groups that already imploded and now are seeing "value" investors buy in off of washed off levels. Or maybe just short covering by satiated bears.

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. It's been a wild ride in Mosaic (MOS) of late. Last week after a stellar earnings report, the stock was pushed down to $80, where I took the position to a 6%+ type stake. Monday, I took 10% of my position off the table as the stock (in just 3 days) reached $104. Then on Tuesday, I took another 15% off the table around $107. These gains were just far too much too quickly (not that I was complaining). As I wrote at the time "All these sales go under the category of "sell when you can, not when you're forced to." If only I knew how appropriate those words would be by Wednesday. I bought back some of the shares I sold around $100 Wednesday, and then 24 hours later in the $88s range. The stock is down a full 10% lower from that level by Friday, but I have more than enough exposure at >7%. I did not catch the top ($110), nor bottom (upper $70s) but was able to maintain my 6-7% position, and place a nice trade in between.
2. Tuesday, I took profits in the coal names, as the stocks were up 3-4% in a tough tape, and up 10% from levels just a week earlier where I added to my positions. The volatility in this tape is of course extreme. I essentially just lowered my allocations back to where they were 2 weeks ago in these names.
3. New Oriental Education (EDU) reported a good quarter, beating estimates, but by missing analysts expectations with conservative guidance by half a million dollars the stock dropped well over a billion in market cap. This is logic. :) I added one layer as the stock dropped to $70, and later in the afternoon, another layer as the stock was imploded down to $56. Just due to the need to raise cash, I did sell the shares I added at $56 near $64 later in the week. All in all, I went from a nice gain in this name to a -$2800 loss in this position and considering the hectic drop this week, I can live with that.
   
4. I closed my long standing position in iShares Malaysia (EWM) Tuesday, in anticipation of Asian markets potentially following the US market down. Malaysia remains one of my favorites in the region as a natural resource rich country, but I had a gain I wanted to lock in, was short on cash, and want to move away from Asia exposure for now. While I do expect a bounce in the region I expect 2008 to be shaky as global growth slows - but I still think Malaysia will be the least exposed to the coming shakeout. I do expect to be back in this name at some point.
5. I made a lot of transactions Wednesday - due to low cash position I had to sell some positions on the long side to add to others. I essentially moved cash from positions holding up (plus the sales I made the day previous in coal stocks and Mosaic) and moved into stocks that had been hit very hard. The details are found here.
6. I closed my small position in iShares Brazil (EWZ) and rolled the funds into Petrobras (PBR), which in fact is one of the 2 main weightings of EWZ. This puts more focus on the 1 name I want the most exposure to within the index. I also added some First Solar (FSLR) taking the position to 1% of the fund for the first time ever. This is still a very richly valued stock even after a huge drop.
7. Along with Mosaic (MOS) I took the opportunity in the selloffs in the fertilizer names to add a sizeable chunk in Potash (POT), and a smaller piece into CF Industries (CF). For the "long long" run I prefer to focus on names dealing with potash due to its 'wide moat' (even if Morgan Stanley is worried about inventories), but CF Industries (CF) is probably the best value in the near term.
8. Under Armour (UA) imploded this week off an earnings guide down, so in a "better safe than sorry" move I closed Crocs (CROX) at a significant loss. When the retail stocks make their inevitable dead cat bounce and move up 20-25% for no good reason this will look like a dumb move, but I am simply worried about an earnings warning in any retail name coming out of the blue. I'd rather focus on sectors whose earnings I have implicit trust in. That said, Crocs is dirt cheap if its earnings do come through. Absolutely dirt cheap.
   
9. I closed US Steel (X), a position I had as a shorter term trade (not an investment) - for a very small loss due to a good entry point in the stock. The share price has held up very well all things considering the last week, which would imply to me, this stock will run very hard once the market stops assuming that Mars will crash into Earth. I put this money into Ultrashort Russell 2000 (TWM), taking that position to >3%. If the market does have this waterfall selloff moment, I will have some gains in this position, and flip it out, and convert it back to cash or buy some long positions.

Again, I repeat this selloff has been quite awful, and in a very tight time frame. When they take the "generals" (leaders) out to be shot as they have this week, this means we should be closer to the end than the beginning of this move down. However, I would still like to see 1 very bad open to trust this as a true (near term) bottom. Back to it Tuesday...

Foster Wheeler (FWLT) CEO on Cramer

Here is a link to a Ray Milchovich of Foster Wheeler (FWLT) on Cramer's show this weekend.

Again, we can paint an "End of Day's" scenario for any company, even McDonald's (MCD), even Walmart (WMT). But each day that passes certain countries become richer, and certain poorer. A company like Foster Wheeler (and most of the infrastructure names I have) are tied to countries getting richer (through trade or petrol). Short of a global trade collapse combined with crude oil retrenching to $25, the secular growth is not going to be ending anytime soon. Can backlog growth slow? Surely - 2 years worth of backlog is enormous; the law of large numbers eventually kicks in. But these are not 45 PE stocks, Foster Wheeler trades at a similar multiple to "safety stock" Procter & Gamble (PG) with twice the growth rate.

Does this mean the stock cannot crater 30% from here? Nope, it sure could. But it would be based on outright panic and not understanding the story. Generally when stocks falter in a market malaise people want to "find a reason", when the reason is "market malaise". These seems to be happening in many names I hold. Separating stocks going down for general market reasons versus company specific is the trick of it all. Those who choose correctly will benefit over the long run.

I cannot find many other sectors where I have a book of business 24 months out spoken for. combined with that business growing 20%+ annum. If you know any, please let me know - I'd like to go investigate the company for inclusion to the fund.

As an aside, my first purchase of this stock was on day 1 of the fund around $100, it promptly fell to the mid $80s as the market tanked in mid August. I heard the same reasons I hear today. 2 months later it was $150. By layering in and out of this position (adding at points of weakness, culling during the runs) we still have a +$5000 gain in this name, despite some (in fact many) purchase points higher than the current price of $130. It continues to be one of my favorites, and I don't see that changing for quite a long time. Whether its $100 or $130 or $160 or $190. The story is the same; only the stock price fluctuates. Same goes for most stocks in this group.

Below is summary of the video

What should Homegamers do with a stock that seems to react to every tick of the market (especially oil prices)? That’s what is happening to Foster Wheeler

Foster Wheeler Ltd FWLT 129.94 1.36 +1.06% NASDAQ

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[FWLT 129.94 1.36 (+1.06%) ], one of Cramer’s long-time favorites that got battered down 50 points “in a heartbeat” even though nothing fundamental within the company seems to have changed.

Foster Wheeler CEO Raymond Milchovich reassured Cramer on Wednesday’s Mad Money that FWLT has seen “nothing but good news” since the last time he was on the show in mid-November.

While Foster services the oil industry, it is truly an infrastructure company with exposure to chemical, pharmaceutical and other energy businesses as well. For investors to trade the stock down along with oil is ridiculous, according to Michovich. “The daily spot price of oil has absolutely nothing to do” with the projects Foster works on, which are multiyear contracts that are analyzed by supply and demand functions over long periods of time – not by whether oil closes at $90 or $100 on any given day.

Listen to Milchovich, Cramer said, not the skeptics. Foster Wheeler is “money in the bank,” even if the market doesn’t treat it that way.

Long Foster Wheeler in fund and in personal account